The 4 Horsemen of Coronapocalypse | The Acquirer's Multiple®

In this week’s episode of the VALUE: After Hours Podcast Taylor, Brewster, and Carlisle discussed The 4 Horsemen of Coronapocalypse. Here’s an excerpt from the episode:

Tobias Carlisle:
Fellows, let’s move on to another topic. I’ve got a comment up on the screen. I don’t think you guys can see this. But I’ll just read it out for your purposes. “Unless you believe that the stock market was a bubble before the virus outbreak, there is no way you can justify the sell off, even if companies post zero revenues in the next year or so.” So this dovetails with my topic, which was I agree with all of the hot takes that… Someone did the mad libs for if you could’ve predicted that someone was eating a bat in a Chinese wet market or whatever it is that a pangolin that led to a big sell off in the stock market here and come down and collect your prize. You’re right. Nobody was going to get the precise detail of the thing that led to the big sell off.

Tobias Carlisle:
However, there are lots of guys out there how have been talking… Now I’ll just talk about a few of the things that I watched that we all had plenty of notice of. Mick Faber did a great… So the yield curve inversion as the first thing. Cam Harvey did his PhD dissertation on it I think. In back test it worked really well. I think his PhD dissertation, I’m not entirely sure, but I think it was late ’80s, early ’90s. Basically it’s had no false positives, and it’s preceded every single big sell off that we’ve seen. And I don’t think it’s so much as an indicator that the stock market’s going to sell off. I think it’s an indicator that there are some financial difficulties under the hood when the front stocks getting more expensive than further back through the term structure.

Tobias Carlisle:
So yield curve inversion. On average, from the yield curve inversion to the sell off or the recession, I think it’s about 10 months. And he made his announcement in about June last year. So it’s basically right on time. And then he went on Mick Fabar’s podcast, and he talked about it. He went on a podcast with Josh Brown and I think Michael Batnick and talked about it on that. Got picked up in Business Insider. It was everywhere for a while, and everybody just kind of forgot about it. And then now we’ve gone into a sell off.

Tobias Carlisle:
One of the things… Now I acknowledge that this indicator is less good than it used to be, but value selling off is an indicator that something is coming in the market. If you listen to my real vision interview with Chris Cole, he says before he asks me one of the questions that it’s one of the metrics that he tracks to look at what he thinks is coming in terms of volatility. So when value starts underperforming, that leads to sort of like a precursor to some big sell off.

Tobias Carlisle:
And then you remember Cliff Asness wrote that paper where the six weeks of just being punished for being a value [crosstalk 00:28:44]. Arguably that was a pretty good harbinger of something coming.

Tobias Carlisle:
New York Fed has this recession odds at 30%. That was a little while ago, a month or so ago. If you go and look at that indicator, that indicator does… It doesn’t give very many false positives. Last time it kind of spiked like this was 2007, and the time before that was about in the 2000s I think. It’s a pretty good indicator. And then on top of that, as we’ve discussed before on the podcast, there are a lot of value indicators. Cape. I know that Shiller P/E is kind of… People don’t really like it because it gives them the wrong answer I think is the real reason, not because it’s indicating anything. Not because it’s wrong because it disagrees with what they think. I think that the Shiller CAPE was silly high. It was over 30, and now it was 22 or something the last time I looked at it. Long run means 16.7. long run means the long run mean for a reason. It’s because we traded below that for a long time. I don’t know if that’s the real mean. I think if you look at the mean over the last 20 years, it’s probably higher. Look at the mean over the last 30 years, it’s probably a bit lower.

Tobias Carlisle:
So I think that you didn’t necessarily have to know the precise nature of the draw down or the precise cause of the draw down to have some sort of inkling that something was coming. And there were a lot of pretty reliable indicators that said rather than looking at the stock market, just like the global economy was in a little bit of a trouble. The global economy was starting to cool a little bit. And often that leads to some weakness in the stock market.

Bill Brewster:
Yeah. I think both things can be true. I think the argument… So that statement that was posed said if you don’t think the market was in a bubble, and I’m going to add or overvalued, there’s no way that this sell off is justified if earnings are zero. Okay. Well, I think you just went through most of the reasons that maybe people disagree that the market was valued appropriately. I also agree with the fact that if you are running a DCF and your one year is zero, it actually doesn’t impact the value 30% on most companies. Ironically, it actually hurts the ones that are front loaded the most. But I think both are true. I think liquidity is going to determine investment results over the next two years.

Jake Taylor:
[crosstalk 00:31:14]

Bill Brewster:
So liquidity, you should be okay. If not, you’re screwed.

Jake Taylor:
Maybe that’s a partial explanation for why value is sort of that canary. It leads into the eye of the storm because it tends to be more front loaded in what you can measure today. So maybe that gets whacked first potentially if you start discounting things.

Tobias Carlisle:
I just think the bid goes away. I think value guys are a little bit more disciplined for the most part. What happens at the end of a bull market is people look at price trajectories, and just the stuff that’s gone up the most is the stuff that they want to be in. And value stocks are kind of not those stocks. They’re the stocks are cheap. So if you’re a value guy and you’re hunting around for stuff that’s undervalued, for one thing there’s a lot less of it and it doesn’t have that attractive price trajectory. But that’s why momentum works really well right up to the end of the [inaudible 00:32:14], and then it gets taken to the woodshed or I mean right up to the end of the berm, and then it gets taken to the woodshed in the bust.

Bill Brewster:
Yeah. I mean, look, I’m done making proclamations about bonds and corporate debt and stuff. Talk about being proved wrong in 1000 different ways. But-

Tobias Carlisle:
Why are you proved wrong?

Bill Brewster:
Because-

Jake Taylor:
Well, I did them before.

Bill Brewster:
Well, yeah. Because I was focused on things like they have no convenience, and I didn’t know the whole world would default at once. Not that it will. But if you’re a lender to a cruise line, you may end up with some nice equity or the airlines.

Tobias Carlisle:
You might end up working on the boat.

Bill Brewster:
Or yeah. Or the casino.

Tobias Carlisle:
I think they’re going to get bailed out I think.

Bill Brewster:
… Petri dish.

Tobias Carlisle:
They’re going to get bailed out.

Bill Brewster:
Who knows what it looks like.

Tobias Carlisle:
It used to be you took the boat to the courtroom steps and you auctioned it off, and the next bloke, he got a cheap boat. And he then went and made a whole lot of money on his boat until he leave it up and got a whole fleet of them. And then he went bust and gave it to the next bloke. That’s how it works.

Bill Brewster:
Yeah. Well, now you just have to wait 21 days to get on it because those things are gross.

Tobias Carlisle:
21 days to get on, and then 21 days to get off.

Bill Brewster:
Yeah. You’re going to be there for a while.

Jake Taylor:
Now you lever up back all your stock and then hire a huge lobbying team, and then get your bailout.

Bill Brewster:
Yeah. I don’t know that I like this take. I feel like this is way overblown.

Jake Taylor:
For now. Wait until the pleas start coming in of the real pain start.

Bill Brewster:
Dude, I know. I mean, I follow the airlines really closely. I’ve been very vocal that I disagreed with Doug Parker running a levered buy back strategy. I don’t think they should get bailed out. I have very different feelings on like Delta, Alaska, Southwest. I mean, those guys run a tight ship. But it is what it is. The cards came out.

Tobias Carlisle:
Was Jamie Dimon’s heart event a leading indicator?

Bill Brewster:
Oh god. I didn’t like that at all. We need Jamie right now.

Tobias Carlisle:
You got to look at the Ford data.

Bill Brewster:
Really?

Bill Brewster:
You know what’s interesting, if you look at the history of Bank of America, I mean, what made Bank of America was APG Anene going into… I hope I didn’t mess up his name, but going into a situation like this when no one else would lend money, he was the one that was the liquidity provider. I hope that’s what our banks can do. I know a lot of people don’t want them taking credit risk right now, but we need to get through this. And everyone needs to get through it together. I mean, this is not… Like we’ve gone from everything is moderately okay and we disagree politically to like an all out war against a virus. That’s an amazing shift.

Tobias Carlisle:
It doesn’t feel like some of the political disagreement has gone away though.

Bill Brewster:
Yeah. That’s what crisis does. That’s why I’m actually bullish.

Tobias Carlisle:
Well, I think you should be bullish. I mean, whatever that means. I think you should be.

Bill Brewster:
I am optimistic about our future more so than I was when people were like, “Oh, it’s all fake news. Go to the restaurant.” Now we’re finally all on the same page. We can fight this thing together, except for West Virginia. Get on the page, West Virginia. Come on.

Tobias Carlisle:
I saw a note from Paul-

Bill Brewster:
I think we are all going through some pain. Stop what you’re doing.

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