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Dan Ferris:
The word crypto terrifies me. I’m like, wait a minute, wait a minute, wait a minute. You’re a bank and you’re taking deposits in crypto? How’s that going to work out? Look, you could just take the biggest, the blue chip crypto, Bitcoin. It trades on nothing. It trades like the most speculative, risky thing on the face of the planet.

Addison Wiggin:
I’m Addison Wiggin. We have Dan Ferris. Dan Ferris, I’ve known you for a number of years. You have been studying the market longer than I have, which is interesting to me. And I’m just going to kick it off with a statement that you might not even know is true. You coined the phrase, the daily reckoning.

Dan Ferris:
Maybe I did. I seem to remember that there was another fellow who came up with that, and every time somebody tells me this, I said, “Oh, no, no, no, no. I remember we exchanged emails and we went back and forth,” and then this other fellow said, “Daily reckoning.” But if the evidence points to me, I mean, okay.

Addison Wiggin:
I think you should take the credit.

Dan Ferris:
If you insist.

Addison Wiggin:
Yeah, do it.

Dan Ferris:
Twist my arm. Give me the credit. Yeah.

Addison Wiggin:
But it’s important that we’re talking about this because we’re looking at a similar set of credit cycle issues that led to the founding of The Daily Reckoning in the first place, right?

Dan Ferris:
Yeah.

Addison Wiggin:
That’s what we were doing back then. And then we had the banking crisis in 2008, and now we’re facing another one. And it’s kind of a cyclical, I want to say credit gets overdue at some point.

Dan Ferris:
Right.

Addison Wiggin:
So first of all, welcome to The Wiggin Sessions.

Dan Ferris:
Thank you. Great to be here. And it’s good to see you again and hear your voice. It’s been a very long time.

Addison Wiggin:
Yeah. I think the last time we saw each other was in 1217, a long time ago.

Dan Ferris:
Yeah. People don’t know that’s the address of a building, forever ago. And if it was in that building, it had to be 15 years or something. I mean, it’s crazy.

Addison Wiggin:
All right, so let’s talk about the experience that we’ve had together. What I think we’re approaching right now is another banking crisis, and you’ve been talking about that a lot also. So let’s go.

Dan Ferris:
Yeah, it sure is looking that way recently, isn’t it?

Addison Wiggin:
Yeah. Well, I mean in the last week for sure.

Dan Ferris:
Yeah. I mean, the story is that this is about, in the case of Silicon Valley Bank, they had these high risk loans, and when they got the high risk loans from all these startup companies, they said, “Hey, hey, hey, we’ll give you a loan, but we want all your business.” So they got high risk loans and high risk deposits as well, and they thought they were doing a good thing by using the money to buy safe. And I’m using air quotes, safe Treasuries and mortgage backed securities. I mean, how could that go wrong? It could go wrong if you bought the bulk of them in 2020 and 2021 and then sat through 2022 and saw the market take 30% off of Treasuries, more a worse performance than stocks. And the worst performance since Treasuries were invented in 1780 something.
So I mean, it was the moment I’ve been telling people for a little while now, 2020 was the peak of the biggest asset bubble in all recorded history. The bond bubble, right? Interest rates at 5,000 year lows, mean bonds at 5,000 year highs in price. So there was that. Then we saw the equity markets peak in phases throughout 2021, finishing up with the S & P 500 and Dow peaking in January 2022. So that’s it. Stocks and bonds peaked over that timeframe, and we’re now seeing what happens. All the startup companies that Silicon Valley Bank did business with, they’re not money makers. They’re money losers and cash burners, and the only way they could make money is to raise it in the stock market. Well, not after 2022.

Addison Wiggin:
Yeah. So what does that mean? So literally, what does that mean?

Dan Ferris:
Well, it means that instead of saying, we can sell another million shares to get us through the next 12 months, you’re saying we’re going to have to spend X amount that we’ve already raised during that time, and then you’re going to start cutting people. I mean, there’s a cascading effect there, because then they stop being in hyper-growth mode, which is all they know how to do, and then they start trying to rein themselves in. But that doesn’t work.
When you don’t make money, when you lose money on every unit you produce or whatever you’re producing, you got to find a way to raise the cash, or you need to start making money, and that’s not going to happen. There’s no way out of not making money, and you have a pile of cash in the bank and then you run it down because you have to stay alive. It really is that simple.

Addison Wiggin:
Can you get behind the scenes on Silicon Valley Bank, and everyone calls it SVB, so let’s just go with the acronym.

Dan Ferris:
Yeah. So SVB is just what I just explained. They cater to all the startups and when the startups’ stock values, equity values, were absolutely murdered in 2022, really starting in 2021, a lot of these are the companies that peaked at various times throughout 2021. Like the ARC Innovation Fund, Kathy Woods Fund, a lot of those money losing companies were in there that peaked February 2021. So that’s been two years already. So it’s two years of having a real hard time, or actually most of the time being impossible to raise more money in the stock market and maybe having a loan to pay back and having just whatever cash you’ve raised on your IPO and that’s all you have left.
And even companies that are not in danger. I think Roku and Roblox came out with announcements that said they had, in each case it was something like 20 or 25% of their cash in SVB. So even if you’re kind of, okay, there’s a lot of impact with it.

Addison Wiggin:
Maybe it would be helpful to explain how that happened. So there’s Roku, and even we’ve heard a lot of news about Uber lately. SVB is an influential bank in the region. What’s the difference between capital invested in and outlet? That’s really interesting because the people who are trying to invest in new ideas, they’re really buying marketing. They’re not actually buying the financial health of the bank. And I think that’s the real answer is SVB was funding a lot of alternative or maybe tech investments, but they’re not actually making any return on that.

Dan Ferris:
Well, to the extent to which they made loans, you could say they were trying to earn some type of return, but I think a lot of those loans are… Some of them are probably worth zero and a lot of them are worth less than par. That’s your return. And then whatever you can do with the deposits that you get. I mean, they were profitable before they had to report reality, right? It looked profitable.

Addison Wiggin:
Yeah. That’s what I want to know is blame the report reality, because that’s kind of interesting.

Dan Ferris:
Yeah, it is interesting. I heard one person put it this way, if you had to mark everything to the market, all their securities, all their held to maturity type securities, all their Treasuries and MBS and everything, they were probably insolvent in November. They were insolvent in their last report. But you don’t have to do that. So that was when we started hearing about the bank run. And then of course, that just got way out of hand. People started realizing that… It’s very basic. It’s like finance 101. Assets couldn’t cover liabilities, and people started getting nervous about it so they went to the bank, or there were some pictures of people standing in line at the bank, but really online, and withdrew and transferred everything that they could.
I saw stories of people who actually did get out everything over $250,000, but obviously at the moment of seizure, I’ve heard 85 and 90% of the accounts were over $250,000. So in other words, those are all technically uninsured, just unsecured liabilities. But we know they’re going to be backstop now.

Addison Wiggin:
All right. So I have a couple questions. One is like how does it happen all at once? Like the build up is what it is, right? And we all kind of like, especially in our world, we know what’s happening. But then it happened. I mean, that was a rapid decline. And I’ll just give you an example and all right, now I have three questions. The first one was you could buy one year Treasuries on Thursday, which is, what are we talking about four days ago on the trading market for 5.2, almost 5.25. And now they sell for less than zero. So they collapsed all at once because of the fear of a banking route. How does that happen? Seriously, how does that happen? It happens fast.

Dan Ferris:
Yeah. So the speed, Ernest Hemingway covered this in Sun also Rises. How did you go bankrupt? And the answer comes-

Addison Wiggin:
[inaudible 00:11:49]

Dan Ferris:
… two ways; gradually then suddenly, is the answer. And that’s how it works. I was pretty bad off as a young man. I had spent too much money and I knew it was happening, and then all of a sudden one day I thought, oh man, I got a real problem. And I dug myself out of it. But wow. So I experienced it firsthand in a very small way as a very young man. You continue paying what you can pay. You just continue doing what you can do until the absolute moment when you either do not have another single dollar at your disposal, or in this case, you’re in a regulated industry, you do what you can do until the moment when regulators see crystal clear, this is not going to work. You’re insolvent. We’re declaring you insolvent even if you can pay another bill in the next five minutes, and then it’s over. Gradually, then suddenly.
And the losses, I mean, it took a year for Treasuries to have their worst year ever. So that was a 12-month process. Meanwhile, everybody’s saying they’re Treasuries, they’re mortgage backed securities, they’re fine. Yes. SVB owns six times more than the pure average of the industry, but it’s okay. We have more than half of our assets in this stuff, but it’s okay. They’re MBS in Treasuries. How bad could it be? Minus 30% is how bad it could be. And once something like that happens, you just-

Addison Wiggin:
Let’s get into the anatomy of the trade. So I was actually, my personal money, I was trying to invest in one year Treasuries four days ago, because they would’ve paid whatever, 5.2, and then today they pay less than zero. So how does that happen?

Dan Ferris:
Well, it happens because it’s fairly short-term money and fairly short-term safe money is where people go when they’re scared and people are, there is a certain amount of panic. We’ve seen the action in the market, just in the stock market and in the banking sector, all the banking ETFs and all the bank stocks had a really rough few days. Even though really are all banks, startup banks in Silicon Valley? No, they’re not. Are they all crypto banks? No, they’re not. Signature was into crypto. No, they’re not. So this is-

Addison Wiggin:
Do you think that the banks that are getting… They’re having trouble right now, let’s just be polite about it. Do you think that they were overly leveraged on crypto? Because I wanted to ask that question of somebody who studies the market.

Dan Ferris:
It’s funny because Silvergate was another one, and I-

Addison Wiggin:
Yeah, that’s another one.

Dan Ferris:
I was always terrified of Silvergate. I was so terrified on it, I just-

Addison Wiggin:
Why?

Dan Ferris:
Because of the word crypto. The word crypto terrifies me. I’m like, wait a minute, wait a minute. Wait a minute. You’re a bank and you’re taking deposits in crypto. How’s that going to work out? Because we’ve seen, look, you could just take the biggest blue chip crypto, right? Bitcoin. It trades like a worthless bio… What?

Addison Wiggin:
Up and down. No, it trades up and down is what it does?

Dan Ferris:
Yeah. It trades like a worthless biotech stock. It trades on nothing. It trades like the most speculative risky thing on the face of the planet, which as far as anybody can tell, it kind of is, right? I mean, I sort of hope it works. I’m sympathetic to the idea, very much so. I mean, we had it in the newsletter, Extreme Value, for some time and did okay with it, but it trades like any highly risky tech stock. And so that’s the one that might be worth something and then all the rest of this other garbage is probably worthless. So when you tell me a bank is going to take deposits in this stuff, I think to myself, oh my God, how is this going to work out? And I never did understand it. I never did understand exactly what Silvergate thought its business model really was.

Addison Wiggin:
That’s a good place to start because let’s start with Silvergate and then Silicon Valley, and then you have Signature. Signature is a retail banker, and they’re getting hammered now, which is not… That’s not healthy for the broader market. So that’s the word that everyone wants to use right now. Is it a contagion or Biden speech? I think it was yesterday maybe where he said “Oh, the banking system is safe.”

Dan Ferris:
Yeah. Oh, I wish they wouldn’t say that because every time they do, it’s like you know it’s untrue.

Addison Wiggin:
What the fuck does the President know about the banking system?

Dan Ferris:
Oh, enough to be dangerous, but not enough to be truly useful. So I heard that, I don’t know if you saw on Twitter. This clip was going around Jen Saki from her new TV show in MSNBC. She was saying, and she knows this because she was the press secretary, she said, “Biden doesn’t do anything before 9:00 AM. He doesn’t do anything at 9:00 AM in the morning. He’s a night owl. He’s not up at that time, or he is not doing anything at that time. So to get him up at 9:00 AM to stand in front of a microphone and read this thing that says the banking system is okay, they must have really thought something terrible is happening,” and it’s Shakespearean and he thinks the lady death protests too much me thinks, so it’s suspicious at least.

Addison Wiggin:
No, but I think it’s also true.

Dan Ferris:
And it probably is true, but if it’s not, the culprit is not crypto. The culprit is Treasuries because they’re all hanging onto it. They’re all holding to maturity.

Addison Wiggin:
Yeah, I was kind of going in that direction anyway. But the real issue is the banks have not been able to calculate the rate at which interest rates have been raised by the Fed, the overnight rate. They’re caught in that trap.

Dan Ferris:
Yeah. I mean, they know if they’re losing money because rates are inverted or whatever, the curve is inverted, they know how much they’re losing. I promise. They’re not going to tell you if they can avoid it, but they know. Because they know what their assets are, they know what their liabilities are.

Addison Wiggin:
It caught that fast. How do they get caught in 48 hours? Come on.

Dan Ferris:
When we’re talking about people caught in 48 hours, again, it’s we’re talking about gradually and suddenly. We’re talking about somebody like the executives. They were selling stock ahead of time. They were paying bonuses. They were doing everything as normally as they could for as long as they could.

Addison Wiggin:
Yeah. Did you hear that was one of the news reports. They got paid bonuses like seven hours before. Come on, man.

Dan Ferris:
Yep. So don’t fool yourself. They knew what was going on and they were trying to issue themselves a golden parachute. I don’t know if it’ll be clawed back, but it probably should, right?

Addison Wiggin:
I’m not in favor of clawing anything back.

Dan Ferris:
That’s fair. The clawback should come from shareholders, not from the government.

Addison Wiggin:
You guys fucked up and we want our money back. I’d be okay with that.

Dan Ferris:
Absolutely. They own the company. They should be able to vote and say, “No, we vote no this time around.”

Addison Wiggin:
That takes a couple quarters at least.

Dan Ferris:
Yeah. In fact, I think people calling for bailing out all the depositors, even over 250 grand and all this stuff, I just think it’s insidious. They just didn’t learn from 2008. They didn’t learn anything from 2008. In fact, it shows you the degree-

Addison Wiggin:
I could go on about the interest rate level and I will.

Dan Ferris:
Yeah. Okay. Do.

Addison Wiggin:
Not right now.

Dan Ferris:
Oh, okay.

Addison Wiggin:
But I think that’s the problem is that they’re trying to regulate people’s risk levels by dropping the rate at different times or whatever. So maybe a great question for you right now is what are they going to do on March 20th? Are they going to raise the rate by 50% because they say they’re data driven?

Dan Ferris:
Yeah.

Addison Wiggin:
Hold on. Don’t answer.

Dan Ferris:
I know what you’re going to say, but go ahead.

Addison Wiggin:
They say they’re data driven and they have all this employment information data, and yet they’ve got a banking crisis on their hands. They’re going to drop rates, aren’t they?

Dan Ferris:
They’re going to do what?

Addison Wiggin:
I think they’re either going to not raise rates or drop them.

Dan Ferris:
No, I think they’re going to raise them 25 bips. 25 bips says, look, core is hot, core inflation is hot. 5.5 is a hot number.

Addison Wiggin:
So this would be the crux for me is the real goal is to save Wall Street.

Dan Ferris:
Yes. The Fed’s mission is the socialization of risk since 1914, since it opened for business. Yes. That is a primary-

Addison Wiggin:
Why is that going to be different two weeks from now, or…

Dan Ferris:
Well, they’ve got a narrative to run here, buddy. They’ve got a story to tell, man. We’re the inflation fighters. We still have to tighten. But yeah, 25 bips. And all this 50, 75 bips, it was nonsense. They should have raised it 200 or 300 right out of the gate, or, hey, here’s an insane idea. Let the market set rates and quit manipulating the bond market.

Addison Wiggin:
Oh, that’s crazy. What Dan Ferris, did you just say that?

Dan Ferris:
Yeah. Would the market have gone zero? Would the market have instituted its version of ZERP for years and years? No. People want to get a return on their money, and all the Fed did was… In fact the whole financial system, the status quo is the encouragement of speculation. It’s the promotion of speculation, of moving money around so that folks can take something off the top.

Addison Wiggin:
What I would say would be a number of issues in the banking system where people were taking advantage or leveraging up low interest rates for a long period of time, and they thought that would be the norm. And it feels like Silvergate was one of those. Silicon Valley was one of those. Let’s not blame crypto for it.

Dan Ferris:
No. No, no, no. Yeah, there’s a systemic issue. I believe it is simply, it’s the whole issue of this whole massive mega bubble, which is just cheap money. All of the stimulus and deposits and extra money that was… The government borrows money, it prints it. That’s how the US government prints money by borrowing it. So they issued all that debt and sent out PPP checks and stimulus checks and spent money outright due to the pandemic, due really to the lockdown of the pandemic. And all of that if you look at bank deposits, I mean, it just goes parabolic and now it’s crashed. So all those deposits went out and suddenly banks are flush with these deposits. So what do they do? Well, they’re paying diddly squat on them, so it’s good cheap money. Yay. Yay us. Unfortunately, right around that time during 2020, the biggest asset bubble in all recorded history was peaking, the bond market bubble, the interest rate bubble, really.
So I think it was March, I can’t remember the date. I want to say 9th or 10th, something like that. In March of 2020, the 10-year trades below 40 bips of yield. And then I think again, below 50 bips of yield in August, and then all of the negative yielding debt of all these sovereigns in Europe, Japan, et cetera, all around the world, was a peak of 18.4 trillion in December. So that all means extremely low rates, extremely cheap money is everywhere. Unfortunately, at that time, all these banks just had deposits shoved at them. And so it was extremely cheap money because they didn’t have to pay anything because they’re not paying anything on deposits.

Addison Wiggin:
I want to be very clear about what happens, because I’ve been trying to explain this myself, and I think you’re doing a good job right now, but it’s very clear to me that when the rates are extremely low for an extended period of time, which is literally policy driven, it’s not actually a market thing, and those rates are low for as long as they have been then banks made mistakes.

Dan Ferris:
Yeah, I’ll say. Everybody did. Everybody who had capital to allocate. I mean, it is making it impossible for people to get a decent return, a safe return on savings encourages speculation. They go up in risk. So they put more money into the stock market and then stocks go up and they don’t think they can make more on Apple or Google or whatever, so then they buy the next tier down and the next tier in quality down and the next one down, down, down. And then you get to 2020 and 2021 with all the worst garbage peaking after enormous run-ups. I think ARC Innovation ETF, which is really the poster child of all that, I think it was up like 158%, I want to say in 2022, maybe to the peak in early 2021. I mean, enormous in the 10 or 14 month return. Enormous.
Those businesses didn’t increase in value by that much. I mean, their economic footprint, some of them probably shrunk during that time because they’re all losing money. So yeah, it’s an inducement to gamble. And the stock market becomes this crazy thing where we get meme stocks where people think that they’re going to go to the moon and people are buying stuff like AMC. And you and I both look at that and we go, well, it’s a dying business in a declining industry and it’s got tons of debt, and oh, by the way, they really kind of doubled their share count with these new securities and we know what happens after that. It’s just like everything turns into a biotech stock or a penny mining stock.

Addison Wiggin:
Right. So what do you do? What’s the alternative? You and I are both asking that question.

Dan Ferris:
Yeah, the alternative makes you look like an idiot while it’s all still going up. The alternative is Dan saying, you better hold plenty of cash in years like 2019 and 2020.

Addison Wiggin:
That’s a good question. How do you hold cash when the dollar itself is in question?

Dan Ferris:
That is a good… I’m glad you said that. Holding cash is of course, in part, a direct bet on the value of the US dollar. Admittedly. However, holding cash is a stable option with no expiration. There’s no theta, there’s no time decay really. Yes, there’s the time decay of inflation. But let me ask you something, Addison. How would you feel if you had everything in cash in early 2020 until this moment? You’d be hailed as a genius. Little bit of cash, a lot of cash, little bit of gold or silver or something.

Addison Wiggin:
Thank you, Dan.

Dan Ferris:
Yeah. So yeah, you’re welcome. Me too. What you do during that time is you look foolish and you do foolish things and say foolish things and tell people you better be careful. This never ends well. I mean, November 19th, 2021, we published it in the Digest. I said, I’ve never been this bearish in my entire life. It was the day the Nasdaq peaked. I said, you better buy some put options. You better be careful. You’re going to get run over by a train. I mean, I just pounded the table. I couldn’t believe what was happening. And we know how it all has turned out. But yeah, the answer is you look foolish until you don’t to your question.

Addison Wiggin:
So what’s next for you?

Dan Ferris:
What’s next for me is a couple of things. One of the things I try to do is be the person who entertains extreme scenarios, extreme risk scenarios, because I don’t think enough people do. I think I try to think about systemic risk and big cycles. So I’ve been-

Addison Wiggin:
So that’s one of the ones I wanted to talk about is the big cycles, because I am more interested… I’m just interested in history and I feel like we’re living through an historic period. And then people will write about this later and they’ll be like, oh yeah, that’s what happened at that time. But if you can extrapolate forward historical periods and make decisions, that’s how people make money. A lot of money.

Dan Ferris:
Yes. Yeah. People say it’s different this time, it’s not different this time and all that. If you understand that it’s never different this time. It really helps. We never have a massive financial mega bubble without serious pain for quite some time afterward. So this time I think there is at least some potential for the United States to have its… It is experiencing its kind of peak Japan type moment where the market goes sideways and doesn’t make a new high for 10 years at least, if not 20. Japan’s into more than three decades of that now that the market still hasn’t returned to its 1989, ’84… What is it? 34?

Addison Wiggin:
[inaudible 00:31:20]. No. 1989.

Dan Ferris:
Yeah, 34, yeah. That’s right. 34 years since 1989. So I think there’s potential for that. And I think that the bear market, like run of the mill garden varieties type bear market after a massive bubble would take the S & P 500 down at 75% from the January 2022 peak. Nobody’s thinking about-

Addison Wiggin:
Wait, hold on. That is a crazy statement-

Dan Ferris:
It is.

Addison Wiggin:
… because I was thinking 30% and I did the math, and I’m like, holy shit, that would mean massive turmoil for most 401K holders, most IRA holders, most people that are like, I don’t really care, just put my money in the market. 70% would be twice what I was thinking.

Dan Ferris:
Yep. And again, I think the mistake that there’s a big potential to make a certain mistake here, to look at all bear markets and try to average it out and say, oh, well, we’re probably there. It’s probably not much worse than this. But not every bear market is preceded by the biggest financial mega bubble in all recorded history. Did I say that enough times, yeah?

Addison Wiggin:
Well, that is also true because if you… Like I was saying 30% whatever, and then I looked and all that did was take us back to 2020. So if you do the math, a bear market of 30% right now would take us back to 2020 pre-endemic levels. But what you’re talking about is a larger sort of cyclical bear market that might take us back to what late, I don’t know, ’50s. I don’t even know the math on that.

Dan Ferris:
Yeah, the last time I personally, let’s see, let me grab a quick chart. The last time; it’s 1,200 on the S & P 500. So the last time we saw that was, it looks like, darn it, I hit the wrong button here. Sorry. Last time we saw 1,200 looks-

Addison Wiggin:
It’s going to be early 2000, right?

Dan Ferris:
Yeah. I’ve just messed up this chart that I don’t know how to use. Yeah. So anyway, what you said. No, actually it looks like somewhere around June 2011, something like that. And that’s a little more than a decade.

Addison Wiggin:
I would’ve thought earlier.

Dan Ferris:
Pardon?

Addison Wiggin:
I just would’ve thought it was earlier. That’s it.

Dan Ferris:
Yeah. So just call June 2011, around 1,200. So I mean, that lapse a decade, or more than a decade off your returns, your compounding, your wealth that you filled up.

Addison Wiggin:
Let’s talk about that. How do you think about where to put your money in a situation where we feel like the market is topped out and might not do so well in the next few years? You can’t buy high and expect to get returns lower.

Dan Ferris:
Right.

Addison Wiggin:
So what are you doing now?

Dan Ferris:
Okay, so we look at, technically, I don’t think it’s enough data to really look back historically. So anecdotally, I’ll just say. Some work was done on the sort of the brutal, sideways action in Japan for many years. And it was found that a sort of quantitative systematic value system buying stuff that was cheap by price to cash flow, price to book price earnings, things like that, the traditional value metrics, produced excellent returns over-

Addison Wiggin:
Even in Japan?

Dan Ferris:
In Japan, yeah. We do have this example of, in other words, a multi-decade sideways market. And we know that buying when the value metrics are cheap works, and it was systematically selling every two years, I believe every year or two. I don’t remember the exact study, but the parameters. But I know they were buying based on those metrics, and the returns were pretty phenomenal in various types of stocks like mid, small, large cap, et cetera.
So that’s one thing. You’re going to buy value, you’re going to look for what’s cheap overall. And you can do that with almost any decent value fund. And the value funds they look like if you take a value S & P 500 and a growth S & P 500, they overlap so much. You go, how can that work? But it does over time. And you can see also if you plot these things as I have, you can see them just like it’s like the TikTok of history, value outperforms for a while. Then growth outperforms for a while, which is the period we just had since 2009, and now I think we’re in a growth outperformance period. So that’s one idea, value.
Another one is commodities. Commodities are in addition to bonds, I think they’re the big sort of macro sensitive, rate sensitive kind of asset that people need to understand, which they tend to not understand it because prices can fall for a long time. But then we get these big turns and value starts working. And a lot of those value names are commodity producers, oil and gas producers, miners, et cetera.

Addison Wiggin:
Yeah., So how do I say it? We’ve known each other for a long time, and I know Rick Rule, he is a buddy of yours and mine. We’ve been talking about commodities for a long time, and we keep saying buy them, but why do we say buy them if the market doesn’t change? So that is a very specific question because I think people think more short term than the way that we talk about buying commodities.

Dan Ferris:
Yeah. I mean, admittedly, even in a good long cycle, just use the ’70s because it’s too easy of an example. Even in a good long commodities bull market cycle that lasts a decade or more, there was a massive recession in the middle of that. People forget that. Arthur Burns did succeed in creating a recession. He just didn’t go far enough for political reasons. So yes, it’s volatile. There’s more volatility in commodities than there is in other things in bonds, in stocks.

Addison Wiggin:
I kind of want to hear you say something like over the long term, if you invest in the building blocks of all the stuff that’s around us, the commodities that we use to build computers and microphones and phones and cars like that, why doesn’t that work?

Dan Ferris:
Well, the reason why commodities don’t work is that they shouldn’t. It should always fall in value over time. That’s a good thing. When they fall in value over time, that’s what we want. We like that. That means we have a higher standard of living, but our currency being what it is and central banks being what they are, cycles will happen. And we get into these predicaments where there’s too much leverage, financial assets are suffering and look like they’re not going to do great for a while. And it just so happens at those times that so-called real assets or hard assets tend to do better.
And I think we’re at the beginning, anybody who thinks oil is done, and the commodities run that we had has done, I don’t think so. I think this is the beginning. And I think we’re looking not at a super cycle, but at a hyper cycle because commodities have the wind at their back two or three different ways. First of all, we are genuinely short of them. We haven’t found big new copper mines recently. And we haven’t found big new… I mean, practically fill in the blanks, big new anything recently. And oil and gas companies are getting mixed signals from governments about this green energy transition. But their investments are like 20-year investments. They don’t want to do that. And investors aren’t stupid. They say, Uh-huh, you pay us more dividends and share repurchases, please. We want the cash now because we don’t trust what’s going to happen in the future.
And I made a chart that I put in the Ferris Report newsletter, and you could see all the biggest oil and gas companies, their capital expenditure’s just down over the past, I think it was like five or seven years or something.

Addison Wiggin:
So why is that? Because they’re afraid that those expenditures are just not going to pay off?

Dan Ferris:
What would you do, Addison? I’m going to say, hey, we are going to put you out of business one day.

Addison Wiggin:
[inaudible 00:41:25] you. But-

Dan Ferris:
Yeah, we are going to put you out of business one day, but we need you to produce right now. That’s the message. And we hate you by the way. We blame you for the destruction of the planet or something, which is… It’s all ridiculous. But that’s the narrative, that’s what’s happening in politics and in the market.

Addison Wiggin:
Does that mean a buying opportunity for oil companies or natural gas or shipping companies or whatever?

Dan Ferris:
Producers. Producers. Selling gas producers. Miners, people like mining companies. One of the companies I’ve recommended, it has more reserves of a certain key metal in the green energy transition than anybody in the world. And it’s a certain metal that people just aren’t finding big enough deposits of lately. So that’s a great one, because finding new mining deposits and then bringing them to production is a process that can take decades. So it’s not something you start up quickly. It’s not like eBay and you do the code in your garage over a weekend, and then you have a business on Monday. It’s not like that at all.
So yes, we have not produced… We don’t have enough of any of these things and certainly not enough to supply this transition to electric vehicles and all these other technologies that aren’t nearly as great as what we’re being told.

Addison Wiggin:
I mean, you talk about lithium or cobalt or nickel, the things that we don’t have.

Dan Ferris:
Yeah, copper, lithium, nickel, cobalt, all that stuff.

Addison Wiggin:
And all the places that we know that they exist, or we don’t even know that they exist yet are in politically untenable places.

Dan Ferris:
Yeah. Oh, there’s that too. It’s not a freewheeling entrepreneurial society like Silicon Valley 25 years ago.

Addison Wiggin:
Used to be.

Dan Ferris:
Yeah. Used to be 25 years ago. It’s Africa. I mean-

Addison Wiggin:
Well, it’s places like Greenland I think.

Dan Ferris:
Yeah. Or the United States. We have plenty of metal in the ground in the United States, but you’re probably not going to get a lot of it out.

Addison Wiggin:
All right, so let’s get to the meat of it. How do you invest in this stuff? Tell me what you would want readers to take from your work.

Dan Ferris:
What I would want them to take from my work is that to get a really nice return on this, Rick Rule calls it capturing the beta. In other words, if you just get the market return for commodities over the next several years, you’re probably going to do great. You don’t have to swing for the fences and buy a whole lot of risky companies. You can buy all the blue chip mining and commodity producing companies, and you’ll probably be… I think you have a very good chance of making an excellent return.

Addison Wiggin:
What would the rate be like 20%, 22%?

Dan Ferris:
Yeah. Fat double digits. Teens to mid-twenties, high teens to mid-twenties per year [inaudible 00:44:55]

Addison Wiggin:
But that’s not bad. I was just excited about 5.25 Treasury rates. You can make money when the market goes south.

Dan Ferris:
Yeah, that’s a sensible view, by the way. It is good to get excited about 5% Treasuries after all this time. But I think you can do better in commodities because in addition to the other things, the lack of supply, the green energy push, just good old-fashioned inflation, I think is probably stickier and longer lasting than anyone today thinks. And rates are higher for longer, more so than anyone thinks.

Addison Wiggin:
But inflation also means that prices for commodities will go up as well.

Dan Ferris:
Right. The real point of it, as you well know, is that the price goes up because the thing you’re buying it with is falling in value. So that affects everything, and how inflation has been during our lifetime. It’s like you never know quite where it’s going to pop up, and then one day you realize, oh, it’s in the stock market, isn’t it? Or it’s in the bond market-

Addison Wiggin:
Yeah. Real estate. I mean, it’s [inaudible 00:46:15] big time.

Dan Ferris:
Exactly.

Addison Wiggin:
Which is okay by me.

Dan Ferris:
Yeah, I know.

Addison Wiggin:
I have some.

Dan Ferris:
Okay with me too.

Addison Wiggin:
All right. Cool, man. Dan, it’s been a while. We got together.

Dan Ferris:
Yeah, yeah. It’s been too long. We should do this more regularly.

Addison Wiggin:
Yeah. It sounds good to me. And it’s nice to see that we’re on the same page after whatever, many years and miles.

Dan Ferris:
I know. Old guys. Old guys, a lot of old guys are on the same page right now.

Addison Wiggin:
I’m impressed by your, I don’t know, you got to like a [inaudible 00:46:58] goatee thing going.

Dan Ferris:
I look in the mirror and sometimes I think I look like Santa Claus, but my wife gave me-

Addison Wiggin:
Well, not really though. You look like one of those advertisements for Just for Men.

Dan Ferris:
Right. I know what you’re talking about. Yeah. My wife gave me this thing and it just like-

Addison Wiggin:
It works.

Dan Ferris:
Yeah. Anybody can do it. You just, vroom, and you’re done.

Addison Wiggin:
I can’t even grow it. So. All right, cool-