Craig Hoagland: Investment Portfolio Manager, making real bets on the future.

Vance Crowe [00:00:00] You sound like you're describing the apocalypse to me.

Craig Hoagland [00:00:03] Yeah. Well it could turn it, it could end badly. There, there, there's, that's clearly one possible outcome that's not an inevitable outcome.

Vance Crowe [00:00:12] Okay. From,

Craig Hoagland [00:00:12] From where we are today, this is the Van Scroll podcast.

Vance Crowe [00:00:20] Welcome back to the podcast. I am so glad you're here. This week I interviewed a man named Craig Hoagland. Now Craig is an understated quiet man, and I've had understated quiet people on before, but never one quite as reserved and reluctant to come on the podcast as Craig. In fact, after I sent him the email, then we had to text and then we had to get on a phone call and get it scheduled. And then he had all kinds of questions about what we would talk about. And at first I found myself being like, well, I think Craig just wants it to be staged. I think he wants to have control of what's going on. But what you'll find out in this podcast is that could not have been further from the truth. Craig, I believe, was just getting ready so that he could say things that were valuable and unique and interesting because from the very beginning, we start talking about subjects that I feel like I have a pretty strong knowledge of, but I have never heard his perspective. And that's an interesting thing, and it's a really good thing. Craig is an investment portfolio manager, which essentially means there are groups of people out there that say, well, we have a pile of money and we want it to become larger, so we're gonna hand it over to you and we will let you take a small fee in exchange for helping us grow that pile of money. And the way that Craig does it is that he goes out into the world, he understands what he thinks the trends are, what new tech is coming online, what what's going on with governments, and interest rates, and all sorts of different ideas.

Vance Crowe [00:01:56] And he figures out where can we be uniquely placed to benefit from predicting what's gonna happen in the future more accurately than other people. And he's great at it. And he's, he's fantastic to listen to. And if you've ever been intimidated by concepts like inflation or interest rates or cryptocurrencies like Bitcoin, then this is the conversation for you because Craig has an extreme gift at being able to make things relevant and comfortable and interesting. So I am so delighted to be handing the microphone over to this interview. I hope you buckle in and enjoy this conversation with Craig Hoagland. Craig Hoagland, welcome to the podcast. Thank

Craig Hoagland [00:02:44] You.

Vance Crowe [00:02:45] You, you have one of the most bizarre jobs that I've ever heard of because you get to explore all of the things that people are hearing about the cutting edge, what's going on in technology, cryptocurrencies, what is it exactly that you do for a living?

Craig Hoagland [00:03:04] Well, we manage, we allocate capital, we manage investment for portfolios for people. And like you say, that leads into a lot of research into where interesting ideas are and interesting things are happening in the economy and also in capital markets. So,

Vance Crowe [00:03:21] And so are you a regular stockbroker then?

Craig Hoagland [00:03:24] No, not really. The way I would break that down as a stockbroker had a big incentive to make trades for people. 'cause they got paid every time their client bought stock or sold stock. We don't get paid when we trade. We get paid based on the, the amount of assets we're deploying for people. And so our goal is just to grow that asset base as much as we can.

Vance Crowe [00:03:51] So what, what, what do you call your profession? You're a CFA or a

Craig Hoagland [00:03:56] I? I am a CFA. That's a certified financial, or sorry, chartered fan, chartered financial advisor. But the more common name of what for our profession is investment advisors.

Vance Crowe [00:04:09] And tell me about your investment advisor group. Who, who do you work with?

Craig Hoagland [00:04:12] I work with a handful of people. Our firm was founded by a gentleman named David Anderson, who started the firm in 1980. And he still comes to work every day and a couple of analysts and a couple of people who keep track of the portfolios and make sure the back office functions are working well.

Vance Crowe [00:04:33] So when you think about Labor Day is just around the corner and you think about the people that go out every day and they're, you know, pouring concrete or they're setting asphalt or on a roof. If, if you were to describe your job to them, it would seem like, man, that's the greatest job on earth. People give me money and all I have to do is make sure that they make more money and everything's fine. Why is your job not that easy?

Craig Hoagland [00:05:00] Well, it is the greatest job on Earth I, in in the sense, I mean, what you, what what really makes the job sing is you spend a lot of your time thinking and learning. So it's very intellectually stimulating. And then you spend a big chunk of your time with the clients you work for, helping interpret that world for them and also helping them understand their own financial position, their own goals. So there's the ac, the analytical exercise, and then there's the human contact that gives it all meaning.

Vance Crowe [00:05:33] And so who's the type of person that hires you and says, here's a pile of my money now make that pile of money bigger?

Craig Hoagland [00:05:38] Yeah, well, a lot of people who have savings aren't comfortable investing those savings for one reason or another. The financial markets are a little, can be opaque, can seem intimidating. They aren't sure what to do, they don't want to second guess themselves. And so they, they get professional help. I mean, it, it's just like if you had to work on your own teeth, you'd be really nervous so you'd go

Vance Crowe [00:06:01] To the dentist, right?

Craig Hoagland [00:06:04] So, so for for many people, the stock and bond markets seemed that way. And so they hire folks like ourselves to help them.

Vance Crowe [00:06:11] And I remember the very first time you and I ever sat down to talk, you know, I inhale information about what's going on in the world just because I'm this curious type. But a lot of times my knowledge of this doesn't equate to making something happen in the real world. Every once in a while it does. But for example, I believe you told me, you and your son when you heard about Bitcoin, you guys put together a miner and started mining your own Bitcoin. Is that right?

Craig Hoagland [00:06:38] That's correct. I have, I have been a Bitcoin miner. I got really interested in cryptocurrencies. There's a funny story behind this. My, my wife inherited some money from her father in 2014 and she was really interested in cryptocurrencies, had just heard a little about it and decided she'd take a little sliver of what she had had inherited and buy a couple of Bitcoin, which back then were about $700 a piece.

Vance Crowe [00:07:05] Okay, so still early but not super early. Correct.

Craig Hoagland [00:07:09] So she bought two Bitcoin and her goal was to make enough money on the Bitcoin to be able to sell them and rent a houseboat on Lake Mead for a weekend that we could invite some friends to, which costs about $4,000. So she held those, she bought the Bitcoin and of course immediately Bitcoin went down. She, she happened to buy 'em at a high point. They went from seven or $800 all the way down to $300. And she sort of said, oh, this was a disaster. And she kind of forgot about them. And then a couple years later Bitcoin came crawling back up and then screaming back up. And she sold one of them for $4,000, which paid for a trip to Lake Mead, which we took.

Vance Crowe [00:07:54] And is she now a ler, is she hanging on to her Bitcoin?

Craig Hoagland [00:07:57] She eventually sold the other one also and my own experience. So she sort of introduced me to it. And then we have a son who's very interested in computers and technologies and particularly on the system side. So he's, he's the kind of kid who would build his own computer system and he was home for the summer and I said, Hey Jackson, maybe what you could do, you know, to pay your rent for the summer is build me a mining rig. And so he did, he built a mining rig that didn't mind Bitcoin at mine, Ethereum, which is a different cryptocurrency.

Vance Crowe [00:08:29] Yeah.

Craig Hoagland [00:08:31] And I bought all the parts and he put it all together and loaded the software and joined the consortium and we were mining Ethereum. And that was a really interesting experience. I wanted, my, my parental agenda was for him to learn about the blockchain and this whole community and this this tech basically. And I got a giggle out of it 'cause I was mining Ethereum and thought I might make some money out of,

Vance Crowe [00:08:54] Do you remember what year you were mining Ethereum in?

Craig Hoagland [00:08:57] It was probably 20 the summer of 2016.

Vance Crowe [00:09:03] Okay. All right.

Craig Hoagland [00:09:04] So it, it was a red hot crypto market at the time and, and we had huge paper gains on the mining rig. And, but it was fun because we saw in real time what happens when the price of a cryptocurrency goes up is

Vance Crowe [00:09:18] A lot more computing power enters the market

Craig Hoagland [00:09:21] A lot. Yeah. And we also saw firsthand how much electricity it takes to do this.

Vance Crowe [00:09:26] What did your electricity bill do in the, it it went

Craig Hoagland [00:09:28] Up by about a hundred dollars a month from running one rig.

Vance Crowe [00:09:32] Did that offset by how much Ethereum you mind?

Craig Hoagland [00:09:35] It depended on the price of Ethereum, which jumped around a lot. So there were some months we booked large paper profits and the rig only ran, he got, had it set up by the time he went back to school. And then I didn't know enough about the software to maintain it and keep it going. So it's sort of performance degraded slowly over the next few months. And then the price of Ethereum came down to where it clearly wasn't making money and then we shut it off.

Vance Crowe [00:10:01] And 2016, was that because the Bitcoin mining had already become pretty established and you were talking about people, people having dedicated ships that that would, that would mine as opposed to being able to build your own rig?

Craig Hoagland [00:10:14] Yeah, there were definitely more efficient ways to mine. Ethereum had had, had, the tech had been created to be a little more democratic. And so it was harder to make it an asic a design circuit to mine Ethereum that was going on more in the Bitcoin world.

Vance Crowe [00:10:33] Right.

Craig Hoagland [00:10:33] So Ethereum was still a game that, that mom and pops could play.

Vance Crowe [00:10:38] So as you're learning about this, you, I, it's funny because when I would come home from college, my dad would be like, here, I got a project for you. I need you to cut down that tree and then split the wood and stack it. That's right. So I think your son sounds, that sounds like a lot more fun, but once you learn about this and you understand how mining works, are you then explaining to your clients this is how crypto works?

Craig Hoagland [00:10:59] Yeah, I I actually have a whole PowerPoint presentation that, that explains the blockchain and exactly how the blockchain works and how it's the, the blockchain awards that occur at time intervals that keep the miners in.

Vance Crowe [00:11:12] Well give it a go. Can you do it off of the top of your head? Can you,

Craig Hoagland [00:11:16] Yeah, basically what happens is there's a, a, a math problem, if you will, that can only be solved through what a middle school student would call guess and check. So you try, you, you come up with a, a potential solution and then you try it and if it works, you win. And if it doesn't, you try another one. And,

Vance Crowe [00:11:37] And for Bitcoin it's based on the multiplication of prime numbers, correct?

Craig Hoagland [00:11:43] I don't know that.

Vance Crowe [00:11:43] Okay.

Craig Hoagland [00:11:44] I don't know that, but the, but the, but the main point is it's random who wins. You have a better chance if you have a faster computer. 'cause basically you can make more, more guesses. Right. And then occasionally you win and you get an award depending on which currency you're in. That can be quite substantial. So,

Vance Crowe [00:12:01] And you had mentioned before the, the pools. So you end up getting into a group of people that you're pooling your, your guesses together.

Craig Hoagland [00:12:09] Yeah. So if you have one little mining rig in your house, you can mine away and you might win the award, you know, 10 every 10 months or one this year and one next year and none the year after that. And, but in bi in the Bitcoin world, the award's worth hundreds of thousands of dollars. So to take out that variability, you join a consortium that might win a couple of times a day, but you get a tiny fraction of their award.

Vance Crowe [00:12:33] So, and have you kept up with the Bitcoin world? I mean, it's spiked all the way up to, what was it, 21,000 and then dropped down. But it's slowly been creeping back up. I the last time I checked it was what, 10,000 or 11,000? Yeah,

Craig Hoagland [00:12:46] No, having made the deep dive into it, we have completely exited.

Vance Crowe [00:12:50] Oh, that's really interesting. Why? Yes,

Craig Hoagland [00:12:53] Yes. Well, it was because of that firsthand experience. So the thing you learn about mining is that it's a large scale operation. The the, the winners in that game are gonna be big corporations with, I mean if you google Chinese mine Bitcoin mining operation, you'll see photographs of basically data centers

Vance Crowe [00:13:15] And they set them up right next to energy sources as close as they can.

Craig Hoagland [00:13:19] That's right. You want to be next to a hydro dam that doesn't have enough development around it to use the electricity. So they're trying to give it away. And that's literally where some of these things were located around the world. So there was experience with the mining, but more than that, we watched Bitcoin and cryptocurrency go through what's called the, the, the s the technology adoption S-curve, which is this, if you imagine an S-shaped thing, it, the early adopters come on the first part and then the curve gets steep as it as it penetrates public consciousness. And there's lots and lots of adoption. And then the last few people who will never adopt it, you know, these were the people who couldn't program their VCRs back in the 1980s or who still don't have a smartphone today. That's the end of the s-curve. So we watched cryptocurrency penetrate the public consciousness beyond the news every night. Lots of stories. Coinbase had more accounts than Schwab did at one point.

Vance Crowe [00:14:18] Oh, I did not know that. Right.

Craig Hoagland [00:14:20] So mil, tens of millions of people were in this

Vance Crowe [00:14:22] Coinbase that that explains a lot because they have the worst customer service on the planet,

Craig Hoagland [00:14:28] Right? They, they, they grew incredibly quickly. So we went through all that. And, and what on the other side of that, what was interesting to me is there's still no general use case for Bitcoin, right? I mean, you hear about ransomware being paid off in Bitcoin. You hear about people who don't believe in currency wanting to own Bitcoin. People own it for very reasons, but they're pretty esoteric. They're, they're a little bit fringe relative to mainstream culture. And in the early days there was an argument that, that cryptocurrencies were gonna be easier to transact with than currency that you can just boom, boom and put in an address and off it goes. And that's not really the case. One, one thing I learned from owning a bunch of different cryptocurrencies is that it's kind of a pain, you know, it's, it's the wild west in terms of security. So you might keep your crypto at Coinbase, but if Coinbase gets robbed, your crypto's gone.

Vance Crowe [00:15:31] Yeah. And they can't get it back. It's, and

Craig Hoagland [00:15:33] And they don't guarantee it. The feds don't guarantee it. You're on your own. It's kind of, to me the analogy is the old days, if you lived out west and you're, and you had some gold and you could either bury it under your house or you could give it to Wells Fargo to put in the local bank. But if somebody robbed the local bank, your gold was gone and you had no claim. So, so what's the answer to that? The answer to that is you get a hardware wallet and you do a whole geeky crypto thing that involves having a bunch of codes and remembering where it is. And every time you want to transact, you have to load up your hardware wall and move your crypto to your exchange and then do your exchange. And then you get paid and then you have to get a, a distribution from the exchange, which can be, can be hard to get a wire outta the exchange. So the whole thing was way, way more difficult than just living with dollars. Right? Dollars are easy. You can set up a little a CH transfer, you have a credit card, you got cash in your wallet. It, so to me, the whole promise of crypto as an alternate means of exchange was a fail. It just hasn't happened. So then you're left with, well maybe I'll own it 'cause it's a store of value and it'll appreciate, but without a real world use it, who's gonna really wanna own this in the long run? So, so that was the, that was my takeaway from being in a owning, in a, owning it, mining it, transacting it, speculating in a, you know, sort of the range of activities was, hey, you know, does this thing really have purchase in the real world?

Craig Hoagland [00:17:09] And, and so far it doesn't.

Vance Crowe [00:17:12] It's an interesting thing. You know, there are a couple of points that you may, you know, you don't own your Bitcoin unless you have the wallet. Like if, if Coinbase has it, then you, you essentially are an investor in Bitcoin. You don't actually own it. And, and I take your point that the real world use cases are, are few and far between. And I think what was realized was if you want something, a currency whose power is derived from the fact that it is decentralized, you don't have one central command and control thing like the Federal Reserve controlling how much money gets into the money supply, then you give up ease of use. And, and if you're talking about a technological age where people are saying, we want these things to be smooth and frictionless, that was one of the, the big terms that they had for it. It was not as simple of a solution as, oh well we'll have this currency and then people will build on top of it and it'll, it'll go smooth. I I, you know, I'm a ler like I I I, and I was actually, as you were talking, I was asking myself the question, what is it that someone would have to say in order to convince me that I should give up on this idea? And I don't have a good answer for that. You know, for a long time it was, the reason that Bitcoin was so solid in my mind was that it, it would be very, very difficult to break the code and break into it. But that's not a good enough reason to have something that other people can't get it.

Vance Crowe [00:18:42] You have to have a reason. So I'm not, I'm not entirely sure that I'm on strong philosophical grounds outside of I'm one of those people that, that also is on, on some of the fringe beliefs. That it is good to have a currency that another group of people, a cartel can't just change how many are out there. And, you know, as, as a member of a, of a bank, like I understand how the Fed works and I have a general understanding for how they print money and how inflation works. And so this to me is a, if anything, it's the manifestation of not liking the fact that somebody else can inflate my money.

Craig Hoagland [00:19:23] Right. Right. I I get that. I get that. And to me, the, the, the reason, I mean I obviously have the counter argument 'cause I'm out, I'm, I'm, I don't own any crypto anymore, but to me the, the, at least like the dollar or any other sovereign currency, there's gonna be a need for it because the government only accepts tax payments in that currency. Right. Nobody requires Bitcoin except maybe a criminal organization that's, that's ransoming your

Vance Crowe [00:20:00] Data. Yeah, that's that's true. That's fair enough. Right,

Craig Hoagland [00:20:01] Right. So there's gonna be an, so there's at least a basis for a demand for, for sovereign currencies. In addition, the governments have the benefit of being able to make the rules so they can say this is the only currency that can be used inside of our territory. And they could outlaw Bitcoin, which in some ways, you know, the Chinese have tried to do that to some degree. So, and then the other interesting thing, Vance, is the, the concern about debasing currency and printing too much of it and causing inflation. We're at the end of 10 years where more currency has been printed in the world than any time previous. And the world is also devoid of inflation.

Vance Crowe [00:20:49] Okay, well,

Craig Hoagland [00:20:50] So it's not happening.

Vance Crowe [00:20:51] This is in reality. This, this will be a bit of a disagreement. Like I, I, I mean because you, the question becomes how do you measure inflation, right? Like, because if you say, well, how do you measure and how, what's your perspective on how to measure inflation?

Craig Hoagland [00:21:06] Oh, I would just say it's, it's a measure of how many goods and services you can buy with your dollar bill.

Vance Crowe [00:21:13] But you, there are other ways to say whether or not we are in a good financial position. And for example, something we talked about before the podcast, which is there was a little bit of time where the amount of money that you get investing, getting a bond for two years is worth more than if you took a bond for 10 years.

Craig Hoagland [00:21:36] That

Vance Crowe [00:21:36] Does not seem to me to be rational financial policy. That is, it seems to be connected to inflation to me. Is it connected to you?

Craig Hoagland [00:21:47] Well, you're talking about what's in the press all the time now, the so-called inverted yield curve,

Vance Crowe [00:21:51] Right?

Craig Hoagland [00:21:52] Where the normal logic is, you know, Vance asks me for a loan and I say, well, how long do you need my money? And if he says, eh, I need it a week, I'll be like, don't worry, just I don't need any interest. Give, just give it back to me. He says, well, I need it a year. I'll say, okay, gimme 1% more than I give you. If he says I need it for 10 years, then I go, okay, there's some risks there. You know,

Vance Crowe [00:22:13] Maybe I won't get it back,

Craig Hoagland [00:22:14] Won't get back. You know, who knows where we'll be in 10 years. And so I want you to pay 5% per year for the 10 years. So normally the longer a loan is, the higher the interest rate and the current circumstance in the bond market is the opposite. In the, in the US treasury market, the, the shorter the treasury bond, the sooner it matures and you get your money back, the lower the rate, or sorry, the higher the rate of interest and the longer it is, the lower the rate of interest. So that condition importantly is determined not so much by government policy, but by markets. Okay. This is a key thing to understand about the bond market. The Federal Reserve Bank, which is a branch of the US government,

Vance Crowe [00:22:56] Not technically,

Craig Hoagland [00:22:58] Well it's part of the US government. It's not controlled by the executive branch or, or it's, it's

Vance Crowe [00:23:03] Which part of the, which branch is it in then?

Craig Hoagland [00:23:05] Well, it's set up and it answers to Congress.

Vance Crowe [00:23:08] Okay.

Craig Hoagland [00:23:09] But it's given independence to execute its mission independently. Okay.

Vance Crowe [00:23:13] But it

Craig Hoagland [00:23:13] Is, it's a US government agency,

Vance Crowe [00:23:15] Right?

Craig Hoagland [00:23:15] So the Fed controls short term interest rates like overnight loans. It sets the interest rates at which banks lend to each other overnight at which banks can borrow from the Federal Reserve overnight. But beyond that, it doesn't have policy control over rates. And all the other interest rates in the market are determined by market participants. So it's market participants who have said, you know, if I'm gonna low money to the, the government for 10 years, I'm happy with one point a half percent interest, which is where it is today, annually. Whereas the Fed has the short term rate, the overnight rate is set at about two point a quarter percent. So about 75 basis points, or three quarters of a percentage point higher than the tenure. That's, that's very unusual. It doesn't make sense, but it's not unprecedented. And typically the way that's interpreted is if you're gonna lend money to somebody for 10 years, one thing you wanna make sure is that your interest payment is higher than the rate of inflation. So when you get your interest payments and your money back, you at least have the purchasing power you started with. And so one way to interpret that is market participants are saying, we think over the next 10 years, inflation's gonna be less than one point a half percent. Right? So that inverted yield curve is a big signal that inflation expectations are low.

Vance Crowe [00:24:47] Do you think that, do you think that inflation after printing the most money?

Craig Hoagland [00:24:51] Yes.

Vance Crowe [00:24:52] How, how in the world does this make any sense at all? Because my natural, I, I'm fair enough, there's a lot here that I am, I am using just my natural gut instinct that if you print a lot more money, more money than ever has been printed before, then you're going to head towards inflation. Yes. So when somebody tells me something that's opposite of that, I, I don't understand that. Yes. But I'm willing to learn. Okay,

Craig Hoagland [00:25:14] So imagine the situation we're sitting around a table with, you know, five or six people and there's a thousand dollars on the table and we're buying and selling stuff for each other from each other. And that's our economy, we'll call it the poker table economy. We're just buying and selling stuff and all of a sudden somebody walks in and plunks down another thousand dollars. Now there's $2,000 on the table. But let's just say the amount of goods and services to be bought and sold doesn't change. So the price of everything should immediately double. There's twice as much money, there's the same amount of stuff, you double prices and you just keep going. So that's the logic behind your statement. The Fed has created more money, so prices should be going up. The amount of money's growing faster than the amount of goods and services. How can the price not be going up? And the answer to that is a really important question of the mechanics of how the Fed does that. What happens is the Fed prints money and they don't dump it on the table and give it to the people who are spending it. Instead they print the money and they go to the big Wall Street banks and they buy bonds from them and they say, Hey Goldman Sachs, hey JP Morgan, we just printed a fresh $10 billion. We wanna buy some bonds. And they bid for bonds at market price and they buy them from those banks. So now you're Goldman Sachs and your JP Morgan and now you have $10 billion of fresh cash 'cause you sold your bonds for the cash that came from the Federal Reserve.

Craig Hoagland [00:26:46] What do they do with it? They turn around and they buy another bond or they buy another security or some kind of investment asset. So it goes into capital markets, it becomes investment capital, but it doesn't land on the table to be spent. So what's happening so far, the way we've increased the money supply is mostly it has increased the dollar value of all the investment assets that are out there of the capital that's available to fund investments. So really important, this is, this is, I think the most interesting thing going on in global economics right now is that this is not only happening in the us this is happening all around the world.

Vance Crowe [00:27:37] So in this point, you know, if it goes into capital markets, what you're essentially saying is there are people out there that are saying, I wanna build a bigger factory because I think I can produce more widgets or maybe, maybe I'm gonna provide some service that people are gonna want. But you know, we didn't suddenly increase people's demand by $3 billion worth. You're now banking on that magically that demand will be there because if you increase that supply and there is no demand, then bang, you've got, you've got inflation.

Craig Hoagland [00:28:10] Yes. But you have inflation not of prices of goods and services. You have inflation of the value of financial assets.

Vance Crowe [00:28:20] Alright? It's

Craig Hoagland [00:28:21] A completely different thing.

Vance Crowe [00:28:22] Okay. So what you're saying is now you have people that are putting money into Bayer Corporation and, and enterprise, I'm just trying to think of companies of and

Craig Hoagland [00:28:34] Treasury and US treasury bonds.

Vance Crowe [00:28:35] Okay?

Craig Hoagland [00:28:36] So when interest rates are low, that means bond prices are high. So the main thing that's happened from all the central banks around the world printing a lot of money and buying bonds is that bond prices have gone up. Right? And then that, that dominoes through financial markets. Because say you're in Germany right now and you have, you make some money, you have some savings, you want to invest it, your option in Germany is I can lend money to the, to the government of Germany and I get, I receive a negative interest rate.

Vance Crowe [00:29:14] So why in the world would anybody

Craig Hoagland [00:29:16] So well we, we will come back to that in a second.

Vance Crowe [00:29:18] Okay? Because

Craig Hoagland [00:29:19] There are, there is a reason why people do that and that actually might come back to crypto. So we'll tie that up. But, but, but my option is I can give the German government my money for 10 years and they'll pay me minus one half of 1% per year. Right? The way this dominoes through capital markets is I say, I don't wanna do that. What's my next option? Well, I can go buy German stocks or European stocks or if I'm, if I'm German, I could buy American stocks. So they do, they buy stocks and that pushes up the price of stocks or they go buy, they go do a real estate project and that pushes up the value of real estate. So all these financial assets or capital assets have upward pressure on their prices that flow from the printing of money, which was used to buy bonds, which drove down interest rates, which made bonds a less attractive investment. So people went into other investments. And so you have what we call capital pressure throughout the world that's pushing asset prices up.

Vance Crowe [00:30:19] Aren't you describing the perfect storm for bubbles? I mean, aren't you describing what happens when, when you just start pumping money into, I mean, 'cause there are corporations, one of the most fascinating debates I've ever seen is Eric Schmidt versus Thiel. Peter, Peter Seale. Peter Thiel says to Eric Schmidt, you guys have so much money you don't know what to do with it. You have a billion dollars in cash Google, and you're the, the only thing that's making money for you is search and all these other things aren't helping you. You don't know what to do with your money. And that's a hundred percent right. Just because you give a corporation money, just because they have a whole bunch of assets or even liquid cash doesn't mean they have a place in r and d that they can invest that to return more money. And herein lies, if you're describing the situation where more money is dumping in, you haven't seen some radical transformation in technology, suddenly you have these prices going up. You can't put your money in a safe place like bonds. You sound like you're describing the apocalypse to me.

Craig Hoagland [00:31:22] Yeah, well it could turn it, it could end badly.

Vance Crowe [00:31:26] There, there, there's, that's clearly

Craig Hoagland [00:31:28] One possible outcome that's not an inevitable outcome. Okay.

Vance Crowe [00:31:31] From,

Craig Hoagland [00:31:32] From where we are today. So the, if, if you say, I think what you're saying is the problem, one of the problems the world has is it has more investment capital than projects to invest in. Google is one example of that. If you look at the aggregate numbers across the economy, it's the same thing.

Vance Crowe [00:31:51] Yeah. Pharmaceuticals, I have friends in that business and they say we're we're trying new things, but nothing's paying off.

Craig Hoagland [00:31:57] Yeah. And if you look at the, the aggregate accounts for the United States, corporate profits are at record highs and reinvestment rates in, in those corporations are fairly low. So a typical company, if it has a hundred dollars invested in it, in all of its assets, its factories and its inventory and everything else, it makes about $10 and it reinvests about four. So there's an extra six bucks that have to go somewhere for every a hundred. Are

Vance Crowe [00:32:27] They issuing dividends? What do they do with

Craig Hoagland [00:32:29] They pay dividends and they buy back stock. Basically they, that's extra money that they cannot use productively inside the corporation. So they give it to the owners either as a dividend or they buy back stock, which is in,

Vance Crowe [00:32:41] To continue to support the price of the stock. And

Craig Hoagland [00:32:43] Well, it's an indirect way to give the money back to the shareholders. Ba basically the, the company could pay a dividend. But just because of Wall Street tradition and norms, once you start paying a dividend, there's an expectation you'll continue where whereas, so say you have, you make 10 cents, you reinvest four, you have six to give back. Typical firm might give two back 2 cents back in a dividend and take the other four and buy stock because the next year, if they don't have 6 cents to give back, they can cut back the stock buyback won't ruffle any feathers. You can't really cut the dividend without upsetting people.

Vance Crowe [00:33:19] And so what are you seeing on the horizon then? You know, what of the various scenarios, the way this can play out, what do you think is possible?

Craig Hoagland [00:33:26] Well, the, the, the one that we're on right now, so, so the, the problem with the, the, the situation we face is that we have more capital than we have projects to invest in. The number of projects is driven by how fast the economy's growing. Because when economy's growing, that means demand is growing. That means we need more goods and services, we need investment dollars to, to put those into place and that investment dollars are drawn from the capital markets, right? So we have a surplus of capital and a dearth of projects. So what we really need is for the economies to start growing again. And the mechanism we're using to try to get the economy to grow is to print money, buy bonds, add more capital to an already surplus situation. That's the problem. And so far, right now, in like 20, in 2019, so far the big storyline has been, economies have been slowing, have grown more slowly than expected. So there's a general perception that we need to stimulate economies to grow. And the way we're gonna do that is to lower interest rates and print more money. And so the big concern is that's just not gonna work. What that's gonna do is lower interest rates, create more capital, but not create more projects that need the capital. So what needs to happen goes back to what you said before, there needs to be something to stimulate demand so that we, you and me and everybody else have more wherewithal and more desire to go buy more goods and services so that that capital has a use, right?

Craig Hoagland [00:35:07] And that would actually stimulate inflation and that would bring interest rates back up.

Vance Crowe [00:35:12] And historically, if you were looking back at times when that kind of demand happened, it'd be like the internet came about and suddenly you now have all sorts of services that you can get new projects, you can invest your time on watching streaming video or, or whatever that is, but you need some large scale shift in society to make that demand be soaked up somewhere.

Craig Hoagland [00:35:34] Yes, that's right. And that happens. The most reliable way to make that happen is, is is to have more children to change the demographics.

Vance Crowe [00:35:47] And that is not happening in the United States right now

Craig Hoagland [00:35:50] Or anywhere. There, there is a very consistent pattern across countries across time that when, when countries get wealthier and people move into cities, they have fewer children. And there's some startling United Nations population projections that basically say the world population is gonna stop growing by the end of this century. We're round numbers we're it's seven and a half billion people now in call it 2020, by 2050 we'll have 10 billion people and by 2100 11 billion and that'll be stable or declining. That's a sea change. And that has huge implications for capital markets and economies because it's really hard to grow an economy when the number of people in it aren't growing.

Vance Crowe [00:36:40] The first thought I have is the end of this century is a long way off, right? Yeah. Like, you know, you, how things will change in the next 80 years is pretty big. But where does this start playing out? Does it play out sooner than that? Is that, well,

Craig Hoagland [00:36:52] It started playing out 10 years ago.

Vance Crowe [00:36:54] Okay,

Craig Hoagland [00:36:54] Because I gave you the numbers for the globe. There's the, the population growth from seven and a half billion people to 11 is wildly unevenly distributed around the world. And you can basically think of all of that growth occurring in emerging economies and in particular in Africa and the Middle East. And the so-called developed world is already shrinking. If you think about Japan, Europe, China, and the United States, that aggregate group of countries is not growing anymore.

Vance Crowe [00:37:29] This may be shifting gears too hard, but I do want to get back to the negative interest rate and why people would, would invest in that.

Craig Hoagland [00:37:36] Yeah.

Vance Crowe [00:37:37] How, how, what's going on there?

Craig Hoagland [00:37:39] Yeah. So, so you know, if you and I were faced with, if you, if you loan your money to the government, you'll get a negative interest rate. We could be like, no, we're just gonna leave it in the bank. But if you're a big institution that has tens of billions of dollars to invest, leaving it in cash is not an option. You, you, you can't have a warehouse big enough to store that much cash or dig a hole in your backyard big enough to put it all in. So what, what are your real options? You can go to your bank and say, Hey, bank put $70 billion in cash for me

Vance Crowe [00:38:15] And now they've gotta get that money out there working. So they've gotta go give loans and

Craig Hoagland [00:38:19] If they take that money and give it to their central bank, they have to pay a negative interest rate. So they're gonna charge you a negative interest rate,

Vance Crowe [00:38:27] Okay?

Craig Hoagland [00:38:27] They're gonna say, Hey, big European insurance company, we'll park your 70 billion, but you have to pay us negative one half percent per year. And so the insurance company is out of options. If, if you have $70 billion that, that, you know, say you're a life insurance company and you're gonna pay out the 70 billion when all your policy holders die over the next, you know, 80 years, you have to have that money around to pay them. So you, you have to do something with it. And there's no option. The only risk free option is offers a negative yield. So you can do some of that and then you can go take risk by buying stocks or real estate or you know, investing in private equity or something else. But basically some of your money's gonna end up in those negative interest rate solutions because you can't have all of your money taking stock market level risk or real estate market level risk. So that's why those negative yields exist and why institutions invest knowing they're gonna lose money.

Vance Crowe [00:39:29] What are you telling your clients right now they should be paying attention to? Because we're talking about huge amounts of capital being injected in people hoping that that's gonna stimulate the economy populations are going down. Yeah. So this are these unpleasant conversations that you're having with your clients. Well,

Craig Hoagland [00:39:45] You can paint a pretty negative picture, but there are things to look for that would show that we were gonna turn in a more positive direction. And one of them is, let's think about how could we stimulate demand in the economy, demand for goods and services. Remember that's the solution to this situation. And knowing that we have to overcome the slowing in the population growth as part of it. So the traditional mechanism for stimulating demand is what's, is so-called fiscal policy, which is economic ease for the government, borrows money and spends it one way or another. Either give it to people to spend or they build infrastructure projects or they grow the government. But, and, and that traditionally has worked to stimulate demand. That's what governments do in recessions. The United States did that in a huge way during the great financial crisis. We borrowed funds equal to about 10% of our economy for four years in a row and spend it on various things. And that helped us get through the great financial crisis. So one thing to look for is instead of just relying on central banks to print more money to stimulate the economy, there's some effort made to stimulate the purchasing of goods and services. And that will probably happen first in the form of, of governments deciding to borrow more money and spend more money.

Vance Crowe [00:41:15] Does this come off in like major tax refunds? I remember that one that one year I was in college and everybody got a check from the government, you know, for returning their tax dollars. Is that what that looks like? Or is it they start building bridges and steel workers now have work to do things like that?

Craig Hoagland [00:41:33] Both. Yeah, it could be both. Yeah, it could be either or both depending on the administration and how they decide to do it.

Vance Crowe [00:41:39] But these things seem like magic because you can't, I mean, you can't just dump value into the world and have it be, I mean if, if it were as easy as governments just spending money and there's no bill to be paid at the end of that, you know, we could just have governments spend endless amounts of money. So where does that, how does that all shape up? Yeah,

Craig Hoagland [00:41:59] So you're exactly right. And the problem with fiscal policy is the government's borrowing more money, which means now the, the federal debt gets bigger and most of the countries in the world already have an uncomfortably large amount of government debt. So in my view that those fiscal solutions borrowing more money and spending it is a short term thing, it would definitely help in the short run. But then like you're saying, it's like having one more drink at the end of the party. The hangover is gonna be worse in the morning and the hangover is in the, is in the pile of government debt. So, so that we, there are limits to how far that can go. And like you say, you can't do that forever without paying the piper. So there's gonna have to be, in my opinion, there's gonna have to be another round of demand creating efforts beyond traditional borrowing and spending by governments.

Vance Crowe [00:42:52] Do you see any interesting things on the horizon? Things like virtual reality? Will that change the nature of consumer demand or,

Craig Hoagland [00:43:01] Well, technology's interesting because technology creates new industries, but it also makes existing industries more efficient. And when you make an industry more efficient, it delivers its goods and services at a lower cost, which is disinflationary. So technology is can help 'cause it creates new things for us to spend our money on, but it can also create more disinflation by making the things we already buy cheaper, right? So it's a double-edged sword in, in this context of how do you stimulate demand? How, how are we gonna get out of this really low interest rate environment? So I don't really think that's the answer. I, I think somehow you have to put money in the hands of people who just go out and buy stuff without adding to the federal debt and without increasing the supply of capital in the world. That's the cha That's where we are. We're at the end point of 80 years of, of accumulating debt and

Vance Crowe [00:44:11] We are not having the conversation I thought we were gonna be having. This is fascinating. No,

Craig Hoagland [00:44:15] That's, that's where we are. But, and there are potential answers to that they haven't yet arisen in the political dialogue and even not very much in the economic dialogue.

Vance Crowe [00:44:25] What, what kind of answers would you say they are?

Craig Hoagland [00:44:27] Well, there's, there's two in particular. One is if you think, well our problem is we have too much capital and not enough money or not enough demand to go buy goods and services. If you have a way to take some of that capital and turn it into demand for goods and services that begins to solve the problem. And there are different ways you could do that. The one Elizabeth Warren is running around talking about right now is tax people who have piles of money and give it to people who don't. And whatever you think about Elizabeth Warren, that policy would help address this problem. So that's one turn capital into demand.

Vance Crowe [00:45:06] Okay? I immediately react very, very negatively to that. So is there a reason I shouldn't react negatively to that? Because it seems like, you know, you start down that path and the rich becomes anyone that has more money than me, and then you start pointing that ray gun at those people have too much and things get outta control real, real fast.

Craig Hoagland [00:45:28] Yeah, and I, and I'm not suggesting this as, I'm not endorsing Elizabeth Warren's policy. I'm saying if you sit down and analyze the problem, this is a potential, a potential solution is just to move dollars from the capital bucket to the demand bucket.

Vance Crowe [00:45:44] Fair enough. I've never heard anybody describe this. And if those people had more money, they probably would go out and spend on more goods.

Craig Hoagland [00:45:50] Well, there's, there's definitely people who make more money than they're going to spend and there's definitely people who spend every dollar they make, right? Either because they, they have no self-control or because they don't have much money,

Vance Crowe [00:46:02] One

Craig Hoagland [00:46:02] Or the other. So if you move dollars from people who have more than they spend to do to people who spend every dollar they make, you're going to increase demand for goods and services

Vance Crowe [00:46:12] At least for a time until it reac accumulates back up into,

Craig Hoagland [00:46:15] And there's, and like you're saying, there's some million issues with how you would actually do that both politically, morally, mechanically. And and I'm not offering solutions like that. I'm just saying this is one thing to look for if you start to see solutions that are moving dollars from capital to demand that helps us solve this problem.

Vance Crowe [00:46:36] That's very interesting. That's,

Craig Hoagland [00:46:38] That's a, that's one thing to keep your eye out for. So the first thing to keep you out for is

Vance Crowe [00:46:42] It also probably becomes more attractive to do that, right? Like, so whereas if somebody had posited that 10 years ago you wouldn't have it. But if you start watching markets slip down or you, you, you don't, you don't have a way to soak up or create more demand, then it becomes more and more incentivized to make that happen,

Craig Hoagland [00:47:00] Right? That that's what's different. Now, in the past when we lowered interest rates, we got a demand response. And, and demand responses are great. 'cause that creates the need for, for projects that put capital work to make money for the capitalists, right? This time around it's not working the last 10 years, generally speaking, the globe has had the lowest interest rates it's ever had and there hasn't been much demand response. So you have to sit up and say something's different. And if you're investing, you wanna look around and say, what could change to break this pattern?

Vance Crowe [00:47:38] Okay, so what else is available besides the Elizabeth Warren take from the rich and give to the poor? Well,

Craig Hoagland [00:47:43] There would be, there could be other ways to do that besides Elizabeth Warren's policies. For, for one, the other way to do it is if we go back to one of the frustrations central banks have right now is they print money and they buy bonds, and that just contributes to more capital, which doesn't turn into demand. What if central banks printed money and gave it to entities who spend money, gave it straight to who spends money? Households, businesses, governments, anybody who buys and sells things. So if you, in other words, if you print a new money and bypass the bond market, don't go buy bonds with it somehow. And again, I don't have any detailed solutions, but this is what you wanna look for is a solution in this direction. If you print money and put it directly into the pocket of some entity or person who's gonna spend it, now you're gonna stimulate aggregate demand. Now, traditional economics would say that's gonna be horrifically inflationary. This is when you wanna own your Bitcoin. Crazy central banker is printing money and giving it to people or whoever or other entities who are gonna spend it. That's gonna create a gigantic wave of demand that's gonna overwhelm the ability of the economy to supply goods and services. And that's gonna create inflation

Vance Crowe [00:49:08] Prices just go through the roof. Yeah. Because now everybody can buy an iPhone. Yeah. So, so now that you raise the price in order to make it so the amount of supply you have meets the amount of demand that's there and, and then you're back in the same spot that you were in before because the same people that were poor, they have relatively the same amount of money as the people that were above them buying iPhones when they weren't the ones buying iPhones before.

Craig Hoagland [00:49:33] If everybody got the same increment, you know, if once a month you turned around there was a new thousand dollars in your bank account from the Federal Reserve.

Vance Crowe [00:49:40] So this is where UBI ends up being. The, the universal basic income becomes like a, like a mechanism that you could get where central banks issue money to

Craig Hoagland [00:49:50] Right? People

Vance Crowe [00:49:51] That would create aggregate demand. Okay,

Craig Hoagland [00:49:53] So UBI could be could go back if you, if you funded UBI by taxing wealthy people, then you're back to taking money out of the pile of capital and giving it to people who are gonna spend it. If you funded UBI by printing new money and giving it to everybody, then you're in this last solution.

Vance Crowe [00:50:14] I think one of the hardest challenges of thinking about things like central banks printing money is the consequence of putting out a trillion dollars is so diffuse from the regular person from me.

Craig Hoagland [00:50:29] Yeah.

Vance Crowe [00:50:29] What happens when banks get overextended? What, you know, when a central bank, not even necessarily us, let's just say, you know, country X just keeps printing money. How does that show up? What does national debt end up doing to a country?

Craig Hoagland [00:50:44] Printing money is different than accumulating debt. In fact, the left has this idea they call modern monetary theory, which the core of it says governments can spend money all they want as long as they're able to just print the money to do it. So print money and build a highway, print money and pay your Medicare recipients, right? And that idea, the traditional economists would say, that's a little bit of madness. You're gonna, you're gonna catch the house on fire and the way you're gonna catch the house on fire is you're printing money and giving it to people and that's gonna cause inflation. And the modern monetary people say, okay, that's true, but are we worried about inflation right now? Or are we more worried about the opposite? And if we, and if we tried this, we might find we still don't get inflation and it might work out. I think that's,

Vance Crowe [00:51:38] They wanna try, oh,

Craig Hoagland [00:51:40] They, they want, and, and this is a way, as a politician, if your goal is, is to fund a lot of things for a lot of people, this is a convenient theory because it says you can do it without borrowing and you can do it without causing inflation. So it sounds like a panacea. So, you know, me personally, I'd be very concerned if we went down that road in any kind of aggressive way. But to go back to what can break this trend of slowing economy, slowing demand, and lower interest rates, that's the sort of thing that would do that. Whatever it's other problems, it would signal a change in the current regime, in the current trends, which is what we're looking for. You know, as money managers, you're trying to figure out how am I positioning my bond portfolio? What kind of stocks do I wanna buy? And if you think interest rates are going drifting lower and lower and lower, you'll aggressively position your bond portfolio and you'll defensively position your stock portfolio. And if all of a sudden you get rumblings of major fiscal spending or printing money and giving it to entities that spend it or moving money from the capital bucket to the demand bucket, then all of a sudden you're gonna change your positioning. You're gonna be more defensive with your bonds and more aggressive with your stocks. So that's why, that's why I've been thinking about this is because this is, this will help determine the next move we make in portfolios.

Vance Crowe [00:53:06] What, what news do you listen to or pay attention to? I mean, you have a finite amount of time, you can only pay attention to one thing at a time, and yet there are interest rates changing by the Fed and Chinese tariffs and trade wars and things going on in Europe and the EU breaking apart. How, how do you choose what to pay attention to? And and what are your, where do you get your news from?

Craig Hoagland [00:53:30] Yeah, there's three news sources that I really respect. The Wall Street Journal, the Economist magazine and the Bloomberg fleet of reporters and the for financial and business news. And if you pay attention to those, you'll, you'll pick up these storylines in their daily coverage. The other thing about the modern era is you can tune your Google News AI to feed you this stuff. If you show an interest in it, it'll give you more.

Vance Crowe [00:54:02] Yeah. Do you, do you attune

Craig Hoagland [00:54:03] Your Oh yeah.

Vance Crowe [00:54:04] Your Google News.

Craig Hoagland [00:54:04] Oh yeah.

Vance Crowe [00:54:05] And are you listening to much news? Do you listen to podcasts and, and

Craig Hoagland [00:54:12] I listen to podcasts every day.

Vance Crowe [00:54:14] Wh which podcast do you find interesting? Right now,

Craig Hoagland [00:54:16] CNBC has a daily sort of summary of what happened in markets. And I listen to that most days. There's a podcast called Odd Lots, which is done by, I can't remember if it's JP Morgan or Goldman Sachs, but one of the big banks has a couple people who bring in interesting thinkers from, mostly from within their organizations. That's

Vance Crowe [00:54:36] Interesting. 'cause most of the corporate podcasts are terrible. Right. They don't want to take any risks, so they don't say anything valuable and you, you never

Craig Hoagland [00:54:45] Yeah. Not like this conversation. Yeah. So, yeah. But you will get different points of view. They'll, they'll, they bring in people who have thought a lot about things like cryptocurrency or a lot about negative interest rates. So they're, they're touching topics of interest. And so I have a whole raft of those that are on my phone every day.

Vance Crowe [00:55:05] One of the things that's happening right now with regards to population is that people are getting older and their 4 0 1 ks have stipulations that when you reach a certain age, you don't get to keep putting money in. Now you've gotta take that money out. And th this brings up two thoughts for me. One is that we do have an interesting phenomena in our markets in that every week or every two weeks, they take a certain percentage of everybody's paycheck and pump it into the market, right? The market knows it's about to get an injection of cash. So it's not like it's dealing with a finite amount of money. And then now, and I think this, the 4 0 1 Ks have have happened where you're forcing people to take money out, but they don't have any use for that money right now. They're still either making an income or they have some other passive income. So now they're accumulating piles of cash and they know if I just let it sit there, then the inflation is just gonna burn it off. So talk to me about the ebb and flow the pumping in and the ejection out of money in markets and what do you see there?

Craig Hoagland [00:56:09] Yeah, so the, the, the phenomenon of money coming outta paychecks and going into 4 0 1 Ks or other retirement plans has been in place for decades. So that's not a pronounced thing in markets. That's just background, that there's a constant inflow of cash. And as you say, there's an outflow as well. And we have clients who are of an age where they're forced to take money out of their retirement accounts in a so-called required minimum distribution. And they literally take it out at that moment. You have to pay tax on the amount that comes out of your IRA or your 401k. So they take the money out, they pay tax, and then they take the residual and just put it into another investment account. So they just cycle it out of the market, pay some tax, and boom, it goes right back in. So for people who don't need to spend it, it's just, it's really just a tax event. And the money moves from a retirement account to a, a tax exposed account.

Vance Crowe [00:57:09] Will that become larger and larger as the, as the bulk of the baby boomers hit that age? I mean, that's gonna be, it has to be every week that, that, that bulb getting bigger, right?

Craig Hoagland [00:57:21] It it, yeah, as the baby boom gets older, it should get bigger and bigger. But because that money is cycling in capital markets, you know, some is siphoned off to the government and the, and the rest just ends up back in the markets, I, I don't think that's a big influence on which way asset prices are going.

Vance Crowe [00:57:38] What do you think are big influences on the, on the way asset prices are moving?

Craig Hoagland [00:57:43] It's funny, 'cause when you talk to most people, if you talk to the, the, the man or the woman on the street and you say, you know, what makes the value of a stock go up? They're, they say, well, the company's gotta be doing great, which is true, but they tend to underestimate how important the, the, to the value that stock interest rates are. And this goes back to what we said earlier. When an investor has new money to invest and they look at their options and interest rates are very low, they're more likely to go buy a stock, right? So the thing that would really damage stock prices would be a rapid rise in interest rates.

Vance Crowe [00:58:24] Because if you could put your money in a bond and, and have way lower risk and likelihood of return being

Craig Hoagland [00:58:31] Yeah,

Vance Crowe [00:58:32] Clear that, why would you put it into the stock market?

Craig Hoagland [00:58:35] Yeah. So like, like we said earlier, if if you give your money to the government for 10 years, right now you get 1.5%, which is approximately the rate of inflation. So you're just treading water, you're not making money. If all of a sudden the government was gonna pay you 5% and inflation was still one and a half or two, now you're making money in a risk free manner by giving your money to the government. So you're less likely to take the risk of owning stocks. So stock in that scenario, money would flow from the stock market to the bond market. And that's a much more dramatic effect than the cycling of 401k money or IRA money.

Vance Crowe [00:59:13] When money is flowing into bonds, aren't you then giving it to cities to do infrastructure projects and build those bridges that you were talking about before?

Craig Hoagland [00:59:22] Potentially. I mean, once a bond is in the secondary market, once you and I can trade a bond between each other, the bond's already been issued, the project's already been funded.

Vance Crowe [00:59:31] Oh, that's right. So I hadn't really thought of it that way. Right.

Craig Hoagland [00:59:33] So it's just change. It's like a used car changing hands, you know, the original work that was done to build the car is over.

Vance Crowe [00:59:40] Very interesting.

Craig Hoagland [00:59:41] Yeah.

Vance Crowe [00:59:42] So changing subjects in continence entirely, let's head over to China. What's going on with the China trade war that people haven't already heard in the news? What is the perspective that you think is being overlooked right now?

Craig Hoagland [00:59:57] Oh, well, I, so that's a very opaque process, right? We're not in the room when the Trump administration talks, and we're not in the room when President Xi and his advisors talk. So I feel like that trade war gets a lot of coverage in the news, and it's hard to say what's happening beyond that in terms of what the outcome would be, what the way, but, but it's a big influence on markets. So we have to incorporate it into our thinking. We can't just say we don't know what's gonna happen. So

Vance Crowe [01:00:30] Two, two weeks ago, I had a man that runs a trucking company, LTI trucking, and he said he can already feel the impact of the trade wars because he runs refrigerated trucks, essentially on the internal of the United States. And there's been a huge movement of the trucks that normally would've been sitting right by the docks waiting for things to be imported to move across the country. They don't have any work. So they're moving into the inside, into the interior of the country, flipping over to refrigeration trucks, and they're driving down the price of moving refrigeration, which, you know, that's an amazingly interesting thing that must be happening in all sorts of industries, right?

Craig Hoagland [01:01:09] Where they're secondary or tertiary effects,

Vance Crowe [01:01:11] Right.

Craig Hoagland [01:01:12] Of the trade war. Yeah, I think that's absolutely right. And you, you might see that in farm ground, for example, if you can't make money growing corn or soybeans, maybe they grow another crop. And now we go into surplus and that and, and that crop. So yeah, this, this would be happening throughout the economy. And the, the confounding thing is in theory, you know, the trade war could be over in two months. There could be an agreement, the tariffs could be lifted, everybody could huge, but

Vance Crowe [01:01:46] The knock on effect would, would last much longer.

Craig Hoagland [01:01:49] Well, it's just hard to bet on how long these knock on effects are gonna go on. So there's probably some investment idea that flows from the fact that all these trucks are moving to the interior of the country. You know, maybe it's a, it's a good time to invest in, in transporting some refrigerated product because it's gonna get cheaper and cheaper to do that, but you don't know how long that's gonna go on.

Vance Crowe [01:02:11] So is that how you think? Is that, is that how your mind works? You hear something you like, like this trekking thing, and then you decide, hey, I'm gonna go pull on that thread for a while. Where, where is there a chance to make money in the medium term?

Craig Hoagland [01:02:23] Yeah, if it seems like a big thread, right? The, the other way to play that in the capital markets would be you can sell short companies. So you could bet against, you could say, I think this is gonna only get worse, and so I'm gonna sell trucking stocks.

Vance Crowe [01:02:39] Selling short is an interesting game though, because if you own a stock, the lowest it can go is zero. But if you're betting against it, that stock could go up presumably forever. I mean, you could have bet against Amazon, you know, 10 years ago, and you'd really be in a hard spot when somebody says, we want the, we want the money for your, we're calling your short.

Craig Hoagland [01:02:57] Right? That's right. And, and, and to be clear, we don't, for our client accounts, we only own stocks long as it were.

Vance Crowe [01:03:07] Do you short stocks

Craig Hoagland [01:03:08] Personally, we don't do any shorting. I have short stocks personally, and occasionally I will do that.

Vance Crowe [01:03:13] Is it, does it feel like you're throwing money on the roulette table? Are you feeling more adrenaline when that happens or no? You're, you're fairly confident.

Craig Hoagland [01:03:21] Yeah. You just, you don't do it in a crazy size and you don't do it with the open-ended mindset that you're talking about. You have a pretty strict idea of how much money, you know, where your limit is as it were, when you're gonna close out the position, if it's going against you,

Vance Crowe [01:03:37] What's the difference, do you think, in the mindset of the professional? I, I, I'm not, I'm not even entirely sure what to call what you, what you do, but the profo professional portfolio manager as opposed to the amateur sitting at his computer, what, what's going on in the difference between the way you think and the way they think?

Craig Hoagland [01:03:56] Well, part of it are things like, it, it, and I don't, you know, you say amateur, there's people with all different knowledge bases. Well,

Vance Crowe [01:04:05] I, there's

Craig Hoagland [01:04:05] People mean

Vance Crowe [01:04:05] They just love the game, right? That's, that's the,

Craig Hoagland [01:04:07] They may know more than I do. I mean, they may have insights that I don't have. So, but to speak in generalizations, they're gonna be focused on how well is a company doing, what are, how good are the fundamentals? And maybe less focused on the valuation of the company, how much you're paying to own those fundamentals.

Vance Crowe [01:04:29] Oh, okay. Right. Say more about that. Right. That's really interesting.

Craig Hoagland [01:04:32] So it's just the idea that everything has a price that's appropriate. You know, you could think about, you know, jewelry, there's beautiful jewelry that's worth a lot, and there's okay, jewelry that's worth a little, and the same thing with companies. There are companies that have fantastic business models and wide competitive moats, and they're very stable earnings and they're worth a lot. And there are companies that are very exposed to forces beyond their control, and maybe they've got a lot of debt on their balance sheet and they're worth a little, and that valuation part of the equation in our mind is as important as an assessment of the fundamental outlook or how well the business might do. So there's two decisions, how, how attractive is the business and what's the appropriate amount to pay for it?

Vance Crowe [01:05:18] And one of the reasons that we had to move the timing on this interview is because you do things like talk to CEOs of companies, you get a CEO on the phone, what are you asking them and what are you trying to figure out by asking them that you don't get just from reading their PR statements?

Craig Hoagland [01:05:35] Yeah. And the, and the, the CEOs are not allowed to tell you things that are not public. So we don't get on the phone and try to pump them for information about are you gonna make the earnings expectations for this quarter? Really those conversations are about trying to understand the most significant strategic issues for the company and get the CEOs thinking about how that's going. How are they pursuing that? Do they perceive the opportunities or the risks the same way that you do?

Vance Crowe [01:06:08] So they actually get something out of those conversations as well. Potentially you could be saying, Hey, I thought of this thing and they could have an aha moment with you.

Craig Hoagland [01:06:18] That is possible, but I wouldn't say that happens all the time, but, but yeah, we, we, we, we try to bring a thoughtfulness to it that's more long term in nature. And if, if the, if the executive we're talking to has been, you know, forced into short term thinking by events, then maybe there's some benefit to them.

Vance Crowe [01:06:42] Talk a little bit about what makes somebody good at the job that you are, you, you are playing in, like if somebody was in college right now and they're thinking, Hey, this is the direction I want to go in. I wanna, I wanna buy and sell ideas. What should they be studying and what would be the traits that they could develop that would make them better at this game than other people? Yeah,

Craig Hoagland [01:07:07] So you need some mechanical knowledge. You need to study accounting so that you can read financial statements. But equally important, I, if I were advising someone in taking college courses would be go take behavioral finance courses, behavioral

Vance Crowe [01:07:22] Finance. Yes.

Craig Hoagland [01:07:23] Because the market is comprised of humans making decisions. And the better you understand the way people make decisions, the more able you're going to be able to interpret what the market's doing. And the way to do well if you're building portfolios is to do something different than what the broad market's doing. Right? So you need to be able to look at the behavior and say, okay, here's what's going on, here's how that ties into human nature and here's what I'm gonna do. That's gonna be a little bit different. Or, or here's where I think human nature's gonna take the market next.

Vance Crowe [01:08:01] Did those courses exist when you were studying? No. Where did you go to school?

Craig Hoagland [01:08:05] Stanford.

Vance Crowe [01:08:06] And, and so now those courses do exist.

Craig Hoagland [01:08:08] Oh yeah.

Vance Crowe [01:08:09] And did you read books to get yourself caught up to with the students?

Craig Hoagland [01:08:13] Yeah, there's a, there's a whole body of literature on behavioral finance now, tons of it. And it's, and I'd say that's as important as the basic financial accounting, that kind of thing for what we do. The o the other thing I'd say, Vance is there are a lot of ways to, to approach the problem of what am I gonna do that's different than the market that's gonna work. And there are lots of different ways that do work. So one, one portfolio manager might be a financial specialist and dive into the accounting and read the annual reports and all the SCC filings and come up with little insights where they might spot promise or trouble in a company. Another person might sit back and look at the bigger picture and be more focused on the behavioral issues of the market and look for signs that the market mood was changing. You know, the, the, the trope is the cycle of fear and greed and try to monitor that in some way. So there are lots of ways to approach the problem.

Vance Crowe [01:09:19] It, it's funny because, you know, I, I got in on Amazon really early and I, because I was excited about it and I liked it. Same thing with Bitcoin. And I became somewhat convinced that, you know, I had the, the special gift, you know, the Midas touch right up until, and I mentioned this on another podcast right up until I thought trucks were gonna move to natural gas and I lost my ass in that. And so it's really funny because you can be completely lured into believing you really can read things or you have a special way of seeing things and then bam, have something blow up on you.

Craig Hoagland [01:09:57] Yeah. And if you had taken behavioral finance, this is one of the things they would've covered. There's a human tendency to be overconfident

Vance Crowe [01:10:06] Yeah.

Craig Hoagland [01:10:07] In our beliefs. And if someone says something has an 80% chance of happening, it's probably more like 60. Right. So we overestimate our certainty in outcomes.

Vance Crowe [01:10:19] What, what have you improved over time? What, what, what would you say is something that you developed a discipline that made you better now than when you started?

Craig Hoagland [01:10:28] Yeah. Well, I, the, the key to this whole thing in my opinion is you, you have to have some technical ability. I mean, just mechanics of accounting and so on, but managing emotions is really the key to this whole thing. And David Anderson, our founder, told me that on about my second day of work back in 1996. And it's true, it, what what happens in markets is when you're, when your, your ideas are working, you get confident and you get excited and you feel invulnerable and you start taking a risk. And when your ideas aren't working, you feel foolish and you feel dismayed and you start to get more cautious. And so one of the tricks is to sort through that emotion and stick to whatever your approach is and, and ride it through the ups and downs knowing that whatever your approach is will have times when it's working and times when it's not. But if you, if you get knocked off of that by the joys of winning or the, the despair of losing, then you're, then you've lost yourself.

Vance Crowe [01:11:45] I was reading some of the philosophy of Rene Girard this morning. I just kinda stumbled upon it and he, he said something that sticks out to me that you're talking about, which is even the strongest men are a few bad experiences away from becoming very superstitious. Right. And, and that really stuck out with me, right? Because like you start saying like, whoa, maybe that's happening because I, you know, didn't rub the lucky penny in the right way. Do you, do you find that to be true? Like, do you have to avoid superstition in, in your world where, where you're betting on things that are so complex that the emergent phenomena that occurs no one could know for certain was going to happen, right? Do you feel that pull towards superstition? Right.

Craig Hoagland [01:12:34] Well, the funny story is our, our firm was founded in 1980, long before I was there. And it was founded in David Anderson's garage, or actually a room above his garage. And they had a cat, the family cat would come wandering into the garage and if the cat sat on one end of the radiator, they would buy bonds and if it sat on the other end of the radiator, they would buy stocks.

Vance Crowe [01:12:57] That, that was

Craig Hoagland [01:12:58] The joke. So yeah, superstitions is, is part of this whole thing. I don't, I don't really feel that the, I we're prone to that. I don't really know any serious investor who's been prone to superstition in a real way. The emotions are the real challenge.

Vance Crowe [01:13:18] And do you come home and talk with your wife about where you've won and lost and do you find yourself being able to talk openly without, you know, worried about your emotions being driven up or down by a spouse that's got, I mean, she sounds like she's got her head on straight. She showed you about Bitcoin Yeah.

Craig Hoagland [01:13:36] Before

Vance Crowe [01:13:36] You did so Yeah, by

Craig Hoagland [01:13:37] Far. Yeah, no, that's not a problem. We can, we can talk about things. She does joke about, she needs an app on her phone that tells her how the market did. So she'll have some idea of what's walking in the door.

Vance Crowe [01:13:50] So do you come home with the market on, so I, this is something that's, that's very near and dear to me. My father's a stockbroker and raise seven kids in the middle of central Illinois that he was an Edward Jones broker. But all the way back when Edward Jones was actually running it, and he became a stock broker for farmers and for local people that had no access to the market. And so when I was growing up, now, you know, you have CNBC and you have the different investing channels and you can see the ticker tape running around. But that was something that I grew up with as a central experience that I think most people didn't. So I knew what was going on in the market and didn't understand when my fourth grade teacher didn't know what the, you know, stock symbol for, for, you know, caterpillar was.

Craig Hoagland [01:14:39] Right.

Vance Crowe [01:14:40] But so, so for me, I can remember earlier when I was younger, my father's emotions going up or down on black Monday or some, something like that. But later on in life he just kinda leveled out you, if you saw him even during the worst financial crises, he was much more level, he might be a little bit more tired, but much more level. Do you feel you're the same way?

Craig Hoagland [01:15:03] Yeah, I can relate to that a lot because as you do it for a longer period of time, you just gain perspective on things that the markets go cycle up and down that, and as you gain confidence that you have value to add and a role to play through all that, it's that that can calm you down as a participant in that market. So I, I could relate to what your father experienced. It sounds like he did well over his career and probably went through that same cycle. Yeah. He being pretty nervous when he was in his twenties and much calmer in his fifties. I

Vance Crowe [01:15:40] Think so, yeah. He's in his seventies now in his, just in the process of beginning retirement where he is giving clients back to other people. But he used to have this phrase and it, I don't think he got it until he was in his forties or fifties, but I can remember when he started, when you would ask him, how'd the market do? And he'd say, well, the market does what the market does, and and you'd be like, come on dad, what it do? And he goes, well, the market went up and then it went back down and then it goes up and then it goes back down. Yeah,

Craig Hoagland [01:16:04] Yeah, yeah.

Vance Crowe [01:16:05] And that was not something that happened when I was, when I was younger.

Craig Hoagland [01:16:09] Right, right. It's more immediate and more impactful.

Vance Crowe [01:16:13] So when regular people are watching the stock market, they have their 401k or they have their, you know, portfolio, how closely should they be watching what's going on in the world and how much should they say, I gave it to my financial planner, or I put it in Vanguard now I'm just gonna let it ride.

Craig Hoagland [01:16:32] Yeah. So the, the general comment is the less they watch it, the better. Probably because most people are, if they follow their emotions, will do the exact wrong thing. So, you know, think of humans as, you know, the school of fish that are all going this way and that way. And if you see the school of fish going left and you decide, okay, I'm gonna go hard left, that could be right before the thing goes back to the right. So you, you, you don't wanna pay a lot of attention to what everybody's doing in the markets. And the key thing is to understand the nature of your investments and what a realistic expectation is for returns. Not today, not this month, not necessarily this year, but over long periods of time and build a program that makes sense for you. We always say we know a lot more about ourselves than about what markets are gonna do, especially in the short run. So make your plan based on what you know about yourself, a financial advisor can help with that and then stick with it and your plan changes. Not when markets change, but when you change. So if you go through some life event, you sell a company, you retire, you get married or divorced, something big happens, then it's time or, or even if you just go through time and you get older, then it's time to go back and say, does my plan still fit me? But it shouldn't be about what markets are doing.

Craig Hoagland [01:18:06] And that's the, the way we look at that is the test of whether a plan is right or not is when markets gyrate. You don't get knocked off your plan if, if you do, it was the wrong plan for you because markets are unpredictable, they're volatile, and the the, the most predictable way to win is to make a plan and stick with it over time.

Vance Crowe [01:18:30] As you look at the future, your son is in college now or he's done with

Craig Hoagland [01:18:34] School one just out in one end.

Vance Crowe [01:18:35] And what do you think of how the collegiate situation is in the United States? How, what are the opportunities there? Are they headed in the direction you were, you, you think is a good direction?

Craig Hoagland [01:18:47] Yeah, my kids have both turned out to be stem interested kids into computers and math and data analysis. So for kids like that, the world sets up great. There's tons of opportunity and that's wonderful for them. More generally speaking, I'm not sure that's a great way for the economy to be shaping up that liberal arts backgrounds that are less quantitatively oriented don't necessarily have the job prospects that the people who can really work with numbers have.

Vance Crowe [01:19:21] Yeah. And it seems like the people that can really work with numbers can create those technological efficiencies you were talking about before

Craig Hoagland [01:19:27] That

Vance Crowe [01:19:28] Continues to wipe out some of the, the work that was done by people that had dreams of being creatives. And then the creative work is incredibly hard to do successfully.

Craig Hoagland [01:19:39] Yep, that's right. Well, it's hard to do it and be financial success.

Vance Crowe [01:19:43] That's what I mean. Yeah,

Craig Hoagland [01:19:43] Yeah. No, that's right. That's, and that's just the nature of the current economy. That's where we are.

Vance Crowe [01:19:51] So I, I know you actually have to get outta here before too long, but I wanted to make sure, because I, I did use the term that sounds like the apocalypse and I wanna make sure you have a chance to describe what you think the future looks like on, on the horizon. What, what, what should people be excited about or what, you know, should they be battening down the hatches? What, what do you think?

Craig Hoagland [01:20:13] Well, I, I don't, I don't think there's cause for undue alarm. I think that the issues we've talked about are very important and are indicative of the way things are going and that economies and the policy makers in them are gonna need to adapt. Right. And so we're looking for signs of adaptation. That was a lot of what we talked about today. So that's, that's one important thing. If if we don't get that, if the, if we don't get that policy response, then there may be a cause for concern. So that, and, and not to go back down the rabbit hole, but that looks like more announcements of lower interest rates and more money being printed without any complimentary policy to stimulate demand.

Vance Crowe [01:21:02] So

Craig Hoagland [01:21:03] That's, that's a signpost to look for.

Vance Crowe [01:21:04] Yeah. I think that the takeaway is be watching for the thing that will stimulate demand and if you see a whole lot of supply getting cranked on without that demand, that's, that's the thing to look out for.

Craig Hoagland [01:21:14] Yeah. Then we keep going into this world of lower interest rates and soon you and I will go to our bank and our bank will tell us they're gonna charge us to park our money in our checking account.

Vance Crowe [01:21:25] And that's when you'll be back in the market buying Bitcoin.

Craig Hoagland [01:21:28] That's right. That might bring us back around to cryptocurrency.

Vance Crowe [01:21:32] Well Craig, thank you so much for stopping by. I really

Craig Hoagland [01:21:36] Appreciate it. This was fun, Vance. Thank you.

Vance Crowe [01:21:37] And oh, before we go, if anybody wanted to find out more about your firm or, or hear more from you, how would they go about doing that?

Craig Hoagland [01:21:46] They could just Google Anderson Hoagland and Company.

Vance Crowe [01:21:50] Okay.

Craig Hoagland [01:21:50] And we'll be right there.

Vance Crowe [01:21:51] Alright. That sounds great. Thank you so

Craig Hoagland [01:21:53] Much, Craig. All right. Thanks fa. Bye-bye.

Vance Crowe [01:21:54] Bye-bye.

Craig Hoagland [01:21:54] Well,

Vance Crowe [01:21:54] That's it for this week's interview. Thank you so much for hanging around and listening to Craig Hoagland and I discuss all things economics, tech, Bitcoin, and all sorts of other things. If you're looking around and you wanna find some interesting people to follow this week, because people like Craig, while they are fascinating and interesting people, they do not have social media channels. And I have a strong belief that one of the ways that you can make the world a better place is by interconnecting smart people with other smart people. You never know what will come up from that. And that's why I love Twitter so much. And so when my guests don't have their own Twitter handles and they're they're companies, they're not somebody that you could reach out to, I always wanna suggest people that I think are personally interesting. And in the last couple of weeks, I have really spent a lot of time on Twitter and even outside of Twitter, communicating with a guy named Keaton Krueger. And Keaton is a really interesting guy. He works for an agriculture company, he's got an ag background. I think he's moving back to the farm after having lived in the city for quite some time. And he's got some very deep and interesting knowledge on diet and how to think about what you eat and how you live in the world. And the way that I came across him is that he started commenting on the podcast, telling me what he liked, telling me what questions I could have asked, and then filling in details of things that I didn't know anything at all about. And I have always found that the people that raise their hand and, and start tweeting at me to try and have a conversation about the podcast, they are very interesting people to interact with.

Vance Crowe [01:23:30] And I wanna share them with you so that you can talk with them as well. So I highly recommend if you're looking for a new person to follow with some interesting perspectives on the world, check out Keaton Kruger, that's K-E-A-T-O-N Krueger, K-R-U-E-G-E-R-K-R-U-E-G-E-R. Keaton is great. And if you reach out and decide to follow him on Twitter, send him a note and tell him you heard about him here on the Vance Crow podcast. Stay tuned on Friday, I will be coming out with another communications episode. I'm, I've been told that I should no longer call those bonus episodes. I take your word on that. I just need to come up with a clever title. I'd like to keep them on the same platform so they come out on this one podcast. But we'll see how that goes. I hope you like and enjoy those. So check those out. And if you wanna learn more about some of my consulting and communications work that I do, some of the speeches that I give, check out Vance Crowe dot com. So thanks so much for stopping by and we'll see you either next Wednesday or Friday. Thanks.