UPTHINKING FINANCE

• [5:50] Why Russell decided to dissect his analysis in his book
• [8:22] What it’s like to be the guy with the unpopular opinion
• [11:11] How to understand what was happening in Asia
• [14:22] Why it’s important to understand the underlying conflict
• [17:14] The importance of studying financial history
• [20:08] Where the Asian Financial Crisis originated 
• [22:49] What Russell didn’t see coming in his forecasting 
• [25:48] What is the idea of “The birth of debt?”
• [31:00] Monetary systems follow a circular trend
• [33:33] How you would benefit from reading Russell’s book
• [36:56] The currency board system in Argentina
• [41:33] What’s happening next in Russell’s world

Let’s assume that a government authority is running the Hong Kong peg, linked at a set rate to the US Dollar. If there are lots of buy orders for the currency, it will push the exchange rate up. But let’s say it’s not allowed to go up, so the government entity must intervene in the stock market. When it intervenes, the government accumulates United States Treasuries on the asset side of the balance sheet. 

But people forget to focus on the liability side of the balance sheet. The government has to buy treasuries with newly created Hong Kong money in the form of commercial bank reserves. It’s exactly what happens with quantitative easing—assets go up and the central bank's liabilities go up. It is supposed to lead to an economic boom. That’s what was happening in Asia. 

The assets accumulated by the Asian Central bank were treasuries from someone else’s bond market. Some of the banking systems were growing their assets by 30% annually, an unbelievable boom fueled by the exchange rate policy. There was no incentive for anyone to intervene. 

It all started with Thailand and then bled to Russia. In the 90s, Korea was one of the biggest exporting countries in the world. When their currency went under, the world was flooded with cheap products from Korea. It played a key role in bankrupting Russia. Brazil was next. It was toward the tail end that it brought down Long-Term Capital Management (LTCM). 

The Fed slashed interest rates and bailed out LTCM. It sent a message that if anything happened in the markets that would be bad for the American economy, Alan Greenspan would intervene. The reaction of Greenspan transformed the next 20 years. The entire US monetary policy was altered because one hedge fund was in trouble. People were shocked. So they borrowed like crazy. 

Russell thought that the Asian currencies would devalue. What he didn’t focus on was how much damage would be done. When Thailand devalued, he would’ve guessed the US dollar would devalue by 50%. It went down 90%. Over 1,000 people died in riots across Indonesia. He never would have forecast that it could have resulted in the devaluation and near bankruptcy of Korea. 

The fundamental mistake was to see what was happening and say that a deflationary wave was coming to the whole world. The great wave of deflation turned out to be incredibly positive for equity valuations. Russell emphasizes that you can never underestimate the power of a falling Fed funds rate to rejuvenate growth. It worked.

The day that Paul Volcker was made Chairman of the Federal Reserve, it was different. It was a great time to buy bonds. Russell would argue—going back through the years chronologically—things change every 30 years. Monetary systems last about 30 years and then they fall apart. Debt to GDP has gotten to such an astronomically high level that every time there’s a recession it looks like things are teetering into a depression. 

How will the system change this time? In 2009, the answer was quantitative easing. This time, Russell thinks it will be financial repression. It’s a radically different system. What does Russell see happening next? Listen to the whole episode to hear his thoughts. 

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• Library of Mistakes
• Anatomy of the Bear: Lessons from Wall Street's four great bottoms
• The Asian Financial Crisis 1995–98: Birth of the Age of Debt
• The Solid Ground Newsletter
• Connect with Russell on LinkedIn