The TSC Streetside Chat: The Power of Gold Author Peter L. Bernstein

Peter L. Bernstein puts most Wall Street economists and money managers to shame.

He's been a proven money maker, managing billions for institutional investors until he sold his firm in 1967 to Sandy Weill and what we know today as Citigroup. He has advised Fortune 500 corporations and the biggest nonprofits on where to invest and how to stay out of trouble. He's a big picture guy at a time when so many analysts are specialists. He's also an independent thinker when many sell-side analysts are in the pockets of the investment bankers and their underwriting clients. He knows his history when most know only last quarter. He lived through the Depression, served in economic intelligence in the CIA's predecessor, the Office of Strategic Services, or OSS, in World War II and has observed numerous bull and bear markets. And most importantly for readers, he can write. Peter has written seven books on economics and finance, including such well-reviewed texts as Against the Gods: The Remarkable Story of Risk and Capital Ideas: The Improbable Origins of Modern Wall Street.

And Bernstein has a new one just out: The Power of Gold: The History of an Obsession. He sat down recently with TheStreet.com's chief markets writer, Brett D. Fromson. In a wide-ranging conversation, they discussed the rise of gold, the role of the dollar as today's gold standard and the scary chance that a sharp decline in the dollar could trigger within five to 10 years the next great financial crisis. You won't want to miss what this wise man of Wall Street has to say.

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Brett D. Fromson: Peter, why has gold played such a prominent role in history?

Peter L. Bernstein: It was easy to get out of the water, out of the rivers, or to mine in eras when slavery was commonplace and you had people that would go in and do this really horrible digging process. And because gold is chemically inert, it doesn't ever tarnish, it gives people a sense of being in touch with eternity. I think this is the magic of it. It stands for security and assurance.

Brett D. Fromson: In an impermanent world.

Peter L. Bernstein: And it's also wonderfully beautiful. It's nice to have gold jewelry on. It gives you something. It's also malleable and easy to shape, so even in very primitive times, people made works of art out of it, decorated themselves with it and because of its unusual qualities it conveyed a sense of power to the person wearing it or the statue that was adorned with it. That's why the Egyptian Pharaoh Ptolemy II, every time he went on parade, had a 150-foot phallus made out of gold to march in front of him. This was a really special power.

Brett D. Fromson: Gives new meaning to, "Mine is bigger than yours." Moving on, when did gold become a store of wealth?

Peter L. Bernstein: It was owned originally only by rulers or by the ruling class. And this gave it further value and therefore it became a form of money, where, if you gave it to somebody as a gift or in exchange for something, you were giving that person something that purportedly had some value. It has another quality that's important: It's very dense.

A little bit of it goes a long way, or a little bit of it has a lot of value. So it has naturally lent itself to money. It has survivability. It's hard to tear apart or blow apart or crack. It has the magic associated with it and the density. So starting about the middle of the sixth century B.C., Croesus, the guy who was literally as rich as Croesus, sat by a river full of gold in Eastern Turkey and made the first gold coins.

Brett D. Fromson: He was king of the Lydians, right?

Peter L. Bernstein: Yes. He had a little empire in Eastern Turkey that was on the main trade route between the western Mediterranean and the East. So he was very strategically situated, and when he developed this currency, this kind of money, it was the first money that was acceptable in a number of different countries. Sort of like the euro. It was carefully stamped, so when you got each coin you knew exactly what it was worth. Until people started playing games with it, you didn't even have to weigh the coins. You knew the value right away.

Brett D. Fromson: Of course it was stronger than the euro.

Peter L. Bernstein: (Laughs) It was gold. This is about 550 B.C., very early. And then it was taken up by everybody, the Greeks and the Romans used gold coins throughout their empires. Before the Romans, Alexander went through Asia with gold coins. Most of the gold at that point came from Nubia, in darkest Africa, south of Egypt, although there were deposits throughout Europe and in Turkey. And we're talking about small numbers of people then, so there didn't have to be large amounts of it. The idea of coinage was developed further in the Middle Ages. Silver began to be used for smaller transactions, and gold for larger transactions. You had this kind of two-track monetary system going on.

In the 13th century, after the Dark Ages came to an end, Genoa and Florence and Venice had genoins and ducats and florins, a monetary system more like what we know. "And because gold is chemically inert, it doesn't ever tarnish, it gives people a sense of being in touch with eternity."

Brett D. Fromson: Which is to say what?

Peter L. Bernstein: Well, with these generally accepted monies and growth in international trade, a huge amount of trade was going on both north and south in Europe, and beginning with the East.

Asia is a tremendously important part of the story. Asia had stuff that Europeans wanted, particularly spices, because they were necessary to preserve food, but also textiles and lovely works of art. So developing trade with Asia was very important in those markets. Marco Polo in the 13th century went and came back with all of these fabulous stories, and the Asians have always coveted gold.

There's not a great deal of gold there, although Marco Polo came back and talked about houses in Japan that were roofed with gold, there was so much. Whether there really was, we don't know, but they have always coveted it.

Brett D. Fromson: Even more so than the West?

Peter L. Bernstein: Well, they haven't used it so much as money as kind of a hoard against insecurity. We know still, today, that people in India get their dowries in the form of gold jewelry, and jewelry was a means of keeping gold, and even in Europe, but also in Asia there were literally hoards kept underground. We keep finding them. When archaeologists dig, they find these hoards of gold.

Gold was very acceptable to the Asians, and although the Europeans complained because they had to give up their good gold to the Asians, they were getting something useful in place of it.

Brett D. Fromson: What were they getting?

Peter L. Bernstein: Spices were the most important thing because they preserved food.

Brett D. Fromson: So when did gold segue from coinage to actually being the underpinning of a paper-based monetary system?

Peter L. Bernstein: Nobody planned this. This wasn't something where somebody woke up one day with a vision and said, "Hey, this would be a great way to run the world." It just developed by a series of accidents.

We get now into the 17th century, when you have the real beginning of capitalism -- substantial growth in finance, insurance was beginning to develop very rapidly. Ships and navigation methods were improving and so trade was growing very rapidly. When you think 1688, the Glorious Revolution in England was the turning point of the modern world.

Brett D. Fromson: When the English overthrew James II?

Peter L. Bernstein: Yes. At the end of the 17th century the religious wars had come to an end; we witnessed a lot of technological development during the Renaissance. The scene was really set for 100 years later when the steam engine was developed, and we were really off and running. But, at that time, because gold was expensive and valuable, silver was also very much a part of the monetary system.

If I could digress for just a minute: The Chinese had long since developed paper money. I think it was in the 13th century. They thought it was silly to use stuff you might have some other use for. Why not use paper? And for a long, long time, a number of centuries, they were able to do this without yielding to temptation. It's easier to print paper than mine gold. So paper money was also beginning to circulate. It's important to mention that at the end of the 17th century, money was ceasing to be something that you could bite into. Because trade and finance were developing so rapidly, there were private pieces of paper that were really promissory notes. They were called bills of exchange and were growing very rapidly as people traded not only within their countries but across international borders. The money system now begins to look like that of today's world.

They were moving pieces of paper and pieces of metal rather than computer bits, but the process was very similar to today. But the thing was that a promissory note by me to you is OK if somebody knows who I am or if there's something to suggest that I'm a reliable source. There had to be something that that this paper was convertible into to make the paper acceptable. And so just by usage they began to say, well, it has to be convertible into gold, that somehow it has to be something that you get in the end. "Asia had stuff that Europeans wanted, particularly spices, because they were necessary to preserve food, but also textiles and lovely works of art."

Brett D. Fromson: Other than another piece of paper?

Peter L. Bernstein: Other than another piece of paper. The pieces of paper grew much more rapidly than the pieces of metal.

Brett D. Fromson: So you end up with gold underpinning the paper.

Peter L. Bernstein: Yes, gold underpinning the paper. Also, silver becomes convertible into gold. Gold and silver were competitive, really competitive for a very long time. Can I tell you about Isaac Newton?

Brett D. Fromson: Sure.

Peter L. Bernstein: Late in the 17th century, late in the 1690s, Isaac Newton was the director of the Mint in Britain. Newton had been the world's greatest scientist, who discovered the law of gravity and had been the nerd's nerd teaching at Cambridge. He lectured regularly, yes, even though there was often nobody in the classroom.

Brett D. Fromson: I had professors like that.

Peter L. Bernstein:A totally withdrawn, introverted, strange man who in his rooms was practicing alchemy. He was trying to use chemicals to create synthetic gold. Anyway, he suddenly got interested in politics. He decided he wanted a job in the government, so he gave up science, gave up Cambridge, gave up a celibate life and began to go out with women and became fascinated with economics. He got in the mainstream in London and was made director of the Mint, which was a much more powerful job in those days than being head of the Bureau of Printing and Engraving in Washington is today.

At that point, there seemed to be more gold coming into England than silver. The result was that gold was getting cheaper relative to silver. Part of it was trade, but part was also the relative prices between the two metals. Gold was cheaper in England than in other countries.

Brett D. Fromson: So they would bring silver in and exchange it for gold, and take it out of the country to resell at a profit?

Peter L. Bernstein: It was a real arbitrage process. But this was a concern for the British government, because there was a shortage of silver in England. So they turned to Isaac Newton, and he had studied economics and discovered the law of gravity and knew the answer to everything.

He set a great tradition for economists of the future because he made a famously bad forecast. He said if you just leave things alone, the price of gold will fall and then people won't want it as much any more and after, silver will go up, because it will look more valuable. But what actually happened was that the market, without anybody saying anything, had decided that gold was the standard, not silver. So while it was true that the relative price of gold and silver changed in the way that Newton predicted, it was the price of silver that went up rather than the price of gold that went down. So gold became the standard against which everything else was measured.

In those days, the wealth of a nation -- and I use that expression purposely -- was determined by its gold stock. And because Britain was a very powerful trading nation, they had a lot of gold at that point. It was 100 years later that Adam Smith rose up and said, "This is stupid. What's the point of piling up this useless stuff? That's not wealth. Wealth is what you can eat and wear and enjoy."

Brett D. Fromson: And this was 1776?

Peter L. Bernstein: 1776. And if the wealth of nations is determined by how productive they are, and therefore how much they can get in exchange for what they export, then this is what life is really about, not piling up money.

Let me talk about Europe now. This was where the fixed-rate currency system developed. Your currency was always exchanged at the same rate with other currencies among the major European countries.

The devotion to this fixed-rate system was so great, and the credibility was so great, that if a country got into trouble it would raise interest rates even if it created unemployment. I'm talking about the 19th century world, in which unions were not yet strong and even democracy was not yet fully developed. A ruler did whatever he could to protect the currency, regardless of the human cost involved. So the credibility was very strong.

Consequently, if a country began losing gold -- was having difficulty because they were growing faster than other countries and therefore importing more and gold began to go out -- they could borrow from one another extensively. In fact, speculation at that time was stabilizing rather than destabilizing. If the value of sterling began to go down in the foreign-exchange markets, speculators would buy it because of their conviction that Britain would get its house in order again. That is so unlike today, when a currency that's under pressure from speculation just gets worse. The speculation is self-fulfilling. In the old gold system, speculation was stabilizing. "So they turned to Isaac Newton, and he had studied economics and discovered the law of gravity and knew the answer to everything."

Brett D. Fromson: What was going on in the United States at that time?

Peter L. Bernstein: We were much more democratic than Europe. In addition, the silver lobby was very powerful because they produced silver in addition to the gold found in 1848 in California.

And silver was seen as the money of the common man, the small denomination stuff. Americans distrusted bankers, foreigners, all those kind of people. So we didn't have the kind of credibility the Europeans had. It wasn't that easy for us to borrow in a pinch when gold started to flow out. So if we got into difficulty, and gold began to move out, it moved.

Brett D. Fromson: Let's move to the 20th century.

Peter L. Bernstein: The U.S. came out of World War II with most of the world's gold. But we were very generous to Europe and then Asia. These countries began to get their economies in order and to grow very rapidly and become serious competitors. The gold began to go out.

Brett D. Fromson: What was the mechanism by which it went out? Through trade deficits?

Peter L. Bernstein: Trade deficits were settling in gold. Under Bretton Woods, exchange rates were fixed, but only the U.S. dollar was convertible into gold.

Brett D. Fromson: So it was a dollar-based international monetary system.

Peter L. Bernstein: Yes, much like today, really, except that the rates of the other countries didn't change. We maintained millions of troops outside the U.S. because of the Cold War. We were importing more and more, and we were investing very heavily because Europe and Japan were getting under way now. It was the opposite of today, when everybody wants to invest here.

Foreigners were owning more and more dollars and beginning to cash them into gold. So we were in a real bind, and finally, in 1971, Richard Nixon shut the gold window, which meant the dollar was no longer convertible into gold.

This is the last gasp of the gold system, the gold standard. The issue involved there -- and this went all through the 20th century up to 1971 -- was the same as the issue that William Jennings Bryant was talking about in 1890: Do you tie yourself to the rest of the world in this very fixed way, or are you the master of your own fate?

Brett D. Fromson: We now have a dollar-based floating exchange rate monetary system. Are we any less, are we any more masters of our fate than we were in 1971, when we had the old gold-supported fixed exchange rate system?

Peter L. Bernstein: This is one of those economist questions -- on the one hand, on the other hand. It depends on who you are.

On the one hand, if the United States of America has one set of problems, Malaysia or Thailand or even Brazil has a different set of problems. These smaller countries have had terrible problems of adjustment as it is, but it would have been much more difficult for them without floating exchange rates. We see Asia reviving today, coming back really strong from what happened in 1998, and one of the main reasons is that their currencies were devalued, and therefore their goods are cheaper in world markets. Their goods and services are cheaper in world markets than they were before.

And imports to them are more expensive than they were before. And so the dramatic change in their balance of payments in their international financial relationships is very important. The U.S., in a funny way, doesn't have the same freedom of movement. If the dollar were to become weak, I think we would be in a very frightening situation.

Today, speculation is not stabilizing, but destabilizing. The dollar has an aura of strength in world markets that is valid, but this is where people want to keep their money. But were we to have an inflation rate that's higher than that of the rest of the advanced countries, or if the Europeans and the Japanese ever get their act together ...

Brett D. Fromson: Economically?

Peter L. Bernstein: Economically, and began to develop in the same way that we have in the last five, six, seven, eight years -- technologically and rapid growth and low unemployment and high productivity and all the wonderful things that have happened here for reasons we don't quite understand. "So we didn't have the kind of credibility the Europeans had. It wasn't that easy for us to borrow in a pinch when gold started to flow out."

Brett D. Fromson: The euro and the yen would give the dollar a race?

Peter L. Bernstein: The euro and the yen would give the dollar a race. If the movement were in the opposite direction, it could gather momentum and history suggests there are only two ways to go, so what would be so terrible about that? Suppose this began to happen.

Brett D. Fromson: An incipient flight from the dollar.

Peter L. Bernstein: Yes, if there were flight from the dollar, what would this do to us? Why should we be worried about it?

Only within the last couple of weeks or at least within the last month, [Federal Reserve Chairman Alan] Greenspan himself said this is something that could happen eventually, and that we have to be concerned about. And he's the guy with his hand on the trigger, so it's going to be his job to try to take care of it. It's a very different kind of crisis from the kind he's used to dealing with.

Why should we care? A weak currency is inflationary. Otherwise, it really doesn't matter a hell of a lot, but it means that instead the pound is now $1.40, that instead of an Englishman wanting to import something from the U.S. ... Then he'd get $2 for his pound. So that one pound would be $2 worth of stuff instead of $1.40 worth of stuff. Then we'd see our exports going up, and we'd have to pay $2 for a pound's worth of English merchandise. To go over there to have dinner in London is expensive enough now, but it would be that much -- 50% -- more expensive than it is now.

So, we would be exporting more, and we'd have less import competition. And the consequences would be inflationary. The only way to prevent this is to raise interest rates sky high, and that certainly makes the stock market go down and the bond market go down.

Brett D. Fromson: And the real economy?

Peter L. Bernstein: And then this hits the real economy. And that's really the classical medicine, you see. Then the real economy gets weaker and we don't import so much. Because we're now importing about $30 billion more than we're exporting. That would change.

Brett D. Fromson: Are you concerned about the dollar flight question in the near term?

Peter L. Bernstein: Near term, no. I have a basic philosophy -- I guess because I'm a child of the '30s -- that anything can happen. And that economic conditions change and that good times develop maladjustments and lead to bad times. Bad times can lead to readjustments that lead to better times and this is how the world works, and there's absolutely no reason to believe that's ever going to change. So, while I'm not concerned about this near term, all the necessary ingredients are there for something of that nature to occur.

Brett D. Fromson: Meaning a dollar crisis?

Peter L. Bernstein: Meaning a dollar crisis.

Brett D. Fromson: How important is the federal budget in a currency crisis?

Peter L. Bernstein: In every case where a country's got into currency trouble, the fiscal position is in trouble. They were running into or moving toward the red. "But if the surplus begins to shrink, that could be a problem, and there are a lot of reasons to think that it may."

Brett D. Fromson: That was a necessary precondition?

Peter L. Bernstein: To get the gold flowing back in, they had to get their fiscal house in order. This was before the bankers in other countries would lend to you. You had to take these steps and this is really the awful crises of the early 1930s, when Britain got into trouble. In 1931, with millions of people unemployed, raising their interest rates, the gold still kept going out of Britain. Then we did the same thing, raised taxes and interest rates in 1931 -- banks failing, prices falling, unemployment going up, but we had to protect the gold. To some extent, although we don't have the gold standard anymore, we would face the same kind of danger if the dollar were to become very weak.

Brett D. Fromson: Explain that.

Peter L. Bernstein: There would be a run on the dollar, as I said before. I think that as long as the budget is in surplus to this extraordinary amount, the crisis might not occur or might be much more muted because the U.S. would still look like a stable place. But if the surplus begins to shrink, that could be a problem, and there are a lot of reasons to think that it may.

You've just got to read the daily paper ... these budget projections are based on very fragile kind of substance, any one of which could easily be wrong. That takes away a very important prop under the dollar. I think we could survive weakness in the dollar if the surplus was strong, and we could see the surplus diminish if all the other factors stayed in place, but all of the necessary ingredients for a dollar crisis are there. I'm not sitting here and predicting it, but in painting scenarios, which is I think the only rational way you can do it as a forecast, you need to look at all the different possibilities. It sure as hell belongs in there.

It's more of a likelihood, but I think if you're talking about a five- to seven-year time span, I think the probabilities are good.

Brett D. Fromson: What do the Europeans get out of the current dollar strength? We don't hear them complaining too much.

Peter L. Bernstein: If you can't sell at home, sell abroad. You can still do business. And the weak currency helps that. And I guess they'd be in worse trouble in some ways if they didn't have the export markets.

Brett D. Fromson: Has the dollar replaced gold? And can any currency ever replace gold in its role as the means of exchange?

Peter L. Bernstein: The dollar has replaced gold vis-a-vis the rest of the world because it's the standard that every other currency is expressed in terms of dollars. The ultimate reserves that other countries hold are dollars. They pay their obligations in dollars. Huge amounts of world trade are denominated in dollars even between country A and country B, where the U.S. doesn't even come into it.

So that, in this instance, the dollar is playing the role of gold. But the dollar is also the currency of the United States of America and its value is subject to what happens in the U.S. economy. Gold stood outside the system. It was a stateless currency. It therefore played a different role from the dollar.

The dollar plays the same role as gold in all of the rest of the world at this moment, because the dollar is perceived to be as good as gold. But the gold standard was a rigidly enforced system of exchange rates that didn't vary, and where speculating against a change in exchange rates would be a losing proposition. I don't think we'll ever go back to such an arrangement. It puts each country in too much of a corset. You crucify the world on a cross of any standard. Each country gives up a certain amount of domestic freedom.

Brett D. Fromson: Let's look at the euro. One of the reasons it appears to be so weak is obviously that the fundamental economy in Europe is not as strong as the U.S. economy. But another problem they have is that the European Community is perceived to be weak as a political entity, and they have essentially created a common currency without a common government.

Peter L. Bernstein: So they don't have credibility. This is the big word. What the gold standard really conveyed was credibility -- credibility that a country would not let inflation run away, that its currency would continue to have purchasing power. This was the promise that the gold standard conveyed because the gold would begin to leave if they weren't behaving. But that was a world in which you could create unemployment without creating a revolution. Today's world is much more difficult. This is why I think that going back to that kind of arrangement is very unlikely; the corset is too tight.

Brett D. Fromson: Which currency today seems most vulnerable to you?

Peter L. Bernstein: I think the most vulnerable currency is the dollar because we have this tremendous deficit in our current account.

But, except for us, there aren't any major currencies that are exposed. The more we buy abroad, the more other currencies accumulate dollars and therefore seem to have plenty of reserves to take care of them if there were a run on their currency.

The only country that is exposed to that kind of crisis is ourselves. Because we have some reserves of foreign currency but not an awful lot, relative to the magnitude of what our foreign liabilities are. But if there were reasons to move out of the dollar, then there would be a lot at stake, and the speculators would be right out there bidding and it would not be stable. It would be very destabilizing. "I think the most vulnerable currency is the dollar because we have this tremendous deficit in our current account."

Brett D. Fromson: Just paint very quickly what that might look like.

Peter L. Bernstein: The pound is now costing $1.40 for Americans and it might cost $2. You'd get maybe 50 yen for a dollar instead of what you're getting now. It would make the purchasing power of dollars in terms of foreigners go down. But more importantly, it would be an attack on the capital market.

Brett D. Fromson: In the United States?

Peter L. Bernstein: In the United States. Foreigners would begin to liquidate their assets.

Brett D. Fromson: Stocks and bonds.

Peter L. Bernstein: Yes. And there's no reason why an American sitting by and seeing a foreigner selling wouldn't join in, because the consequences of holding might be bad. So it would be real bad, it would be the mother of all crises. Certainly it could be the worst since 1974 because the dollar is so overowned in the rest of the world today.

Brett D. Fromson: How might the Fed cope?

Peter L. Bernstein: Greenspan's experience and skill and his ability to put his finger in the dike at moments of crisis has created liquidity when there was a liquidity crisis.

This would be the opposite kind of a problem, in that creating more dollars would only make the situation worse. And the only answer is to push interest rates up, not down. And that's very painful medicine.

It's really a scary possibility. This could be a moment when gold suddenly regains its luster, because maybe the euro and the yen don't look like the answer to everything, and so there's a reversion, in a really scary time, to more primitive kinds of things.

Brett D. Fromson: How so? Because gold represents some kind of absolute value at a time of panic?

Peter L. Bernstein: If you visualize something like this in the very complex financial system we have today, which is a world of derivatives, all of which have a huge amount of counterparty risk attached to them, gold is something for which there isn't any counterparty. That's it.

In that kind of crisis we'd see the price of gold way up again. I'm sure there would be some reversion back to that, because it would look like the only thing that people would be willing to take if they began to lose confidence in the value of paper money.

Brett D. Fromson: Final question. You're not only an economist, but for many, many years you were an investment manager. What would you say about where money should be invested today? How do you position yourself now so that you don't get wiped out in a panic seven years hence, but you don't forego the appreciation in, say, U.S. equities in the meantime?

Peter L. Bernstein: I have a very simple answer to that. And it's a stuffy, old-fashioned answer, but it's delivered with great conviction. Diversification is very important. We do not know the future, and diversification is the only rational way to deal with the future.

The theme of the book is that greed gets you nowhere. So, 100% of anything is a terrible, terrible mistake. If I'm 60% in equities, and the market keeps going up, I'm not going to make as much as the guy who has 100% in equities. But I'm going to do all right.

But if it's wrong to be in equities, I'm also going to be a survivor. And I don't know whether it's right or wrong, but I don't have to maximize -- maximizing is taking very big risks. I don't know, if I were 25 years old I suppose I would take a different view, but for people who are accumulating for their retirement, which is kind of the big motivation today for being in the market aside from having fun, and it is a lot of fun, surviving is just as important as seeing it grow. If you don't know which way the cat is going to jump and you're 60% in equities, you'll get richer. You'll come out OK.

Brett D. Fromson: And the other 40%?

Peter L. Bernstein: The other 40%? Look, I'm not picking 60% as a number, but less than 100%. I just don't buy the 100% theory at all. I read one just the other day I shouldn't mention -- the PaineWebber one. It's very well done, but it's pure extrapolation of the past into the future. You can have something that looks perfect and it's not durable.

Cash is the ideal hedge against this kind of crisis that we're talking about. Because when interest rates go up, Treasury bills are what really serve you best. If you have a hedge against an extreme outcome like 10% in bonds or 5% in gold, and the worst happens, these things pay off big.

Brett D. Fromson: And gold?

Peter L. Bernstein: In 1980, the value of all the gold in the world, the monetary gold in the world, was more than the value of the New York Stock Exchange. So if you had taken just a small position in gold in the 1960s and the early 1970s, it would have exploded into an enormous amount when everything was hitting the fan, so you don't have to have a big position as a hedge against an extreme outcome like that for it to pay off.

So I think I would have small positions in bonds and maybe gold stocks. But cash is the primary hedge against the stock market. It also has a cost. The return is low. But in an inflationary period, it's a wonderful thing to hold because you're rolling it over as money market fund rates just go up. But I would not be 100% in stocks. This is the main thing. What you do with the rest, you fiddle around, but I would not be 100% in stocks for anybody under any circumstances, ever.

Brett D. Fromson: Peter, thank you very much.

Peter L. Bernstein: Thank you.