Domestic Markets Panel: Bliss Through Ignorance

0:00Welcome to the second of two panels for this conference. I'd like to thank my dynamic crew here for volunteering to be part of this. And we've added a member of Kevin Duffy's firm, Bill Lagner, who's sitting on the end here. You may not recognize him, but you should recognize Doug, Kevin Duffy, Duffy, Jean Epstein, Adrian Day and Bill Lagner. Morgan Reynolds on last year's financial markets panel at Austrian Scholars Conference told me that the panels are usually a lot better when I don't prepare and typically I ignore for that advice and try to over-prepare and I think Robert set the bar pretty high yesterday by having a nicely done panel with this international group.

1:06So the first topic I'd like to get to, I'd like to start with is what's fairly common knowledge is that we've got a lot of liquidity in our system. Nobody's really talking about inflation or hyperinflation, but they are talking about liquidity, hyperliquidity, lots of credit sloshing around. This has been a common theme in, I think, Kevin's presentation and Adrian's, and as well as Doug's. Adrian made the point yesterday that even though profits are up in several, for a lot of companies, real earnings have been kind of flat. We've also seen that all different sorts of asset classes are up, and that includes asset-backed securities, mortgage-backed securities, high-yield, and also investment-grade securities, and obviously treasuries.

2:03And that means that a lot of the financial stocks are doing very well, and they make up a very large percentage of the S&P right now. This is another thing I pointed out a year ago, and if you had invested then you'd be doing very well because financial stocks have continued to do well and they're a large percentage of the S&P and if you had been overweight or if you're just a passive investor in some kind of 401k plan, then you're doing all right. So the passive holders and people who have been invested in the S&P, one way or another, have benefited from this, from this. And that's the good side, hence the title of the panel, which is Bliss Through Ignorance.

2:53We don't know what benefits have come for us, excuse me, we don't know the cost of that yet. and I think when you do talk to people I had a conversation with my neighbor just the other day and he joined me and we talked about Alan Greenspan's testimony and he said well we're really going to miss him when he's gone he's done such a fantastic job and I said oh I'm going to Las Vegas I'm going to be talking to a big group of people I can't believe that you would say that I was just going to say the opposite and so I had to think about what his perspective was why he, you know, why he feels like the maestro has steered such a wonderful path.

3:38And I think if you look at the last year, the bond market has really dodged a lot of bullets. There have been a lot of events that have not stirred the pot at all. And a lot of it due to, as previous speakers have talked about, the Asian banks buying up American and Security. So the benefit to the bond market is really immeasurable. We don't know how much longer this is going to last, how long it's going to be perceived to sail smoothly. And some of the events that it seems to have ignored over the last year include rising commodity prices, which traditionally has been a pipeline to higher inflation in the and the Future, the surge in oil prices, the rise in gold, the doubling of the CPI, the core CPI, of course the drop in the dollar against the euro, unemployment around 5%, I think GDP around 4% and five rate hikes.

4:44So it's survived all that. Now, you know, the positive interpretation of that is we've got a resilient, dynamic, productive economy, it's a capital magnet, we're super-sized, high octane, high calorie, we're doing a wonderful job, and the bond market's simply too big to fail, and Greenspan's doing a wonderful job. But it seems to me that we're on a bit of a precipice, that it's not just a cluster of events that could unravel it, but any little scare could start to unravel things, such as an inflation scare, or a scare to consumers' debt is very high.

5:29Some of the excesses on the consumer balance sheet are really piling up. So in Greenspan's testimony on Monday, which Congressman Paul referred to, he talked about the conundrum, and that was the real headline in the papers on Monday and Tuesday. There seems to be ample reason for the long bond yield to be going up. There's a lot of pressure, but there's really no fear. And even though he's hiked rates five times, there hasn't been a sufficient amount of pressure on the long end to raise the yield curve in parallels. So the long rates are still very low and even, you could interpret it as saying, well, Greenspan has given it kind of an official stamp.

6:23There should be more fear than there really is. And so we seem to be at a very interesting extreme at the moment. Just a few weeks ago, Stephen Roach from Morgan Stanley had a column and also used the word conundrum, which seems to be the word of the week. He put it slightly differently. He said, based on the imbalances which we've heard described amply over the last couple of days, there doesn't seem to be any easy exit strategy from the current system. Some base savings have been low and the country seems to be far more interest sensitive than we were five or ten years ago.

7:09So any move in higher rates is going to affect a lot more people this time around. And that could mean that the policy response may be that the Fed stops its tightening and that again precipitates weakness leading to further loosening later down the line and we get some kind of high inflation or new type 2 stag inflation or stagflation or something like that. So with all that positive news in mind, let's turn to our panelists and get their reaction. and I'd like to go first into the, really what I consider to be the domestic question of the day, which is the state of the domestic housing market and I've taken this brief audience poll the last couple of years at the Austrian Scholars Conference Financial Markets Panel and it seems to be evenly split among the people who believe there is a national National housing bubble and the people who believe it's a fairly localized phenomenon.

8:20I'd just like to see a show of hands in this audience at how many people think there is probably some kind of national housing bubble. What's that look like, about two thirds? So how many people think it's that there may be housing bubbles in localized markets, say West and East Coast and some other pockets? So, it's about a third of the audience. Does anybody disagree with either of those two positions, like there's no housing bubble, housing is pretty fairly valued? One person, okay.

9:00Okay, thank you. So, let's, who would like to say something about housing right now? Would you like to, Jean? If I was going to, actually, obviously the 10-year interest rate is basically the housing interest rate. What, it probably pricked up my ears about what you said about the 10-year interest rate is that Greenspan was clearly, in his testimony last week, disappointed and perplexed that the 10-year rate has not risen. and, you know, I'm no fan of the man's intellect, but in that particular case, he seemed to have a pretty intelligent discussion of the possible reasons for it, but why the interest rate has not risen, but he was still perplexed and just said that whatever reasons you can apply to it would have been true, you know, for the last few years. Why is there anything special about what's going on? He was expecting the 10-year rate to rise in response to that.

10:33Real Estate Investment Trust tied to rents, the rental rates, that's apartment rentals and mainly, and I'm just interested to ask my fellow panelists, and you know, of course, the rental prices were, rents were particularly depressed a couple of years ago because, especially because so many people were buying homes and not renting, and I'm just wondering whether my fellow panelists think that aberration is right in itself, or whether there still might be potential to buy real estate investment Trust, tied to rents. So the second, the second, there's two questions here. What about rental rates and what about the 10-year no? Okay, well let's, maybe we can talk first about this differential between housing prices and rents, because that's a pretty common, not a common observation, but it's a known observation about the differential between housing prices which return an imputed rent, and Imputed Rate of Return and then regular rents and there's a big difference there.

11:38Do any of the panelists have anything to say about that, Bill or Doug? Well, I think part of the problem in looking at the tenure, for example, is the CPI computation, which changed in 1999 and we do not use home values anymore, we use an owner's equivalent and Rent. So the CPI is incredibly understated. So there are many people, the long-only camp, the mutual funds, the pension funds, et cetera, that are forced to buy fixed income. And they look at what the CPI or the proposed CPI is by the government. They're buying 10-year bonds and not really worried about it. They're getting some kind of a spread and they think they're being compensated for the inflation risk. And in reality, the inflation risk is is much higher. The other distortion in the bond market I think today if you look along the yield curve is the global carry trade. You've got the Minister of Finance from Japan that was in New York a few weeks ago essentially courting hedge funds and because the cost

12:50of money has gone up here, basically making yen available at almost no cost, taking that Money and going to Brazil or the U.S. bond market or any bond market and essentially buying bonds and playing the spread. Of course, there's the currency risk there, but we're not talking about small markets and we're not talking about small amounts of leverage. We're talking about a lot of leverage. And I think Jim Grant, his latest piece here, actually the source was Bianco Research, Jim Bianco. The last decade he has a chart here that shows the growth in stock market margin debt and the growth in bond market primary dealer debt and the stock market margin debt has gone up a little over two-fold where the bond market leverage has gone up over four-fold.

13:45So the game is, the Wall Street game, the money center banks and the hedge fund community is we could borrow money at very low interest rates around the globe and we're going to go out and play the spread game and if the world stays status quo and we can leverage it 10 or 15 times we're going to make a very good living. I think that's what's distorting the yield curve. People are looking out at the 10 year, the 30 year and they're looking at some of the other markets. Is it big to fail now like banks? Well, the Greenspan put, which has been around for years, and every time there's been a crisis, Greenspan has essentially flooded the system with liquidity, and it's amazing that people have already forgotten long-term capital. And Adrian spoke yesterday about the foreign central banks and their appetite for our debt, and the latest figures, last couple of months, you can see that the appetite is slowly dissipating.

14:44And who's going to pick up slack? Is it going to be the hedge fund community? I don't know. Well, I don't know. I read a couple stories earlier in the week. There's some rumors about the proposed pension reforms and proposed social security reforms. Some market participants may be, in effect, front running on the reforms, buying longer dated securities, getting into that market for their pension liabilities. Certainly, some of the European buyers are doing that. Has anybody else heard anything about that, or would you like to move on to the next topic? Just let me understand how we wrap this up. You were addressing the issue of why the 10-year interest rate to Greenspan's disappointment is not higher.

15:32Greenspan also pointed out that unfortunately, he said to his disappointment as well, The ten-year interest rate internationally is not as high as it would like it to be either, so that it's difficult for him to... He considered the possibility that there might be something involved with the U.S. ten-year rate and foreign rates, but he said it's true of all of them, that they're not as high, they're not high enough, and they haven't risen, so that was a concern. Were you trying to address that point? I just lost it. Well, I just think that my point is that there's a lot of liquidity available around the globe, whether it's here or Japan or anywhere in between, and I think there's just a lot of speculation going on by money center banks.

16:23If you look at the way money center banks are making money, the hedge fund community, there's just an extreme amount of leverage, and essentially what you're doing is you're inflating the value of the bond market, all along the yield curve. And those are just some of the distortions that are prevalent today. Yeah, I mean, as has been pointed out by others, I mean, there's been a huge global increase in liquidity in the last few years, and along with that has been this really desperate, quite desperate search for yield in many cases. and I mean Bill's correct about the hedge funds and so on but it but it's it's more than that it's I mean it's part of that it's a reflection of that people just searching for yield and not taking into account adequate risk I mean people pushing the South African bond market to where it is a Brazilian bond market or Indonesian bond market the junk bond market in this country pushing the

17:18yields to points where they simply do not compensate for the risk and I think I think it's this hunger for yield, but of course, as we all know, every price is set by supply and demand. We talk about the huge increase in liquidity searching for yield, and at the same time, to answer, or to address, I should say, not answer, to address Jean's point about global tenures, I mean, a lot of markets globally don't have long-term bond markets. They don't have 30-year bond markets. So for a lot of markets, 10 or maybe 15 years is about as long as they go out. So when people are looking for Indonesia or something, I mean, I don't think Indonesia has a 30-year bond market, so it's supply and demand. Well, do you think this bond bubble is basically the explanation for the housing bubble in the United States?

18:13and it's not at all clear that we agree that there is a housing bubble, we do agree that there are bubbly areas, west coast, east coast, lost wages, but do you, I know Jean's skeptical about the existence of a national bubble and Bill and Kevin I think are pretty committed to the idea that there's a national bubble. Kevin, do you have anything to say? Yeah, I actually agree with this gentleman down here. I'm not sure that there's really a housing bubble, but there is a credit bubble. There is absolutely no doubt in my mind. And we've heard too many anecdotes. A friend of mine who happens to be in the audience told us last night, he's from Scottsdale, and he has a neighbor who has extracted equity, Of course the value of the homes have tripled in the last five years and this gentleman extracted a lot of the equity from the home, went out and speculated in two or three condominiums, quit his job because he figures that the real estate market only goes up and he can make easily $100,000 a year just speculating in real estate and we can go on and on and on, everybody's heard the stories, there's absolutely no doubt in my mind. We've had three, manias are rare, bubbles are localized,

19:38Manias are the mother of all bubbles. You don't see manias come around that often, maybe once in a generation. I think it's a result of what these gentlemen have talked about over here. The central banks, not only our central bank, but foreign central banks, the GSEs, pushing the envelope, creating these massive credit expansions. We've had three manias in the last 15 or 16 years. We had the mania in Japan in the late 1980s. We have a mania in technology in the late 1990s, and we have a mania in credit today, absolutely. I'm sorry, so what do you, we have a mania which is going to lead to what? What's going to collapse? The stock market and the bond? What's going to happen?

20:25Well, first of all, 40% of the profits in the S&P come from financing or financing related activity. And that in a more, quote, normal environment might go to 5 or 10 percent. So, and we don't even, we're not even getting into all the inflation and the accounting games that are going on in the profits game right now. So absolutely it will have an effect. But where it's going to have an effect is Warren Buffett said, when the tide goes out, you find out who's been swimming without a bathing suit. And what's happened is, you have a lot of people in this country that are totally, totally margined to the hilt, are levered up, and those people, when they're flying around with, there's no margin of safety whatsoever, and something's going to happen, these people are going to get in trouble, and then the dominoes are going to start to tip over, people are going to have to sell real estate, and I'm not saying it's going to happen everywhere to an equal extent, certainly you have the speculation that Southern California is off the charts,

21:27It's crazy in Florida, Washington D.C. Some of these markets are insanely speculative, but at the margin, and that's what drives markets. People at the margin, those that are swimming without a bathing suit, we're going to find out what happens to these people. Well, I had a discussion last night briefly with a gentleman in the audience about what the end game is going to look like between debtors and creditors. And I'd sort of say that for near the end of this discussion, but it sounds like it's maybe a good thing to think about now, what might it look like.

22:12We know what it looked like after the SNL bailout. You know, there's a big property overhang in California. We know what happened in the Southwest. I feel like I should be dancing. So maybe we should take some requests. Do you guys know any quiet songs? We all want to slow dance today. Would you like the karaoke? So just let me know. Just let me know if you can't hear me in the back. We can overdub this later, I suppose, but anyway, let's talk about this, what happened before during downturns and how might it be different. Go ahead, Kevin. I think, you know, maybe looking at what happened to Japan in the late 1980s, I think maybe that's instructive because you had, you sort of had this period over the last 15 years, the haves and the have-nots.

23:07The have-nots are the poor people that lever themselves up in real estate, watch residential real estate go down 50 to 75 percent. The haves are the people that rent it, that now are able to, now the price is coming down and they've benefited remarkably. So, deflation, quote deflation, even though I don't believe that Japan has experienced a deflation in the Austrian sense of the term, And the deflation of the asset bubble in Japan has certainly benefited a lot of people, and I think the same thing will happen in this country. But there's one big difference, of course, and you're aware of this, between where we are now and where Japan was, and that big difference is that there aren't an awful lot of people, consumers in this country, with very good balance sheets, certainly not in aggregate.

23:58Japanese in the late 80s although a lot of people were speculating a lot of people are on margin the average typical consumer actually had a fairly good balance sheet and had a lot of savings so was able to you know sustain himself a little bit. I have to differ with balance sheet point at the fact is that of course these measures are difficult the best one that in my opinion is the ratio between between household net worth and household income, and it was at a record, you know, its record high was about 6.2 times. In the early 80s, it was about at 4.2. It's now at 5.5. So it's actually, now, of course, we can always belittle it and say, well, gee, you know, obviously that means that's a lot of housing, it's a lot of stock market, and so it's a lot of bonds.

24:55However, let's at least take it where it is and acknowledge that if its record high was 6.3 in 1999 and it was low at a time when supposedly it was so great we were all saving so damn much, but of course the proof of the pudding is what the hell you own, not what you're saving, which of course is my point about investment to begin with, it was at a low of 4.3, so it's at 5.5 now. If it goes down to five, we're talking about trillions of dollars worth of value lost, and it would be down at five. So in the aggregate, I don't see a great deal of concern, but of course that in itself doesn't tell us about localized problems, Of course it doesn't in itself tell us about the more subtle issue of malinvestment, but I do find that part of the problem is that when we look at the standard measures, then we don't really, we find that some of these statements don't quite hold up, so I have to challenge that point about how we don't have much of a margin, and again emphasize that it's not what you save, I mean the Japanese were throwing shit at the world,

26:15Wall. That's how they saved. It didn't amount to anything. If you're not going to create value from what you save, you have the feckless expansion of credit as they did, especially in Japan in the late 80s. It doesn't matter if you're saving twice as much. Basically, that's a lousy idea. You could explain to a kid, you've got a lemonade stand and you go into grape juice and the grape juice doesn't sell. That's not good. That's the Japanese way. Grape juice doesn't sell. It's obviously a loss. It was a lousy investment. It's a The question of being parsimonious with your investment and making sure it goes in the right place. And so that's why I'm a bit of a dissenter from the idea that our low rates of savings mean anything. The point is, again, as I was trying to frame it, an individual owns stock. And much of the savings that's done for that individual is not recorded personal savings rate.

27:05Your own stock, the company you own, is investing a whole lot of money in tangible and tangible capital. Capital. And where it's felt, if it succeeds in any way, is through the capital gains.

27:23Despite the crash in the stock market, the recent crash in the stock market in the last few years was not at all comparable to past crashes. The reason it wasn't at all comparable is because at any 10-year period that you could pick, choose any month in the S&P 500 Go back 10 years and you would have made a pretty fair profit. So, and indeed, that was because we did have very legitimate productivity gains in the 90s that held up profits. The crash of 74, I mean, go 10 years back, you would have been broke. And so I can't see in the broader numbers that source of concern. However, of course, I will add, obviously, we did have a nasty recession in 1991.

28:08We did have slow recovery, so I'm not trying to say there's any great reason to be totally confident that we're in great shape. Of course we're not. We never are. However, I don't anticipate the kind of crash that we have been talking about. And I will say again as well that the sorts of things that we're talking about that could cause some major debacle, those have been true for years. We've always had reasons to expect a major debacle, and it doesn't happen. And same thing about the national housing market. We do have very nasty, awful localized bubbles in housing. However, nationally, we've never really had one. And we've had some pretty bad situations that could have led to it, but we never had it.

28:56So that's my view. Well, what would you consider to be an excess then? An excess? An excess in the housing market. There's been talked about this problem of equity extraction, people borrowing against their homes, and, you know, leveraging up. I know it's certainly true in the Bay Area. I don't know if it's true in middle America, but I assume it's also true on the East Coast. You know, I have conversations with Doug frequently, and we, over the last couple years, and we both say, you know, I can't believe I've seen this, you know. Here's another extreme. I couldn't believe it could get to this extreme, but here it is. There have been articles in the New York Times lately, real estate returning 1% an hour and that sort of thing.

29:47The point about leveraging up is that in what I was talking about, which is net worth in ratio to income, that includes all the leveraging up you could talk about. Obviously, if your debt is as high as if you're leveraging your real estate, then your net worth is less, and national net worth would then be less, but it's at 5.5 in relation to income, which is on the high side historically, and indeed unfortunately a lot of it is housing. So therefore, if we look at the aggregate numbers, we don't see alarming leveraging up at all. However, again, we've seen leveraging up and refinancing, of course, through the in the late 90s and currently. There always are risks and there are indeed, I think, dangers of localized bubbles in real estate, of course.

30:38However, again, looking at the broad numbers, I don't see this awful leveraging up of the anecdotes talked about. The broad numbers don't show it. Well, let's try to move to Doug. Do you have some things to say on the house? I'd like to pluck to, you know, some friends of Jeff's and mine, the FDIC, the Federal Deposit Insurance Corporation, or as they call it, the corporation, of course they are the government, but they've come out with a study on this, because there is this talk of do bus necessarily follow booms, and so they've studied many metropolitan areas, have come up with since 1978 there's been you know 63 booms and there really hasn't been all that many busts you know the busts really weren't caused by the increase at least from their data the busts weren't caused by an increase in the in the prices but the oil patch decline and then the declines on either and other coasts in California and New England, which was more related to defense contractors

31:51and that kind of thing. So, you know, the jury is still out in terms of modern history in terms of whether these busts necessarily follow booms. Now, they sound some caution Now, they sound some caution in terms of homeowners have never been leveraged like they have been in recent years and the idea of getting a 30-year mortgage and putting 20% down is really passe. You're really, you know, an old fuddy-duddy if you do that and, you know, the new way of thinking is to keep your home, you know, 100% leveraged at all times so that you can use the excess money to buy more real estate and then, of course, leverage it and continue on or buy stocks which automatically return 10% a year.

32:50So the way to financial health now, at least according to some mortgage brokers, is not to have a normal mortgage, but to maintain complete leverage at all times. So whether that will change what happens remains to be seen, but at least in the last 20 years In the last few years or so, we really haven't seen any busts, and that's really what we're experiencing in Vegas, where we had a huge boom last year, but we haven't had a bust. Prices have really remained steady, and so there hasn't been the big correction that many people thought there would be.

33:44Well, I guess the main point there is that any sort of rising values are going to mask a lot. They're going to mask a lot of mistakes that are being made, and you're just not going to know who's swimming without a bathing suit as long as values keep going up. So, do you feel Vegas is on the edge, or do you think it's just... Well, I hope not, since that's how I make a living, but... I think that many of the communities in the United States that have housing booms have some severe supply constraints as well. Not that that cures this problem all by itself, but Vegas by most people's estimation maybe We have seven years of traditional home building land left before we hit the government land, which we probably will never let loose of in any great quantity.

34:50I think that's very common on the west coast and the east coast where there's a demand for housing, but getting building permits and getting approval for those units is often and thus, instead of having price corrections that you would normally see through, you know, supply and demand, you don't see that because the supply doesn't come into the market like it would with stocks and other types of investments. I want to say to that point, it slipped my mind, it is true that, you know, we, any way If you look on the supply side of housing, just anecdotally, or in terms of the numbers, you find, as the gentleman was saying, the supply isn't coming through.

35:39You've got demand chasing supply, but you have a situation in which the second, the contractors who build two and three homes at a time, who are, I've been told, still close to about 70, 80 percent of the market are getting squeezed, and the ten largest firms are getting an increasing to share the market because they can talk to the localities and they can accommodate them, they can spend money on amenities, they can spend money on bringing in roads, and so if you look at the inventory, this number called months of supply of houses available, you find it's pretty low, and it just doesn't keep up with the demand, and so that's another reason for the rising prices of homes, which is just a legitimate point that the supply is just not going to meet the demand Zoning Restrictions and localities clamping down in different ways, and then in addition, as well, I should have added, that if you disaggregate the prices nationally, then you find huge areas of a country where you don't really find much in the way of any dramatic increase in housing prices, which is so much the worst, of course, for those localities, east and west coasts, especially, as we were talking about, where you do find it, which are the reason why you look at it in the aggregate.

36:58and that's where it's really happening. Kevin, you had a point to make and then... You know, manias have several defining characteristics. You see a parabolic rise in prices where it starts out as a normal bull market, all of a sudden turns into a breeding, feeding frenzy. You have valuations that detach from reality. You have, it becomes a national sport. Everybody wants to participate. But the fourth is rationalizations. There's always some kind of rationalization Why this game is going to continue forever, why the valuations aren't absurd, why prices are going to continue to go up, and we saw it in Japan, we see it with every May, we saw it with Japan in the late 1980s, they're not making any more of this stuff, you see it today, and you can talk to any public home builder, any CEO, turn on CNBC, and they're going to tell you the same thing, well, we have an advantage because of the limited supply and the permitting process, the demographics,

37:57and the low cost of credit and the availability of credit and the government standing behind this. These are all the rationalizations why it just can go on and on. I just want to finish and get back to what Jean was saying regarding household net worth. You've got to scratch your head when interest rates are at 40 year lows and more and more people are opting for adjustable rate mortgages, interest only mortgages, The Financial Obligations Ratio is near an all-time high. We are clearly in a mania. There's no question about it. And the coastal cities, obviously, are where you read the stories, but it's pretty evident.

38:42Everyone is pushing the envelope, and it's not going to take much to essentially jar the market. And I think the difference this time is the Fed has come to the rescue time after time with money printing and bailing out of long-term capital. I think that the difference this time has been the kindness of strangers and at some point, and they've kept the consumers clearly engaged in this game, but at some point they will pull the trigger and they will bail out. Yes, let's try to, unless one of the panelists has a final thought on the housing market, I think we can escape this mania and move on to one of the next topics. I wanted to ask Adrian about some of the comments that yesterday's panelists made on China and if he was in general agreement with what was said yesterday, and I guess I'm really looking Looking for more of a discussion of what your investment philosophy is.

39:50You talked about looking for absolute value rather than relative values and it sounds like you don't particularly obsess about any particular market place but you're looking for individual values in those places wherever you may find them. Okay, that's a couple of questions I guess. You know, China, I certainly don't pretend to be a specialist on China. But I think it's an open question, is what I would say. It's certainly true that there have been some pretty horrific busts in China over the last 20 years. There are better fundamentals this time, in the sense that the preceding boom was not quite as great.

40:41I mean we had growth of, whether you can trust the numbers or not, we had growth of 14, 15, 16 percent as opposed to 20, 21, 22 percent. We certainly have a much stronger financial, I don't mean the banks, a much stronger financial system at the government level now than we did 15 years ago when the country last passed. It seems to me that there are reasons to be relatively optimistic on China, but I still think it's an open question. As I mentioned yesterday, particularly at the consumer level, you've got banks that are in aggregate pretty close to bankrupt, and you've got, you know, consumers that are too highly leveraged and a lot of problems at the consumer level right now with people not being able to pay back their loans.

41:40You're not seeing that at the corporate level yet or the business level, but you're certainly seeing it at the individual level. So it strikes me that, in summary, it's still an open question. I mean, I'd much rather come up here with a very firm view one way or the other, or the other. But it's still an open question and I think one just has to see how things progress over the last, over the next, you know, three, six months. Look at the shipping rates, look at the inventory build-ups or orphans, you know, look at what happens. I think it's an open question. Okay, would you like to talk a little bit about just your general investment philosophy? Because I've spoken I've spoken to money managers in the Austrian tradition, in particular, Tony Deaton, if he were here, he would say, you know, I don't care about the market, I don't care if the market goes up, I don't care if it goes down, I'm looking for individual companies, I'm looking for interesting opportunities, and I just don't care about the market that much.

42:39Well, I'm a bit of a blend, because to be honest with you, and there may be some disagreement up here, I think it's a little bit extreme to take the Tony Deaton approach or even, for whom I have a great deal of respect as we know, or the Warren Buffett approach that you don't wait, three minutes spent on figuring out the market is three minutes wasted. I think you have to have some kind of view, some kind of opinion. Now that doesn't mean, of course it doesn't mean that any of us can predict with any kind of accuracy what's going to happen to the market. But I think if you have a view that interest rates are likely to go up and we have a bubble in credit and housing, then you take a more cautious view on certain types of investments.

43:25If you have a view on domestic demand in Asia, which has grown tremendously, I don't mean just China, but the domestic demand in Asia, which has grown tremendously in the last few years compared with 1997 and compared with previous cycles, so is Asia going to be able to understand the decline in the US if we have one you've got to have some kind of view on that to know whether you want to be aggressive or cautious in buying certain sectors certain markets so it's not a matter of saying well you know I'm a bull on this or I think the economy is going to do this so therefore I'm going to buy everything but it has to affect how aggressive or cautious you I mean just to take an example gold stocks forget gold as a hedge or an insurance

44:39You've got to have a view on what the prices of oil and gas are going to do, because if you think the price of oil and gas is coming down, you know, you ought to get out of these stocks pretty quickly. So I don't know if that answers the question. Well yesterday you were talking also about one bank that you like, you like the Hong Kong Shanghai Bank, HSBC, but financial stocks are doing very well right now and you did offer the qualification that you have to look at this company before you get into it because it may be a little rich right now. Well, no, absolutely. So, I mean, that's a good example. That's not a stock that I'm buying right now, because I do think it's at the high end of the valuation range. I guess what I'm saying is, I like to look at individual companies, and I think this is what people should do if they're long-term investors.

45:27You need to look at individual companies from the ground up, but you have to put it in some kind of context before you decide whether to buy it or sell it. So Hong Kong Bank, in my view, is a great company. This is a truly great global company. I want to own it. It's a question of when do you own it. So, Bill or Kevin, would either one of you like to talk about your strategy and comments? We actually met with Tony the other day, and he did want us to pass along some advice to the group. He said, bet on black, six minutes of every hour, but only on odd days.

46:13I need to write that down. Six on black. We do things a little bit differently. I mean, we're just looking over the last couple of years and essentially there's been this massive inflation and just about that commodities, gold, real estate has gone up and has done very well, emerging markets. But we think we've sort of reached the end of that inflationary phase and the next phase is more of a contractionary phase and that the debts of the American consumer and perhaps even the marginal Chinese consumer, that you're going to start to see a debt liquidation and you may actually see some of these lenders who have been amazingly aggressive start to panic.

47:06The first thing is to get out of the way. Whether we have inflation or deflation does not seem to be good news for lenders because if we have an inflation, the cost of capital is going up. If we have a deflation, probably the collateral is going down. So the first thing we would do is just avoid, for the most part, the financial sector, and in particular, those people that are really pushing the envelope, the most egregiously, like the subprime lenders, the GSEs, the big banks, that sort of thing. Do you look at companies that, for example, do a lot of vendor financing, who have large finance, whose earnings come from their financing arm as profits?

47:53That was more of a, it was a bigger issue I think back in the mania, the tech mania where you have the loosens and you have the Cisco's vendor financing, the telecom companies and the internet companies. Today you have the Asian, the Japanese and the Asian central banks essentially vendor financing the American consumers. So those are the parallels between the vendor financing. It seems to me that one of the philosophies of Austrian investors is that they tend to be more focused on this idea of downside protection. I've heard Mark Fauber say this, I've heard Tony Deaton say this, and I've heard all of you imply it in one way or another. Perhaps a lot of your clients just don't want to lose money.

48:39They want to make a little money, but they really don't want to lose a lot of principal. principle. And so they like the idea of having some kind of insurance product. That's why they're attracted to gold or gold stock, something like that. And, you know, I guess that gold is the preferred method among people who are here. And I'm just wondering if there are any ways that, besides gold, that you would argue, you know, plays on the yield curve I think just to sort of use broad strokes here, the idea of risk, there's a Latin proverb something to the effect that you cannot avoid danger without taking risk, so I don't think we can just kind of go into a shell and just buy gold.

49:40You know, broadly, we think it makes sense to have gold as a hedge, but we really, ultimately, we want to be invested in the productive part of the economy. Market entrepreneurs, we want to try to avoid the political entrepreneurs. We think that over time, political entrepreneurs like, for example, a Fannie Mae is a classic political entrepreneur. I mean, how is that any different than Enron four years ago? So, you know, broadly, those are sort of some broad themes. Also, we're not too encouraged about the government's, the US government's ability to just print money. So, we don't want to necessarily hold a lot of dollars.

50:25We want to own tangible assets, commodities, but do we want to own orange juice in our backyard or barrels of oil in our backyard, I think we would rather own mankind's ingenuity than just own the materials because over time, if the free market is allowed to function, the price of commodities is going down. Bill, do you have anything to add to that? Well, I'll touch on Fannie Mae. I think it's interesting. We probably won't see audited financials from Fannie Mae for a minimum six months, and yet the company still trades in the New York Stock Exchange.

51:13Friday it hit a four and a half year low, and if you're looking at one of the engines behind the consumer, it's Fannie Mae. I mean essentially Fannie Mae and Freddie Mac have been able to expand their balance sheets at unprecedented rates the last six, seven, eight years and basically that game is over. And so if you're looking for data, anecdotal data to point towards the consumer basically rolling over, I think that's probably where to look. I think another thing that we look On the subprime lending side you look at a company like Countrywide Financial, which is one of the largest lenders in the country, residential lenders, and the CEO of the company is selling stock, basically he's almost sold his entire position, and every other week he's selling 100,000 shares, those are the things you look at in terms of where are we in the cycle, you've got to scratch your head, and just a couple of things that we do in the fund

52:18are trying to capitalize on this unwinding of the debt that Kevin alluded to. Jean? I wanted to just mention a couple of approaches I might consider as an amateur. You might consider as an amateur. First, understand that, as a gentleman was saying yesterday, timing bubbles is a very dangerous, I think the difficult game and you have to be a genius to time bubbles properly. I think that if there's any big criticism I have of the panel, I think the indicators you might use for timing bubbles can sometimes be confusing. And unfortunately, they don't put indicators together for us that help us time bubbles.

53:07The other realization that should give you humility is to understand that in order to think in terms of getting a real edge and real niche, you not only have to think of yourself as a good forecaster, you have to be a forecaster who can do it better, who can establish a margin of superiority between your forecast and the market's forecast, and the market isn't always that stupid. and often of course nobody quite knows what the future is going to bring so to establish that margin superiority is especially difficult and so I think that what leads you to believe then that the default position is to be relatively passive as an investor, to think in terms of broader asset classes and to try to have more than a 10 year horizon realizing because you don't think you can time bubbles, but given that I still am impressed by two things.

54:11Number one, as I was saying in my more extensive talk, I'm really intrigued by the possibility that the market is making a huge mistake with respect to the asset class I would call intangible, intensive companies. And the reason for it, as I was saying, is first, not only the obvious, that investment in intangibles clobbers your short-term profits. So it's not a very good ad for you as a company, but your long-term profits might be surprisingly good. But secondly, because the market doesn't know how to measure intangible investment, it's very befuddled by the ability to do so, and therefore overlooks these stocks.

54:58and that those creative people who know the numbers I think have been making huge strides in that regard so I would consider that particular asset class which I think as I was saying in my overly dramatic way is probably the investment of the new millennium also I want to end on a bump I would consider junk bonds seriously as well for an obvious reason if you have a 10-year horizon then there are two things you don't have to worry about too much with respect to junk bonds first that they're very volatile and, second, that they're subject to illiquidity, which is, on top of that, a problem. Over the very longer term, those aren't a problem, and indeed, as well over the longer term, the recognition that companies that are on the other end of junk are borrowing and have issued the junk bonds are going to default, but by and large, most of them won't. By and large, most of them will pay.

55:55and so then when you then on top of that consider that the that that your retirement funds are where the tax shelter is and then then you might seriously consider putting a huge piece of your tax shelter retirement income or some piece of it into funds that invest in junk bonds although I should add that a friend of mine who's a A high-yield bond analyst has said he'll call high-yield bonds junk as long as those who sell quality bonds will call them low-yield bonds, which of course they also are. So those are my only two points, junk and intangible asset companies.

56:42Adrian? Just very quickly, a couple of points on this issue you brought up of risk and portfolio planning and so on. I mean, clearly, clearly, if all you're focused on is risk and downside protection, you're never going to make any money. You can't go 40 years just investing in treasury bills and gold and protecting your downside, but you're never going to make any money. We all know that. I think we know that. So clearly, I agree with what Kevin had to say. The way I look at it, and there's different ways people do this, but I think it's important for individuals to separate their portfolio into different categories. This is a fairly obvious point, I guess, but to take a certain part of your assets and say this is my downside protection, this is my insurance component, I want to insure against various risks, I want to insure against the collapse in the dollar, I want to insure against higher interest rates, I want to protect myself against inflation and so on, and build an insurance component of your portfolio that is more or less permanent. And you don't worry about fluctuations, you don't worry about what individual

57:48And you certainly aren't trying to maximize returns, you're just protecting your downside. And that will depend on your own personal circumstances, how much that should be. If you're a 20-year-old person with wealthy parents and you've just got a new job and you're not married and you don't have kids, you don't need as much insurance or downside protection, shall we say, as a person who's 60 and about to retire and has got three kids about to enter Harvard College and so on and so forth. and of course if you're 70 years old and you don't have any heirs and you've got 20 million dollars in the bank you don't need to care about upside at all, you know, why take any kind of risk at all if that's your situation so everything there depends on your individual situation there's a lot of things that can go into that and then the other quick thing on you know, the way I look at things is, as I said, it's not really a matter of having a...

58:39it's not necessarily a matter of trying to predict the future because trying to predict the future is a mugs game, it can't be done, I don't think, it's not only difficult, it just can't be done and it's certainly not a matter of timing but as a value investor when you look at the risk or reward and you say well this does not represent good value and this does not represent good value and this does not represent good value and you wind up with 80% cash in your portfolio, you're not really making 嗯, but that's where you live, that's where you're left, because you can't find anything of value. Jeff just whispered in my ear, you know, you talk about Intentional Investment, Intentional Investment Intensive Companies, you've got a couple of, I named a couple of name brand Intentional Intensive Companies, really Google and Walmart as you call, really to illustrate point because my whole point is to think of them as an asset class as in terms

59:41of thinking of investing in over a hundred of them because you're not picking any particular one you're merely betting on the concept betting on the asset class beyond that of course if you're brilliant and you want to start with that list of a hundred and pick the ones that you think are particular winners that's something else again but I'm talking about the asset class of of Intangible, Intensive Companies. I'm going to ask a question or two that was submitted by the audience. In yesterday's panel, the question didn't come up about India, and I was just wondering if Adrian had anything to say about opportunities in India, or if he's looked into it, or... I seem to think I'm talking an awful lot now, and I don't like doing that on panels.

1:00:29Yeah, I'll be very quick on India. I mean, my view on India is a little bit prejudiced by the fact that I've tried to make money twice and lost money twice, and so, you know, two times whatever the third time shy. Anyway, you know, India is certainly a country and a market, but has disappointed many investors many times. It's a sort of country that always everybody knows has a great potential, but it never seems to fulfill its potential. I think that may well indeed be changing a little bit. We shouldn't forget that one of the fundamental things about India, we all know that it's English-speaking and the rule of law and democracy and all that kind of stuff. But after independence for a couple of decades, this was a socialist country and almost a communist country. And it also has an enormous bureaucracy that I think is what's really held India back, the enormous bureaucracy.

1:01:20You know, is that changing? I think it may well be changing. It's also very difficult, other than buying the funds, which are fine, and for most investors, the funds are probably the way to go. But other than buying the funds, it is extremely difficult, even for institutional type investors, professional investors. Very, very difficult to buy individual Indian companies. There aren't that many listed. and the ones that are tend to be, you know, the most expensive, obviously, selling at high premiums. I think I'd like to actually open up the questions to the general audience. And if you have a question, please raise your hand and please try to speak up, because we're listening to the Bee Gees up here.

1:02:08Is that the Bee Gees? No, that was 30 minutes ago, I'm sorry. This gentleman. You know, when you're listening to your comments on the different markets and stuff, I hear two schools of thought, and I hear one school that seems to me still based on the fact that efficient markets somehow work. And that is all part of our process of making decisions about investment. And then there's the thought, you know, efficient markets are quads. You know, we're not talking about efficient markets. I mean, efficient markets are quads. It will not work. So the traditional investment policy goes around just the advanced education and laws.

1:02:58You all care to elaborate on that? Well, let me see if I understand your question. Are you asking a question about whether we're embracing efficient markets or is it more...? Well, let me just say one thing and turn it over to the panelists. I don't think there's a lot of orthodoxy in the investment theories of the panelists. and just about a month ago I heard Jim Pappalava say pretty much the same thing and he recommended specifically against that having too much of an orthodoxy in your theory of investments and you know the question is then well what is it that you use and I think you have to get an idea from what the panelists are already been saying about where the focus is.

1:04:06Let me try to address the question. I think that the term efficient markets was invented by mathematically inclined economists with their head in the clouds. The very term efficiency is ridiculous to talk about with respect to markets. I think that, conceptually, what you're talking about is the market generally more or less got it right. Is the market generally got it right in terms of what is known, what can be known about the future, or does it have it wrong? Can you beat the market in some way? And my feeling is that you very rarely can, but because getting it right, and more or less getting it right, given the inability to forecast the future and the ambiguities in the future, is not very difficult.

1:04:57That's why I hate the word efficient market, because efficiency almost implies that it's some very precise requirement that the market can deliver on, but there's no such thing really in my view, it's only that conceptually, can you beat the market with a certain, does the market really miss a lot of obvious, fairly obvious stuff, if given a certain amount of study you can get on top of? My feeling is that at times it does, but rarely, that's why I believe that that passive investing is the default position. You treat different asset classes more or less the way they've been behaved in the past. I believe we have a system of capitalism, very imperfect, but the capitalist system, as I would still prefer to put it, has shown that stocks generally do better than bonds over the very long term, so you obey that rule.

1:05:51But then, on top of that, I can only see, as I've said a couple of things, The intangible investment companies where it may well be that the market has made a huge mistake, really a glaring mistake that I think is very dramatic and I've also seen certain very steely-nerved hedge funds that are short sellers do extremely well. People who are willing to hold on to these positions, see them reverse a little bit, I am impressed by short sellers and I can understand short sellers who look at or analyze and I believe, of course, the reason for that is that the market really is very oriented toward buying, very scared of short selling. It's not the American way, it's even more difficult to short sell, as you know, so that's another category where I think probably the market misses things, and indeed, I'd be willing to listen to my colleagues up here who have other different insights into how it misses things, but I think by and large, it doesn't miss a hole.

1:06:53But again, it's not efficiency so much, it's simply that the ability to understand what's going to go on in the future is rather limited and it wouldn't be too surprising if the market does it about as well as you can. So, Kevin or Bill, does the market miss anything? Adrian? Well, if it didn't, we wouldn't be in this business. Fair answer. No, I think Jean's right. Markets, most of the time, are rational. Man acts rationally. If he didn't, capitalism wouldn't work. But there's a classic, Extraordinary Popular Delusions in the Madness of Grounds by McKay.

1:07:41And he said, men, it has been said, will go mad in herds while they come to their senses slowly and one by one. Number one, like I had said earlier, manias every now and then, they come along. Maybe once in a generation, we have happened to have three in the last 15 or 16 years, but it does happen, and I think when it happens, that provides opportunity. Number one, to recognize it and just get the heck out of the way. Two, I agree with Jean also in terms of timing. If you're a short seller, it's probably not what most people ought to be doing at home. Look at 1996, the famous Irrational Exuberance speech by Greenspan.

1:08:26The Dow is at $6,500. He may have been right. The risks may have been high at $6,500, but the risks to a short seller were even greater. So, and then I think we could also, if you want me to, address how we deal with the problem. I'll give you an example. If you want to be a short seller, the problem is, theoretically, you have unended risk. And theory has come into practice. I mean, it certainly came into practice with the internet bubble, as some of us here can attest. But we're seeing some anomalies out there. For example, the 10-year Japanese government bond yields about 1.4%.

1:09:14This is one of the great asset bubbles in the world right now. And the beauty of short-selling a bond is that there's a limit to it. You don't have open-ended risk because a bond will only go to a 0% yield in maturity, as far as I'm aware. So, for example, there are futures on the Japanese government bond. They are currently traded about 138, close to 139. The worst case scenario for a short seller is that yields go to zero and this bond rallies to 150. If yields were to rise to 5%, the bond would So that's an example of a short sale where you've got limited risk and where the risk and reward is a little bit more balanced.

1:10:08Thank you. Adrian, do you have a point? Just very quickly on this point, I don't disagree with what anyone said. I mean, to me, clearly markets are not efficient. But that doesn't mean that everybody should assume that one is so bright that one can outperform the market by picking stocks I don't think any of us up here are suggesting that and sort of to get to the gentleman's question and something, you know, for investors I think a lot really depends on having a well thought out approach to investing and sticking with it. now I don't mean you never change your mind if circumstances change but I mean having a philosophy or an approach to investing and sticking with it I have absolutely no problem for example with a person who when he's 20 years old says I'm gonna buy five or six really about the market I'm just gonna hold them and over 10 years or 15 years he'll probably do very very well and I have

1:11:09there's a lot of you in this room obviously will know Harry Brown and his permanent portfolio concept you know you divide your assets equally into four are all different categories, gold, growth stocks, what are the others, bonds, and you'll have 25%. So that's a way of making sure you sell things when they're a little bit more expensive and buy things when they're a little bit cheaper. Now, no one is going to pretend that that's going to make you the wealthiest investor that ever lived, unless you start with a lot of money. But it is a perfectly valid concept for the person who wants to be low maintenance with their investments, whether it's all of your investments or part of your investments so I guess what I'm saying is there's different ways to skin the cat but it's important to understand what what your psychology is how active you want to be what risk you can tolerate because there's nothing worse than determining that you're going

1:12:02to be a long-term investor but panicking and becoming a short-term investor at the bottom which is what a lot of people do you know they say they're long-term investors but as soon as things collapse they suddenly become short-term investors So, have an approach and stick with it, is what I would say, as long as it's a valid approach, of course. So, Bill, do you have anything to add? Any other audience questions for now? Yes. Do you have any other recommendations for now on the kind of things that you're talking about? And who would be prepared to make the first move actually walking up the floor? Do you have any other recommendations? Yeah, actually that's similar to another question that was submitted in the written question about if there's any sector that you would be overweight right now and obviously a couple of them have been mentioned and a couple of underweight sectors have been mentioned such as financials and perhaps homebuilders and under and you want to be

1:13:09overweight intangibles assuming you can find this this category let's let's come Let's come up with a fund. Let's do it. Oh, there is no fund. It doesn't exist. That's the exciting part of it. There is no damn fund. Although I will say that, look out, Brook Led, who's completely laid back about this thing, I mean, he's talking to a fund, but he's giving him very tough terms. He wants indemnity. He's a difficult guy, and he doesn't really care that much about it anyway, because he's got other fish to fry. He wants to basically indict the entire method of accounting in this country, is actually very much in the process of doing, and so that's why there's something interesting about this, and why I urge people to look into it in their way.

1:13:57Obviously, I guess if you think, if you've isolated over a hundred of these companies, if you take a look at what Baruch Lev has, actually I'm looking into it myself, as I might imagine I am, and with him, I don't know what I'm going to do with that, but if you have over a hundred of them, then you probably can think in terms of doing a sort of random sample of them, if you can afford 30. So it's not impossible. But again, because there are no funds, that's an additional reason why it's especially interesting. Adrian, are there any underweight or overweight? No, I mean, I'll give you some walk out the door specifics, and let me just start by saying when I talk to an audience that I may not see a game for a year or two, or may indeed never see a game, but again, I don't want to harp on the risk, but what I'm going to get back to is risk, because I don't want to throw out some junior gold stock, but I think it's the best buy right now and I'm loading up on it, but a month from now, the first round of results come in and it's lousy and I'm out of it, and three years later or five years later, you say,

1:15:03So I am going to look at things that I feel very comfortable, but if we meet again in five years or ten years, at the very minimum you won't want to throw a tomato at me. So, you know, one of the areas that I like a lot are these things called business development companies, BDCs, I don't know if anybody knows of BDCs. They are basically companies that make loans to small and growing businesses, they're specially taxed by Congress, so they have a special tax system, so as long as they pass through 94% of their income, they don't pay any tax at the corporate level, and of course it's a bet on, to some degree, to some degree, it's a bet on small business, which is, I think, as Kevin was saying, I mean it's a reflection of the American people and the vibrance of the capitalist system. So you're not making a bet on whether stocks are overvalued or whatever. Now all of these things have had big runs in the last six months, so they are not at what I would

1:16:15call screaming buy levels. One I'll mention is one called Gladstone Capital. Gladstone Capital, the symbol is GLAD, makes loans to small middle market companies they're all senior debt that's all they do is senior and they're all fully collateralized 100% collateralized they the Gladstone capital is yielding right now it's been out about four years it's been public although Gladstone's been in this business for 30 years it's been our public this particular company about three years they have pretty much fully invested their IPO funds but they have not started to leverage yet these funds typically leverage two to one and more. That's the maximum they're allowed to by law. So right now it's yielding a little over 6%. It's trading at $24, yielding a little over 6%. Now, I have to tell you, the 6% for BDCs is at the low end, but you're getting the most conservative BDC there is, number one. And number two, you're getting a company that has only just invested their funds and

1:17:19and has 100% more of the leverage to come yet. So over time, as they invest more of the funds on the one-to-one leverage, that dividend yield will go up. And I want to be absolutely clear on this. I am not for one second saying that I don't think the stocks are 24. I'm not saying for one second I don't think it's possible you'll see south of 20 at some point over the next year. But if you buy that and you take a long-term view, 3, 5, 10 years from now, I think you will be extremely happy at the growth in the dividend, the consistency of the dividend and frankly the low risk that there is to that stock. The difficult part of this market is that it's almost, it's just about completely devoid of value and one example is Jeremy Grantham, who we have a lot of respect for, has been

1:19:16One way to look at it is, it's sort of a way of looking at the cost of insurance. If you wanted to insure your portfolio against a large decline, one way to look at the cost of that insurance is the VIX. And the history of the VIX is that everybody wants to insure the house after it's burned down. So the VIX has traded in a range over the last 15 years of let's say 10 to 50 and today it's at 11 and a quarter. The CBOE just came out with futures contracts a month ago on the VIX. So you can actually buy now, you can buy a futures contract which has a notional value of about $13,000 I think the margin required is about $3,300. You do pay a little bit of a premium because you want to buy some time, but that's something in terms of value.

1:20:15Insurance is very cheap right now. I would not want to be a seller of insurance. I would definitely want to be a buyer of insurance. That's sort of an esoteric way to do it. Doug, do you have anything to add? Well, I didn't know I was here for investment ideas, but something that is intriguing in the property area and not to... I guess we beat up on that enough and at the risk of rationalizing here. What we have going on in this town, and I don't know if it's anywhere else, is there's a tremendous number of apartment units that are being converted to condos. And I think that's a phenomenon that's going on all around the country.

1:21:03And the other thing that's going on, if you look behind this hotel, you'll notice a big blank spot where there are parking cars. Well, those all used to be apartments. So I think, and as interest rates rise, and I think as fewer people qualify for loans, more and more people are going to have to go back to apartments. So I think apartments, over time, are going to have their day again. something Jean brought up early in the panel discussion, you know, rents haven't, and with REITs haven't necessarily been great, but I think rents are going to have their day again, and especially in Las Vegas, I think rents will explode in the next couple of years. The other thing that's added to that is most apartment land in Las Vegas has been bought up by home builders, so the normal number of apartments that would have been built in in a normal market have not been built.

1:22:00So I think we'll have a severe apartment shortage in Las Vegas, and it's possible that the same phenomenon could go on in other cities. So, Mark, how much time do we have left? Just a couple of minutes, so let's take one more question, if anybody has one. This gentleman in front here. Yeah, there's a lot of indexes, okay, I think a lot of indexes. One of the ones that concerns me right now is the long-term secular trend in the industry from the 40s through the 80s, secular uptrend from the 80s, both are currently in that secular down trend, Well, you're asking, where should we be in a rising rate environment if we really believe that rates are going to rise?

1:23:16I'll tell you what, I'll just give you a kind of a partial answer. I think you're absolutely right. I think Jim Grant sort of made the point that the bond market peaked, the great bull market from 81 to what, 2003, peaked in May, June of 2003, and that they are very long-running bull markets and bear markets. I think what's also just interesting is that the change in the market's major inflection point of the late 70s, early 80s was not really a monolithic event. You had gold peak at certain times, the stock market bottomed in August of 1982, bond market bottomed in September of 81.

1:24:05We're seeing, we think anyway, we're seeing a similar change in financial assets that's all turning down. The tech market, the tech bubble peaked obviously five years ago, Nasdaq, and now you sort of have this credit bubble, maybe that's the next peak to come, but it's not a monolithic event, and I think it's already, the change is well underway. I'll just say one quick thing on that. I mean, I think Kevin's already answered your question. So, if I may, I'd just like to follow up with what your comment and what the lady's question was. One of the beauties of a company like Lassen Capital, which lends money to small business, is that, in fact, they do very, very well in a period of rising interest rates, because first of all, they're based purely on spread. I mean, that's what they do.

1:25:02Everything they do is locked in rates, so everything is based on spread. But in a period of extremely higher rates or a credit crunch, that's actually a very, very good environment for the kind of company I mention like Gladstone, because better quality small businesses can't go to the bank and get money at any reasonable rate. So a company like Gladstone, and we saw this several times with Gladstone's former companies, American Capital and then Allied Capital which he's been with since the early 60s, precisely during credit crunches they were able to put money to work with better quality companies at higher interest rates which of course when the economy recovers really, really does well. So if you do buy Gladstone I wouldn't be worried about a slower economy at all.

1:25:50Well, I can't think of a better song to end on than the one we're listening to right now. It's a brick house. And I hope I didn't cut anybody off too soon. I'd like to thank the panelists for joining us today. They did a wonderful job. And for those of you who are coming to the Austrian Scholars Conference in a month, it'll just be a rerun of this, okay?