Background to Episode
In this episode Kartik kicks off the conversation by explaining the impact of technological deflation on the global economy and the ineffectiveness of traditional monetary policy. He then argues for pairing near-zero interest rates with low inflation. And later makes a strong case for universal basic income. In the second half of the podcast, Kartik gives an overview of the disruption artificial intelligence is causing in the investment world. Be sure to stick around until the end of this episode when we'll talk about why healthy yields in bonds, CODs and savings accounts are likely to be a relic of the past.

Guest speaker: Kartik Gada
Kartik is a hedge fund manager, investment banker, author, and an expert on artificial intelligence and fintech. The hedge fund he co-manages, Lakewood Asset Management, targets returns in excess of major stock indices by harnessing the power of machine learning. His book, the ATOM (The Accelerating TechnOnomic Medium), has generated over 2 Million views and was the subject of a Google Talk.

What You'll Learn in This Episode
● Why the Fed is struggling to get interest rates right. 1:03
● How quantitative easing doesn't create inflation. 5:05
● How technological deflation keeps inflation in check. 5:50
● Whether a country can be in a perpetual state of quantitative easing. 8:06
● Why quantitative easing doesn't help Main Street. 30:50
● Universal income 31:25
● How AI is impacting investment management 1:12:07
● How is AI disrupting finance jobs 32:23
● Whether People be retrained fast enough? 34:58
● How AI will disrupt investment management and boost returns: 38:00
● Why Fixed Returns are So Low
● Why investors must use AI to just to keep up with the changing times.

Key Words
  • technological deflation
  • interest rates
  • Federal Reserve
  • artificial intelligence
  • AI
  • investing
  • investment management
  • automation

Resources and Related Content

    Ask Wealth Bootcamp
    If you're an entrepreneur or business owner interested in better managing your personal wealth, then you're in the right place! Let's make this podcast as good as it can be. The more you tell us about the challenges you're facing and the areas you're interested in, the more we'll improve. If you have a question you'd like us to answer, an issue you'd like us to address, or a suggestion which guest to invite, give us a shout at

    Here are the kinds of questions and issues we can help you with:
    • What financial issues keep you up at night?
    • What are the risks you worry might really set you back financially?
    • What areas of your financial life would you like to better understand?
    • What financial challenges as an entrepreneur do you see around the corner?
    • What risks in your business is your spouse worried might spill over into your personal life?

        E2 | A Technology Driven Economy - with Kartik Gada

          December 9, 2019 (recorded in July)
            Full Transcript

            Matt Lewis 0:04
            I'm Matt Lewis, your host, and this is Wealth Bootcamp. We're a weekly program serving global entrepreneurs and cross border families. You know, entrepreneurs, they can be great at creating wealth, but not necessarily good at preserving it. Many are so busy building a business that they neglect their personal finances. It doesn't have to be that way. At Wealth Boot Camp, we'll show you how to build personal wealth alongside your growing business. We'll look at the unique risks and opportunities that entrepreneurs face in their financial lives. And we'll explore how you can immunize your lifestyle from the risks you bear in your business. I'm Matt Lewis, private wealth advisor to entrepreneurs and founder of Westbridge Wealth Management. You may already be building a successful business, but how about designing a successful life around the things value most. Sound good? This is the place to make it happen. Let's get started.

            Today here at Wealth Bootcamp, we have a special treat for you. Our guest speaker is Kartik Gada, who has spent nearly his whole career at the crossroads of finance and technology. He was an investment banker for nearly a decade, his specialty during that time: technology mergers and acquisitions. Today, he's a co founder and manager of liquid asset management. This is a hedge fund that uses machine learning to enhance returns and better manage risk. Kartik has the financial chops you would expect of such a quant fund manager. He teaches two classes at Stanford University, the first options and futures, the second, the new economics of technological disruption. Last but not least, he is the author of the atom. A book about the growing prominence of technology in our economy.

            Today we'll be discussing how technology is altering the macro-economic environment in which we live. And we'll also be looking at how we can go about harnessing the power of AI to better manage our investments. It is my distinct pleasure to introduce you to Kartik Gada in this second episode of Wealth Bootcamp.

            Now before we dive into today's episode, we have an important message for you. Our disclaimer, please be aware that the information provided in today's episode is for educational purposes only. Unfortunately, I haven't had the opportunity to get to know you. So I'm not in a position to give advice that will suit your particular needs. We have a lot of different listeners in our audience, and a one size fits all approach isn't going to work. I do provide investment advice to my clients at Westbridge Wealth Management. But there I'm able to tailor my advice to their unique circumstances. While I encourage you to use the Wealth Bootcamp community as a learning platform. Please bear in mind that we're providing education and not investment, legal or tax advice. And with that, let's return to our program.

            One more comment, please be aware that this recording was made in July of 2019.

            Kartik, thank you so much for joining us. I'd like to start off by asking you to tell us a little bit about yourself and your background.

            Kartik Gada 3:22
            Thank you, Matt, and happy to be here. Thanks for having me. Well, regarding my background, it's kind of complicated in that I have an expertise across many types of finance. I've done investment banking for a long time, and I also have a background in hedge funds, both running my own hedge fund as well as providing advisory to some others. At the same time, I have a deep technology background. My areas of expertise are FinTech, financial technology and artificial intelligence. I happen to teach a couple of classes at Stanford University, including Options and Futures on the finance side as well as the New Economic Mixture of Disruptive Technologies on the engineering side and the business side. In that light, I have written a book that is available online freely. It's about the economics of technological deflation. And it's gotten about 450,000 views. So that is the long answer to what my background is.

            Matt Lewis 4:21
            Wow, Kartik, it sounds like you have enough material for a couple of episodes. Now, you mentioned technological deflation. Is that something the Fed perhaps doesn't fully comprehend? And if so, is it struggling with it, is is that one of the reasons we have this hot cold on again, off again, monetary policy from the Fed?

            Kartik Gada 4:40
            Exactly. That is exactly correct, because if you consider what the Federal Reserve and other central banks of the world have done, over the last nine or 10 years, because there was insufficient inflation in the United States, there was a threat of deflation, which is far more damaging to the economy than inflation at this particular point, they started a program called quantitative easing which is analogous to printing a controlled amount of money. And they did this for a while and they found that it was not causing inflation, they expected that it would cause inflation because that had, in fact happened in comparable situations many decades ago in other countries, but there was no inflation. The US Federal Reserve started then other central banks worldwide started as well: Japan, China, Europe, and so forth. And over the aforementioned period, about $23 trillion has been produced by the central banks and there's still no inflation. The price of oil fell by half during that period and the price of gold also fell by almost half during that period. And the reason for that is because there is pervasive technological deflation the economy, because technology is now a certain percentage of the world economy and rising which means the amount of deflation will also continue to rise. This is what the central banks are unable to figure out, so they are not only baffled as to why there is no inflation, they keep expecting inflation to emerge any day now—it never does and that's why they have found themselves in this particular position where they have raised rates too far. And we have an inverted yield curve as a result, meaning that the Fed funds rate is higher than the 10 year yield. And it is confusing—

            Matt Lewis 6:21
            And that's usually a harbinger of recession, right?

            Kartik Gada 6:23
            That's usually a harbinger of a recession. Yes. And this time, it would be one entirely of their doing because there was no reason to raise rates because there was no inflation. They just imagined that it would emerge. So they wanted to be proactive, but instead, they're creating the much bigger problem, which is deflation, and weakening the economy.

            Matt Lewis 6:41
            It's interesting that, say, 10 years ago, inflation was such a bad word. Now, it seems the Fed would welcome inflation, they miss it. And they want their tools back. They don't they don't seem to have enough tools.

            Kartik Gada 6:55
            Well, inflation is a Goldilocks type of a mountain that in 1970s there was too much inflation. But when you get to too little inflation, and approach deflation, that is much more frightening in a debt heavy society like ours because people have mortgage debt, student loan debt, so forth. And a deflation where your pay actually stays flat or goes down while your debt payments are the same is much more frightening. And they do have an infinite supply of tools, they just don't realize it because it is easy to be in a perpetual state of control the quantitative easing, which is what Japan is already doing, I mean, United States was the pioneer in the difficult concept, which is to start quantitative easing at all, but then they stopped it for no real reason. Whereas a country like Japan continues it and is seeing benefits from taking a more expansive approach to their quantitative easing to halt deflation.

            Matt Lewis 7:46
            How many interest rate hikes were there over the last two years maybe, was it—

            Kartik Gada 7:51
            So there were actually nine hikes of a quarter point each because the rate was close to zero. And that's what it was for 10 years and then they raised it all the way up to about two and a quarter percent, which is too high. I contend they should have kept it at zero.

            Matt Lewis 8:06
            Because histor ically it seems low, doesn't it?

            Kartik Gada 8:09
            Yeah, historically its very low because now deflation in the economy has made the equilibrium point much lower. There was a time when 3% was normal. But I would say zero is normal because the 10 year yield which is not controllable by the Federal Reserve, for the most part, is under 2%. Therefore, the Fed funds rate has to be zero just to create a difference of under 2% between the two. And then quantitative easing simulates a negative interest rate on the front end, creates, you know, a zero percent official Fed funds rate but then minus 1%, due to the amount of money printing being done, and therefore the yield curve has a 3% gap minus one versus plus two on the 10 year yield. I'd say that is the steady state that is needed to create a robust economy. Quantitative Easing can be a very good thing if it's recognized how much one can do without inflation that effectively becomes another source of money in economy that is not coming at the cost of either causing high inflation or taxing people. And so that is kind of the direction that I take my book and my other writings in.

            Matt Lewis 9:09
            So does this this inverted yield curve or partially inverted yield curve concern you at all?

            Kartik Gada 9:16
            Absolutely, because it could cause a recession very quickly too and the Federal Reserve is not reacting fast enough to their own supposed principles, which is to not allow a negative yield curve. Now normally I would be the first person to say that a head of state should never pressure the central bank to do something, but in this particular instance, the President of the United States has told the Federal Reserve, "Why are you allowing a negative yield curve you should lower rates quickly and immediately" and in this particular instance, he happens to be correct. That is what should be done.

            Matt Lewis 9:52
            It's interesting to see how it's going to unfold and it seems like the Fed is again dragging its feet—but you know, the market is so addicted to the The Fed accommodating it. The Fed does wants some semblance of independence. It's not easy. It's not an easy job.

            Kartik Gada 10:08
            It's not easy, but the market has become accustomed to that. But at the same time when the natural rate has to be zero to negative and that quantitative easing has to be permanent—fine the stock market will structurally rise, which is good for those who hold equities. But that will become the steady state in the future because the exponential growth inherent to both technological progress and economic progress will manifest in terms of a higher and higher stock market that way.

            Matt Lewis 10:37
            It's fascinating to see the people at the Fed struggling with the effects of technological deflation and not understanding it. And perhaps that's a good segue to begin discussing our second topic today, that is: how artificial intelligence is impacting investment management and what we could expect from AI in the future. Could you kick it off by giving us a little background on artificial intelligence?

            Kartik Gada 10:58
            Now in the financial markets, certain types of computational power has already been used for a long time in terms of doing very rapid trades of stocks, finding fractional differentials between stocks, and doing the trades—not only much faster than a human could do that—but also on a 24 hour basis. That has been present for some time but now that has changed the stock market in a number of ways in that the correlations between individual stocks have risen a lot and stock picking has become a far less productive activity. Fundamental analysis of an individual company, checking it for growth or value characteristics, learning its business, its earnings, other aspects of the company is a far less worthwhile use of an investor's time because these algorithms have increased—not only correlation—but have made sure they can operate at a speed that would always outperform a human. For that reason, humans can do well if they use artificial intelligence to their advantage. And that involves quite often not doing any stock picking, but rather taking a principle of individual index investing and using other mathematically derived products, like options and futures, in a very intelligent way and using AI inherent to that to reduce one's risk, enhance one's returns, and modulate around other market shock events that way.

            Matt Lewis 12:25
            So to clarify, why do you say stock picking isn't as profitable as it used to be? It seems over the last, I don't know, year, year and a half that active investing that stock picking has begun to perform again. Are you saying stock picking isn't as lucrative because machines are doing a good job of it and all that profit has been eradicated? Or What is the reason?

            Kartik Gada 12:47
            Well, it's more because the algorithmic short term trading within all the big stocks in the market has increased the correlation between all of those stocks. Therefore, between the largest companies that one could select the correlation in performance is higher, therefore, putting in a lot of effort to study one and selecting it as opposed to another is less productive.
            Matt Lewis 13:09
            But if the company's financial results aren't correlated at the end of the day, there should be a breakout. Should there not?

            Kartik Gada 13:17
            There should be, except the element of trading you know 90 95% of daily volume is round trip trades has increased the correlation in pricing very, very highly. And a few large stocks are doing well now, but that is either just a high beta type of investing philosophy or it is because return is concentrating into the few biggest stocks, partly because of the Federal Reserve actions, making debt purchasing and share buybacks cheaper for big companies and it would be for smaller companies. So that's even a separate problem that the Federal Reserve actually created.

            Matt Lewis 13:50
            Okay, I follow what you're saying, but at the end of the day, the results of the company should dictate to a large extent their valuation—so fundamental analysis may not produce good returns of the short term, but it should over the long term.

            Kartik Gada 14:04
            Maybe, but one should be prepared to continually rotate out of one stock into another. It's unclear that it would beat the index even then—because remember, one has to look at that continuously as it relates to how a certain stock is weighted within the index and so forth. So a lot of time could go into that and the investor could end up liking the index still, even after all of that.

            Matt Lewis 14:30
            Well, let me ask you this Kartik, the US economy has officially entered the longest expansion in its history. It's been growing now for 121 consecutive months. That's just surpassing the previous record, which was 120 months between 1991 and 2001. So if we're at the end of an economic expansion, or approaching it, should we be taking some chips off the table? Should we be more defensive?

            Kartik Gada 14:53
            Well, that is a very good question and unfortunately, the answers that arise to that question are entirely outside of basic market fundamental analysis and in the hands of the Federal Reserve. Yes, we have just recorded the longest economic expansion. That said, the market is teetering a lot to this to lower rates in a timely fashion because of their ego. They don't want to make it appear that their rush to raise rates was ill considered and done from a position of ignorance—even though it was. If they lower quickly, we may avoid recession risk, but they will look bad, and they don't want to look bad even though that would damage the financial well being of hundreds of millions of people. So if they can be made to lower rates, or of their own volition be inclined to lower rates, then we could very well avoid recession and go for a couple years more without a recession. However, if they take too long and they lowertoo late and by to smaller magnitude, then we could certainly have a problem. And this would be a recession entirely of the Federal Reserve's creation even much more so than the previous recession, because outside of them having raised rates too much there is no fundamental distortion or bubble in the economy to anywhere near the same degree as we saw in the prior two recessions.

            Matt Lewis 16:09
            Yes, I understand you Kartik, but couldn't you make the argument that if the Fed were to lower interest rates before the next recession arrives, then it would just be wasting its ammunition. And it would not have the tools you would like to have to manage the recession when it does arrive?

            Kartik Gada 16:24
            No, they don't need the same tools because lowering interest rates is no longer a tool at all. The Fed funds rate has to be zero forever. The tool that they have infinite supply of is quantitative easing, they just have to modulate that amount higher or lower. As I was saying before, the amount of quantitative easing that can be done without inflation is much higher than the Federal Reserve realizes they could easily do twice the amount that was done before and still not have inflation. Therefore, the size of the tool and variety of the tool available to them is infinite. The interest rate lowering tool is an obsolete tool because it's no longer needed. What is needed is more QE and more pervasive QE. The second problem with the QE that they've done—not only was it not enough, and they kept starting and stopping it creating uncertainty, but because of the Charter of the Federal Reserve—now the charter can only be extended by Congress, but the Federal Reserve is not requesting it'd be expanded at all either, so they both share blame—is that they only buy two types of instruments, both of which are very disconnected from the average person. They only buy treasuries and mortgage backed securities. Therefore, that has created a distortion in the economy only in those instruments over the entire market, and the remaining 90% of the US population has seen no effect from the quantitative easing they have done. For example, house prices in places like Palo Alto and San Francisco are much higher than the 2007 peak, but those are already the wealthiest people with the highest house prices. Whereas the interior of the US: Phoenix, Las Vegas, etc, are still well below the 2007 levels, which is exactly the opposite of what any stimulus policy to recover from the housing bust should have been. So the tools that they're using are too limited in scope and they should be requesting more expansion of their tools. If they were to do quantitative easing again, the best thing would actually be to give cash payouts directly to people.

            Matt Lewis 18:08
            You know, something told me you're going in the direction of universal income.

            Kartik Gada 18:11
            As funny that would sound, because that would be much more pervasive and people who are in economic distress spend that money immediately, causing the vibrancy of that economic activity to manifest much more quickly. Which does not happen when they just buy treasuries, which is a very convoluted and indirect way to create any stimulus because the stimulus still happens more than a year after the money printing was done, which is, you know, not helpful for the day to day lives of people in distress.

            Matt Lewis 18:41
            So 121 months into this expansion and Main Street still has yet to participate.

            Kartik Gada 18:47
            Yeah, they have either not personally dissipated or only in a very indirect and delayed sense and therefore, whatever stimulus they received was years later and, if anything, almost by accident,

            Matt Lewis 19:01
            There's a lot of concern in the press that artificial intelligence and digital workers could take over traditional jobs and the financial advisors and portfolio managemers world will be out on the street. Frankly, I'm not too concerned about this, because so much of what I do is solving the unique problems that my clients face, and it is at the end of the day, it has very little to do with trying to just beat the market.

            Kartik Gada 19:24
            Well, as I mentioned before, any task that is repetitive and one where the same task is being done by hundreds or thousands of people at the same time, those are candidates for what AI can take away. Now, if you go back to the 1970s or 1980s, there was a profession called the stockbroker where the individual would be on a phone, all day long, trying to persuade clients to buy issues of a stock and many of them were full service brokers. Now those jobs went away just through automation of stock trading through firms like Estock for $5 trade, Schwab and others. And now you can trade a stock for $5.

            Matt Lewis 19:55
            I'm picturing the movie pursuit of happiness.

            Kartik Gada 19:58
            Yeah, or you can go to movie like Wall Street 1986 as an example of that as well. And so most of those jobs went away. But now you can trade a stock for $5—or in the case of Robin Hood—even for free, and you can trade instantaneously. So that is an example of automation that took away a certain category of jobs but did not reduce employment in the sector as a whole. A lot more jobs were then created in things like what you have described, which is individual private client services, addressing of problems that are not directly related to the stock trading aspect, and things like that. So employment has net that decreases it's just the nature of jobs that has changed. It's not something new, that has in fact been going on for over 200 years, it's just now happening much faster. Artificial Intelligence—despite everything we hear about it taking away people's jobs at the moment—the US economy is at 3.6% unemployment, which is a 50 year low. We have a 50 year low in unemployment even simultaneous with all this automation, because I contend that artificial intelligence and automation net net creates more jobs than it takes away. And that is simply because any entrepreneurial activity becomes much broader in scope when you don't have to hire people. Right? We say jobs to certain types of financial advisors are going away, but that means the person who used to hire those financial advisors can do all of that work without hiring those people, and therefore can service a large number of clients by themselves. And that is, to some extent, what you're already doing and what others can also do in that vein.

            Matt Lewis 21:32
            I understand the idea that AI can create jobs, but the question in my head is whether that additional work that will be created will be translated into people providing services, people receiving income—because it seems like mainstreet usually gets left behind.

            Kartik Gada 21:49
            Yeah, there is a skills mismatch issue even in the US economy in the fine print, like I said, the unemployment rate is at a 50 year low, but at the same time, there are 7.5 million jobs that are unfilled In the US economy, even though there's some people that are underemployed right now, and that's because the jobs that are open are mismatched with the skill set of the people doing them. Someone who was an accountant or a telemarketer, who might have been eliminated through automation, cannot become a data scientist with just three months of training, for example. And in that system, there's a role for government, but that also goes back to what I was saying about the Federal Reserve—any stimulus they do has to take the form of cash because that is the immediacy needed when people are in a retraining mode, which takes more than three months maybe lengthy and stressful if someone is mid-career meaning they're over 40. And that is where such a stimulus should find itself rather than at some very esoteric level of just buying US Treasuries. But that's a different subject. The entire, coming back to this, automation of a lot of financial services work that was being done, whether the stockbroker or, in a contemporary sense the financial advisor, really does increase not only the amount of money retained by the client—because there's lower fees—but the enterprising private wealth manager can do much more because they can use AI where they might have in the past needed to hire someone. And if they couldn't afford to hire someone, they could not have entertained taking on that work at all but now they can.

            Matt Lewis 23:17
            Well, that certainly resonates with me—I do have to confess, however, that I really enjoy fundamental analysis. I used to be an equity research analyst, I enjoyed putting in the work finding those hidden gems out there. But at the end of the day, you don't necessarily get rewarded for that work. You may attract some new clients by generating alpha, but you really hold on to them by managing risk.

            Kartik Gada 23:41
            Exactly. And also efficiency of fundamental analysis—one other example that I give is—in this day and age, you can research things across the whole world because they're accessible in a way that wasn't. The effort it would take to research one stock, even a big stock like apple or Amazon, the amount of work you have to do, for the same amount of work you could become an expert in the entire oil market, the whole oil futures complex worldwide, which has much more investment opportunity, but for the same amount of effort on the analyst side. You could also research an entire country and their market, their political system, their risk profiles, their central bank actions, everything like that. So, for the same amount of work, as one used to devote to an individual stock, you could instead take on those much larger chunks of knowledge through the availability of that information today, and therefore have a much more sustainable and durable body of knowledge from that work.

            Matt Lewis 24:33
            Interesting. So Kartik, could you tell us how you think artificial intelligence is going to impact the investment management world? And also, if you could give us a view of what you think investment returns will look like, say 20 years out?

            Kartik Gada 24:47
            Well, the annual returns of the stock market will be much higher than just because of the exponential rate of technological and economic growth.

            Matt Lewis 24:53
            That's wonderful to hear. music to my ears.

            Kartik Gada 24:56
            We're already starting to see some sprouting of that—and the conversation we had about the Federal Reserve not allowing things to grow at the natural rate because of their outdated paradigms—will by then obviously, no longer be the case they will be forced into going with the new technological realities there. So returns will be quite a bit higher, as well as accessibility of the market will be quite a bit higher. Now, many things will be very hard for average people to understand because the complexity is rising. That is, if any thing, creating a gap between the few who understand the super complicated things, whether it's artificial intelligence, whether it's cryptocurrency and blockchain, versus the masses, and when I say the masses, that might be 80% of the people who just conceptually, mathematically, technologically, economically, cannot understand these things and therefore cannot participate in them very well. So those gaps could rise a lot.

            Matt Lewis 25:53
            Let's explore the idea of a black box. Let me give you a few examples, how about long term capital management, way back in 1998. After several years of stellar returns, it ended in disaster. The Fed had to step in and compelled banks to pick up portions of LTCM's portfolio, otherwise the entire financial system would have crashed. Then more recently, there's Boeing and its fleet of Max 737s and the two air catastrophes that occurred because of software that we can't seem to understand or get to the bottom of—how do we get comfortable with technology we don't understand?

            Kartik Gada 26:30
            So, technology can always cause new problems even as it solves a problem in the examples that you have provided each of those where an aspect of human management failure, in particular, for example, with the recent Boeing incident. The software was faulty, the software was one where they had cut some corners and had intrusted perhaps in lower wage providers in countries—where critical work is often not outsourced to—with perhaps too much of the work just to save some money and obviously, they had gone too far with that with a regrettable result. But at the same time, what has to be viewed with technology in general and artificial intelligence in particular, is how much of the rote human tasks are being automated and then how much you when oversight is needed. In the case of tasks where it is very repetitive and boring and expensive to do it, artificial intelligence is a godsend because it might be 10, 20, 50 times more efficient than a human at very little cost. Then if the human is just in charge on the quality management and the oversight side, then that's where you can get the best possible outcome. In our case, the algorithm was created by us, but then artificial intelligence use it and continues to get better, because artificial intelligence, by definition, is software that continues to learn through greater use, and our algorithm can use get more refined. But the human element in the whole thing is: how far do we want to go? And what is the optimal risk reward analysis.

            Matt Lewis 27:59
            There's something I've been struggling with and i'd love your opinion on this Kartik, I think you could shed some light. If we were to rewind 30 years into the past, back then that were decent fixed income returns. In fact, you could put your money in a bank and you see 3, 4%—bonds might give you anywhere between 5 and 12%. Those are very good returns, sometimes better than equities, but today we seem to live in a completely different reality. Is there any chance that we could return to decent fixed income returns of the past?

            Kartik Gada 28:28
            Fixed income had those high returns in the timeframe you mentioned, 40 or 50 years ago, but what was the inflation rate at that time? Right, it was higher than now. That's why even the savings accounts were 3, 4, or 5% in some cases. Now, we are in structural deflation of the economy which can only be offset by the Federal Reserve and bonds and savings accounts can no longer be relied on for, not only any type of return, in what I say will be a zero interest rate environment and simulated negative interest rate environment, so everything has to be equities of seeking. The issue there is that the entire bottom market has to shrink and diminish in importance because in addition to, not only their low returns, the correlation, or the rather, the inverse correlation that enabled hedging between bonds and equities is no longer true. It was long recommended that a portfolio will be 60% stocks and 40% bonds because when the stocks crash, the bonds would rise somewhat, then your total return will be okay. That is no longer true in an age of technological deflation. So yes, while equity return percentages will continue to rise, that does come at the expense of fixed income dwindling and being almost unviable. And that's why I say a middle ground has to be created by the Federal Reserve which has to be in a mode of simulating negative interest rates without actually docking people's accounts. They have to produce cash and disperse it. And while that kind of fills the gap between the absence of fixed income as a viable place to put your money.

            Matt Lewis 29:58
            Well, the bonds, the fixed the income portion of that portfolio you described, 40% would still be defensive in a bear market, it's just the bull market, it's not going to do very well.

            Kartik Gada 30:11
            In the bull market it will not do very well, but it'll be much less defensive in the bear market than it was before because the interest— the 10 year yield is already 2%, how low could it go in a large crash? In the old days, it could fall from 8% to 3%. And therefore, the value of the underlying bond more than doubled while your stocks tanked. Here, there is no more room for that, therefore, it will be much weaker and limited of an inverse correlating hedge.

            Matt Lewis 30:34
            But okay, so it will act more like cash eventually.

            Kartik Gada 30:38
            Yeah, it's more like cash and—

            Matt Lewis 30:39
            —matches pretty defensive, actually.

            Kartik Gada 30:41
            Yeah. But that's why when there is injection of continuously more cash—as the Federal Reserve ought to do—then the person is more a head just because there's, you know, a continuous new injection of new cash, not in reaction to the market but in an automated and pre published way so as to not distort the market or create the appearance of reacting to the market. Then you have a built in cushioning that is not something manually managed by the Federal Reserve. And I describe all of this in great mathematical detail in my book publication, which is freely available online.

            Matt Lewis 31:15
            And the name of that book again?

            Kartik Gada 31:16
            The name of the book is ATOM: A , T, O, M—which stands for accelerating techno-nomic medium. And the URL for that is And then singularity would happen in your 2050, so, it is 450,000 views and has been featured in a Google Talk in a number of other media publications.

            Matt Lewis 31:37
            All right, that's excellent. Kartik, my last question before we sign off today, how much of this low interest rate environment is the result of the great financial recession and what was left over from tarp and quantitative easing? And how much is the result of technological deflation? Is it possible for the central banks of the world to press a button and set off a smart-bomb that resets everything and takes us back to a world in which fixed income returns are reasonable?

            Kartik Gada 32:06
            That world will never come back again because technology is inherently deflationary. But the money earned through that return in the past 3, 4, 5% in fixed income could be more than exceeded if the Federal Reserve quantitative easing was done in a more diffuse way like I am saying. There could be thousands of dollars per month per US citizen that is dispersed and there still would not be inflation from that, even though the cash position and savings position of individual receiving—it would be stronger. So that way it is not a simulation of the age of high fixed income returns, but it is a more robust dividend of that for that reason. Also the this cash disbursement pad they talked about could also be used to gradually replace income tax because you're porting the taxation burden from humans onto artificial intelligence technologies, thereby enabling lower tax than zero tax and even negative tax on humans—since technology is becoming more and more pervasive in a larger portion of the economy, it should share a proportional burden of taxation too. So the trade off, while not analogous to high fixed income return, is something much better, like there might be zero or negative tax rate on humans, which is another way of saying: cash payout to people and not requiring to pay income tax, because technology is taking up the need for that.

            Matt Lewis 33:26
            You know, it seems to me the pension funds of the world really miss decent bond returns and would look forward to some kind of fixed income replacement. Do you see that happening?

            Kartik Gada 33:35
            I think that's where pension funds have to change. The low interest rates are extremely attractive to the big companies that are doing share buybacks for them. Companies like Apple, Amazon, they have done $200 billion plus of share buybacks just because they can issue corporate debt at super low interest rates, meaning they're the ones paying interest—but since interest is so low, they pay very little—and they have exaggerated their earnings performance through that because their earnings per share, has become very attractive simply because they keep reducing the number of shares, therefore earnings per share rises from the shrinking denominator, shrinking number of shares, and the absence of fixed income has been manipulated by them very well, leading to higher equity returns. So the very good stock market performance is partly due to the other demolition of fixed income returns.

            Matt Lewis 34:23
            Fascinating, fascinating. All right, well, thank you so much Kartik. Really enjoyed the discussion today.

            Kartik Gada 34:28
            Absolutely. Thank you, Matt. And thanks for having me, and I look forward to speaking again.

            Matt Lewis 34:34
            Thank you for tuning into this episode of Wealth Bootcamp. We're a community for entrepreneurs where we make sure you're building personal wealth, even as you build your company. If there were any parts of today's show you'd like to revisit, you can locate them quickly by running a search of the show's written transcripts. You'll find all our transcripts at on the podcast page, as well as show notes and links to all the authors and books we've mentioned. Be sure to tune in next week when we'll discuss self-directed IRAs and all the tax benefits that come with them. In the meantime, have a great week. And thanks again, from Wealth Bootcamp.

            Information provided by Westbridge Wealth Management, LLC and/or Wealth Bootcamp®, whether through the Wealth Bootcamp podcast or any other public media, is not meant to be and shall not be construed as a general guide to investing, or as a source of any specific investment recommendations. Such information is provided for illustrative purposes only and shall not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.

            Made on