Charlie Munger: How to Survive the Economic Recession

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The country did not need a currency that's good for kidnappers and so on. What do you think happened? Because there are a lot of big names, a lot of people, and um, there are people who think they just got to be on every deal that's hot and they don't care whether it's child prostitution or Bitcoin.

Oh well, Charlie Munger is back and he is bringing the spice! Recently, he sat down for a 20-minute interview with CNBC where he talked about inflation, the Federal Reserve's excessive money printing, a potential 2023 recession, and you guessed it, the demise of crypto. This is actually really exciting for us as value investors because, well, obviously, Charlie is just a legend.

But it's also exciting because at least 98 years old, he really doesn't do that much media anymore outside of the Berkshire Hathaway shareholder meeting or, in the past, the Daily Journal shareholder meeting. So, in this video, let's explore what Charlie thinks about the economy right now and what he expects to happen in the not too distant future.

His opinions start with the Federal Reserve, and interestingly, despite many content creators ripping into America's Central Bank over the past say year or so—yet sometimes that's me included—it is interesting that Charlie doesn't exactly share the same negative opinion.

"I basically like the existence of the FED. I think in a world of quiet currencies, we need wise central banks and I think we've had pretty good people in it trying to be contributors to civilization. If you look at Japan today, you would find the federal bank has made our Central Bank of a little mouse that hardly tries to do anything. So we've learned that central banks can be really important; you can push them to great access if you have to in enough trouble. So by and large, I like Central bankers and by and large, I hate Bitcoin promoters."

Interesting how favorably Charlie views the Central Bank, isn't it? And this is despite the Federal Reserve printing about four trillion fresh US dollars in recent years and arguably triggering the severe inflation that we've seen over the past year or so, which is now obviously really hurting everyone.

But he goes on to explain exactly why he's so supportive of the Fed, and this is a point that does tend to get forgotten about.

"Do you worry about the Fed creating a recession by slamming on the brakes too hard?"

"Well, I think the Fed is willing to have a little recession in order not to have under control inflation. That's what they're supposed to do. They're supposed to be the one guy at the party that doesn't hang around with one punch girl and getting drunk, although a lot of people say they're the ones who provided the punch bowl. Well, I think that's pushing it. Besides, I think we were in enough trouble when this thing started. The Fed hadn't done what it was very aggressive; we would have had one hell of a mess, which would have been way worse than what we have now."

As Becky says, many do make the argument that the Fed were the ones that provided the punch bowl, aka they're the ones that printed all that extra cash. But Charlie is quick to remind us that had they not done that, the economic conditions we would have seen would have been a lot worse than what we have now.

"I think so much has happened, and in the past few years, it's almost hard to remember that there was a time where 15 percent of people in the US lost their jobs. Lines at food banks went for literal miles and families across the country were very quickly depleting their savings as they were locked down. So while we, you know, find it funny to hook into drone power and the Fed, now Charlie definitely sees things more leniently as what they did in 2020 was kind of necessary. And if it means a recession in say the next 12 months, then so be it, because it's better that we have it now when everybody at least has a job than instead having a dark recession in 2020 when everybody was in a really tough spot."

And then, of course, the other thing that rose out of the Fed's actions over the past few years was the increasingly enthusiastic commentary that fiat currency is dying and in fact cryptocurrency will be the next big thing.

And while Charlie definitely gave his opinions on this area, which I'll get to, personally one resource that I've been using recently to keep track of the news around, you know, crypto and FTX and BlockFi—that whole situation has been Morning Brew, who are the sponsor of today's video.

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But with that said, let's now hear Charlie's take on the current crypto situation.

"The way I look at it is that it pains me that in my own country I see people that were once regarded as reputable people helping these things exist, promoting their use and so forth. This is a very, very bad thing. There are people who think they're just gonna be on every deal that's hot and they don't care whether it's child prostitution or Bitcoin. If it's hot, they want to be in. I think that's totally crazy. Reputation is very helpful in financial life and to destroy your reputation by associating with scumballs and there's gumball promotions—a huge mistake."

"Do you think those companies did any due diligence or what happened?"

"I think they actually mean well, though that you're seeing a lot of delusion. It's partly broad and partly delusion; that's a bad combination. I don't like either fraud or delusion and the delusion may be more extreme than enough delusion."

"How so?"

"Nobody's going to build a new thing that every 12-year-old kid can be a billionaire or something. They just call it MongerCoin, he starts trading it or something. It's crazy. It's demented."

Interestingly, here Charlie doesn't just hook into those that bought cryptocurrency, but he takes aim more at the big players that say invested heavily in crypto projects and businesses. And here he raises a really fundamental point that he goes on to repeat a few times throughout the interview.

Over the past 12 months, a lot of investment firms have been really caught out with the dramatic collapse of cryptocurrency and crypto exchange businesses, but really they shouldn't have been. I mean, right from the start, we've all known that cryptocurrencies have no intrinsic value. Yes, they have imputed value, but they do not have intrinsic value. And we've also known that the success of most of these crypto exchange businesses has been extremely ponzi-like.

Now, as a value investor standing at home plate with infinite strikes, it's pretty easy to just let this go and all the value investors I look up to did. But it's crazy how some even well-known value investors just feel as though they need to be in on every single deal. They need to be making money in every single situation. I think this is a very dangerous mindset to have in investing because it also leads you outside your circle of competence.

So in Charlie's view, he's more angry at those that got sucked into the delusion and the promise of returns and didn't actually stop to think about what they were actually buying. Interestingly, he thinks the reason why this went so extreme is actually because there is a lot of merit behind the technology of cryptocurrency, the blockchain.

"Have a listen: There is the argument that blockchain is different, that blockchain is something that businesses and industries can build on. It is what sucks people in. And by the way, that reminds me of Ben Graham. He says your good ideas, okay, you're in way more trouble in your bad ideas. Now it sounds very peculiar. Well, what he meant is the thing is basically a good idea. I mean, it's a good contribution to mathematics or something. But you've got a good idea; it's much easier to push that to wretched excess. Of course, it's always going to be some good idea. Nobody's going to say I've got some I want to sell, you know, blockchain is a new good thing that's come up like fairy dust."

The same can be said of mortgage-backed securities. You know, it started as a genius way to safely securitize mortgages, but over decades it was such a good idea that it just kept getting pushed. It got pushed to that wretched excess and eventually it collapsed the entire global economy in 2008.

But of course, every time Charlie comes out and criticizes cryptocurrency, he gets labeled as, you know, just an old man that doesn't get it. You know, he doesn't like tech; he doesn't get these new businesses of tomorrow; he's just an outdated value investor.

Well, I would definitely challenge that viewpoint and in fact, Charlie himself actually discussed it in this interview.

"I guess if you look at what happened with crypto, even though there were some big names, this is a situation where probably the vast majority of people did not get pulled in."

"Well, I like the speculative excess of the best of the Avenger capitalists where they give us a new company like Zoom or a new company like Stripe or something. And I so I like the new companies they create and I'm glad we have new things being invented so I'm not against everything that's new. I'm just ahead of everything new that is kind of magic and delusion; it's kind of a chain letter delusion carrying it along. Of course, I don't like it; these things do enormous damage. These big collapses, they can trigger bigger recessions and depression."

So Charlie isn't against new tech; he just takes aim at the speculative new ways to make money that rely on hype as opposed to fundamental business performance. This gets back to that fundamental lesson of investing he mentioned previously.

"Have a listen to this clip and basically just replay it every time you're thinking about buying something just because it's hot. People push it."

"I wish we had a system of public repute which was more possible with the kind of people who promote these things, and I wish the good people on our side will tell you to stay further away from these things. What happens is that in certain places they want to be in everything that could get hot and run for a while. Randy Graham had a joke about an upper motor went to heaven, and I'm standing on the Gates of Heaven when he heard of boys coming up from below and said oil was discovered in hell. And he stopped going into heaven and started down in. Saint Peter said, 'What are you doing?' I'm leaving! He says, 'There may be some truth in this rumor.' I don't like wretched excesses and manias and so forth."

"And we have a lot of long, illiquid securities. Marcus, you're never going to get rid of crazy excess and manias and crazy things that get real promoted and crest and then collapse. But it's so simple if you have my approach to life; I just don't even look at them ever. Why would I look at them? I don't believe in magic. If somebody tells you you got some magic called Bitcoin is better magic because it's got something like blockchain in it, it's just so easy to just flip it aside and say this is beneath me. Think of the trouble I've avoided in my long life; a huge list of activities I guess that are beneath me. I don't want to do everything that's legal that will make money; I want to equip myself reasonably well in life. And if something even smells bad, I tend to give it a wide detour."

"My way of doing things works. No arguments, just staying rational was a very, very good thing to do, and that's it. You have to be long-term focused and you have to steer clear of speculation. If you stay rational like that, as Charlie says, it's not hard to get rich. Investing is a game of temperament, not a game of intelligence. I think it's important to always remember that."

But anyway, guys, they're Charlie's points from his latest CNBC interview. Let me know what you think down in the comment section below. Make sure you sign up to Morning Brew as well; I'd really appreciate it as I said it supports the channel a lot, but you know it's also 100% free for you guys, so give it a try.

But anyway, guys, please like the video if you did enjoy it, subscribe if you'd like to see more, and I'll see you guys in the next one.