Episode 40 - The Future of Finance (Transcription)

Mattimore: Welcome to hence the future podcast. I'm Mattimore Cronin. 

Justin: I'm Justin Clark. 

Mattimore: And today we're discussing the future of Finance. That means we'll be discussing the future of investing the future of personal finance the future of how to fund a business also disruptive technologies, like blockchain cryptocurrency high frequency trading and lastly we'll get into the future scenarios.

So how will the global economy and the US economy likely change in the future and in the worst-case best-case and most likely scenarios? So to start out I think. Testing is a good place to begin and I'd like to ask you about what are some of the different investing philosophies.  

Justin: Yeah, so I mean there's there's two major. Philosophies there's passive investing where basically people just set their money aside into something like an index fund where they don't have to touch it and the index fund itself is not actively trying to pick stocks or anything else. It's really just. Choosing a collection of let's say tech stocks to build a tech index and just the growth of thats that index is the growth kind of that sector as a whole so it's kind of a way to perform on par with the market without having to really think about it.

There's a lot of benefits to that. I know we've both read common sense guide to investing and listen to the philosophy of John Bogle. So there's a there's a whole philosophy around this and it tends to be the best sort of philosophy and investment strategy for a lot of young people or people just getting into investing.

Mattimore: right and for any of our listeners, you probably heard the advice that you need to diversify when you invest and index funds are the. The farthest extent that you could possibly diversify because you're basically just buying a share in the entire US Stock Market the entire International stock market and the entire us bond market and John Bogle recommends those three index funds as the only three funds you would ever need to invest in.

Justin: Yeah, and it's really cool to so Vanguard in particular and you know, there's there's a whole bunch of index funds out there. But some index funds are there sort of Lifestyle funds. So they're designed for people that are 20 years old right now and it'll be a really long term maybe a little bit higher growth higher risk.

Investment with more stocks rather than bonds because bonds tend to be a little more stable. So there's just like different breakdowns depending on risk tolerance and age because if you're if you're older, you don't want to have a super risky portfolio. It's more about wealth preservation than wealth generation, 

Mattimore: Right and a really good rule of thumb that John are that Jack Bogle gives is the age rule.

So basically whatever your age is, that's the percentage you should have in bonds. So if you're 27 years old you should have twenty-seven percent of all your assets in bonds. And then as you get older, if you're a 65 year-old, you should have the majority of your of your funds in bonds because it's you know, you're not looking for big risks when you're at that age. You just want to have more of a stable nest egg. 

Justin: Yeah, I mean there's there's a lot more that I think we could get more into some index funds and maybe we bring it up later. But just to kind of finish up the question the next philosophy is active funds or active investing where basically you invest in let's say a fund or something else like a mutual fund, for example where the people that work at. This mutual fund are actively trying to pick stocks that will go up or sell stocks that are going to go down in the future and the problem with these now it you know active actively managed funds kind of boomed in the 80s and 90s when there was probably a lower velocity of information and fewer people in the space in general, but they tend to underperform the market right and even if the returns themselves - like the raw returns of these funds are a little bit higher than the market - the fees that you have to pay typically to actively managed funds are ridiculous because there's wait for this fun to operate they need to pay hundreds of traders to you know, do their thing and typically the compensation packages are fairly high for these people.

Mattimore: Right and the likelihood of one of these actively managed funds outperforming a passive index fund like Jack Bogle recommends are very small. So in the first year, if you are a be testing an index fund versus an actively managed fund, there's about a 40% chance that the actively managed fund will outperform the index.

And every subsequent year that likelihood goes down to by the time you're 10 years out. There's less than a 1% chance that the actively managed fund will outperform the index fund. So for anyone listening to this, if you're new to investing the simplest advice that not that I can give but the Jack Bogle can give who Warren Buffett said has done more for the individual investor that anyone in history.

So this guy is legit. Yeah, he recommends you use the age rule for bonds keep 15 to 20 percent International stock market and then put the rest into the total US Stock Market. So you have three index funds and you just have to look at it once a year to make sure you've got the right split between the three and then that's a pretty much a sure recipe for success in the long term.

Justin: Yeah and the thing that people need to keep in mind too is it's very easy to be driven by emotions when it comes to investing, so if you see that the stock market crashes, what you'll want to do is like oh shit I need to get out of this. Yeah, but no, that's the absolute worst thing you can do because you bought high and you sold at the absolute lowest if you really want to do something a little bit, you know crazy but possibly fairly good returns is you buy when the market crashes because everything is super cheap. Well obviously don't. We're not investment advisors. So do all the research for yourself. 

Mattimore: That's why the Bogleheads advice is stay the course invest early and often and stay the course and even if you time the market as horribly as you possibly could with investing the longest that there will ever be.

A really bad economic at least based on historic data is about 10 years a decade and they refer to it as a lost decade. That's like if the in the worst possible scenario, but if you're planning for long-term like for retirement. Then as long as you just invest early keep investing often like I know for myself I have an automated every month at the end of the month $1,000 gets invested into my Vanguard fund and then at the end of the fiscal year, I just make sure I have the right proportion of international and US bonds and then even if you have a negative return in a 10-year period which is pretty much the worst case scenario.

Then over 20 years 30 years 40 years by the time you're going to need it for your retirement the odds of it's still being negative or basically zero and if you did lose all of your money, that would mean that the whole stock went under and that basically means that okay, there's nuclear war. There's zombies like money does nothing matters.

Justin: so one other thing too that I wanted to add to the active investing discussion is there are definitely funds that can actively invest well so one huge example is Renaissance Technologies founded by James Simon's back in the late 80s, I think but it's kind of that.

He was one of the first Quant hedge funds which is sort of the hedge fund of the future like it's all algorithmic based but his fund the Medallion fund which it performed so well that they returned all of their investors money and now it's just internal people invested there, but it's roughly I think over the course of thirty years, it's returned roughly 30 percent per year on average. And is that mostly from high frequency trading or I believe they they probably do some sort of high frequency trading but high frequency trading isn't that profitable anymore so they're doing something else too, but they they have hundreds of hundreds of phds and they put they discount the Merit of Finance expertise instead. They they like to have people that are experts in math or physics or something then isn't Finance because it kind of gives the fund a different perspective on the dynamics of the market and maybe maybe a little bit more quantitative aspect to it.

Whereas finance is more about traditional investing and obviously traditional investing active traditional investing right does not tend to work. So they're you know, they're doing a completely different approach to this whole thing 

Mattimore: We should talk a little bit about how these quantitative hedge fund companies have come into existence and sort of how the broad trends have been shaping up for different financial institutions. Because if you think about it from our parents generation, like what the finance industry was like when they were our age really it was a lot of people had a 401k where the employer would contribute and then these 401k or Pension funds would be managed by active hedge fund managers and they would take their fees. There was a lot of smoke and mirrors around how much people were actually paying to the hedge fund managers because finance is something that's a little bit complex. So it's easy for them to kind of hide. You know how much they're actually collecting and fees and what they're actually doing and so a lot of people got really screwed with their 401ks and their and their Pension funds and a lot of people didn't even know they were getting screwed that they basically thought that they were everything was going fine.

But because of the emergence of things like high frequency trading and some misaligned incentives often times, what would happen, is that the individual investor would get shortcut compared to the actual Brokers and dealers so when someone would put in the trade and this, you know started around the 2000s - not not that that long ago. That's when it got really big was when someone does a trade like let's say I want to buy, you know, a hundred thousand shares of Amazon I mean I guess that's a lot of money. But yeah, if I wanted to put in that order what used to happen is you would see okay a hundred thousand shares of Amazon are available at two thousand dollars a share.

And then you click purchase and then you get exactly what you expected to get you get a hundred thousand shares for two thousand dollars a share. But once these high frequency trading algorithms came into prominence, what would happen is you'd press enter and you wouldn't even get all the hundred thousand shares and then you would end up actually paying a slightly higher price than what was quoted between the spread of you know, the minimum and the maximum it would tend to be slightly higher and the reason why is that? People high frequency Traders had a speed advantage so they could see when there was a demand for a certain stock and then they would buy up that stock to drive up the price and then sell it to them at the slightly higher price and then sell off and take the difference. And so essentially these high-frequency Traders were not put we're not experiencing any risk themselves. They were basically just exploiting the individual investor who had a slow normal connection. Whereas these companies would pay hundreds of millions of dollars to put Fiber Optic Cables right towards the stock exchanges, like get the fastest possible connection so they could undercut everyone else and this had been a huge issue until people started to figure this out and you know in the book Flash Boys they talk about how now there are institutions that actually implement some level of fairness where they'll make sure that the trades go at the same speed to every different. Every different exchange so that no one can undercut them.

So essentially there's slowing down the speed so that it'll go to all the exchanges at the same time so that it's impossible to get undercut and so I guess that's why now - high frequency trading isn't as popular as it was in the past, which is a good thing for any individual investor.  

Justin: Yeah, I mean the high-frequency trading is it's a really interesting thing that happened kind of like you said, someone could put out an order.  First and then since the high-frequency Traders are so fast. They see that order and react afterwards, but can take action before an order actually goes through drive up the price ultimately hurting the end user.

That's so I would I would at least want to differentiate quantitative hedge funds or quantitative trading with. High frequency trading because there's aspect there's a spectrum. 

Mattimore: It's electronic trading. Yeah there's the subset of high frequency and then more that's just like, you know, a really intelligent programmatic way of trading like betting on the volatility as opposed to the price and 

Justin: There's it would be considered quantitative trading if you had a program that looked at stock market data made decisions and just emailed you to tell you you know, what stocks to trade manually or something. So that's like one end of the spectrum and then again on the other end. You have the high frequency trading where there's almost no oversight and these these high frequency trading firms can place thousands or maybe even tens of thousands of orders.

At the same time whereas if you were if you were trying to do that manually, that would be completely unfeasible. You would need to have like one employee per trade that needs to be out there.

Mattimore: Yeah, and I find it really interesting to see what the financial market looks like from the computers perspective because when you look at it with human eyes, I mean even like the blink of an eye is something like 20 milliseconds or I forget how many military but it's like fairly slow compared to the speed at which humans which computers trade and so when humans are looking at a stock market, it looks fairly stable. But if you zoom in into the millisecond and to the microsecond into the nanosecond, there is so much going on that a millisecond in time is like years in computer time - based on how long that seems to them. Yeah. Oh narrowly, they're able to focus on like exchanges at the nanosecond level. 

Justin: Yeah, and the other thing to to maybe point out is how high frequency trading firms even make money in the first place because they don't necessarily make money on the direction of the stock prices.

What tends to happen and what a lot of exchanges have is if you add liquidity to the market, then you get a little bit of a rebate for go pay you to trade with their exchange. Yeah, because you're so there's a bit in an ask for every stock or every every security that you want to trade. So what price do people want to buy it at and what price people want to sell it at is a little bit different.

So if you can buy it at a sort of unfavorable price or at a favorable price to you, like if you're selling near the ask price, then you're adding liquidity to the market or or tightening the bid-ask spreads which is ultimately good for liquidity overall in the market. So. What exchanges will do is just give you a little bit of a rebate and you sometimes hear about market makers like that's sort of what they do market makers used to be more manual, but now market makers tend to be these high frequency trading firms, right?

Mattimore: But I think the key when I think about high frequency trading is that they're not adding any value to the economy. All they're doing is undercutting people and making the system more complex and less efficient than it needs to be. It's a way of gaming the system and exploiting a gamers will use the word exploits of how to you know, get what they want in a way that's many would consider cheating and I think that for economic stability we need to get rid of ways of exploiting the system because it just exacerbates the problem and the gulf between the Haves and the Have Nots income inequality. The people who already own Financial assets versus the people that don't and the more that there are ways for people to exploit the system that gap widens and we'll talk more about this as we get into the future scenarios, but there are a lot of economic indicators that are similar to what we had in the 1930s before Hitler rose to power and if we're not careful there could be some very serious repercussions from continuing along the path that we're on which allows people at the top to continue gaming the system to take fractions of a penny millions of times over from individual investors retirees pensioners all the people that don't have the same level of market information and market knowledge as the people who run a lot of these hedge funds and trading firms. 

Justin: Yeah. Well, so. I'll add something else. That's maybe a little bit of a different perspective. So with high frequency trading firms the at least right now, the ultimate losers are not necessarily the individual investors. It's more the the other funds in the market that aren't high frequency trading firms because we're not out there going and buying a whole bunch of stocks over and over and really who's getting hurt are the other actively managed funds who are losing some of those actively managed funds owned like the actual money is owned by individuals retirees pensioners often not always I don't know what the breakdown is of actively managed funds and passive it like index funds are but I think that a majority of this at this point are in passive investing strategies or long-term investing strategies where you're not like quickly buying and selling so the other the other I think counter-argument to high frequency trading and even active trading so high frequency trading firms really just found some way to they found a little edge in the market whatever that edge is, but the same thing could be said for actively managed funds as well. If you're a good actively managed fund and you found an edge you're making money based on buying and selling not necessarily adding any value to the market. You're just buying and selling based on what you think is going to happen. Yeah, it's like an arms race between all of the actively managed funds.

Mattimore: I mean that's the interesting thing about these funds is that they're all computers and algorithms, networks together trading with one another and it's good to look at some cases that are more extreme for how this could pan out in the future like for instance the 2010 flash crash where a single share of P&G went from $100,000 to zero dollars. In a fraction of a second and clearly the actual value of Procter & Gamble did not go up or down to that degree.

What happened is these programmatic algorithms were basically trying to undercut one another and it just kept happening to the point where it went like all the way down and then all the way up and we still don't really know exactly what caused it it's very difficult to know exactly how it happened and how to prevent it but it's definitely the case that this was the result of algorithms trading with one another and creating artificial demand and artificial supply.

Justin: Yeah, I think that happened to to a high-frequency trading firm individually, like they had some strategy where they, you know, when they're placing hundreds or thousands of orders every second. They had this cascading effect where one decision affected the market in some way and then it led to another decision which continued to drive down basically they continually. Bled out money right for you know, 10 minutes, but that drove their hedge fund from like in the billions to in the low millions. I think they lost 90% of their overall value because this algorithm went haywire. I wish I could remember the name of the fund.

Mattimore: I believe the way that they finally fixed it was that they just turned it off and turned it on again. Pause for a fraction of a second and then it sort of recalibrated and it was fine. But that's what's the most terrifying about the financial markets as they are today as compared to the past is that there can be some very sudden changes that are driven by algorithms as opposed to human behavior and human inclinations that can wipe out someone's life savings. In a fraction of a second and fortunately we've rebounded like the flash crash recalibrated and everything was more or less fine afterwards, but it's not out of the question that we could have some market crash. And then it not rebound like for instance. Imagine if there is some really intelligent AI in the future that realizes that the way that we've been valuing certain assets is not accurate and therefore like starts to trade lower and the other algorithms do and like maybe the whole market is not as high value as it currently is being valued at and if the algorithms figure that out and then it all goes down and then it doesn't rebound.

I'm not saying this is going to happen. I'm just saying we don't know the possibilities but there's a lot higher chance for drastic changes when you have algorithms tied together than when it's just based on like the normal workings of the world. 

Justin: Yeah. Well, so I would say that it's probably more due to the speed of the algorithms and with humans [probably] the same conclusion would be reached if there was a huge overvaluation like they're potentially is right. Now with companies the algorithms. We'll just figure it out faster and the Crash will be faster. I think I don't know if that would have an effect. 

Mattimore: Yeah. No, I mean there is a rebounding for the algorithms making the market much more stable and much more accurate. If there's no one under cutting anyone else everyone goes to the markets of the same speed if that's the case then yeah, it may be much more stable and much wiser to have these algorithms trading rather than humans with our it's a logical whims and trying to instinctively want to sell in a bear market and buy in a bull market.

Justin: Yeah. It basically is a way to get around our super impulsive reptilian brains and be completely rational. 

Mattimore: Yeah, I don't know if you're comfortable. But do you want to talk a little bit about your the way that your hedge fund works because it is interesting that I don't know if you're able to or not, but I'd be fascinated to hear sort of how your hedge funds algorithm combats some of the human tendencies that we were just discussing.

Justin: Yeah, I'll try to stay as as broad as possible. But basically with a with some a couple of guys I started a hedge fund. It's technically a quantitative hedge fund. We write computer programs that will trade in the market for us. But what we're not doing is like stock picking and try we found kind of this Niche area of the market that we really understand and we focus on that completely. We don't try to do the basic, you know, the picking the direction of the market because nobody knows what we're doing is something more along the lines of volatility trading and I think the broad category of our strategy would be volatility arbitrage. It's which I think is also subcategory of statistical arbitrage. Yeah, I mean we the whole philosophy that we have is building up everything in your portfolio to work with each other. So we have if you've ever heard of Modern Portfolio Theory which is basically the standard way to develop a diversified portfolio that maximizes a Sharpe ratio, which is essentially just your average returns over the volatility of those returns. So the higher the Sharpe ratio the either the more stable or the higher growth or both an investment is so with Modern Portfolio Theory you basically see what the correlations between everything in your portfolio are and what the expected returns of those things. 

Mattimore: You're basically betting on the volatility and if there is some market crash or recession, It may actually be easier to measure the volatility and therefore your fund may do better in the more volatile time. Whereas most people will be scrambling and frantic in a volatile time. 

Justin: Yeah, we would. We would greatly enjoy at least the the fun would the fun would be it would be. Yeah, probably probably in a good position and a bear Market. I mean it can it son. It's designed to be uncorrelated with the market in general.

So it doesn't really matter what and the technical term for that is 0 beta. Beta is just like what the correlation is with. The stock market. So if it's a if your beta is 1 you have a one-to-one correlation with the stock market if you have a 3 beta that means that for every 1% increase in the market yours increases 3% and every 1% decrease yours decreases three percent.

So we want a beta of zero, which means it doesn't matter what the stock market is doing. We will you know ours will just do its own thing whether it's going up or down cool. Yeah, so that was sort of vague. 

Mattimore: That's great. I mean it's useful to have funds like that that aren't tied to the same sort of metrics that most funds are because I feel like that kind of adds to the stability of the overall Market when there's some people betting volatility as opposed to price and.

Justin: Yeah, and every so for every fund out there that finds its own edge, it's adding a little bit more efficiency to the market. There's there are markets that are more efficient than others. Like for example, the stock market is pretty efficient it it's really hard to make and that's why it's really hard to make money is because there isn't really much of an edge.

There are more Niche markets that are. Less they're less efficient. So there are more opportunities to find these sorts of edges. Right 

Mattimore: And there is one thing I just want to touch on as far as investing and then we can move on to personal finance and that is commission-free trading because this is something that was not available even 10 years ago and I my favorite tool is Robinhood.

And you can download the app. You can pick individual stocks. And as we said we do not recommend getting too enthusiastic about picking individual stocks because it's a much higher risk, but let's say you've already taken Bogle heads advice. You've got most of your money and US Stocks bonds International stocks if you want to have some fun and if you really believe in certain companies, And you can use Robinhood to buy shares of Amazon or apple or Tesla or whatever company you feel like has a really good chance of winning in the long run.

And I also really like Steve Jurvetson is advice about staying with your picks. So if you pick certain companies don't like sell and buy frequently like make a bet on a company say you know, I really think apple is going to be around for the next 30 years and they're going to keep developing amazing technology and I'm going to invest in Apple, but I'm not going to sell if it starts to go down and if you take that approach with with all of the companies that you really believe in some of them will go to 0 but those will be offset by the ones that go way up in value.

So I think just minimizing the level of like trading as a result of emotions or you know, whatever you're seeing on the charts. If you can get away from that and focus more on which companies do you believe in long run then and you do commission-free trading so you're not giving over some percentage to some stockbroker who may as well be a chimpanzee throwing a dart board at a dart board then you'll be better off than the majority of individual stock picking investors.

Justin: Yeah that so have you heard of how Robinhood actually makes money or like a decent chunk of their money. Well, so the the way that they make money from Individual orders this by selling your trades to high frequency traders ha ha ha ha so you are getting screwed, but it's only a couple pennies.

No, you're not getting screwed you. It's actually better for the the investor because one they're not paying commissions. So if you were trying to make these trades with Charles Schwab is typically like anywhere from five to Fifteen dollars per trade. Like it's stupid some of these brokers. So the ones that are actually losing out are the other actively traded firms because the high frequency trading firm is going to go and place the order at not necessarily the market price. It's actually going to try to get good fills on these orders. Hmm. So you you can go and you know get an actual good price on something where it's typical that you're taking the market price which is the most unfavorable and you're paying a commission. So it's actually better for the individual it got a lot of bad.

Press back in I think. I forgot one it when people figured it out or when they released it, but I think it was late 2018. But that's probably mostly because of the negative press related to high frequency trading firms, but they you know, it's. It's easier to just jump to the conclusion that Robin Hood is bad or selling your data and make right evil.

Mattimore: Well, the thing people need to realize is that even when people get quote unquote screwed by high-frequency traders. It's relatively small fractions of the value of the overall stock. And if you are investing in the long run, like you're buying Amazon not so you can sell it tomorrow. But because you think it's going to be worth a lot more in 30 years, then it's not that big of an impact and when you compare the downside of maybe getting a little undercut with the upside of not having to pay any commission's then it definitely is better than the alternative.

Justin: Yeah. Yeah, and so one one other thing before we get into personal finance to talk about is there are other types of investing that aren't just stock market and bond market investing. So there's there are things like gold there alternative Investments like real estate. I don't know if that's technically alternative but there's also this is a real estate index fund and Vanguard.

Yeah. Yeah, so it's. That's one asset that tends to be uncorrelated with the market. Obviously if you don't look at 2008, but there's and then and then there's also stuff like peer-to-peer lending with Lending Club. So anyway, also invest in crypto and we can get more into that later. Yeah, and that's kind of what I wanted to say to is.

There's there's this talk about value investing. So investing in assets that are productive intrinsically that have intrinsic value. So something like a cryptocurrency or even in Gold don't have intrinsic value because the asset itself Gold by itself does not produce anything. You can convert it into jewelry or something.

But and then same thing with cryptocurrency, it doesn't actually produce anything in of itself it has value because humans say it has value and it's all based on our like psychology where as a dividend stock does have intrinsic value because you're buying something that's producing a sort of income with by giving dividends to investors or real estate - it goes up. It appreciates in value, but you can also earn rents from him in the land itself can generate some sort of value. So there's you know value investing is sort of an extension or it's sort of a way to think about your passive investments. So things passively investing in things that have intrinsic value tends to be another good way to look at things.

Mattimore: Yeah. Yeah totally and we're going to get more into what we think about cryptocurrencies and blockchain in the disruptive Technologies part. But I'd like to talk now about personal finance because this is something that unless you were a business major. You probably didn't learn about it in school and yet it's one of the most important pieces of knowledge for anyone's long-term financial success.

So we already talked about how we recommend people invest their money. So we talked about the Vanguard the three funds Bogle had and I think it's also key that we look at the biggest expenses that someone tends to have in life. So the biggest expenses are typically buying a house buying a car going to college paying your taxes and health care and medical expenses.

Those are the big five and when I'm thinking about the future that all five of those could change dramatically in the next 10 years. So maybe we should just talk about them one at a time and maybe a good place to start would be taxes because we just had tax day. And first of all, let me say that everyone should get married because I paid basically half of what I paid last year in taxes because it's it is very beneficial to be filing jointly at least at least in my case.

But something else that I'll say is that a lot of people complain about how complicated taxes are. And for good reason because in most other countries, if you go to Australia England other countries, they don't even know what tax day is like they couldn't tell you what day of the year is tax day because it's not a big event people basically pay taxes like how you would pay your credit card bill like it's already all the information is pre-populated and you look it over and you click submit.

And it's that simple but in the US It's incredibly complicated. And the reason seems to be that the tax Lobby wants it to be complicated and there's a really interesting story that I hadn't learned about until I listened to this planet money podcast where this guy realized that you could vastly simplify the tax system if you just implemented something that he calls ready return where basically you can just you just get everything is prefilled out and then you just submit it because the government knows what you earned.

They know what your expenses are. So why do they have to ask you to fill it all out? And then be freaked out that if you do it in properly, you'll go to jail. It's like the most backwards possible system. So this actually made it to the House and made it and it and it lost in the Senate by one vote.

If this one vote had gone the the way in favor of readyreturn. No one would be freaking out over there taxes anymore people. It would just be like a very straightforward affair. And the reason is that the tax Lobby especially into it which owns TurboTax strongly advocated against it because you know their business basically disappears if anyone can just file their taxes jointly and there was also a bill subsequent to that where the IRS was going to have just an online web page where you can submit your taxes rather than having to go through TurboTax or H&R Block and that also did not pass Congress and it's simply because the lobbists just want to make an extra Buck by making it a little more complicated so people need to pay for expert help and it's so frustrating. 

Justin: Yeah, the stuff like that is one of the most frustrating things about living in the US Is how much power that these sorts of companies have over policy. I mean think of so if you really think about how many jobs would be lost it's kind of.

Almost hysterical that we don't need all of those jobs. It's almost like they're they're technically bullshit jobs. They are. Yeah because they're not adding any value like we could have software running this whole thing because a vast majority of the IRS would probably go under I mean there would still be tax law and and lawyers but all the accountants the CPAs, all of all of those jobs are at least a vast majority of those jobs could just disappear not just companies like Intuit and TurboTax, but like the whole industry surrounding taxes, which is huge.

Mattimore: This gets into America's obsession with jobs as opposed to doing things in the most efficient way that will grow the real economy. Not just like bolster it with needless jobs that people don't really tend to enjoy anyways. Yeah, we should talk about that and when we talk about the economy for sure, yeah, so as far as the future of taxes, I think it's quite likely that there is Major time.

I mean if in the next 10 years, we don't come to some programmatic way of filing taxes. Then I don't think there's much hope for the rest. Like it's such a simple issue that if we can't wrap our heads around this I have very little hope for the rest of the US economic sectors. 

Justin: Oh definitely. So what are your thoughts on stuff like savings credit cards? Obviously, we have these big expenses like college so you know what? What do you think in terms of like how do people pay for them? Especially like student loans is a big one for me. It's one of those where people spend potentially hundreds of thousands to go to college for a degree. That isn't necessarily going to earn them enough money to pay that off.

Mattimore: Well, this this really gets into the role of college and that's something I wanted to discuss because. On the one hand you can say the role of college is to get people a job train them for the skills. They're going to need for a job. They can actually do that will actually provide value or in them money and allow them to support their family yet another way to think about college is that it's a way of freeing your mind and the actual term like a liberal arts education liberal comes from the Latin libertatus meaning freedom. And it's about freeing your mind and I think this notion of freeing your mind is going to be so crucial. Once we get beyond the automation phase and once people once a vast majority of people aren't able to contribute to the economy then having a liberated mind where they can they actually have more understanding of what matters in life and they can pursue what's most important to them that's going to be incredibly important and I think college does a fairly good job of that especially because a lot of college is about interacting with your peers and. Social interactions and a lot of it's even more about that than necessarily like what you learn in your classes, but on the job preparation side, I think colleges are doing a pretty terrible job compared to modern work.

I mean if you look at something like Lambda school, which is a much better financial way of paying for college. 

Justin: So what is that? I actually haven't just for listeners. 

Mattimore: So Lambda school is this new type of it's not really to replace college, but it's something that sort of augments it so it trains people to be developers and they have a really innovative business model.

So essentially you. Actually can get a stipend while you attend Lambda school. They will pay you $2,000 a month while you're attending Lambda School. And then afterwards you just guarantee something like ten to fifteen percent of your income for the first couple of years after you graduate Lambda to school and if you can't get a job or you get a really low paying job.

Then you barely have to pay anything back to Lambda school, but if you get a high-paying job. Then Lambda School makes money. So it really aligns the incentives of the school with the student because both are just fully aligned on job preparedness getting the highest possible salary right after and it's had incredible results.

I mean, I follow some of the guy who started Lambda School. And he's always posting like people who were previously making like ten bucks an hour and then they went to Lambda school and now they're making like, you know 200k right out of school and it just shows that if you really focus on job preparedness for a modern job, like being a web developer being a mobile developer being a UX/UI designer being, you know systems architect.

Like yeah any of these jobs that are really in demand but there's not a whole lot of supply of them because college is haven't caught up to the times that's just better for the overall economy. And as I look into the future, I can seriously see a lot of the current college is getting disrupted and I think that the main top tier are going to stick around because of the liberating the mind and social connections and network and that kind of thing, but for the colleges that right now are marketing themselves as job preparedness, but they still have bloated prices and there they haven't really caught up to the times. I can see a lot of those getting disrupted by newcomers like Lambda school and the nature of education really changing and actually becoming far less of an expense that most people have to pay.

I mean if you think about how much it is now, it's incredible how much college costs like what like 50 Grand a year. 

Justin: If you're going especially if you're going to a private school or an out-of-state school. Yeah, it's stupid. That's really cool though about the Lambda school. It's almost I mean you can think of Even This Personal Finance conversation in terms of investing your investing some time, you're getting some money up front and then you get some return later like a good job more or and then you have to pay a little bit of interest on that like ten percent of your salary. Like all of all of these decisions can still be boiled down to investing you're just investing different things like 

Mattimore: You're investing in the person you're like buying shares and their future.

Justin: Yeah. That's what Lambda school is doing for sure. And then as the student going you're just investing some time and brain power to your future and everything about personal finance is about like how do you make that trade-off between right now and where you want to be in the future and what your goals of the future are because not everybody has the same goals.

Maybe some people are super frugal or live in a lower cost of living area or live in a higher cost of living area. So that changes how you want to budget and what you need to do, but I think there are still some basic principles that you need like that anybody can take away from this conversation like building credit with a credit card for example, but not going into credit card debt.

I don't I think nobody should go into credit card. Well, okay. I hate to say nobody but there's a time and a place to borrow more. 

Mattimore: Passively go into credit card debt. If you go into it, you should knowingly be like, okay, I'm going to put down $10,000 in my credit card so I can invest in the business because I know in a few months that'll allow me to produce more than $10,000. Like that's when you go into credit card debt not because you had a shopping spree and you weren't paying close enough attention. 

Justin: Yeah, I guess that's that's the thing too that I feel like a so one of the stats I saw is 60 percent of Millennials couldn't cover a $1000 emergency purchase. Oh, I've read even greater stats.

That's like even a $500 most really not even just Millennials, but most Americans could ya cover a $500 bill? Yeah, and that's one of the things with personal finance that you I think everybody needs to have at least a little bit of a an emergency fund. It doesn't necessarily need to be invested. I also don't necessarily think a checking account is the best place like there are places where you can earn safe low returns on the money you have I think well front even has a calf a cash account.

Mattimore: Yeah, I mean even in a Vanguard fund like you can. Withdraw at any time with no penalty, even if you have a Roth IRA, which is retirement fund you can withdraw at any time no penalty and everyone should be maxing out the Roth IRA every single year because it's idiotic not to you make you'll be a millionaire by the time you retired guarantee.

Justin: Yeah and base maybe to give an overview of IRAs as you can contribute. Now in 2019. The limit is $6,000 a year for IRAs. There are traditional IRAs. There are Roth IRAs. A Roth IRA basically means you pay taxes on the money that you invest. So if I put six thousand dollars to my Roth IRA this year I'm paying taxes on those six thousand dollars, but when I withdraw that money 40 years later.

Then I don't have to pay taxes on any of those gains. And if I had a somewhat decent investment, let's say let's say I have it in an investment that's making 5% a year for that term that's going to double in price once or twice. Yet I'm not paying taxes on any of those games. I only paid on what was put in so it's really good for young for young people, especially yeah Roth IRA. 

Mattimore: And A good rule of thumb is that if you expect to earn more in the future. Like it, especially if you're a young person and you think okay. I'm making this amount now, I'll probably make more in the future. Then you should get a Roth IRA if you're thinking okay. I'm making this much now, I'm probably not going to make more than that in my career. This is the peak then you should probably get a traditional IRA.

Justin: Yeah, and there's there's a lot of different things. You can also be maxing out your 401 k is like all of these things if you have an employer that'll match a little bit like that's. That's some money that's essentially free if your employer matches. So there's there's a lot of things that people can do.

This is kind of again in the investing discussion. Yeah, but but it's also for personal finance reasons to like you can use some of these things as an emergency fund. I think there are these to withdraw early but I mean either way there's something that you have going for you you're building a little bit of a rainy day fund. 

Mattimore: Alright, so now let's touch on some of the other big life expenses like buying a car and buying a home because I could see both of those changing significantly in the future. 

Justin: Yeah. I mean, especially if you live in cities big cities. Well, I guess it depends on how dense the city is maybe La isn't the place for this but if you live in a city like New York, you can get by without owning a car for your entire life.

Mattimore: Yeah. Well, I've heard Kara Swisher say that in the future like when our kids grow up owning a car is going to be as quaint as owning a horse has now because if you can just on-demand summon a self-driving car to your door at any given time then. Why would you own a car that's just going to sit idle for most hours of the day?

Justin: Yep. Yeah, I mean you could treat it essentially you should spend as much money on it like proportional to how much time you spend in this is car I mean, I know some people are huge car Fanatics and I understand that I understand that if you have a bunch of money and you want a really cool sports car to show off.

I mean, it doesn't even make sense or it doesn't only make sense in the far farther future, you know a couple decades. 

Mattimore: Well, I wouldn't buy a car today.  Unless it was a Tesla. 

Justin: Yeah depends on where it is too. If you live in like rural, Wyoming or something in the driver the 

Mattimore: But even if I was living in rural, Wyoming, I think it makes far more sense to buy a Tesla Model 3 that has software updates that will keep pace with self-driving technology as a progresses as opposed to buying something that is based almost certainly going to be outdated in like five years. 

Justin: Yeah, I mean, I totally see that kind of I see that cost being more of a rent rather than a own thing. 

Mattimore: Well, there is just this analysis that said that Tesla's maybe the only car in history to appreciate in value to actually go up in value relative to the rest of the market as self-driving technology gets better because most and most other cars are like, you know, as soon as you drive it off the lot it's lost 30% of its value or something crazy and then it keeps going down from there.

Justin: And I guess with Tesla since you do have those software updates it is it is actually getting better. Yeah, as time goes on that's really interesting. So what are your thoughts on how home purchases will change or just living quarters? 

Mattimore: Yeah, I think that most people are mistaken about the idea of home ownership. They think home ownership and the whole idea of home ownership as being part of the American dream. Is derived from this Fannie Mae advertising campaign in the 70s. Like that's literally where the term American dream was first put out into the public sphere. So everyone bought into this idea of okay you buy a home you get a to, you know, you gotta have two kids you get a white picket fence.

You got two cars in the driveway. This is the American dream and the argument was so if you're renting. Then you're just throwing money away. You're just burning money because it's not actually going into an investment a mortgage. Whereas if you're buying a home you're putting money into something that is going to increase in value and then you can have a big payoff when you sell your house.

However, that doesn't take into account the other ways that you could invest your money. That's basically saying, okay, you're going to just not save any money or are you going to put money into a mortgage? But if you actually look at what would happen if you put your money into let's say index funds like we were talking about the beginning of the podcast.

Versus into a home the numbers show that you're far better off putting it into investment funds because it's less volatile. You're not competing with every Real Estate Mogul out there whose doing all these things that any individual homeowner just cannot do as effectively you're not paying for all the expenses of when there's a leak in your house when there's when there's mold like all of these unexpected expenses that can be huge. And the other thing is your money is completely tied up it's not liquid. So if you have let's say a medical emergency or something big happens in your life. You lose your job or you have a new kid and you have more expenses, you know, can't. Sell your house immediately you have to take into account.

Okay, what are the market conditions what sort of capital gains taxes? Am I going to have to pay will this continue to appreciate in the future? Whereas if you have your money in index funds whenever you need money, you can just take it out with basically no penalty. And just it's a much less stressful life.

Like really the only argument that I can see for owning a home is if you really just want to grow roots and you want control over your future like you don't want to have to move houses if your landlord kicks you out like you really want this to be the home where your kids grow up and then your grandkids grow up.

That's the only real argument I can see four. Owning a home as opposed to renting.  

Justin: Yeah, I mean, I totally agree. I think that everyone you know, especially at this age when it's kind of the point of you know, right now I'm engaged so like everyone's asking when are you going to get a house?

You know when you're going to put a down payment but like I don't plan to like I don't I don't really want to I guess the other reason to to buy a house would be if the rentals in the area just kind of suck. I mean it just depends on where you live. Maybe we'll also do you can buy your house outright with cash.

It's a different story than if you're paying a mortgage with interest and yeah, I think people also underestimate how much a mortgage actually costs. I think I think on average with a 30-year mortgage with current interest rates. And you just pay everything on time the way you're supposed to you're paying almost double the value of the home over the 30 years because of the interest 

Mattimore: James altucher does this analysis in his book and the amount of money that you lose by having a mortgage as opposed to investing in index funds is the amount of money you need to retire. So a lot of people that bought into this idea of you must own a home and they pay a mortgage and it's all these unforeseen expenses now their at retirement age and they're having a really tough time because they don't have the nest egg that they thought they had and if then they decide to sell their home, there are these huge capital gains taxes and they don't have as much as they thought they did and it's just it really is a vicious for most individual people. Now, if you're a Real Estate Mogul and you're really savvy you can have some huge wins. I mean more fortunes have been made in real estate than any other sector in the entire economy.

But if you're an individual, it's probably a good idea to rent and invest your money in index funds. 

Justin: Yeah. Yeah, and if you want to be exposed to real estate Investments, maybe invest in a real estate investment trust or REIT exactly and that that might be a way to get you know, similar returns as if you were owning one, but you're also not tied down to a single market because if you're Diversified across cities and states, then the returns are a little bit more stable than if even if you were you wanted to buy an investment property.

You still are really I mean, you're almost absolutely correlated with the local market, which could be good or it could be terrible. It just depends. 

Mattimore: Yeah, and then the last big expense and then we can get into the more commercial side of Finance is medical expenses and. I feel pretty hopeful in this area because it seems like there's so much momentum moving towards some sort of universal healthcare in America where we can catch up with the rest of the industrialized world and give people some safety net so that they don't go bankrupt whenever they get in a car crash and it's incredible how many people go bankrupt in the US each year as a result of medical expenses. And just overall the more I look into Finance the future of finance and The more I've been prepping for this episode. I really think everything boils down to America not investing in its citizens not investing in the future of its society and instead just trying to extract value.

From the citizens for selfish reasons like or the lobbyists can influence policy that makes it the it's the whole system is the lobbyists the Senators the you know, but if we had the mindset of hey, let's invest in the long run, you know kind of like how China thinks and they think okay. We're going to invest in education.

We're going to make sure every kid has a good education has enough healthy food to eat has medical expenses covered. If you just did those three things then 10 years down the line 20 years down the line 30 years down the line. The whole society is going to be so much healthier than if you just focus on okay, we need to cut education spending so we can put more into the military industrial complex and we're not going to give people free healthcare because that's un-American.

It's like it's so idiotic, but it's you know, people just get stuck in their ways and because we've been kind of doing it this way where it's kind of like screw everyone else. I'm looking out for number one. It's kind of like the American ethos and then you just get used to that and you start you stop looking at it as something that's that's sick or wrong and you just see it as like, oh, that's the American way of doing things.

Justin: Yeah, I mean it's. The health care thing is particularly frustrating to me because the costs associated with especially the basic health care are way more than they should be and this, you know, this goes into the whole conversation about insurance and that whole thing future of healthcare was actually a good episode where we talked about some of this but yeah, I think you know if we can solve and you know stop being so dumb as a country and as you know lawmakers, this expense is going to basically be gone for the vast majority of people unless you wanted some sort of like the things and he'll answer doctor. Yeah. Yeah you can. I think that's one people that a lot of people don't realize like if we have universal healthcare there will still be insurance if you wanted their own like super like you said fancy-smancy service.

Yeah, exactly or if you want stuff like plastic surgery like kind of the the frivolous parts of medical care, but for the most part. We don't need that expense and that the basic expenses are what's killing a lot of people and putting a lot of people into debt. 

Mattimore: Yeah. It's kind of like look if you're in a war and your soldier gets shot in the leg. You should just fix that shoulders leg for free. So the soldier can continue to fight for you. You don't say like, oh well, do you have enough money to fix your own leg? I'm not going to help you. Because that'll lead to you're going to lose the war in the long run and we shall think about our citizens as like economic soldiers for the country where they in aggregate create the health of the society and of the economy.

Justin: Yeah. No, I mean I totally agree and and that's this is just it's one of those areas where a lot of the world is doing it right and we just you know, I think maybe we just need a little bit of time before. We realize like oh, we're stupid for a long time. What are your thoughts on maybe the I know the next the next topic we're going to talk about is future of commercial finance and how to maybe start a business.

Mattimore: Yeah. Yes. This is a high-growth area meaning a lot has been changing over the last several years and the biggest change has been. In equity crowdfunding. So we've had crowdfunding for a while. Meaning you can go on Kickstarter. You can go on Indiegogo. You can say. "Hey, I have this new idea for this intelligent bicycle helmet that can you know, whatever" and then you can get it funded and you basically give perks to the people who funded you and say OK you'll be one of the first people to get this smart bike helmet if you give me a hundred fifty bucks or whatever it is. And now there is a new type of crowdfunding called Equity crowdfunding.

My sister actually works for one of these companies called start engine and it's the same sort of idea as regular crowdfunding except you're actually buying shares in the company. So for instance Oculus Rift raised millions of dollars on Kickstarter, but once Oculus got sold to Facebook for more than a billion dollars, none of those Kickstarter investors made anything they banned a lot of them were pissed they were like, oh so we funded this new vision of the future because we believe in you guys and then you go ahead and turn around and sell your company to Facebook make all this money and then we're left in the dust and it's just another behemoth that doesn't necessarily have the same values that we were being sold when we initially invested in Oculus and so E\equity crowdfunding gets around that by actually giving shares to the people and the big legal change is that you know, you don't have to be an accredited investor. If you can be a regular investor who makes a regular salary and isn't some big shot.

Yeah, I can see this becoming much more prominent in the future. I mean, we saw just a couple of recent examples when the Notre Dame Cathedral burned down over was like a billion dollars in a couple of days. It has over a billion dollars billion dollars of people donated to fix it. 

Justin: Wow. Yeah, I mean that's that's awesome.

Mattimore: Trump tried to fund the border wall with crowdfunding and really it made you know, there was a decent chunk of investors who put money into that and so I could see this as a vehicle not only for private sector companies, but it looks like it could happen in the public sector with governments to.

Justin: Interesting, honestly, I mean I don't if people want to make the choice of where their money goes awesome. I have a hard time when the government wants to spend money in ways that I totally disagree with but if it is more this crowdfunding way, you know, that's a it's actually really interesting to think about.

Mattimore: Yeah, and and then as far as like anyone who's listening to this who might be thinking of starting a company. Bootstrapping is always the best way to start off because you can keep total control of your company and bootstrapping is essentially you just put in your own money. And then as your company starts to gain revenue you reinvest that Revenue into the company and you sort of pull your company up by your own bootstraps.

But if you have some bigger vision, Something that requires significant investment and it's not something that you're able to pull together yourself or with friends and family. Then you might want to look into venture capital. And one thing that I've been noticing is that there has been an explosion in VC firms relative to the number of actual entrepreneurs.

So there is a lot of VC money available nowadays. And there actually seems to be more of a shortage of entrepreneurs relative to how many VCs there are looking to fund the next big idea. 

Justin: Yeah, and to kind of Go full circle on this if you are if you make Intelligent Decisions related to investing and personal finance, you're in a better position later down the road if you have a business idea to take that risk and to start something.

Yeah, and so just just investing in the long term through index funds or something like that that gives you the freedom to make riskier decisions like starting a company and then that can have an insane pay off if you can do it, right. Yeah. So it's all related Finance like all of these different decisions you make whether you're investing your time your energy, you know, anything is it all pays dividends down the line if you do it correctly and you kind of understand the idea of opportunity costs like you were talking about with real estate and buying versus renting.

Mattimore: Yeah, and the key for that for me has been to just automate everything so you don't have to think about it. So, you know Justin and I both invest a small amount of money each week in the Hence, The Future pretty much happens automatically likewise, I automatically invest a certain amount into my index funds every month and likewise I invest a certain amount into my Robinhood funds every month. And then I also put a little bit into savings, but I basically automated everything so I never have to. Worry about a single thing. All I do is like every once in a while. I'll check to make sure everything is going smoothly but really do I have to actually make any changes and this is something that any individual person was not able to do in the past.

I mean you'd have to hire Brokers and all these middlemen to have that kind of a system in place. Now, you can just get like whatever your bank is, you know, Wells Fargo or chase Vanguard Robinhood. And that's basically all you need and then you're set you can just set it and forget it. 

Justin: Yeah, and that's good too because. I was listening to a book. I actually forgot it's been a while. But basically the one of the takeaways was that people that just forgot about their Investments did way better. Yeah, it just kind of forgot about these little these little investments that they had from decades ago and there, you know doing great pool.

Mattimore: Well, I'd like to talk now about some of the disruptive Technologies. Like I'm curious to hear your thoughts on how big of a role you think cryptocurrency is going to play in the future how big of a role you think blockchain is going to play in the future? 

Justin: Yeah. So cryptocurrency. I at least in its current form.. I'm highly skeptical because of how unstable it is and kind of like I was saying earlier doesn't really have intrinsic value or it's not backed by anything or not stabilized by anything. It's just kind of at the whims of whatever mining process is taking place and what the flow of these these cryptocurrencies are.

So anyone that all the companies that accepted Bitcoin during its boom lost a bunch of money because of the on the instability of the currency itself. So there needs to be some sort of stabilizing Factor, but I do see a point where for example the US dollar is technically a cryptocurrency. There isn't like physical money is it's being circulated electronically, even if I think storing the transactions through a blockchain might be a good way to make sure that it's it's unfalsifiable and that there's always a path to see how these transactions are taking place. That would potentially be good in terms of just reducing the amount of money laundering because you can actually track these expenses and there will be a lot of things that change because of a cryptic but purely cryptocurrency economy. Like the fact that no one can be paid in cash. So any that would make it really hard on illegal citizens or I think that was a oxymoron it legal citizen and illegal immigrants.

Mattimore: But I think it's useful also to sort of take a step back at how does cryptocurrency compared to other forms of currency that we've had. And essentially we had barter for the first portion of human civilization. I'll give you a pig you give me a horse and yeah, that's probably not a fair trade, but two things two pigs one horse.

And then after that we have the gold standard so we actually had the denarii in Rome that was bad. You know, it was essentially had a percent gold in each coin and that was some of the most prosperous period of civilization was when currency was backed by gold because people would have this big Vault of the central bank that had all of this gold and all of the money was directly correlated to the gold in the bank.

So people had a lot of trust in this form of currency, but eventually there was so much economic growth that the gold couldn't keep up. And so then they had to transition to fiat currency which comes from the Latin which means to become. Or to actualize so basically it's like a twill currency meaning I am the government and I state that this currency is worth such and such so it's not actually tied to any gold standard or anything but it's just decreed by the people who have the most authority and this led to a lot of instability in Europe.

A lot of people think that's what led to World War II partially. And now we're at the point where less than three percent of all money in circulation is actually cash. Most of it's just digital. It's in bank accounts like yeah, you can't actually withdraw anything close to the amount of money that you actually see in the total financial markets is only a small portion of it.

That's cash and the reason why Bitcoin was so appeal or it is still appealing to so many people is that it's similar to the gold standard where. There's a limited Supply that there's never going to be more than 24 million Bitcoin ever. That's just the limit. And as you go through the mining process, it gets harder and harder to extract these Bitcoin similar to how with gold it gets harder and harder to extract gold the more that you extract because you got to dig even deeper so it very much mimics the gold standard system.

So a lot of people were really. Excited about this possibility and like you said, it also leverages the blockchain meaning you don't need some Central Bank that decrees you know, what something is or isn't worth instead it's all peer-to-peer. There's a blockchain there's a ledger anyone can see transactions verify them.

You don't need some big Central Power getting in the way and typically they screw things up because they have their own agenda. Yeah, but the problem that you noted is that Bitcoin became much greater as speculation then as actually using it because if you think Bitcoin is going to go up a couple thousand dollars next month.

Why the hell would you buy something with your Bitcoin that's like idiotic. You should just wait and store it. So until there's like real stability with the currency and people know that it's pretty much going to cost the same this month as the next month as it is next year. No one's going to actually use it for real transactions or very small portion of people will do that.

Justin: And until it's a mainstream currency for transactions. I don't think it'll be really viable at all. But it also needs to be like we said that it needs to be stable first but to kind of talk more about blockchain and not cryptocurrencies and how it relates to finance. I think it has the potential to make markets more efficient because.

If we use blockchain more as a way to make sure that there is good information and everybody has access to good information. Then the markets can become more efficient. So if we can see transaction histories of various people we can kind of get a better idea of what's actually going on in the market.

And everybody can get a better sense of what's going on in the market because their 10th we tend to focus on the fact that there's a financial discrepancy, so some people are wealthier than others. But what kind of gets overlooked is there's also an information discrepancy. So the people with more money can afford better information and they have access to more information. So if we can democratize the information then it's better for everybody to I mean even. 

Mattimore: And it may be a way for us to get out of these cycles of boom and bust that are constantly occurring because basically you've got the Federal Reserve that's pulling this lever of interest rates lowering interest rates when we want to see more growth raising interest rates when we are getting maybe a little too much growth and going towards a bubble. But all of this like pulling and pushing of the lever is artificial and no Federal Reserve no matter how smart they are is going to have total Market information. It's always going to be doing something a little bit less than what's ideal.

And if instead you have a decentralized system where everyone can essentially trade with anyone else with without needing a middleman then that's much more in line with what the real market forces are and it may more accurately align the prices with the actual supply. Just a little economic efficiency.

Justin: Yeah, and if information is out there more quickly than the feedback of certain decisions and the the economy we can get information about those decisions more quickly and feedback about them. And if we have feed if we have quicker feedback, we can make adjustments more quickly and this is just I mean kind of like you were saying it it would probably tighten the cycles and lessen the the amplitude of these these depressions in these bubbles over time. 

Mattimore: Yeah. So I guess a question I have for you is how would you predict the future of crypto 10 years from now because it's funny Warren Buffett made a bet with this journalist. About how what percentage of people would be would have made even a single crypto transaction in the last month and Warren Buffett thought that by 2018 he made the BET five years ago, there would be at least 10% of people would have made a single transaction in the past month turns out it's like less than three percent of people have made even one transaction. A lot could change in the next 10 years. So I guess my question to you is do you think that 10 years from now, there will be at least 10 percent of people that have made a chance Bitcoin Trend or just any sort of crypto transaction in the last month or do you think it's going to progress at a slower pace than that.

Justin: I think it'll progress at a slower pace probably so the the issue with blockchain and particular as as a backing of a cryptocurrency is that every single person that has for example, a Bitcoin wallet has the copy of The Ledger which means that every single bitcoin wallet has the information of every transaction of every Bitcoin or every Bitcoin transaction ever.

This is super data inefficient and super computationally expensive. So there needs to be better ways to kind of have these these sub chains. I think they're I forgot what the term in blockchain research is maybe it's sharding something something where not everybody has the whole Ledger and and I guess I think I actually think there might have been some advancements maybe with blockchain.

You don't have the whole Ledger but only back to a certain point, but everybody has some version of the database which can which can be inefficient. But I think they're there are I mean with all the research going on. There's going to be ways to get around this and I also think like one of so one of the guys.

That I'm that started the hedge fund with me. He's actually like the main guy Zach. He actually thinks he's kind of in the same boat where he thinks that cryptocurrency is, you know a little bit it's not going to work out in its current form, but he thinks there might be a place for like in an index backed or a market-backed cryptocurrency. 

Mattimore: That's what I think too. I think you're going to need some big institutions to back a cryptocurrency before people are willing to accept it. Like imagine if JP Morgan Chase came out with their own cryptocurrency. Like I know Facebook is coming out with their cryptocurrency.

Imagine if Amazon came out with there's all the sudden it seems much more legit. Once you have one of these big companies backing it and if we can get over some of those other issues like the data in efficiencies, I know the computational like the energy expenditure in order to buy to mine these Bitcoin has also been really great.

So if we can overcome some of those then I think it'll be much more widespread. I mean one of the best arguments I've heard for why it may become more prominent over time is simply because there's much lower transaction fees. Like if you're an e-commerce company and someone pays with Bitcoin. You have to pay less as transaction fees, then you would if they paid in credit card or with dollars because it's essentially decentralised.

You don't have to pay all these like tariffs and taxes in the same way. But you know that also may change with more regulations and more developments.  

Justin: eah, I mean that that makes a lot of sense and so I might have missed I mean that. That would be really good to have like companies that support the blockchain.

What I was saying though, is that the blockchain would actually so like currency is backed by gold or you know, theoretically backed by gold to some extent but maybe a cryptocurrency could be backed by an ETF are like the index like the actual stocks in the market. So it's like you have a almost like an index fund that's backing the cryptocurrency.

So there's some sort of value there's actual value to each of the tokens or units of currency right behind it so that you know this I think all of these things need to take place before we can have a solid cryptocurrency. 

Mattimore: Anyways, we could we could talk about crypto all day and we should probably make that a podcast.

Yeah, we should make our own episode around that but I think now would be a good time to take a quick break and then get into the future scenarios.

All right, Justin. What do you think is the worst case scenario for the future of Finance? 

Justin: Yeah, so I think there's there's several facets to a worst-case but one of the things one of the themes that came up a lot in this conversation is when policymakers make decisions that make personal finance investing harder for the.

So things like not solving the healthcare issue or some other sorts of policies that make it so expenses for individuals are pretty high and especially if the income is going to drop for people at some point in the future and there's nothing to cover the basic expenses then you know, like a universal income then I think that would be one of the facets of the worst-case scenario then I think if people don't have money this will lead to people not investing at all people with basically only people that have a bunch of money are able to invest in anything. So nobody in the bottom tiers of society can really invest in their future.

And I think that bottom tier of society could potentially grow drastically. This would lead to insane and equality basically an exaggeration of where we are now if things don't get fixed.

Mattimore: Yeah, it's pretty terrifying when you look at the charts. Of what the economic indicators are now as opposed to what they were in some of the worst periods in history like the 1930s before Hitler rose to power and there's a lot of similarities and I would recommend that anyone go read Ray Dalio's report on LinkedIn.

But anyways, some of these charts are just incredible like the level of income inequality that we're experiencing now. Is very similar to what there was in the 1930s and that's basically a result of whenever there's an economic crisis, the government is buying Financial assets and it's this trickle down approach.

But what ends up happening is that the people who already owned assets become better and better off. And they end up investing their money in financial markets rather than actually spending it and getting it into circulation among workers, goods and services and it becomes this huge big like speculative speculative financial pie with very little going to the actual producers of goods and services and I already touched on this a little bit, but I think that the core problem and what will create the worst case scenario is the fact that we're not investing in society. We're not willing to put money into the education of our kids. We're not willing to put money into health care. We're not willing to make the tax system more efficient and we're not willing to put money into education.

So when you combine all of those things. What are you going to have you're going to have an uneducated poor population? That's more vulnerable to manipulation and misinformation and you're going to have people that once they have one crisis like a medical crisis or losing their job as a result of automation.

Then they get into this downward spiral and it's like the people who are at the top keep doing better and better. And the people at the bottom keep doing worse and worse, but over time like you said the bottom portion gets much bigger and when you think about how this could come to a head. There's a lot of indicators that say that the greater inequality you have when a crisis occurs when a recession occurs the greater the chance there is for armed.

Justin: I mean it makes sense. 

Mattimore: Yeah, so my worst case scenario is a scenario where there's so much inequality and then we hit a recession because as Ray Dalio has said, we are near the end of the 75 year long term debt cycle, and we're also near the end if the five to seven-year short term debt cycle.  Meaning times have been relatively good for a long time and the indicators are pointing towards times not being that good now and into the future while this is happening, there's a greater level of political polarization than we've ever had. Since the 1930s it was a similar level of polarization right would Hitler was rising to power. And so if there's this big recession and the vast majority of people don't have money, they don't have a safety net and the government's not paying for their medical expenses or education or housing or anything like that, then it stands to reason that those people will get up in arms and either they're going to want to fight each other or maybe overthrow the government and maybe get rid of American democracy and put in place either fascism or socialism depending on if it's the right of the left and both of them can be terrible or it'll be redirected towards some exterior enemy like China or Russia and this is basically what happened in Germany in the 1930s where they had just come to the end of the long term debt cycle.

At the end of the short term debt cycle and there is huge income inequality and rather than addressing the underlying reasons, which is that they printed too much money and they didn't have good fundamentals. They instead scapegoated the Jews and they directed all their anger at them and then it drew the whole world into a world war and I'm not saying this is the most likely but it's pretty scary when you just look at the raw numbers and the indicators and so my worst-case scenario is as a result of all these forces either America becomes undemocratic and/or there's armed conflict in the form of World War 3. 

Justin: Yeah. Wow, that's a definitely a worst-case scenario. What do you think for the best case to scenario? 

Mattimore: Yeah. So my best case scenario is we actually respond in the appropriate way to fix some of these and that includes leadership from the top so having. A bipartisan Congress that actually is focused on investing in citizens in the long run putting aside political differences actually getting their shit together and fixing the Health Care System fixing the tax system fixing the education system.

Also, I think it's going to be super important to have clear metrics for Success not just GDP, which is. Pretty bogus metric as far as happiness and well-being is concerned. But real metrics that also take into account things like pollution and when I was thinking about this, I really think that in the long run it's going to be necessary for the US to come up with something similar to China's social credit system so China social credit score takes into account everything someone does online. Everything someone does in the real world, how good they are at paying people back, how much they're trolling others how much they take care of their parents, how good of a citizen they are to their neighbor they take all of these factors into account and they give its citizens a score and they've basically gamified what it means to be a good citizen and a lot of people think this is terrible because you know China is famously anti-freedom of speech anti freedom of press and doesn't care about people's privacy. So there are some pretty bad examples of what a world like that would look like, but if America institutes our own social credit system that encodes American values like freedom of speech freedom of the press privacy, then there will be a competing system against the Chinese system that other companies are a sorry that other countries can emulate and because when I'm looking at all these trends, I mean think about the fact that you can look up any one on LinkedIn any company any employee find out who they are come up with some messaging strategy to get them to do what you want to do.

Just like how you can find people on Twitter and Facebook, but it's kind of a wild west like there's no real rules around what is and isn't acceptable and people's behavior towards one. Another isn't being taken into account the contributions that people do like taking care of their elderly parents or parenting taking care of your kids or volunteering in the community. None of this is getting measured. So I think it's going to be crucial for the long-term success that America is able to measure what it means to be a good citizen and what it means to have a healthy society and I think that's only going to be possible through some comprehensive scoring system that ideally will encode American values into that system and I think the sooner we get something like this in place the better we're going to have as an outcome. 

Justin: Yeah. I mean that's definitely those are all good things. So with my best case one of the things that I see as an issue now is the education of people in the lower classes of society and personal finance investing all of this stuff in the best case, I would like to see a good education for everybody. So this should be just one of the basic things is actually a good personal finance education because in high school, I had personal finance classes and I think most people do but it's not really that informative about how to make decisions related to money and investing. 

Mattimore: Everyone should just get like one sheet. It's like here's what you should do. 

Justin: Just like you should have a check. Yeah, it shouldn't be that complicated like good personal finance is not complicated. You don't I think it's better honestly if it's if it's a little bit shorter because then you don't run into decision fatigue or anything along those lines, but the other thing that I would say is there's more flow of money between classes.

So there's like with the whole economy, there's people that are spending money in the higher classes not just like putting it in assets like for example a whole bunch of rich people from all over the world will just buy multimillion-dollar pent houses in New York City and just leave them there.

So you just have all this money tied up not doing anything not flowing anywhere not contributing anything. It's just there nobody's even using these pent houses. Ninety percent of the time and that's just one example. There's a ton of other examples of just having a stockpile that's not being productive in any way.

So the flow of money is I think one of the things that could be improved and in the best case, we have an optimal flow of money. So there is flow from the top to the bottom from the bottom to the top and just kind of all over the place. Because I don't think we're going to see a society ever where there is like a normally distributed income where you have most people in the middle and then a little few people at the top and a few people at the bottom.

It's going to look more like a lot of people at the bottom and just fewer and fewer people as with more and more money. But with good flow, I think the catastrophic downside of this is a little bit better. One of the other things that I was thinking about when we were talking about blockchain and finance is with more information out there, we can start tracking things and putting an actual dollar amount on stuff like biodiversity and natural resources because right now we have a superficial view of what a forest is worth in the Amazon. 

Mattimore: Yeah. Well, there are metrics that correlate the cleanliness of the air and the cleanliness of the water with mental cognitive abilities and being able to have productive output. So they are do have real effects. They're just not being measured when you should be measured 

Justin: And they're not being that's not being baked into the price of cutting debt. So there should be it should be way more expensive for big developers to cut down forests and trees and all of these things because there are so many side effects and peripheral effects to this this sort of activity.

So I think if we have more information out there and the better we can track things we can actually start trading assets related to biodiversity to the the size of the Amazon or the size of the Sahara Desert even like this could be this like natural resource in the natural Finance could explode and I think that would be really cool to see is people actually caring about the future the long-term future of these natural assets.

So that's one that we didn't really talk about previously, but I think it's one of those things where you know, my some of my biggest priorities in life are hoping or making sure that we don't ruin the world. Yeah. If that's something that we can accomplish with this but anyways, and then the last thing is something like a universal basic income over the freedom dividend something like negative income tax some vehicle something whatever whatever works practically in this giant ass country that we have.

Something needs to happen to our people can at least have the basics met and if that just starts with Universal Health Care awesome, that's a huge expense that people don't have to worry about anymore. Yeah. So yeah, I mean that's that's one of the big things if people don't have to worry about that, then we can have again more flow of income and money all over the economy between everybody in the economy the and around the world, so. Yeah, I mean those are kind of my best case scenarios. 

Mattimore: That's great. What do you think is the most likely scenario? 

Justin: Yes. So I think I think it's my likely scenario is more towards the what is more along the lines of investing. I think we're going to see our generation may be gen Z having a harder time with investing because especially gen Z when everything is instant gratification with you know, social media, everything is like I want it now like so what I worry is that all of the purchases or vast majority of purchases will be driven by impulses, right and short-term thinking rather than long-term thinking. I think that there will be there won't be much of a change in the overall number of people investing so it might look similar to what we have now, but I think that since the population is growing like there's going to be a lower fraction of people in society as the older Generations die and you know leave leave the economy morbid, but I just think they're 

Mattimore: Their atoms are recycled to create new life. 

Justin: There you go. That's better way to say. So yeah, I just think the likely scenarios is that there's actually going to be less investing. 

Mattimore: Yeah, that's interesting. I mean when you think about it like you post something on Instagram and you're constantly checking to see how many likes you got.

That's kind of a lot of that's kind of how some people especially younger investors approach stock-picking where they pick a stock and then every day they're like, oh is it going up? Is it going down? Should I sell should I buy more? But if you just set it and forget it the three fund portfolio trust in the long term trust in history, then you'll be way better off but I think you're spot on that. It's going to get increasingly difficult for people to take that long term view and they're going to hurt financially for it. 

Justin: Yeah, and I worry that that bleed into the future policy makers as well. That would be that would be pretty terrible that then we're going to start moving more towards the worst case scenario if that bleeds over into policy.

I don't think the whole of society will be completely short-term though. I think there's enough people that are like, oh, well, maybe I should be a little bit more intelligent about how I make decisions though. Hopefully that's not an issue. I unfortunately think it is maybe a little more likely that people don't invest as much unless we see this giant dip and like if we get to the dip of the hundred-year debt cycle and see something like a depression on the other side of that, there will be a ton of conservative people that financially conservative people right? I'm the same way that after the Great Depression a vast majority of people would hoard all of the money they could possibly make and be live as frugally as possible just in case something terrible did happen again.

Mattimore: Yeah. That's I mean that's similar to my most likely scenario where. I think it's quite likely that in the next 10 years. There's going to be a recession and then the question is how do we respond to that? Do we have what real your calls a beautiful deleveraging where we basically simultaneously cut spending reduce the debt redistribute wealth and print money.

Or are we just going to do the easy thing and try to get our way out of it by just printing money because we don't want to cut $1 out of the military budget and we don't want to actually redistribute wealth from the house the Have Nots like the likely scenario is that we don't have the most beautiful deleveraging possible and but I do think to your point.

I do think that that is going to lead to a much greater level of financial enlightenment after this occurs, and I could see a situation where once we recover from this like let's say in the next let's say the next 10 years are pretty rough. But then the 10 years that follow those could be the beginning of this Golden Era where we've really gotten the medical side of Finance figured out. We've got an education covered. We've made taxes much more efficient and easy to understand and we have some sort of Freedom D,ividend Universal basic income or negative income tax where if you're disrupted by technology and you lose your job you will get a thousand bucks a month or whatever and ideally everyone would get that regardless, so it's not tied to anything because that's just the most efficient way to have the system.

And yeah, I mean, I think there's going to be a lot of a lot of hardship unfortunately in the short run and medium run but the only thing I could say as advice to everyone is just. Invest early and often and index funds stay the course and don't spend money on things that don't create value.

Like don't buy like the biggest best possible VR rig and TV, but do by the best possible computer and like anything that's going to help you create value. Pay for if you're considering being a developer is worth it to go to Lambda School and you know be willing to give back 10% of your money or if you want to be a designer, pay the money to get a degree from Shillington and investing in yourself is always going to be a good move and investing in the total market is always going to be a good move. But whenever you allow your emotions to get the best of you it's not going to have good results. 

Justin: Yeah, I mean just to run run a quick little scenario for people if we do see this giant debt crash at this the cycle come to a crash at some point. But you're invested in the long term in index funds you and you continue to buy throughout that entire process, you're buying a lot of index funds at an extremely cheap price and eventually it'll recover.

Mattimore: The worst case scenario based on history is a lost decade meaning things can be really shitty for 10 years, but it's very unlikely. It'll be longer than that. So like you said if you just pretend like you don't know anything about the markets and invest the same amount each month, that's going to be a recipe for Success. No matter how bad it gets. 

Justin: Because the growth period afterwards tends to be greatly accelerated and then the returns you'll see from everything that you purchased in that that dip is going to be huge. So yeah, I mean this it's there's definitely an upside to it.

If you can do the right things in a time like that, you can come out the other side unscathed and even thriving. Good place around it. Thank you everyone for listening.

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Mattimore and Justin

Justin Clark