Casgains Academy: The Stock Market will Return 0% for Decades (w/ Charlie Munger)

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Casgains Academy
Mar 3, 2022

Warren Buffett’s right-hand man, Charlie Munger, is well-known as one of the legends of investing. Through the Daily Journal portfolio, he outperformed the market by almost 2,000% since 1986. Munger recently spoke at the Daily Journal’s annual conference about the serious issues in the economy and the financial markets. This video will explain how Munger is preparing his portfolio to drastically outperform the market in the coming years.

In order to understand how Munger plans to make large sums of money from the economy, we have to analyze the macroeconomic environment. Due to Covid-19, the federal government had to step in to provide support as consumer spending came to an abrupt halt. There are two different types of unemployment. U-3 unemployment tracks all unemployed people who are looking for a job. U-6 unemployment is a broader measurement that also includes discouraged workers and part-time workers. In April 2020, U-3 unemployment exceeded 14%, and U-6 unemployment exceeded 22%. That is a substantial amount, as almost 1 out of every 4 people were unemployed or underemployed. As a result, Congress sent stimulus checks to people and provided various lending facilities and grants to state and local governments. These checks also provided Covid-relief funds that helped businesses. On the monetary side, the Federal Reserve lowered interest rates, which made it cheaper to borrow. The target interest rate went from roughly 1.5% at the end of February 2020 to about 0.06% in April 2020. Today, that rate is 0.08%, but is expected by everyone to increase. As we’ll cover soon, these policies are setting the stage for a terrifying economic crisis. While the federal reserve lowered rates, it ramped up treasury bond purchases in the marketplace, or quantitative easing. During the pandemic, the federal reserve purchased in excess of $4 trillion dollars of debt which had the effect of pushing money out into the economy. M2 is the measurement of the money in the economy, which measures cash on hand, savings accounts, money market, and certificate of deposits under $100k. The law of supply and demand eventually found its way into inflation. More money available to everyone led to an increase in the demand for goods. But that alone did not drive the inflation we are seeing today.

Munger is keenly aware of the increase in M2 money, inflation, and the implications: an asset bubble. The problems tied to the supply chain have also continued to exacerbate the situation. You have probably noticed the shortage of items in the stores and the price increases of various items such as consumer electronics. Most of this is due to the inability to get products off the boats and to the marketplace. The basics of the issue started prior to Covid but were pushed forward by the pandemic. The underlying issues are vast. First of all, there is a limited capacity to off-load ships and a lack of chassis to expand that capacity. The limited number of truckers that are authorized to work at the ports has declined due to a lack of wage increases. The US warehouse technology, which is behind in technology compared to Japan, Korea, and China also exacerbated the issue. Similarly, warehouse worker pay has not necessarily kept up and attracting good warehouse workers is harder. The shortage of warehouse workers has also further constrained supply chains. Ryan Johnson wrote a post that went viral explaining some of the issues from his point of view. He likens the current supply issues to a store like Walmart or Costco having one cashier for hundreds of customers. Truckers like him have to go through three separate lines for multiple hours on end, to then pick up a container to transport it across the country. Goldman Sachs along with a few other investment firms track the supply chain. Goldman recently lowered the stress to a 9 out of 10, with 10 being the highest stress. According to the Marine Exchange of Southern California and Goldman Sachs, the number of vessels at the Los Angeles port waiting to unload goods has declined to 89 from a high of over 100. That is a significant amount when you consider that 20 months ago, there were zero vessels. That might sound horrifying, but there may be light at the end of the tunnel. The expectation for when this economic problem will be resolved varies but seems to be closer to the end of 2022 to mid-2023. The key here is that essentially all this pressure results in a lack of goods supply. This pressure in conjunction with the increase in the money supply has pushed consumer prices to new highs. The consumer price index recently accelerated to an annual increase of 7.5%.

https://www.youtube.com/watch?v=W8H8xMq0Pro

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