Changing of the Guard

Scott: Yes, buddy. I’m here. 

Now, Scott and I ended up getting into a very in-depth conversation on the topic, and about an hour into our conversation we kind of both said to each other, you know what, I wish we recorded this conversation for our members because there were just so many golden nuggets in that conversation. 

So we are here today to do a fireside chat where Scott is going to interview me because the truth is there are many opportunities to make giant profits in 2021. But those opportunities are vastly different than they have been in the past. And on top of that, I believe we are at the very beginning of a 10-year bull market in many sectors that have recently been out of favor. 

So we’re here today to inform you and educate you on what I am coining the new era of investing. Now, I need everyone. I need everyone to limit their distractions and really focus on what I am saying here today because there are in my opinion, tectonic shifts going on in the market and I don’t want anyone to kick themselves when they miss out on something that we covered here today. 

You know, so many traders this year kick themselves because they’ve missed out on zoom video so many traders kick themselves because they missed out on pen nationals. This training today is going to be all about how you will not miss out on these moving forward. Alright Scott, feel free to go ahead and start grilling me. 

Scott: Yeah. Hey, first of all, let me just say thank you so much for having me today. 

And so, you know, as Steven said I had the pleasure of speaking to him earlier on in the week and we were just kind of recapping the year and, you know, there’s a lot of uncertainty right now especially in our nation in the US. 

And we’re just talking about what is going on? How can we plan for the future? We want to make sure we’re doing everything inside the trading business. And so one of the questions I want to ask you Steven if you don’t mind is there’s a lot of takeaways from 2020. 

And there’s a lot of takeaways that I think are going to carry over into 2021 it’s not that like January 1st happened and everything just goes back to normal like we have to plan. And so what I’m want to ask you to kick this off is let’s talk about what was the biggest thing that you learned from 2020? 

Steven: Yeah, I would say, that’s probably the perfect place to start when it comes to 2020 the biggest takeaway that I have from 2020 is “do not fight the Fed” so the way I look at it is I’ve been trading now since 2007 so kind of basically, my first entry into trading was a couple of months before the big crash that happened in 2008 and bled into 2009. 

But over the past couple of years and especially last year, the idea, the concept to not fight the Fed has really been solidified in my mind. If I just look at the past three years, Scott. Let’s look at 2018 for example… 2017 vanished very strong on the heels of the tax reform that was passed. 

2018 out of the gate was like a rocket ship higher and right there at the end of January. Actually, on my birthday in January. That was kind of short term. And what happened on January 26 was the market sold off pretty significantly and we had that big explosion if you will.

What most people don’t realize is one of the reasons why we bottomed in the middle of February 2018 was because the fed kind of came out and said hey, we are not planning on raising interest rates until next year. And of course, from the middle of February all the way till October 2nd, 2018, the market basically rallied with not even a 5% correction. 

The Fed basically was right there at the bottom. Now, why do I say October 2nd 2018? For many of us we know then October 2nd 2018, what happened? Jerome Powell who’s run the Fed came out and said ‘’yeah, we’re not increasing interest rates but we are going to be decreasing our balance sheet on repeat.’’

What happened from that moment we sold off about 20% until a day or two after Christmas of 2018? Now, what happened on a day or two after Christmas 2018? The Fed came out and said ‘’at some point in 2019, we’re going to stop rolling off and reducing the size of our balance sheet’’ so if you remember from literally that day until we get to September of 2019 the market rally. 

Again 2019 off the heels of that announcement, we didn’t even have a 5% correction at all. So fast forward to September of 2019, what happens, the Fed says we’re going to start increasing our balance sheet, what happened in the last quarter of 2019? The market went up every single day without fail. Then we get to this year, we have coronavirus happen. We have the big crash starting on February 24th ending on March 23rd. 

Now again, how do I know these numbers so specifically? Well, it was because on March 23rd the Fed came out and said ‘’hey, guess what market, we are going to be the lender of last resort.’’ Meaning any Joe Blow company no matter how solid you are or how bad you are we will lend you money you need at no interest. 

What happened from literally March 23rd, 2020 to where we are today, the markets rally. So really the biggest take home for me is that you can’t fight the Fed. And now, specifically talking about 2020 yes, of course, they did say on March 23rd, 2020, that’s a Monday. That’s how specifically I know this that they were going to be the lender of last resort. 

But the truth is they did say something this year that is much different than they’ve ever said before. They said for the first time ever that we will allow inflation to run at a rate that is greater than our normal rates so the Fed would prefer if inflation grew at a steady 2% per year for the last 10-20 years inflation has been running far lower than that. 

So what they said this year specifically was we really would like that long-term inflation rates to get back to that 2% level and for the first time ever they said and because of that, we are okay if inflation runs hotter. And in some cases much hotter than 2%. 

So where in 2013 and the last time there was some sort of an inflation scare here in the United States if you will. Ben Bernanke went on 60 minutes at that point and said ‘’oh, I will not inflation get out of hand’’ and inflation did not get out of hand. Fast forward to today, where there is potentially inflation on the rise here in the United States at least. 

The Fed has come out and say something different. Again they said this year ‘’in order to get that long running average of inflation back to 2%. It’s going to need to run a hotter than that for an extended period of time.’’

Scott: Make sense. So what you’re really saying is that the Fed is really saying that there now ok with inflation. Let me ask you this does that mean that it’s automatically going to show up?

Steven: Right, that’s a really good one. So this is one of the things that messes up some traders. They just assumed that because the Fed is going to say hey if it happens. Fine. That doesn’t mean it’s definitely going to happen so just because the Fed says alright, well, let it happen. It doesn’t mean it’s going to happen. 

There are many things happening now that have not happened at the level and the rate and the speed that has happened in the past which will likely make now a much different story in terms of inflation coming to the United States. 

Scott: So how does that? What do you think they learned from Europe?

Steven:  So when I think so when you talk about Europe, the question was how does the Fed and the United States learn from Europe? So what happened with Europe was they did not have much inflation at all. They really did not have much inflation at all going on in Europe. 

And the wisdom initially was that ok, if we don’t have inflation, what do we have to do to create inflation? They have to put more money in the people’s hands. The way Europe tried to do this was they tried to cut their overnight interest rate lower than zero. 

So Scott, and my members, you and I, we have money, the money goes into the bank account. Right now, my JPMorgan checking account, I get maybe a basis point a year so I put my money at a bank. JP Morgan puts their money at a bank. They put their money at a central bank. 

So where there is an interest rate for my cash in my checking account for the big banks, the banks institutions, they also have their own interest rate, they also have their own bank, if you will, it happens to be the country’s central bank. So what happens is when interest rates are decreased, it becomes less valuable for banks to hold their money at central banks and at least the United States case the Federal Reserve. 

So if we take a look in Europe, for example, when they have their interest rate at zero that is supposed to incentivize banks. Let’s say, Deutsche Bank, as an example, it’s German bank that is supposed to incentivize let’s call it, Deutsche bank or banks in Europe to say look, on one hand, I can keep my cash over at the ECB. I’m getting nothing on it, zero on it. 

Or I could figure out any way possible to lend that money out via mortgages, small business loans, whatever you want to call it that, unfortunately, once they got to zero wasn’t working. They went below zero. And the idea was if you’re Deutsche bank and you have billions and billions and billions of dollars sitting at the ECB which is the central bank in Europe, it would be losing money every year. 

So that should light a fire under Deutsche Bank to go out there and lend their money. Unfortunately, the demand was not there. So fast forward to the United States. The Fed and the United States said not on this watch, we will not be going below that zero line and we probably don’t even want to go to zero because it doesn’t really spur any economic growth. And it doesn’t really spur demand. And of course, it doesn’t spur any sort of inflation. So of course, what the Fed has done now is much different.

Scott: So, you know what I heard there too is do you feel like that’s what’s justifying and giving validation to the increase in Bitcoin? 

Steven: So let’s talk about the idea first if you wouldn’t mind. How does one get inflation? Because the truth is since October 1987 and I wasn’t even born then. But since October 1987, that’s when they had that Black Monday where like the Dow was down 20% in a single day, the big crash of ’87.

Since that point in time, the Fed has been printing money this whole time and more or less since that time we haven’t really seen any inflation, it’s not just the New York Fed, and the fed the United States that’s printing money for the last 40 years but it’s banking all over the world. But Japan’s been doing it for a while still no inflation. So what is much different today than we saw, let’s say 10 years ago, 20 years ago and why I think there’s a very good chance that we’re going to have some inflation right now is a couple of things. 

Let’s say number one for example. The Democrats right now, want the White House, they want the Senate, and still in control of the house in the United States. That means more or less, whatever they’d like to do they can very much do without very much any pushback. So what they were campaigning on and what they’re likely to legislate on is very inflationary.

They’re talking about things like, you know, President Biden just said he wants to do a $1.9 trillion spending and that was just kind of the beginning of what they want to do. They want to do a couple trillion on health care. They want to do a couple trillion on infrastructure. 

They want to do a lot of different programs where the numbers now are getting to a level that we have never seen before. That’s one of the reasons why because you can’t just get inflation via osmosis. You need a catalyst. So one of the catalysts going on basically in the world right now is the fact that the Democrats won the election in the United States and what they say goes and of course, things like helicopter money, universal basic income.

Things we’ve never talked about before happening now.  If we take a look at that on hand like when you get inflation it ends up happening is you print more money, the value of that currency goes down. So inflation is basically the value of that currency going down and you losing purchasing power and prices having to go up concurrently to stay in line with the value of that dollar going down. 

So on one hand you have US politics, that is, that campaigned on and is pointing to the direction of very inflationary policies. That’s number one. Number two, right now, one of the reasons why we have not yet seen in insane amount of inflation as specifically hyperinflation in the United States is because of what’s known as the Petro dollar. 

So right now, if you want to buy or sell oil through OPEC who is the biggest producer of oil that transaction no matter if you’re Sweden, China, Canada, Mexico, it has to be done via US dollars. What that does is if any country wants to buy gold, they first have to buy US dollars and then they go ahead and buy the oil. So of course previously that has put a floor into the US dollar price. 

But now what we’re seeing is Russia, China, a lot of the Far East countries are now trying to transact oil specifically outside of the US dollar or what they call Petro dollar. So, you have just China alone, for example, who is no longer having to buy US dollars at the same rate that they were because they just don’t want to transact anymore in US dollars via oil, if you will, that’s also going to put pressure on the price of the dollar. Again, that’s inflationary. 

And then the last thing. And the last thing really is the fact that the dollar is there and people trust the dollar and people think it is a legitimate currency because it’s back by the US government. The trust in our government and our elected officials. Every single year that goes by goes lower and lower and lower. 

The polls show in this country that a third of the country does not even really trust the results of our most recent election. So you have the democrats running, basically the government and if they ran on and they’re signaling their policy is going to be very inflationary. You have basically China, Russia and a couple of other countries out there in Asia who are signaling that they no longer wish to transact oil specifically in US dollars. That’s bad for the dollar. That’s very inflationary. 

And the last thing is that you have tons of millions of people in the United States that don’t really have faith in what’s backing the US dollar that is certainly going to go ahead and cause people to circumvent that financial system. And again, putting pressure on the value of the dollar which is inflationary. So going back to your initial question when it comes to Bitcoin specifically so in the past, Scott like I was not a big bull on Bitcoin and I have to tell you I was wrong. I was in Miami. 

Two weeks ago last week whenever it was this point and my childhood friend and I, we ended up getting a cabana by the pool. We put like a television. There was a television set in there, extra waters and everything and we put on a Fox Business and I never really watched television. I definitely never watched it during the trading day but rarely do I even ever really watch television. So we’re sitting on this cabana and we’re looking at the ticker symbol and literally, the first symbol that came up was Bitcoin.

And I was like wow, for Bitcoin that show up on Fox Business and it had as much screen time as the S&P as Gold, and as Crude oil. That means to me it’s probably not going anywhere but when you look at look at Bitcoin, for example, what most people don’t understand is the buying in Bitcoin hasn’t even started but the buying in Bitcoin is basically there so circumvent US dollars. So, for example, Square, the company Square and the company PayPal, those stocks have those stock prices have like rocketed to the moon, have rocketed to the moon over the past year. 

One of the reasons why is because you’re a company. So if you’re a company Scott. And you have a million dollars in your checking account because you generated profit that money sitting there is getting nothing. What Square did and what PayPal did is instead of keeping their money in US dollars in a bank account they put some of that cash in Bitcoin, they’re not getting any benefit whatsoever having a lot of US dollars getting no interest right now. So what they do is they put some of their money. Not a lot.

But they put some of their money in something like Bitcoin because at least you have potential to get some sort of a return on your investment. Apple right now has like a couple 100 billion in cash. What if Apple, which is one company. One company puts 1% of their cash in Bitcoin plus Bitcoin just by that is going to explode. 

But again because you get no interest on your money in a bank account. People are going to be looking to circumvent US dollars so you have a lot of different reasons why people are looking to work around US dollars which of course, puts pressure on the dollar. And it’s very inflationary and if you can find that like you‘re mentioning before with that fact for the first time ever the Fed said sure, if you actually can get the inflation I’ll let it happen. Now you’re sitting in a much higher environment than you were even one to two years ago. 

Scott: What a wild time that we’re in for.

Steven: Yeah. 

Scott: So, for all the traders that are trying to trade at your level and look ahead. You’re saying that we’re going to be in what you call an inflationary environment, right? Can you give like a timeline of when you think that’s like happening where there’s opportunity? What does that mean for invested moving forward does that impact to our members?

Steven: So, one of the biggest indicators of what is next to come in terms of inflation versus deflation so inflation is that the purchasing power of the dollar goes down deflation is the purchasing power of the dollar goes up. So one of the biggest drivers in terms of hey guys, knock, knock, we’re probably going to get some inflation here is typically the price of commodities that are related to food.

So if anyone was to look at a chart right now of let’s say the price of wheat over the last year, the price of corn over the last year, price of pork belly, those have gone to the moon. There is likely already inflation in the United States in food. It’s not so much that I’m just all in on inflation, Scott. There’s a couple things and that’s why I really wanted to have everyone here today.

It’s this idea that as I mentioned before when you have legitimate high level bull markets begin, they tend to begin and they go for many years. They go for many years. So the way that people made a lot of money in the last 10, 15, 20 years is unlikely to be the same moving forward. Let’s look at a couple of sides of the coin.

In the past, we were in a deflationary environment which meant you could have closed your eyes, you could have bought stocks and you could have bought bonds and you could have just showed up 10 years later and like wow, I’m really smart.

When you are in an inflationary environment number one, stocks may not be as attracted as they used to be. When you are in an inflationary environment interest rates are going higher right now because interest rates are so low. If anyone wants to put money at work they’re going to say ‘’well I’m definitely not going to put it in fix income either I want to put it in something where I can potentially make a little bit more that this case has basically been stocks. 

So on one hand, certain stocks will have to compete with higher interest rates if we do due to inflation so there’s definitely an inflationary trade because we talk about if you do get inflation. And I’m not suggesting we get we turn into like a Venezuela situation where we hyperinflation and everything is going crazy. 

What I am saying is just a little bit of a hint of inflation that is likely going to happen in the next couple of months at the latest is such a drastic difference to the way financial markets have been operating over the past couple of years. So on one hand again the Fed is saying doors open. Step on in. We won’t shut the door on you if you’re able to produce inflation. 

On the other hand, last year, certain sectors of the economy, travel, leisure, restaurants, hotels got wiped out. Of course, they weren’t even able to open their businesses in some cases because their state officials or their country said we’re going to lock down those businesses and even if we don’t lock them down you’re only going to be able to operate at a quarter of what it was before. So you take the inflation side which we have not seen at all in the past 20 years and then you take the other side of the fact that hey, we have a bunch of different vaccines that all look to be very effective. The vaccine for the flu that’s been around for decades is only 40% effective.

But the vaccines Moderna, Johnson & Johnson, Pfizer that we have today are apparently 90% plus effective. The interesting thing is President Biden wants to give a hundred million doses in his first 100 days in office that alone takes care of all of the people in the United States that are at the highest level of risk. So if you’re looking at the paradigm shift that is so vastly different on one hand you have the inflation and what names are going to be very benefited from inflation. Those are the commodities. Those are the emerging markets. Those are the industrials, if you will because there’s more demand.

And at the same time, you have. Oh, my business was shut down or people were concerned health-wise and it was reasonable to be concerned health-wise to not go to these establishments. If you get the economy reopening not only is that likely to ramp up inflation but that likely to set the stage for some massive buying opportunities in some names that have gotten relax in the last 12 months due to the coronavirus.

Scott:  Man that makes a lot of sense. This is why I know a lot of our members I mean especially appreciate you being in this kind of guide me through this man. It seems whaled on my head.

Steven: Yeah. Look. It doesn’t mean like tech stocks all of a sudden are buyers. It’s not what it means. But what it does mean is where before it was only tech stocks because they’re the growth stories are they, do they have the same type of risk versus reward as something like a carnival cruise, something like a Marriott as some of these change that because the Federal is able to backstop them. They did not go out of business. And as more vaccines reach globally. As the weather gets a little bit warmer these things are probably going to relax and for a company whose revenue was cut in half. Even if the revenue jumps up 10%, 20% this year what that’s going to do some of these stocks is really incredible.

Scott: And I do want to be clear. This isn’t really about whether, you know, what party you line up with, whether you’re Democratic, whether you’re Republican whether you wanted someone else. Policies are going to happen. Those are going to pass. The Fed is going to do what’s going to do. But that’s not what moves the market per se.

And you’re a big component. We’ve talked about this a lot, you know, really side in your comfort zone. And so, how do you do that with the current suite of products that we have moved forward into 2020? Maybe even let me ask that in a better way like what are you most excited about to share with our members here going into 2021? 

Steven: So when I look at 2020, I would say 2020 blew me away. I mean it just blew me away. When I look at the hedge fund index which is supposed to be the smartest people out there. They got a wall up in 2020. The average hedge fund was down. Our members had some of the best results that I’ve ever seen from them and some of the testimonials that I’ve gotten from our members. They just blow me away I mean I tear up or cry, cheer up every time I hear because so many of our members used to have it so rough.

They’re losing money every year, they’re bouncing around from place to place to and a lot of our members in 2020 found a home. So doing this, educating people, for the last couple of years, Scott. I’ve really been able to understand what works for people, what doesn’t work for people, what really drives results as opposed to what is kind of nice to have. That would be my best takeaway from 2020. Seeing my students succeed.