26 Dec 2020
Charlie Munger made two public-speaking appearances in 2020. In both talks he has made interesting remarks about the current state of affairs in the economy — including Bitcoin, valuations of big tech companies, negative interest rates, money printing, and China.
He first spoke at the Daily Journal Corporation Annual Shareholders Meeting in February 2020. His second speaking event this year was an online interview for the Caltech Distinguished Alumnus Award in December 2020.
On the role of the U.S. dollar as the world’s reserve currency and the big responsibility it implies for Americans:
Charlie: I hate things like Bitcoin. I mean, I hate things that are intrinsically anti-social. Of course, we need real currencies.
One of the interesting things about the current condition is that the Americans — by accident — have created the reserve currency of the world. And the world needs a reserve currency. And I don’t sense any great sense of trusteeship among my fellow Americans for behaving very well in our responsibilities to the rest of the world with our own currency. Our attitude is we’ll do what pleases us. That’s not my view. I think once you get a big responsibility to other people who are depending on you, you ought to think about them too.
Quick, related question:
Question: Do you think it’s necessary for America to record a positive trade balance to keep its prosperity in the next century?
Charlie: The answer is no.
His thoughts on the absence of inflation after the 2008 financial crisis:
Question: We have record budget deficits, record unemployment, and record expansion of the balance sheet. Why do you think we don’t have inflation?
Charlie: Well, regarding inflation. You know, the economists of the world thought they knew a lot more than they did.
What has happened is weird, that in response to the Great Recession, all the nations of the world have printed money like crazy and have bought all kinds of investment assets. And they’ve done things that nobody in the economics profession would have recommended on this scale even five or so years ago — and yet the inflation has been very low.
I think we all have a lot to be modest about when we talk about economics. Lyndon Johnson said that giving a talk on economics was a lot like pissing down your leg. He says, “It feels hot to you, but it doesn’t influence anybody else very much.” And I’m afraid I can’t do much better than Lyndon Johnson could.
His nervousness about negative interest rates:
Question: There are over 10 trillion dollars of securities around the world with a negative yield. And by the president Trump’s Twitter feed, it seems that he wants to bring negative interest rates to the United States. Are you for negative interest rates or against them?
Charlie: Negative interest rates make me very nervous. However, I don’t think the authorities had much choice. It’s politically impossible to do big stimulus rapidly and the only weapon they had in a crisis was to print money and change interest rates. And I think it was probably the right thing to be done. Of course it makes me nervous.
I think, having worked once, people will overdo it. And that’s the nature of governments and people. And of course, that makes me nervous. I don’t know what to do about this.
Question: My question is about the effects of low interest rates on insurance. Lower returns on float may be causing a tighter supply of insurance. For example, there used to be three main underwriters insuring all the taxi cabs in Southern California. Now it is heading towards just one underwriter who will have a monopoly on all commercial taxi insurance in Southern California. You have access to CEOs of Geico and Wesco and a Rolodex that we can only dream of. So do you see 10 years of low interest rates posing a systemic risk to the supply of insurance?
Charlie: I am made uncomfortable with the idea of extremely low interest rates, or negative interest rates even more extreme, lasting a long time. I don’t think anybody knows how those will work. If you are a little uneasy, welcome to the club. I think it’s dangerous and peculiar, but I think we had to do what we did. In other words, I don’t have any good solution for you. I think you’re right to be worried about it.
On quantitative easing and fiscal deficits:
Moderator: What do you think of the combinations of quantitative easing and large fiscal deficit? And where are they going to lead us?
Charlie: Well, there I got a very simple answer and that is, it’s one of the most interesting questions anybody could ask. And we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we’re doing now for a very extended period without some trouble. And I think we’re very near the edge of playing with fire.
Moderator: It is remarkable how much we’ve expanded the money supply; how low interest rates are and how little initial response there has been on…
Charlie: Remarkable is not too strong a word. “Astounding” would be more like it.
Moderator: I’ll let you choose the adjective, Charlie.
Charlie: It’s unbelievably extreme. Some European government borrowed money recently for some tiny little fraction of 1% for a hundred years. Now that is weird. What kind of a lunatic would loan money to a European government for a hundred years at less than 1%?
On the valuations of big tech companies resembling the Nifty Fifty bubble:
Question: Do large cap technology stocks today reflect the bubble environment of the Nifty Fifty, in that everyone is investing in the same 10 or 15 stocks?
Charlie: Nifty Fifty is an interesting question. At the height of the Nifty Fifty craziness, which was created by the Morgan Bank of all places, you had a home sewing company that was selling for 50 times earnings. Home sowing! Great god. We are not that crazy yet. So I don’t think that… I think that a lot of what’s happened is not crazy. I think these companies are very valuable… While they may be selling at too high prices. But home sowing was sure to fail. I don’t think our leading tech companies are at all sure to fail. Well, I think it’s not nearly… The current situation is not nearly as crazy as what… The Nifty Fifty was absolute dementia.
On China’s remarkable ride (e.g., lifting hundreds of millions of people from poverty):
Charlie: The other thing that’s really remarkable. You take the last 30 years of China. They have had real economic growth at a rate for 30 years that no big country has ever had before in the history of the world. And who did that? A bunch of communists Chinese. Now that is really remarkable. So if you’re studying finance, you’ve got a lot of strange things to account for.
The Chinese story is the damnedest thing that ever happened to a big country in terms of economics. No other big country ever got ahead that fast for that long.
Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen? Of course it’s extreme. And I think it proves that it doesn’t… We Americans would like to think that our free expression and allowing all kinds of opinion, and all kinds of criticism of the government is totally an essential part of the economy. And what the Chinese have proved is you can have a screamingly successful economy with a fairly controlling government.
All the government has to do is create a lot of Smithian capitalism. If you do that, having a sort of a controlling one-party government doesn’t matter. That’s not a fashionable thing to say, but I think it’s true.
And on a final note:
Moderator: What are you most curious about in the next 30 to 40 years?
Charlie: Well, having been an investor for so long, I’m of course, interested in these weird present conditions and these weird economic conditions where they’re printing money like crazy and so forth. And of course that’s very interesting.
And I’m interested in the fact that the world has come so far in having these undeveloped countries get ahead so fast like China. Now I compare it with India, which has a way worse economic record, even though they got more of our political institutions. You know, they got more free speech in India, and a way worse economic achievement. I think the economic development of the modern world is very interesting. It’s a very interesting subject.