VALUE: After Hours (S02 E17): OIL! The Grid And Complex-Adaptive Systems, Bill’s Story Arc

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In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:

  • Why Did Oil Drop To Negative $40 A Barrel?
  • The Grid And Complex-Adaptive Systems
  • Bill’s Evolution As An Investor
  • Gavin Baker – Software Contracts, First-Lien Debt And The Reality That No Revenue Is Truly Recurring
  • Charles Munger: “The Phone Is Not Ringing Off The Hook”
  • Is This The Time To Buy Gold And Gold Miners?
  • How Long Before We Hit A New Low

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias Carlisle:
Live, it’s April 21, the day after oil went absolutely bananas. I have no idea what happened.

Bill Brewster:
Negative.

Tobias Carlisle:
Negative $40. Market’s off a little bit-

Bill Brewster:
On 4/20.

Tobias Carlisle:
Tech’s getting beaten up, oil has gone berserk. How you fellas doing?

Jake Taylor:
Living the dream.

Bill Brewster:
I’m doing well. I’m texting my dad right now to let them know that we’re live. No, I’m good, man. We’ll see. Well, I guess we might as well do the opening and then we can get into it.

Tobias Carlisle:
I always like a shout out from where you’re listening in from because we’ve had some like… We’re going around the world. 10 people from 10 different locations around the world. All 10 continents-

Jake Taylor:
Continents represented. We got Atlantis also or what’s the-

Bill Brewster:
Oh, Atlantis, that’s going to have a tough go of it here coming up soon.

Tobias Carlisle:
Whose intro is it today?

Jake Taylor:
I think it might be my turn.

Bill Brewster:
Oh good. I like that.

Jake Taylor:
All right, I’ll kick it off. Welcome to Value After Hours. I’m one of your hosts, Jake Taylor. Joining with me today we have as usual Bill Brewster and Toby Carlisle. Bill, what are you going to be talking about today?

Bill Brewster:
I’m going to be an accounting of where I am, where I’ve been and where I think I’m going.

Jake Taylor:
Okay, therapy session, Toby?

Tobias Carlisle:
I want to talk about oil a little bit. I think that was an interesting situation yesterday, where it traded negative the Front Month future at expiry. I just wonder if it indicates something going on underneath. There are lots of these wild theories going around. I just want to talk about them because it’s fun, but I got no particular insight. What do you want to talk about, JT?

Jake Taylor:
I’m going to be talking about what the power grid can teach us about the economy.

Tobias Carlisle:
Right after this.

Jake Taylor:
Back after this. Right now.

Tobias Carlisle:
Play the funky music on the way in. Who wants to take it away? Should we do oil because that was the weirdest thing I’ve ever seen yesterday.

Bill Brewster:
Yeah, sure.

Why Did Oil Drop To Negative $40 A Barrel

Tobias Carlisle:
Front Month oil, people had tipped this happening beforehand that… All the storage evidently was filled up. The issue was going to be that you had to take physical delivery of barrels of oil. That’s not simply a matter of emptying a pool and filling it up with oil or tipping into the salt mine in your backyard. You actually had to be able to pick it up at [inaudible 00:02:37] get it delivered. You had to have some proper storage facilities.

Tobias Carlisle:
As the day went on, from very early in the morning, it was selling off really rapidly. It went through 10 bucks, went through five bucks, went through $1. That was getting pretty silly, traded down to one cent. I tweeted when it was at one cent just because this is the craziest thing I’ve ever seen, you get a barrel of oil for a cent. Then of course it went negative and it went negative. I think at that lowest, it was close to like negative $40 a barrel of oil. Just absolutely bananas.

Tobias Carlisle:
The reason and I’ve talked to some people I don’t think that anybody has a really good bead on what happened but the thing that I’ve discovered, MBT who’s the Saudi Prince, apparently he had shipped a whole lot of oil to-

Bill Brewster:
Him too.

Tobias Carlisle:
Did I say MBS? Sorry?

Bill Brewster:
It’s MBS. Yeah, it’s fine.

Tobias Carlisle:
No disrespect, I like my hands where they are. Shipped all of the oil.

Bill Brewster:
You don’t want to mess with that guy, man.

Tobias Carlisle:
… Negative, shipped all the oil. That’s why I was using a pseudonym, you cracked my pseudonym.

Jake Taylor:
Sorry, yeah.

Tobias Carlisle:
There were like 4 million barrels of oil being shipped to the States, increased it to 9 million to fill up all of the storage spaces and then crushed the oil price evidently, so that people would consider trying to do this. It was a maneuver not unlike earlier on when the oil price tanked and then went bought a whole lot of European, put a billion dollars to work in each of these different European oil majors.

Tobias Carlisle:
Looks like it was planned. It’s interesting to watch. I don’t know if it’s just old school market operation or if it’s some nation state battle that we normals don’t know what is going on? Oil is tough to play at the moment. Do you guys have any thoughts on that? Does it indicate something sicker about the underlying economy, or is it just market operation?

Bill Brewster:
Jake?

Jake Taylor:
Boy, I don’t know. It is interesting to think about Hunt brothers type of cornering silver maneuvering potential there. I honestly or maybe we need to watch Trading Places again, an try to figure out-

Bill Brewster:
Where is Eddie Murphy in all of this?

Jake Taylor:
Yeah, exactly. I don’t know if this is the crash it and then it swings back the other way. Honestly, I don’t know what the answer is, but I do think it’d be fun to speculate on what comes first, negative $100 oil or positive $100 oil from here?

Tobias Carlisle:
Yes. It was just that Front Month oil contract and the second month back, I asked, did anybody blow up out of this? I just don’t know whether that’s… It’s the Front Month at that point where it’s just about to expire isn’t particularly heavily traded, it’s pretty thinly traded. Anybody… I don’t know any of this firsthand, this is what I was told. Anybody who knows what they were doing was basically out of the Front Month. They were in the second, the June contract. I think it’s the June contract had become the one or I actually don’t know, but I think it was the June contract has become the one that is more heavily traded.

Tobias Carlisle:
USO, which is the big oil ETN evidently had moved most of its exposure to that second month. It wasn’t them who was going to blow up. I had somebody tweet me… That sent me a note this morning saying that DIG, D-I-G, the ETF was up like 800% overnight. I don’t know if that was a share reverse split, because it doesn’t seem to show up in-

Bill Brewster:
Day after day, they do.

Tobias Carlisle:
It’s an oil… Dig is like an oil and minerals.

Bill Brewster:
Yeah, that’s got to be reverse split. That’s like when the LNG ticker was up big like five years ago, while UNG or whatever it is, for the natural gas. Natural gas is just plummeting, and the ticker got a big bump, and people were like, “Oh, look at how much it’s up.” It’s like, “No, dude, you just have one of these split shares you used to have.

Tobias Carlisle:
Well, it wasn’t on a long term chart, it was just on that open… Was 10 times higher than the close, which makes me think it was reverse split.

Bill Brewster:
The interesting thing too… Well, not the interesting, there’s a ton of interesting things, but I listen to the Journal has a podcast also, and they were talking about a milk truck went to a dairy farm, got all the milk that the dairy farm was holding and looked at the woman and said, “Okay, which manure pit do you want me to dump all this in?” She was like, “What do you mean?” They were like, “Yeah, we can’t take this anywhere. There’s nowhere in the supply chain for it.”

Bill Brewster:
Spinach is getting plowed under, oil is negative. There’s no demand for commodities because the supply chain, A, isn’t set up for it, and then I guess the other factor is there’s just no demand. My [inaudible 00:07:38] structure was poor, sorry.

Tobias Carlisle:
The livestock one is a little bit sad that basically there’s a supply chain that takes nine months to process and if it gets to the end of the supply chain, and there’s no takers they just get gassed or slaughtered with… I guess that was going to happen anyway, and then dumped.

Bill Brewster:
They’re making a big deal out of the chicken eggs being broken, but I’ve seen that before. That happened a couple of years ago. I don’t think that is quite as unique.

Jake Taylor:
Yeah.

Tobias Carlisle:
I’ll start having 10 egg omelets.

Bill Brewster:
I think it might be a different type of egg. I don’t know. They get so specific.

Tobias Carlisle:
Duck eggs.

Bill Brewster:
Here’s an interesting fact, there is no value to male dairy cows. The reason is-

Tobias Carlisle:
You can’t milk them.

Bill Brewster:
… all the good dairy. Well, you can, but that’s takes… You can milk anything with nipples if you want to. They have all the sperm in banks. So, you don’t need a male dairy cow anymore.

Tobias Carlisle:
Anymore.

Bill Brewster:
There you go. Well, you needed to milk it first for the sperm, right?

Jake Taylor:
Wait, is that not how it works? We have derailed. Brewster, the Ag insights here, it’s like a 4H Club.

Tobias Carlisle:
I got animal husbandry-

Bill Brewster:
I used to love that industry. It was a fun industry to bank. It was wild. I’ll tell you what, that outbreak in Sioux Falls in the meat processing plant, if you’ve ever thought one, those people are like shoulder to shoulder. They all wear chain mail because they all have knives and you never want a knife fight to break out. It is tough, tough working conditions. You could see how something like coronavirus could spread quick. It’s all I got. Nothing related to oil. You’re welcome.

Jake Taylor:
Looking at the underbelly of a lot of where our stuff shows up, is a little concerning.

Tobias Carlisle:
Are there any traits in any of this? That was the thing that everybody yesterday was trying to figure it out, and it just looked like, basically you got to take delivery of oil, which, when everybody looked into it, Chris had a look, and then he showed what you had to do, it’s just too hard. You couldn’t organize yourself to get it done by the close. I guess if you’re smart, which I saw some tweets, maybe a week or so earlier that had said negative oil was a possibility here.

Jake Taylor:
My favorite one was just pumping into the Gulf of Mexico and then take $15 and give it to the lawyers for every barrel and then keep the other $25.

Tobias Carlisle:
I don’t think there’s any punitive damages in that. I think they’re going to come after you for the profits.

Jake Taylor:
Those are capped at a certain level.

Bill Brewster:
Somewhere, the listeners that are long tankers are screaming at their screens saying, “Say tankers.”

Tobias Carlisle:
Tankers. [crosstalk 00:10:13] Did we fill up the SPR? the Strategic Petroleum Reserve? I think it’s pretty full.

Jake Taylor:
I think we’re going to try.

Bill Brewster:
Wouldn’t it be funny if it comes out that Buffett’s big trade is buying oil right now? Like, “Oh, I just took delivery of all these things and people paid me for them because I had the space. I doubt it’d happen, but it’d be interesting. He did it with the cocoa, cocoa beans.

Tobias Carlisle:
Did he do that personally?

Bill Brewster:
He did that with the cocoa.

Tobias Carlisle:
That’s right. He started with silver too. I don’t know whether he did silver through Berkshire, whether that was a personal trade? I think it was through Berkshire. I think they did talk about that.

Jake Taylor:
Yeah.

Tobias Carlisle:
All right. I don’t think there’s much in this one for Value guys, unfortunately. Just showing how ignorant we are.

Bill Brewster:
Tankers the only thing. That’s the only trade that has really been like, what’s his name [inaudible 00:11:05] or whatever. My man, the shipping man who I interact with on Twitter occasionally, he’s a good guy. Anyway, those guys have nailed it. Now, the question is… The thing that’s hard is I was explaining that trade to my wife, and it took her three minutes to say to me, “Now, don’t you have to buy it and sell it correctly?” I was like, “Well, yeah, you do.” She was like, “That sounds like a really hard game.” I was like, “Yes, you just figured it out in three minutes what took me years.”

Tobias Carlisle:
Just before we move on, I’ve got a good comment here from Kevin’s at [inaudible 00:11:38] “After the Deepwater Horizon disaster, BP was fined 18.5 billion for spilling 4.9 million barrels of oil. The four is negative $3,800 on the oil price.

Bill Brewster:
That’s one way to look at it, thank you.

Tobias Carlisle:
There you go, now you know.

Jake Taylor:
The math checks out, thanks Kevin.

Bill Brewster:
The math does check out.

***

The Grid And Complex-Adaptive Systems

Tobias Carlisle:
JT, do you want to do insights from running the power grid?

Jake Taylor:
Yeah.

Tobias Carlisle:
Do you want to tell everybody what you used to do before you were an investor? Or at the same time you transitioned?

Jake Taylor:
Eat our vegetables. For 12 years before, a lot of people don’t know, I ran the power grid for the State of California. There’s a lot of interesting overlap there.

Bill Brewster:
Wait, there’s a question that’s a necessary follow up. I ran the power grid for the State of California. Can you break that into what that means?

Tobias Carlisle:
Also, was that during the Enron messing with the power grid time?

Jake Taylor:
I came in just a little bit after Enron, but most of the people that I worked with had been pretty heavily involved with that. I literally sat in a room with eight other people that looks like Mission Control, screens everywhere, numbers, charts and maps and stuff that was operating the power grid for California. That’s what I did.

Bill Brewster:
That’s pretty sweet.

Tobias Carlisle:
What does that involve you bringing on different power stations, turning them off?

Jake Taylor:
Right. It’s combining the economics with the engineering. Trying to operate it with the least cost, bringing on different supplies, so generators in different areas, because if you have… The electricity has to travel to wherever the demand is. If it’s too much over one particular line, you could melt that line down. You have to bring on power that can counterbalance if a line is getting overloaded, those kind of things. It’s pretty technical, a lot of-

Bill Brewster:
I’m going to ask a follow up here about our favorite company in the world. How does a smart grid that collects sun and then sells it like this Tesla vision of the world, how does that complicate the grid or make it easier, any of that stuff? I don’t even know the question to ask.

Jake Taylor:
Yeah, how does solar fit into the future of electricity?

Bill Brewster:
Homes being able to shift that onto the grid, what does that do to somebody like you or your old position when you’re watching? How does that get smart for lack of a better term?

Jake Taylor:
It’s difficult because the sun is often not when you really want the electricity. They have now-

Tobias Carlisle:
Sun’s out in the daytime, correct?

Jake Taylor:
Yeah, but most places, yes. What happens then is that a lot of times… And they’ve actually seen this now where there’s a lot of negative prices in late morning, because the demand is not up enough to meet all of the supply.

Tobias Carlisle:
If you had a good enough battery, you can get paid to store… Not unlike the oil, that you can get paid to store.

Jake Taylor:
Yes.

Tobias Carlisle:
Is there any-

Jake Taylor:
That’s the real limit there right now is why… One of the problems with solar is that one, it can go away with a cloud quickly. It’s much more intermittent than say, a big nuclear plant that is just chugging along and it has a very steady output. The other problem is that it doesn’t ramp particularly well. Let’s say that you want to have a… Let’s say a bunch of people want to turn their lights on all at the same time. Well, how do you get all of the machinery to ramp up at the same rate? Because electricity is consumed and produced instantaneously. Supply and demand have to balance 24/7, 365 every 1/60th of a second, which is called a cycle.

Jake Taylor:
It takes quite a bit of coordination to make sure that you have all of these machines on. The solar plants typically, they’re not great at moving up and down to meet when someone wants to turn a light switch on or off.

Tobias Carlisle:
Being able to shift it by storing it as a battery really is a good solution but it’s an interesting difference. We’re trying to move… Internet is being moved from a home or your storage on the cloud is going to be no longer in your business, it’s going to be with AWS or someone else or Google or whoever. But then-

Bill Brewster:
In Iowa where the electricity is sold to you by Buffett, holla!

Tobias Carlisle:
But then it’s possible too that the reverse happens with energy that you start storing it locally, if there’s a battery good enough. Is that technology existent? Is that what Musk is trying to build, or has built?

Jake Taylor:
That’s what a lot of people are building, not just Tesla, but that is what is… If they could get the price of batteries down, then it is a game changer for being able to smooth out the curve of how much you demand from outside of your own little unit of your house, and your solar panel.

Bill Brewster:
You can reduce the amount of base need almost. Because if you can store your battery, then you’re wasting less sun, if that makes… Am I thinking about this correctly.

Jake Taylor:
No, it’s more that you’re shifting the electrons to when you need them. They’re collected at a continuous rate over when the sun is out, but your usage is not on any kind of a continuous rate. You need some kind of smoothing there, and the battery provides that.

Bill Brewster:
That makes sense.

Tobias Carlisle:
To move to your initial point, what’s the connection to investing?

Jake Taylor:
A couple of things. The first one is that when you have a blackout, when you shut down an electrical system, it happens instantaneously, and it takes multiple days typically to get it back up and running. What you have to do is you have to bring on a little generator, bring on a little bit of load, and you’re doing this constant balancing act. While you’re doing it, the voltage and the frequency are swinging around wildly because you’re adding load, you’re bumping up it, you’re adding little pieces and you’re building these little islands, and then you reconnect them as you’re going and eventually you get the whole system back up and running together on the same frequency.

Jake Taylor:
Well, eventually, I think what we’re running into that might be a problem right now if we continue to be shut down like we are, it may take a lot longer than people are expecting to get our economic power system back up and running. The same problem of having little islands and being able to reconnect them, it’s not obvious to me. There are some power plants that take more than a week actually to get online and running because they have to warm up things and they have to stay out a certain temperature zones because it’s bad for the metal.

Jake Taylor:
It’s not obvious that you can just snap your fingers and rebuild a power grid. I think the same complex system that has emergent behavior that is the economy mirrors that same problem. That’s number one takeaway.

Tobias Carlisle:
That’s interesting. Just to destroy the analogy a little, is the power actually… What’s the load like through a period like this? Are we using more or less?

Bill Brewster:
I think I’m using a lot less.

Jake Taylor:
I think we’re using a lot less right now.

Tobias Carlisle:
The only reason I ask is the power consumption seems to go up when people go home, or is that just because they’re turning on lights?

Bill Brewster:
You’re not using any of the office buildings, you’re not using any of the public transportation. Aggregate energy usage is definitely down. I would imagine power’s down.

Tobias Carlisle:
Makes more sense. Just wondering.

Jake Taylor:
Takeaway number two and this is a little bit more abstract, but as you add load on to the system. Let’s say you turn on your hairdryer, you notice that the lights will dim a little bit in your house That is because load added will lower the voltage a little bit. What you need then is a generator that’s nearby to ramp up its output a little bit to then boost the voltage in your house so that your back up to the normal voltage and now your light bulbs, they look the same as they did before.

Jake Taylor:
Well, I’m not going to get into some of the technicalities of the difference between a megawatt and a volt ampere reactive, but there’s actually two kinds of power. You guys might not know about that.

Tobias Carlisle:
I didn’t know that.

Bill Brewster:
I have no idea what he just said.

Tobias Carlisle:
I thought there was AC and DC. That’s all-

Jake Taylor:
There is AC and DC but there’s-

Bill Brewster:
[crosstalk 00:20:54]

Jake Taylor:
Exactly. There is a little magic trick that you can play in this whole system, if you don’t have a generator that’s nearby to prop up your voltage. It’s you add a series capacitor. If you add a capacitor to an AC system, it will actually boost the voltage up.

Jake Taylor:
Now, capacitors are much cheaper to build than say a generator because they don’t require any kind of prime mover, there’s no fuel source for it. With a generator, I have to have some sort of external energy to capture to then turn into electricity. A series capacitor doesn’t require that. As you can imagine, we spent a lot of time and money adding series capacitors to the system over the years, in place of maybe generation a lot of times because it’s cheaper. But what you’re doing there is you’re just artificially propping up the voltage.

Jake Taylor:
What happens is they have this thing called a knee curve and it’s basically as you prop up the voltage, you get closer and closer to an edge where if you add load, you can fall right off of it and you will instantaneously crash the entire system. There’s no slowly ramping down. We’re talking like 1/60th of a second, you could black out if you’re right on the edge of that load curve.

Jake Taylor:
Well, in my mind, a lot of our money printing is really a series capacitors for the system. We’re just propping up the voltage in a way, we’re not actually creating any real generators that will provide the real power. That’s something maybe that I thought people might find interesting.

***

Tobias Carlisle:
I tweeted this thing out last week, just because I was interested to know, there are some relationships between different assets in the market that it’s not obvious that there’s a correlation between the two of them, or that there’s causation between the two of them rather, but there is this long run correlation between them. Something wacky has gone on across lots of different assets over the last… Very recently, over the last month, where they’ve gone from having a reasonably stable relationship to just going asymptotically or exponentially away from that relationship.

Tobias Carlisle:
One of them is oil and gold, which we saw that extent in the oil price alone yesterday, but that had been happening before that in oil and gold. I guess to fit an explanation to it, it is that oil is something that is consumed in the economy, it’s not really a speculative asset a lot, it does have those components to it. Whereas gold is not something that’s consumed, it’s got the other properties, money store of value, more of a speculative asset.

Bill Brewster:
Any sense of Taffer gold?

Tobias Carlisle:
I didn’t look at that one.

Bill Brewster:
Is Taffer gold the same? I wonder if it is. It’s similar; industrial uses, and I don’t know.

Tobias Carlisle:
That’s the problem with silver as money that silver is used in various different things so you can’t get a good gauge as a speculative asset because it’s also consumed, it’s not always there. There were other things like small cap too. So the QQQ, which The Nasdaq to the, IWM. All of these things, they’ve got these really wacky moves in the charts.

Bill Brewster:
That one makes sense to me, man, though. That’s fear to me.

Jake Taylor:
That’s big tech versus small cap. That’s a lot of power to me.

Bill Brewster:
Yes, but if you’re scared, where are you going to buy? To me-

Tobias Carlisle:
Berkshire.

Bill Brewster:
Well, maybe but you got some stuff there. That’s the thing, even that organization, you got the potential for serious insurance liabilities. Now, whether or not that’s mitigated by… At a minimum, you have the potential for serious lawsuits. Whether or not those lawsuits are potentially… Whether or not they win is a different issue. But there’s uncertainty around that.

Bill Brewster:
Then you do have some asset heavy businesses there that take a little bit. If you’re worried about the E, worrying about the valuation right now to me is not what people are doing. Right now, I think people are trying to hide in safety of E, and they’re willing to pay up for that. The question to me is, okay, well, when does that trade unwind, and is that a smart game to play? Those are how I think about it. But that’s why I think the divergence was.

Bill Brewster:
Now, within FANGMAG-

Tobias Carlisle:
FANMAG.

Bill Brewster:
Yeah, that too, FANMAG, we’ll see how that stuff, how people react to some… The numbers could be uglier within some of them than people expect, maybe within all of them, who knows. But I think while you’re blind, that’s what’s going on.

Tobias Carlisle:
I think we’re close to… I think to Jake’s original point, I think we’re close to some sort of… I’ve talked about these before, it’s like the DDOS or NETWAVE, where the saw NETWAVE, where the wave gets tighter and tighter and more rapidly bought. Each dip gets bought. When I look at that exponential move, I always think that that’s… Maybe not in terms of price terms in the relationship because the point of the exponential move is that it moves a lot over a very short period of time. But I think in terms of time we’re getting very close to something breaking down and reversing course there.

Bill Brewster:
It’s possible. Someday it will and when the jaws start to close, there the bottom half of the jaws are going to rip. It’s just a matter of being right on that.

Tobias Carlisle:
You don’t think the top half of the jaws are coming down a little bit too?

Bill Brewster:
I don’t know, man, not with rates here. It’s going to be tough.

Tobias Carlisle:
I don’t know what’s going to happen. I’m just speculating along with everybody else, revealing my biases.

Bill Brewster:
Look, I wouldn’t short them.

Tobias Carlisle:
I wouldn’t short them, either.

Bill Brewster:
It’s just way way too hard to short them.

Tobias Carlisle:
I wouldn’t short an exponential move. I like my head on my shoulders.

Bill Brewster:
Your exponential business is-

Jake Taylor:
Well, sometimes you’re short and then it moves exponential and when you didn’t see it coming also.

Tobias Carlisle:
That’s true. Thanks for the reminder, JT.

Jake Taylor:
Yeah.

Tobias Carlisle:
That trade did reverse course by the way. I wouldn’t say it was a good trade but it did. That’s Tesla for everybody who hasn’t heard my pain in it.

Bill Brewster:
My pain too. I have never been more wrong more often than on a stock. I just don’t even look at it anymore. Jake, I really like that segment. That was really-

Tobias Carlisle:
Is there a third point? Are we through with it? I think there’s-

Bill Brewster:
Wait, I got to follow up on this. We may go a little long. But I think what you’re talking about is What I think may be the difference between the investor mindset and #richpersonbrain, and what’s actually going on in the world. I was discussing… I apologize for not recalling who it was on Twitter, with somebody yesterday about Amazon’s move and they said… I had said, “It’s interesting to see the EBITDA sales divergence with the SN number or in question.”

Bill Brewster:
He was like, “Because it’s too low.” I agree short term, Amazon’s going to have a huge boost. His point was unemployment insurance is going to take care of some of these people that are recently unemployed. But, man, the idea that velocity of spend is going to come back quickly, I don’t see how any company is immune to what we may be looking at. I think that it’s a lot easier to… Ken Fisher put out that we’re not in a recession, we’re in a gap or some bullshit.

Bill Brewster:
No dude, you can’t have 20 million people laid off and just be like, “Oh, this is just some temporary gap and people are just going to bounce back.” For one, companies are going to realize they didn’t need the people. They’re not going to hire them back as soon as they furloughed them. No freakin way, that’s crazy.

Jake Taylor:
Especially not at the same spots and that means training is required, supply chain reconfigurations. We’re talking about a lot of costs that’s going to be incurred over-

Bill Brewster:
Even the law firms.

Jake Taylor:
Even if everyone gets back to work, it’s going to take a while.

Bill Brewster:
Law firms just rebased pay, you’re telling me that they’re going to be like, “Oh, hey, we’re back.” No, you just reset it. Now you give people a 5% raise, not a 20% raise. The economy is going to be running, if you believe anything that the experts are saying, let’s call it even 90%. This isn’t a V. Anyone that thinks that I think is nuts.

Tobias Carlisle:
I got to say-

Bill Brewster:
Now, that might be nuts, and maybe treatment helps.

Tobias Carlisle:
I cannot wait for summer. I’m going to get absolutely nuts on July 4th.

Bill Brewster:
Just make sure you’re six feet away from everybody while you’re doing it.

Tobias Carlisle:
Don’t tell me how to live my life. I’ll be handing out hugs, free hugs.

Bill Brewster:
I’m going to put up Twitter pictures of you and you’re going to get [inaudible 00:30:18].

Tobias Carlisle:
I’ve probably already had it, who knows? You got more points, JT? Sorry, I feel like we’ve derailed your-

Jake Taylor:
No.

Tobias Carlisle:
It’s a good chat.

Bill Brewster:
I think the interconnectedness is really really interesting. If people are interested in people talking about it on Twitter that aren’t us. I’ve seen Post_Market she talks about a lot of the real economy a lot. [inaudible 00:30:43] is a great account.

Tobias Carlisle:
Of course, great account.

Bill Brewster:
SuperMugatu has been really on top of this stuff. He’s always… I don’t know.

Tobias Carlisle:
Good account.

Bill Brewster:
I’d focus on them more than the investors.

Tobias Carlisle:
Dan McMurtry will always be SuperMugatu.

Bill Brewster:
Yeah, dude. I like him personally too. I’ve gotten to know him. He’s a nice guy, but I can’t not refer to his account as SuperMugatu.

Tobias Carlisle:
Trying to go straight. Always going to be SuperMugatu.

Jake Taylor:
He’s like-

Bill Brewster:
He likes it.

***

Bill’s Evolution As An Investor

Tobias Carlisle:
Speaking of evolutions, let’s talk about your evolution, big Bill.

Bill Brewster:
Oh me, okay, fantastic. I thought we still had Jake to go.

Tobias Carlisle:
You liked that segment?

Jake Taylor:
Yes, that was smooth.

Bill Brewster:
First of all, thanks to all the listeners for reaching out sometimes. I really have gotten-

Tobias Carlisle:
So much pandering, just say what you’re going to say. Stop pandering.

Bill Brewster:
Shut your mouth, bro, shut up. Why I want to send the shout out is one of our listeners had told me that I was-

Tobias Carlisle:
Handsome.

Bill Brewster:
Whitney Tilson’s early career path after I took a shot at Tilson for being a complete sellout yesterday, Whitney, if you’re one of the 10 I’m sorry for saying out loud, but what you’re doing is a little bit offensive to me. Anyway, I said, “Well, I should probably have an accounting of who I am. If people are listening to me and I’m taking shots at Tilson.” That seems to make some sense, be honest.

Bill Brewster:
Over the past 12 months, I am roughly in line with the market. Over the past two and a half years, I am slightly trailing on an after tax basis. Over the last three months, specifically, 90 days, I’ve had turnover that is unlike anything that I would wish upon my worst enemy. But I was going through and I thought, okay, well what did I do to survive this? Because I came into the corona crisis, really long financials and the airlines.

Bill Brewster:
When I look through my numbers, I’m talking about… I’ve turned over the portfolio. If you count a buy and a sale as two transactions, each dollar sold and each dollar bought is a separate transaction, it’s been like 130% turnover, which is not at all how I want to run what I want to run.

Tobias Carlisle:
If it’s the time to do it, this is the… You turn it over. When you get the volatility, you turn it over, you get the essence that you want. Buffett sold out of Johnson and Johnson to do his big deal last time and-

Bill Brewster:
Well, this is the interesting tension. I want to be Buffett like in how I approach investing. The other side of that is I held some KKR, I held some Wells Fargo, I had Nordstrom-

Tobias Carlisle:
I like KKR.

Bill Brewster:
I do too. I didn’t like it as much when it was a levered SMID Cap that was going into one of the greatest left tails I’ve ever seen in history. I don’t mind it here. I guess that it’s just been an interesting… I said it to you guys on the podcast. I said, I don’t think that there are rules a couple of weeks ago. I said, we’re staring at the left tail.

Bill Brewster:
As I look at my activity, I was too frenetic. To say that I was unemotional is totally bullshit, but where I’ll give myself credit is I stayed in the industries that I knew. I didn’t get into industrials and stuff that I don’t understand. I was smart or lucky enough to see something and check perfection at the door and go into survival mode at the right time. I hid in some of the large tech names. I understand why people are buying them.

Bill Brewster:
Now, the question is, I look at where financials are, and I’m a little bit like crack fiend that’s searching for another fix. Some of these things are really interesting to me. I’m trying to figure out okay, do I want to be this sector rotation analyst that I really don’t want to… That’s not a game that long term makes a lot of sense to play. But what we were just talking about, these jaws have gotten so wide, that it’s sometimes you got to say to yourself, perfection is the enemy of good here. There’s some really beaten up stuff that I think that I understand.

Bill Brewster:
It’s just interesting. I wrote down a couple of thoughts so that I didn’t forget anything. I over-traded this criticism. I stayed in my lane. When you look at some of the sales, I got really lucky. The margin between when I sold and when they really sold off, luck versus skill is very hard to separate there, but I give myself credit for having an open mind. Where do I go from here? I don’t know.

Bill Brewster:
I do think it’s important to take an accounting and be honest about who you are as an investor if you’re going to take shots at other people for saying they bought the bottom, you got to at least own who you are. That’s who I am. I don’t know where I’m going to go from here, though.

Tobias Carlisle:
Well, it’s the character arc that we’re… It’s what keeps the show interesting.

Jake Taylor:
That’s what everybody’s waiting to find out.

Bill Brewster:
Well, like Jake, you had mentioned somebody was asking about the airlines. At a point they get to cheap-

Jake Taylor:
Hot price in bed.

Bill Brewster:
Yeah, I know. That’s the woman that always cheats on me, I should just avoid her.

Jake Taylor:
Just on the airlines, let’s talk about that a little bit.

Bill Brewster:
Like Sarah [Glassto 00:36:46] I dated this girl, Sarah Glasto. By dated, I mean, it was like one week. I had a golf tournament and it was hard to get girls as a golfer, anyway. One freakin weekend and she cheated on me with Kevin Kennedy, and then I still thought about dating her-

Tobias Carlisle:
I can’t believe you just called them out on a podcast that’s going to be listened to by dozens of people, dozens.

Bill Brewster:
You know what, Kevin Kennedy, fuck you.

***

How Long Before We Hit The New Low

Tobias Carlisle:
We have derailed. Let’s get back on the rails, airlines.

Jake Taylor:
Yes.

Tobias Carlisle:
The thing that… Airlines look optically cheap, right? I’ve bought them. I own one of them. I own Southwest. Buffett has made it okay or had made it okay for everybody to own airlines, because he had bought the basket close to the-

Jake Taylor:
That’s a dangerous comment.

Tobias Carlisle:
Well, I’m being honest. That’s not how I operate. But that’s true, right? That’s a true statement. Now he’s clearly bailed out of a couple. We don’t know what’s happened yet, but he’s sold down to jump out and then Munger had that interview over the weekend that I’m sure everybody’s listened to by now. Basically, where they said, we haven’t done much. Folks got 90% of their money in this thing. We’re not trying to capitalize as much as we possibly can through this. We’re looking to get out the other side. Haven’t done a big deal.

Tobias Carlisle:
That made my blood run cold a little bit actually. Not for the fact that I’ve missed the opportunity that this is a little bit scarier than maybe even guys like me who think this is scary might be even… I might have underestimated how scary it really is.

Bill Brewster:
Dude, 100%. This goes back to what Jake’s segment was. The interconnected nature of how complicated all this is to restart up that people want Buffett to do a deal in the first 15 days of a crisis. The only thing in my mind that has been taken off the table by what the Fed did is a liquidity induced deflationary bust. That’s it. Six months from now, there’s still going to be-

Tobias Carlisle:
Is that 29, or is that 2007 nine? What’s the example of that?

Bill Brewster:
I don’t know, man, but if you have businesses out there that we’re not going to be able to raise capital that probably should be able to at least survive this period. I think that the idea that we have bailed them out is like a very flawed way to operate. I think that the pain… If I had to assess innings, we’re in inning two. I think that you had your first three batters up and you’re pissed you didn’t score a bunch of runs. There’s a lot of game to go in baseball analogy, sorry Toby.

Tobias Carlisle:
I think it’s bottom of the first run, we’ve each had a go at batting.

Bill Brewster:
You got Paul Singer, he’s nervous. You got Buffett, very nervous.

Tobias Carlisle:
Buffett was the other-

Bill Brewster:
Elliott’s.

Tobias Carlisle:
Elliott’s.

Jake Taylor:
I wouldn’t discount the fact that-

Bill Brewster:
It balanced.

Jake Taylor:
I wouldn’t discount the fact that Buffet has a very unique data set into the US economy. The fact that he’s so quiet right now is a very telling to me. He knows what stuff’s moving, he knows electricity, he knows a lot of retail. He’s got a pretty good finger on the pulse of the US economy. I don’t know, I find that to be a very salient data point.

Bill Brewster:
I think zero chance that they don’t want to capitalize on it. I have said and do think the deals aren’t there yet. I also think the deals may come.

Tobias Carlisle:
Yeah, I think so too. But it doesn’t presuppose that we’re going to get another bite of the cherry here, that there’s going to be another leg down?

Bill Brewster:
I think the upside downside skew here is not very attractive for the longs-

Tobias Carlisle:
How would-

Bill Brewster:
The probability is-

Tobias Carlisle:
Do you think the economy is worse than 15%, worse than it was a few months ago? I think that’s a description of the risk reward, the bit that you’re putting on, given where the market is.

Bill Brewster:
I think this is a little bit of investor brain where people have seen the balance and they’re like, the bottom’s in. Yeah, short term for sure. Now, people are able to think about things and the panic selling has gone away. It takes a long leap of faith for me to think that we’ve hit the true bottom. We may have. Everything’s probabilistic, but if we test the lows, I’m not going to be shocked by any stretch.

***

Pay Attention To Buffett’s Slugging Percentage More Than His Batting Average

Tobias Carlisle:
Let’s start throwing some questions in, and I’ll [inaudible 00:41:28]

Bill Brewster:
10% out of the [inaudible 00:41:31] dude, businesses that are going to be able to run at structurally unprofitable levels. That’s terrifying. Whether or not it’s priced in, we’ll see.

Tobias Carlisle:
I got a good question for you. Is Buffett even a tell anymore because he bought IBM, Tesco, or Coke, Craft. Given credit for Coke, right?

Jake Taylor:
How about Apple, that worked out pretty well.

Tobias Carlisle:
Apple did work out pretty well, that’s a good point. He did that in size, so, yeah.

Jake Taylor:
Huge.

Bill Brewster:
Look, I obviously got slaughtered on the airline thesis. I’m not sure that was wrong. The outcome was wrong, was the bet wrong? I am bias assessing that.

Tobias Carlisle:
Which one? Sorry.

Bill Brewster:
The airline. Look, Bill Miller, he saw that too. Those guys are really smart. The idea that Buffett lost it because he laid those chips, I don’t buy that. Plus it’s such a small portion of his capital. The headline to actual risk is way skewed in that thread.

Jake Taylor:
Pay attention to slugging percentage too more than batting average.

Tobias Carlisle:
That’s a good point.

Bill Brewster:
The dude’s OPS is strong. It’s always strong.

Tobias Carlisle:
What about Occidental? Is that a mistake?

Bill Brewster:
That was dead.

Tobias Carlisle:
Is that a mistake?

Jake Taylor:
He’s lost it.

Bill Brewster:
That was a mistake.

Tobias Carlisle:
Is it a mistake?

Bill Brewster:
I don’t know that the preferred deal was a mistake. Taking the common seems odd. I thought that was odd when he did it.

Tobias Carlisle:
Maybe he got no option then. If they just say, we got no liquidity. I don’t think he wants the common. I think they’ve said, we’ve got no liquidity, it’s shares or [inaudible 00:43:04]

Bill Brewster:
But you’re talking about the dividend that he’s receiving. Berkshire or somebody in that portfolio came out of pocket and bought it in the open market.

Tobias Carlisle:
Okay.

Bill Brewster:
That, I didn’t get.

Jake Taylor:
It’s okay. Questions, let’s do it.

***

Charles Munger: “The Phone Is Not Ringing Off The Hook”

Tobias Carlisle:
Here’s a question, is the government going to beat Buffett to the punch, save all the companies and not allow Buffett to get good deals? That’s what Munger was saying, that the phone wasn’t ringing for them, because the airlines were talking to the government, which might be fair enough. There’s one view that the government shut this down, it’s the government’s responsibility to help these guys get to the other side. Nobody wants to dive on that grenade?

Jake Taylor:
I don’t know.

Bill Brewster:
I’ll dive on it. I’m waiting for Jake because I think we have different points of view.

Jake Taylor:
I don’t know how I feel about that. It’s very complicated. Do I think that longer term our system would be run in a much more resilient fashion if we didn’t jump at the first hint of problem? Yes. Do I think that there is a lot of damage that comes from that? Yes. Do I think that we can prevent that damage from ever happening? No. Do I think we’re just trying to kick the can down the road? Probably. I don’t know. These are societal existential questions.

Tobias Carlisle:
If the government shuts you down-

Bill Brewster:
As you know, we don’t disagree that much.

Tobias Carlisle:
I feel like I’m taking on Bill’s position here-

Jake Taylor:
Well, you’re smart and I’m right.

Bill Brewster:
There you go. That’s right. I think you came to my position more though.

Tobias Carlisle:
Well, I think I’ve moved to your position now and I feel like you guys have possibly gone where I was about a week ago. If the government tells you to shut down until you can’t make any money, aren’t they responsible for you?

Bill Brewster:
Look, I don’t think that is what’s going on right now. I think that after the middle of a shut-

Tobias Carlisle:
What do you mean?

Bill Brewster:
Listen, I think in the middle of a shutdown for the government to step in and get you to May, is a different question than did you bail out all of equity here? I don’t think these businesses are coming out in June, humming and bailed out. I think the pain is about to start. I think that everybody wants the answer to be right now, but that’s not the timeline that life evolves on. I think that we’ll find out over the next six, nine months.

Bill Brewster:
I don’t think Buffett is… At this time of his career, is he really trying to buy Cleveland Cliffs off the map? He doesn’t give a crap about a steel company. He’s looking for a good deal, a good business that’s got a bad capital structure. Those problems aren’t going away. I think they’ll be amplified over the next 18 months. I just think, let’s talk in two years to see if he got squeezed out of deals. Right now, I think he’s squeezed out.

Jake Taylor:
Yeah, I agree. How about July earnings season? That’s going to be-

Bill Brewster:
Or September. I think it was Yolo Capital Management I was talking to. It was somebody and they think that the debt cycle, the real default cycle is going to come September, December. That’s a pretty smart take for me.

Tobias Carlisle:
That’s a default funnel. Why that period?

Bill Brewster:
Well, you get through now, and then you come out, and now you’ve got even more leverage. At 80%, how many businesses are structurally unprofitable? You can’t make a lot of things work.

Tobias Carlisle:
There was an interesting comment of Munger’s that they weren’t going to necessarily restart all of their businesses. Did you catch that?

Bill Brewster:
Yeah, I did.

Tobias Carlisle:
Do you have an inkling what he’s talking about there?

Bill Brewster:
Some are kind of crappy. This gives you the excuse to kill them, and you don’t have to say, hey, we’re not holding forever. They’ve killed business.

Jake Taylor:
No more textile production, sorry.

Tobias Carlisle:
I get it, this is a rhetorical question, it’s a good point that how do you play an opponent that goes all in on every hand and materializes chips out of thin air? That does make it tough.

Bill Brewster:
I just don’t think that’s what’s happening. We’ll see.

Tobias Carlisle:
What do you think is happening?

Bill Brewster:
I think they got us through now. I think that you’ve got negative oil, you’ve got people not moving. You’ve got commodities being plowed under, you really want to start a bankruptcy cycle on top of all this? That’s really what we want to do. From a policy standpoint it makes no sense to me to add those chips when you can avoid it. I understand the peanut gallery being upset, but if I was making the decisions, I’d do the exact same thing.

Jake Taylor:
Let’s talk about it this way.

Bill Brewster:
Then, I would not bail people out in 12 months. Then I would let your capital structure determine your fate.

Jake Taylor:
Let’s say that you’re… To me, that assumes an omnipotence to central banks that I think might be misplaced. As evidence of that, I would say how many central banks have been, in human history maybe… I don’t know, let’s call it 250 perhaps. I don’t know what the exact number is, but I’m probably in the reasonable ballpark. How many of those have been able to permanently deliver prosperity through printing, through management?

Bill Brewster:
That’s not what I’m saying.

Jake Taylor:
I know. I’m saying this counter argument though of you’re going up against an opponent who has all of the chips. That to me, I don’t think they have as much power as you think that they have.

Bill Brewster:
Yeah, we agree. Again, because I’m smart and you’re right.

Tobias Carlisle:
Got to be one of the most offensive things Munger has ever said, that I hear that once every six months or so.

Bill Brewster:
He said it to me.

Tobias Carlisle:
Did he actually say it to you?

Bill Brewster:
Yeah, I’m pretty sure, he did about the greatest companies being in China. I think he finished it off with that one.

***

Is It Time To Buy Gold Or Gold Miners?

Tobias Carlisle:
He said it a few times. There’s a question about gold and gold mining stocks, and it’s related to the unlimited QE that we’re going through. Do you guys buy gold? Looks like Druckenmillar Gundlach, Howard Marks, Minerd, all… I don’t know who that last one is. Is he a fed governor? I don’t know.

Jake Taylor:
Scott Minerd, he’s Guggenheim, I think partners, something like that.

Tobias Carlisle:
Collectively we know what we’re talking about here.

Jake Taylor:
Yeah. Well, I do know that there was a weird movement when things were really getting crazy where the junior gold miner ETF, which I’ve kept my eye on for a long time, it dropped down to like 20 bucks a share overnight, really fast. Over a Friday night. Something blew up, I think in some other ETF structure, I don’t know exactly, but I was like, I’m going to watch that for one more day, but if it stays there, I think I’m going to buy some. Of course, it’s at 37 now or something. It absolutely just ripped away from me and I was like, God dammit, my being a little bit conservative here and just wanting to just look at it cost me a fair amount on that one.

Tobias Carlisle:
You want to buy the ETF rather than any individual minors?

Jake Taylor:
Yeah.

Tobias Carlisle:
What does the ETF consist of? Is the market cap weight of a whole lot of bigger miners?

Jake Taylor:
Well that one is the junior. It’s a lot of… But the same similar price action happened with the GDX, which is the bigger minor.

Tobias Carlisle:
That’s the bigger ones. What’s the thought process there that you don’t want to have to pick winners you just want to get exposure to the mining part of it, which… Rather than getting exposure to gold itself, you think that there’s some sort of… You get the tail end of the whip.

Jake Taylor:
My thought process was if I could buy one times price to book of assets that are creating something that I think has the potential to maybe run up a lot, that the operational leverage that would then kick in would be pretty extreme.

Bill Brewster:
Get a couple of super juiced options basically and you’re not paying too much for them.

Jake Taylor:
I’m paying like one times for the roll of the dice at a call option on gold. Sort of a tortured view that I entertain.

Tobias Carlisle:
Makes sense-

Bill Brewster:
I think that’s fair.

Tobias Carlisle:
I’m not criticizing.

Jake Taylor:
Shit the bed on that one.

Bill Brewster:
I don’t know enough about miners to… My thought process is I would imagine they’re helped quite a bit by fuel and energy. I would just get nervous. If your thesis is that inflation is coming, which I’m not even sure that I’m sold on that. I actually am more worried about deflation than inflation then all your equipment that you have to replace is going to go up. Rather just own the metal.

Tobias Carlisle:
You can have asset price deflation-

Jake Taylor:
How do you want to own it?

Bill Brewster:
I’d probably just buy it and put it in a bank which I know sounds out there and I know that some huge guy is going to end up owning it eventually when I try to pay for something anyway. That I think is the purest way to do it is to own the physical.

Jake Taylor:
What if these guys like that Druckenmillar do, are they owning physical somewhere?

Bill Brewster:
Your boy Peter Schiff is, I say your boy, I don’t know if he-

Tobias Carlisle:
Doesn’t he sell? Doesn’t he sell in physical?

Bill Brewster:
Sorry.

Tobias Carlisle:
I thought Schiff sold the physical.

Jake Taylor:
He does, I think.

Bill Brewster:
Then he stores it, and then he charges you a fee and then he tells you why the world’s crashing and why you should buy it from them. But the dude lives… He walks his talk, I’ll give him that. I don’t know that he’s not necessarily-

Tobias Carlisle:
Is he on the other side of the trade there? If he’s selling you the gold, isn’t he on the other side of the trade?

Jake Taylor:
I think they do more brokerage of gold.

Bill Brewster:
I don’t know for sure. He’s a transparent guy. I don’t mind people talk in their book as much as some people do.

Jake Taylor:
You know, his dad went to the mat for… That was the real… He walked the talk there. He spent a lot of time in jail, I think for not-

Tobias Carlisle:
Tax evidence?

Jake Taylor:
Well, principle, like this is compensation. I’m going to stand up against this and try to get to the Supreme Court. That kind of stuff. That’s putting your ass where your mouth is, I guess.

Bill Brewster:
We need people like that in society.

***

Gavin Baker – Software Contracts, First-Lien Debt And The Reality That No Revenue Is Truly Recurring

Tobias Carlisle:
Are we going to see more indiscriminate selling when people see dark clouds again, or are the cheap businesses just going to be the worst ones? I guess that’s a question, like the first time around, Value got smashed up more or less than anything else. I mean, just the deep value stuff, the stuff that I like, rather than the intrinsic value type stuff. DCF has been dumped.

Jake Taylor:
Generic value partners.

Tobias Carlisle:
Where does generic value partners fall? Because I feel like I’ve picked up a lot of generic value partners now.

Bill Brewster:
Probably in the middle.

Tobias Carlisle:
It’s a little bit more deep value these days. I guess…

Jake Taylor:
Generic value partners?

Tobias Carlisle:
Berkshire, Bank of America, Markel, I think-

Jake Taylor:
I was thinking [inaudible 00:54:37] a little bit and FANG still.

Tobias Carlisle:
I think if it’s in my portfolio, it’s the junky, cheap stuff. That’s not true.

Jake Taylor:
Shopify.

Tobias Carlisle:
Undiscovered quality.

Bill Brewster:
Oh my God, that thing has just gone nuts.

Tobias Carlisle:
What’s it like, 80 times earnings? 80 times sales earnings.

Jake Taylor:
[inaudible 00:54:55] not earnings.

Bill Brewster:
December 2018, and I was like, it’s a little rich. Here it is up 4.5, five times?

Tobias Carlisle:
Putting your ass where your mouth is, phrasing-

Jake Taylor:
I know.

Tobias Carlisle:
I guess the question is what happens in this next downdraft? Who knows? If there’s another downdraft, that’s one question.

Bill Brewster:
I’ll tell you what happens. I would lay odds on this, big time, I would lay odds on this. People right now, there are some of these big tech companies, for instance, I think Microsoft is truly actually insulated. Now, to the extent that businesses close, you’re going to lose licenses, but that is systems of record type stuff. Some of these names, I don’t know which ones, if I did, I’d be short them. People are going to realize, this actually was not that essential of a product, or it actually does depend on sales.

Bill Brewster:
Gavin Baker’s written about this in Medium. Some of these names are going to get slaughtered. Minion Capital is writing about how he thinks some of these things are overvalued. You got Sharp Money saying that there’s going to be some pain in some of these names. I think that’s probably where you see the next leg of a lot of pain.

Jake Taylor:
Some of these did not show increasing returns on like you would expect of a good tech economies of scale type of business.

Tobias Carlisle:
How are you measuring that?

Jake Taylor:
Just like unit economics. Look at something like Grubhub or Uber even, I think, these are not-

Tobias Carlisle:
[inaudible 00:56:35]

Jake Taylor:
Well, I know, I’m just saying representative sampling of you don’t get the same type of economics and the scale that… I think that it was just a good story that is called tech even though there’s not really that much tech there, I don’t think.

Tobias Carlisle:
There’s clearly [crosstalk 00:56:55] Microsoft-

Bill Brewster:
My beloved Splunk gets destroyed. I lost $4,000 whole dollars on that thing.

Tobias Carlisle:
I’ve been short that dog in the past.

Jake Taylor:
You gave your money to Toby.

Bill Brewster:
I don’t care. Good. I’m glad somebody that was just everything got it.

Tobias Carlisle:
I’d probably trade it at… Probably we didn’t overlap, but I think we probably both got it wrong. We should probably swap positions.

Jake Taylor:
But you guys are Eskimo brothers.

Bill Brewster:
Oh God, that’s too far.

Tobias Carlisle:
There’s definitely different types of… I would make a… In my mind there’s a pretty big distinction between Microsoft and Netflix, and there’s a big distinction between Google and I think Facebook too. Facebook went away. If Google goes away, that is a bit of damage to my… That’s a big damage to my private life and my business life mostly. If Microsoft goes away, that’s huge damage to my business life in my private life. Netflix goes away, I’ll watch something else.

Tobias Carlisle:
I think that I make a big distinction between… There’s some names out there that I think are genuine like JT and I discussed. This is mostly JT’s idea, I’m just adopting it. But there are businesses out there that are woven into the fabric of life that you cannot, you just cannot extricate them without… You can’t copy them, you can’t compete with them, you can’t extricate them from life. There are other ones if they go away, it might be like, that’s annoying, but who cares?

Tobias Carlisle:
I think you got to make the distinction between, tech’s not a monolith. There are some things in there that are really incredibly valuable. Just too expensive for [inaudible 00:58:34] like me.

Bill Brewster:
I think what value guys in general may underestimate is the amount that some of these companies are overstaffed for growth and how much that flows through the income statement and how that hits your cash flow statement today, versus finance capex in the past. There’s a lot of adjustments and there’s a lot of art when you have to value growth. But I think where some growth people are probably going to get slapped in the face is they’re going to find out that what they thought was an essential service is actually just something that’s frivolous. When the economy is great. You can buy a lot of it and then when push comes to shove, it actually doesn’t matter all that much.

Jake Taylor:
There’s more cyclicality in this secular trend, I think.

Bill Brewster:
Well, and Gavin’s point, Gavin Baker’s point was a lot of people, their brain is thinking, okay, well, software doesn’t get cut. Well, that heuristic was true when software was 9% of IT spend. But now when you combine software and the cloud, it’s something like I think he may have said even up to 50%, I might be wrong. Let’s call it 30%. You start to cut real fat at that point.

Bill Brewster:
If your IT department needs to cut real cost, maybe in the past, it was on premise software, or servers that maybe you differ. Today you look at your software budget, it might be there.

Tobias Carlisle:
We’re coming up on time, fellas. I got one last question for you, where do you put Twitter in that bucket?

Bill Brewster:
Crack; absolutely essential and too cheap. I don’t own it, but I should.

Tobias Carlisle:
Well, now Elliott’s in that too. It’s Elliott, right?

Bill Brewster:
It’s an interesting asset. It’s a very interesting asset.

Tobias Carlisle:
If it gets run for money, if it gets run as a financial, it’s interesting what happens there.

Bill Brewster:
Dude, you live online, man.

Tobias Carlisle:
Because I do think it’s a better social network than Facebook or maybe not Instagram but TikTok because it’s hard to use. Once you’ve locked into it, it’s hard to get out, too.

Bill Brewster:
The problem is… Scott Galloway put it a very good way, Twitter sells to your brain and that’s harder to monetize than selling to your heart and you’re penis.

Tobias Carlisle:
You can’t just stick ads in there?

Bill Brewster:
I think you can, but lust is a much more… You can monetize it better than you can your head.

Jake Taylor:
It’s pictures versus letters. When are you going to move your little chimp brain to want to buy things? It’s like status stuff, not like whoa, that idea blew my mind.

Tobias Carlisle:
Instagram has great ads. I don’t mind getting the ads on Instagram.

Bill Brewster:
Many of [inaudible 01:01:21]

Tobias Carlisle:
Why can’t Twitter figure that out?

Bill Brewster:
Well, I think my man Elliot Turner would tell you that they’re working on their stack right now and that they’re going to.

Tobias Carlisle:
What have they been doing for the last decade?

Bill Brewster:
Messing around, I think. Here’s the other thing, I guess you could argue you have a duty to your shareholders and I would buy that argument. But if you’re Jack Dorsey, why do you care? You’re worth a billion dollars, all your employees are super happy. Your platform is growing like crazy. What’s your incentive to change it?

Jake Taylor:
Some hedge fund guy with his foot up your ass, I don’t know.

Bill Brewster:
Yeah, well, maybe now the incentive exists.

Tobias Carlisle:
All right, fellas, well, that’s time. That was really fun.

Bill Brewster:
Had a good time. Jake, I liked yours. That was very insightful. Thank you.

Tobias Carlisle:
Thanks, everybody. We’ll see-

Jake Taylor:
You’re a vegetable.

Tobias Carlisle:
We’ll see you next week same time, same place, ciao.

Bill Brewster:
Peace.

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