VALUE: After Hours (S02 E32): $WFC And Banks, Cantillon Trillions, Structural Dynamics

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

  • The Disconnect Between The Stock Market And The Real Ecomomy
  • Cantillon Trillions
  • US Airline Recovery May Not Happen Any Time Soon
  • Undervalued $WFC Poised For Turnaround
  • Structural Dynamics
  • How To Size Into Positions
  • Australian Entrepreneur’s Outback Aircraft Boneyard
  • Technology-Driven Deflation

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: We’re doing it live. Here we go. Folks, take 3, 4, 5. We’ve done it, we’ve gone live. We’ve bent space and time.

Bill: We’re officially live?

Tobias: We’re officially live.

Bill: All the sound is working.

Tobias: I had to read this book.


Tobias: Structural Dynamics. It’s about bending space and time. That’s Volume One. Here’s Volume Two right here. That is a weighty book. Let me tell you, it’s starts–

Bill: You read that on vacation?

Jake: Yeah, what are you doing with that? Is that like a doorstop?

Tobias: That’s my father-in-law’s book.

Bill: I’ll tell you what, how about instead of structural dynamics, we figure out how to make a podcast work?

Tobias: He starts with Isaac Newton’s Principia Mathematica and works up to modern-day aerospace, blackholes, and things like that. It’s everything you need with all the proofs in between with a mathematician. Enjoy. It’s so good to be live. What’s happening?

Bill: Dude, I could legit wring my shirt out. I’m so sweaty right now. Between being angry about the sound and the air conditioning not working in this fucking office, I’m in Florida, it’s the summer. I am so soaking wet. What?


Bill: Anyway, financials are ripping.

Jake: Yeah, you’re soaking wet for a different reason. [laughs]

Bill: Oh, geez. Lord.

Tobias: Now I can’t sit. Now I got to put the chat up. Oh my God. It’s an absolute disaster. [crosstalk] Hey, it’s Tuesday at 10:30 AM Pacific. 1:30– No, it’s not.

Bill: Definitely not.

Tobias: We’re late. But normally this is when do the recording. So, if you want to hear it live– because I’ve got a few requests from folks who want to hear it live, if you want to come in and ask questions and so on. That’s how you do it. Just go to The Acquirers Podcast YouTube channel or go to, find the podcast tab, it’ll get you through. I can’t see the comments at the moment. Never go on vacation.

Bill: I can.

Tobias: You got them? You’re looking at it on–?

Bill: Yeah, I’m up on Youtube. I can see them. People are communicating. I’m communicating with people. It’s exciting.

Tobias: Keeping up foreign relations?

Bill: Yeah, that’s right. My webcam looks like street garbage, but whatever.

Tobias: It does?

Jake: Maybe that’s just Florida version of you.

Tobias: Florida Man, Florida Bill.

Bill: I moved down here and just don’t look very good, that’s possible.

Tobias: Like sweaty shirt, sweated-through shirt. That’s Florida Man, right?

Jake: Yeah.

Bill: It’s brutal. I might have to take it off.

Tobias: Well, just let me know before you do because I have to change the rating on this.

Jake: [laughs]

Bill: Too scary. Indonesia’s in the house. What up Indonesia?

Jake: NC-17.?

Bill: I just realized my shirt’s on inside out. Anyway, we have derailed.


Bill: Buttons out.

Tobias: I don’t have a topic this week. What are you guys talking about?

Jake: Oh, Jesus.

Bill: I’m going to talk trade strategy, like how to size into positions.

Tobias: That’s a good one. Don’t touch the mic.

Jake: Exactly. Don’t breathe on anything. It’ll break on us here. I’ve got some exercises for us in the Veggie segment that might be some fun.

Tobias: All right. Well, I’m going to think about my topic by the time it gets to me last. Who wants to go first?

Jake: Hey, we didn’t do our intro yet though.

Bill: Oh, first of all, intro. Approximately 39 minutes late. Welcome to Value After Hours. Thanks for sticking with us, to the true fans, the people that are tuning in right now. All six of you. The other four are lazy. I’m Bill Brewster. This– whatever we’re calling, this is our show today with my cohosts, Toby Carlisle and Jake Taylor. We’ve already done our intros and this is officially the worst intro that we’ve had. So, rock on. Hopefully, the rest of the show is better.

Tobias: Let’s just break it down here. We had problems with Bill’s audio. Then, we had problems getting Skype to come through the Ecamm Live which is what I use. Shout out to you guys. You can fix your product or give me a break on the $14 a year or whatever I paid for this thing.


Tobias: I’m going to need to change my shirt too because I’m so nervous and sweaty from doing that one.

Bill: I almost threw a phone through the wall, thanks to the sound. That was fun.

Tobias: Yeah, I almost went Cliff Asness and punched the computer.

Jake: Ooh, yeah. So, how was the break, guys? Anything fun you want to share?

Tobias: I went to a little lake outside Yosemite, totally disconnected. Read a book on stoicism and another one on human consciousness– the modern one on human consciousness, and behavioralism. It’s striking. I guess there’s a lot of schools to choose from, stoicism is one of them. But it’s the stoics, they got a lot right about the way that people really do behave in MRIs and things like that. Human consciousness book was not at all to do with stoicism.

That’s why I was reading them both. I just thought this is– It’s uncanny how right the stoics are about a lot of these things. The book that I read was the one that you recommended last week that had– it’s got some references to other schools in it too. So, it talks about the cynics, it talks about the epicureans, talks about some Zen Buddhism. Some various other ones, the pleasure-seeking ones. It was a good book. Thanks for the good recommendation.

Jake: Oh, yeah.

Bill: I just can’t help but think this is a value podcast, years into value underperforming.


Bill: I had to go to a lake. I read some stuff about stoicism.

Jake: Yeah.

Bill: Turns out value ripped while I was reading, maybe I should go back.

Tobias: Well, I’m thinking about–

Jake: 100 reasons not to kill yourself.

Tobias: [chuckles] Yeah, I wouldn’t ever do that. But I love the movie Caligula, which has got, Sir John Gielgud, I think plays Seneca and he does commit suicide at the end of that but here’s the trigger warning. But Seneca was the only one who was a slave. The others were– well, Marcus Aurelius who was Emperor and then Diogenes. Who’s the originator? Zeno, am I getting that wrong?

Jake: Zeno. Yeah.

Tobias: Zeno, yeah. Hard Z. Sorry, folks. I’ve totally derailed it.

Bill: No, this is good. A lot of value investors like stoicism.

Tobias: Well, I think you got to be little bit stoked to be a value investor because it’s mostly underperformance. And if you can’t deal with underperformance–

Jake: Yeah. Did you guys see that chart that showed the different years on trailing 10 year, and how rough the 2012 through 2019, little bars stacked up.

Tobias: The thing is it only went back ’37. If you look at that Mikhail Samonov’s 200 years of value, that contextualizes it for you. There’ve been quite a few big, big drawdowns.

Jake: A lot of recency bias on that, 1937.

Tobias: Yeah, it doesn’t get back far enough. It’s only 80 something years, right? 77 years. I’m so happy to be back. I can’t believe it. I’m so happy that it’s all working. I’m so happy to be back. It’s good to see you, boys. It’s good to see everybody too. This is awesome.


Jake: Billy, how about you?

Bill: What, me? What’s going on with me?

Jake: You executed a move.

Bill: Yeah, I drove last week down to Florida, to COVID country. Got to tell you things aren’t that bad here where I am. They are no worse than where I left. It’s a little hotter than where I left but come October, I think I’m going to be happy with the decision. Haven’t really had the chance to crack the Berkshire 10-Q yet because I was doing a lot with the family–

Tobias: Lots of buybacks.

Bill: –but was fairly impressed to see an asset-heavy business, not really have any cash flow– generate as much cash flow for the first six months of this year as they did last year. That’s freakin’ impressive. Some of you out there are fearmongering me about Buffett selling Wells. I don’t care.

Jake: How about the $10 billion precision write-down? I thought that was interesting.

Bill: Dude. I mean, they got a lot of–

Tobias: And they [crosstalk] –10,000 people too out of 30,000.

Bill: [crosstalk] –a lot of OEM stuff that they sell into, the entire supply chain is busted up. On the drive down, I listened to like Boeing, Spirit, Hexcel, United. What else? I went down airline– down memory lane. It was so beautiful.


The Disconnect Between The Stockmarket And The Real Ecomomy

Bill: I sort of pivoted. I had sent out a tweet. I was maybe doing a little after-hours activity, I think, looking at the sky thinking about airlines a couple weeks ago, and I was worried about them making it through this. I’m less concerned about that now. They’re talking about taking– let’s assume that there’s no government stimulus going forward, they talk about losing 20% of their capacity. That’s like taking Southwest out of the market.

Tobias: Oh, don’t say that.

Bill: No, I’m not saying that Southwest is going to go away. But I’m just saying if your whole thesis is– they have the [crosstalk] locked up and all that stuff. I don’t know how full– I was never that deep in those weeds of how they haven’t locked up and what the contracts require, and God forbid, they stopped flying, do they keep their slots? That did not permeate my underwriting. I just don’t know enough about that. Anybody out there that does, please let me know.

Tobias: Here’s the thing, the TSA numbers are back to peak since– they’re trending towards a peak. They’re at a peak since the crisis. We’re not back to normal. We’re well away from normal, but we’re well up from the worst of it.

Jake: All the way up to total dogshit.

Tobias: Yeah, we’re only down like 70% or 80% now.


Bill: Yeah, I didn’t mean to trigger people on the Twitter machine yesterday, but that’s like booking holdings. I forget exactly how they phrased it, but they basically said domestic bookings are down– I think, they said 35%. I could be totally wrong, read the call if you want. But I was just thinking, when used cars or cars salesmen are like, it’s the best car between $20,000 and $23,000 that has two doors or whatever. It’s like, okay. Our definitions are pretty narrow right now.

Tobias: Well, [unintelligible [00:11:11] that’s what we’re looking for.

Bill: I guess but think about what they’re saying. They’re saying, in Europe, domestic bookings are within 35%. If you’re in Europe, and times are good. If you’re in the UK, you go to France. If you’re in France, you go to Spain. Nobody stays in their country in Europe, the train system is so freaking good that’s such a bullshit comp number. Yes, I agree that people are going out of their house. We can have that conversation. Outside of that, I don’t think it means much.

Tobias: Well, the underlying economy is pretty dinged up. We’re talking about– I think it was down 9% in Q2, I think, am I getting that right? To put that in context, 2008, 2009 was down 4%. This is a big hit to the real economy. I just find it hard to see how it– I appreciate that the stocks are up and everything looks okay, because there’s been a lot of stimulus. But I still think at some stage, don’t you look at the valuation and say where the valuations have to reflect what’s happened underneath and I think probably to some extent, the real economy, the planes, trains, automobiles, steel, all of that sort of stuff does reflect that and the stuff that has benefited has been all the stuff that Skype, Microsoft–

Bill: Vitaliy had a good– I’m pretty sure it was two days ago. He wrote a piece and he had made a similar comment where he was like it appears as though the bytes have separated from the atoms when you think about how valuation is, and the problem that he articulated that I tend to agree with just viscerally but, maybe it’s wrong, is like the bytes are funded by the atoms. You can’t have Microsoft exist if Ford is getting crushed. forget about Ford, but the aggregate of all the hospitality companies, I’m pretty sure that was part of Alteryx’s– what made them fall short. You need the atoms to be spending on the IT in order to fuel the bytes. But [crosstalk] valuations haven’t caught up.

Tobias: Is that true?

Bill: I think so, I don’t know. How do I know? I’m just a dude on a podcast.

Tobias: Well, we’re just going to argue about it. You’ve got your business set up, you’ve got it set up, and all of a sudden, you’ve got to work from home. Well, now we’ve got to go and get whatever infrastructure we need to work from home. So, that’s funding that you got– spending you got to get, you might have to truncate that from somewhere else or it comes out of profit or something like that. But that is new spending directed towards us, guys. It does make sense to me that they get a run out of this, but I think that the problem that everybody’s now confronting is that the valuations are very, very stretched. Probably, the business is ultimately tied to the underlying economy. It’s faster than the economy, but probably does follow it in some sense.

Bill: I agree with what you just said. I think it was very articulate and smart. And it reminded me of a letter that I was reading today earlier. And it said, an odd question popped in– this is a 2011–

Jake: Dear Abby.

Bill: What? I can’t quote the person because he doesn’t like to be quoted. Basically, what they were saying is, it takes a while to change habit and what this has done is forced– the person was questioning why online retail hasn’t grown faster, and his point was it really should be growing faster. But at the end of the day, the way that people’s lives are, it just isn’t. So, I do think that there’s a lot of merit in what you see the move in Microsoft, which something that we had– I think you said two podcasts ago that you corrected me on, Toby, which was really smart to pick it up in the time. I said, like, “What, you don’t think up 60% is a little ridiculous?” And you were like, “Well, it only matters if it’s disconnected from the business results.” That was completely correct. It was a stupid comment on my part. But I do think that this is forced a habit shift that has pulled forward a lot of cash flow, that probably would have come eventually, but it makes sense, some of that. But yeah, I still think you need the atoms in the economy.

Jake: Well, you can answer that question yourself by looking around it. How much of the things that you buy, the services, the goods that satisfy your needs come from physical versus digital and how much of the shift has happened in physical versus digital for you? And then try to extrapolate out to the rest of humanity.

Tobias: When does Netflix get some new content?

Bill: I don’t know. But they’ve got a lot in the backlog.

Tobias: Do they need to shoot it? [crosstalk]

Bill: No. A lot of it’s been filmed.

Jake: Is any of it watchable?

Bill: Some of it. Dude, I’ll tell you what, you talk about value investments, Tiger King is like the value investment of 2020. They crushed it on that.

Tobias: Tiger King is the Rick of Netflix content. I couldn’t watch it.

Bill: I looked at Rick earlier in the year and–

Tobias: I’m not pitching Rick.

Bill: No, I’m just saying. I looked at it and I know it’s had a good day and I’m happy for the people that bought it. I just can’t get over– the last time I was in a strip club, it’s been a while, all I saw was sorrow. I was like, “I can’t do this anymore.” [crosstalk] –in my younger years.

Tobias: Sorrow is an unusual name [crosstalk].

Jake: That’s [crosstalk] anecdotal.

Bill: You know what I think it is? I think now that I have kids, it’s like, that’s someone’s daughter.

Tobias: Yep. I have a daughter.

Bill: It’s just changed everything for me. Again, they’re all just putting themselves through college. So, what do I know?

Jake: Lot of doctors in training.

Bill: [laughs] Anyway.

Jake: Do you guys understand anything about the curve control? I saw this tweet yesterday or maybe Friday.

Bill: Good segue.

Jake: Are we still talking about Rick’s?


Tobias: Yeah. It does sound like– that’s unintended, but brilliant. I’ll take it. Do you guys understand this curve control thing? Is that a twist or something like that, QE twist, or–?

Bill: I have no idea.

Tobias: Nobody knows anything. I did say this yesterday– You know?

Jake: Maybe a little bit, but it sounds it’s really trying to squash the front end of the yield curve, like the closest part. I don’t understand why they think that’s a good idea. It doesn’t quite make sense. I don’t understand us monkeying with [crosstalk] money to begin with.

Tobias: I only saw a tweet. I saw the Lyn Alden tweet, where she said that the last time that they tried this curve control was the 40s, and that was very good for value. Sometimes, I think some of these things just coincidental. I don’t really understand what it means. I thought we had a QE twist, which was the point of that was to mess with the curve a little bit. The Fed loves to take us up the risk curve.

Bill: All I know is this feels a lot like two months ago when aerospace and financials ripped just long enough for people to think that they were going to rip and then they shattered people’s hopes. And I feel like it may happen.

Tobias: Well, that’s value. Get ready. Get used to [unintelligible [00:18:59].


Undervalued $WFC Poised For Turnaround

Bill: Yeah. So, on that note, my big Wells thesis that has been super fun and people are telling me that Buffett’s selling, that’s great. The question that it has caused me to think about is– the guys that I studied historically have been mostly Buffett, and I’ve started to study some other guys, and Munger,, but they’re so good at this game, that when they see value, their estimate is so precise that they can bet huge out of the gate.

What I’m wondering is, in a situation like Wells where I think that there’s a business risk component to it, and I really see why I think that it’s going to turn and I really believe that the story has changed even though I was an idiot before and completely missed what was going on in the inside. I was certainly not the only one on that. But is it something that because I think it’s cheap, I bet big or I know that if they’re doing what they’re going to do, the asset cap is going to be lifted.

I believe if the asset cap gets lifted, the stock will probably go up, I don’t know, 15%, 20% over time, whatever. But the business risk side of the equation has really been taken out of the thesis. Does it make sense to bet– ?

Tobias: [chuckles] We’ve lost Bill.

Bill: –smaller.

Tobias: He’s back.

Bill: Oh, wait, are we there?

Tobias: No, you’re back. You just froze for a moment.

Bill: Oh, I’m back. Oy Vey. Anyway, does it make sense to wait a little bit and once the business risk is de-risked, you can pay a little bit higher price. Your risk reward may not be changed very much and it’s a different way to think. It’s a little bit Druckenmiller where it would be like, take a smaller position and start to press once the fundamentals go in your favor. It’s just an odd way for me to think but I see the merit in it. Normally, I’m so constantly thinking that price is your margin of safety, but in this case, it’s almost like improving business quality would be your margin of safety.

Jake: Yeah, we’ve talked about this, you and I, Bill, about using poker as an interesting analogy for that, where you have your whole cards and you know what they are, and you know how they match what’s currently on the board. But then, maybe sometimes it’s better to push all your chips in after you’ve seen that next card that comes up. You could still lose, but maybe you have a better handle on what the probabilities are of winning versus losing. Balancing that against– Buffett talking about how if you wait until springtime to hear the robins, all the good deals are gone basically. But there’s some balance to that as well where more information might be particularly helpful for you. It’s not entirely clear what’s the best course of action.

Bill: Yeah. I think that’s right. Certainly, on something like Wells, I think that people would have benefited a lot from waiting till springtime. I mean it is down a lot since some really smart people have liked it.

Tobias: I feel I asked this question every time we discussed Wells but how bad for banks and insurers are low-interest rates on a flat curve?

Bill: In perpetuity, probably not great. I think that’s why people favor JP Morgan and Bank of America because they’ve got a little bit better investment banking arm. Certainly Goldman. The dream merger on some value nerds mind is Goldman and Wells, that’ll never get done because regulators hate both of them. Maybe it would. I actually don’t think it would be bad for the market but competitively– but yeah, I don’t know. Look, it’s a price times volume game, so that’s why I tend to prefer the bigger banks because I don’t see how the interest compression doesn’t hurt the smaller guy more just as a function of their scale.

Tobias: If you look at European banks, they’re smashed to smithereens. I don’t know about Japanese banks, but I assume the same thing.

Bill: Yeah. Mackenzie wrote about this a while ago, and they pointed out some of the differences.

Tobias: What are the differences?

Bill: Well, at the end of the day, 20% of the bank’s makeup– it’s like a 20-80 rule, almost all the profits. Some of it is demographics in Japan. I think some of it is culture in Europe. I think some of it, you’re right on the rates. I think that is the really hard thing to figure. What I would say on somebody like Wells is, if rates go down, they benefit a lot from mortgage refinancing, then they have to take down there mortgage servicing rights because they have those– It’s very hard to figure what actually ends up happening when rates come down because there’s a lot of parts of the business that are impacted in a way that may not be completely intuitive. That said, Buffett might have sold the whole thing.

Jake: Do you think so?

Bill: I don’t know. It’s the rumor. I have no idea.

Jake: That’ll be pretty surprising to me.

Bill: Dude, you see in the 10-Q, what is cost basis on banks right now? He took it down a lot. Banks, financials, and insurance came in– Let me see, I’ll see if I can find it. But it was a lot, not substantial. And Wells is– okay. So, on December 31st, his banks, insurance, and finance cost basis was $40.4 billion. On June 30th, it was $31.16 billion, and Wells was a $7 billion cost basis. So, it’s possible. I don’t know what else he would have sold.


US Airline Recovery May Not Happen Any Time Soon

Tobias: Yeah. What about the fact that Precision Castparts has knocked off a third of their workforce, which was 10,000 people?

Bill: What are you going to do? You can’t keep them hired.

Tobias: But that’s a shockingly huge number. I’ve been watching the Silicon Valley firings. Every time they knock somebody off, it’s like 3,000 people got to go. That adds up over time. That’s a lot of white-collar that are getting hit.

Bill: Yeah, I think this is part of the policy argument for supporting some of the airlines. I get why it’s offensive, and I don’t know whether or not I would argue for it now. Certainly, in March I did. Now, it’s much harder for me too. But you take 30% of the seats out of the air and then you look at the backlog at Boeing, and then you look at how that’s going through Spirit AeroSystems, it could have real problems for a long, long time. And then, you’re not going to be able to catch up. If demand comes back, this is not a supply chain you can just flick on. It takes time. And they’re not just going to overhire again and reinvest in equipment, that’s not going to happen. This stuff is permanently gone, which to me means really tight pricing for a while on the back end of this. It’s a huge capitalist cycle theory.

Jake: That doesn’t sound like a V-recovery.

Bill: Not in the jobs market. Maybe in equities though.

Tobias: We’ll be on that. Somebody said it was the divided– I don’t know what you call it. The tick has gotten bigger anyway. I think we’re almost back to all-time highs, aren’t we today in this– [crosstalk]

Bill: Yeah, maybe.

Jake: Yeah, we’re really close.

Bill: Think about Spirit. I don’t own Spirit AeroSystems. I forget exactly what their backlog is. I’m pretty sure they have roughly 100 planes on-premises. Boeing 737s, I think that they built that facility to produce somewhere between 65 and 80 planes a month, maybe? Is that too high? I think that’s right. Anyway, listen to the Spirit call about the numbers of how– Boeing’s got to chew through the inventory that is sitting on Spirit’s lot today. And then, Spirit’s got to start producing for them.

They’re gonna try to ramp slower, so they’re probably going to be at 50% capacity while Boeing starts to ramp up their production, so they can chew through some of the inventory. But you can’t flick that on, and now you’re probably two years out, they’ve laid off a bunch of engineers. Do those skills atrophy? Do they stay–? Is it completely irrelevant? Can they just come right back? Are those people going to be willing to have them come right back? It’s a lot of trauma to the supply chain.

Jake: It almost sounds like you would say that having low rates for 10 years made us pull a bunch of demand forward and we built a bunch of shit we didn’t really need yet.

Bill: Hmm, I don’t know. I agree with what you’re saying. I don’t know if I agree in this particular scenario, but yes.

Jake: Okay. Tell that to all the planes parked out in the desert.

Bill: Yeah, but some of that’s a 737 issue. Boeing totally screwed that up. That was not interest rate thing, that was bad managerial. And then, we stopped flying [crosstalk] Yeah, well, I’m just saying. You’re going to blame this on low interest rates, let’s have the discussion.

Tobias: You want to hear a good story about planes in the desert? It’s in Nevada, that very famous plane boneyard in the– where they store all the planes?

Jake: I thought it was in Arizona.

Tobias: Is it Arizona? That would make more sense, and it’s something like that. I don’t know, I’m just guessing, that it’s out there somewhere.

Jake: Something you would fly over. [chuckles]

Tobias: The guy I went to high school with set up a plane– He worked out of that– the same conditions existed in this area in Australia. And so, he set up a plane boneyard in the middle of nowhere in Australia because you don’t need to be close to anybody, you can fly there and set it up. He had four or five planes and then coronavirus hit, and he’s got a full lot. That’s a great little entrepreneur story, is that someone is doing well out of coronavirus. There are a few guys out there, little entrepreneurs doing it.

Jake: Wow. I like that. It’s a very anti-fragile bet he’s got going on.

Tobias: Yeah, he had an empty yard for a while. He’s been doing it for a few years, but he’s hit the jackpot now. Good for him.

Bill: So, does that reinforce like the right behavior? Or did he get lucky? Is he going to attribute it to skill?

Tobias: He could have just grown that business up over time. He could have just worked it– because there’s Asian carriers, Australian carriers, anything that’s in that southern hemisphere closer to that part of the world, what’s that arid human– non-human climate, doesn’t want to fly all the way to Arizona to park their plane in a full boneyard, so they can stick it in this one in the southern hemisphere. I forget the name of it. I’ll give him a plug if I could remember. Not that it’s relevant to anybody here. Anybody looking for a place to park your plane? Shoot me a note and I’ll hook you up. Mate’s rates. [crosstalk]


How To Size Into Positions

Bill: Let me circle back here because I’m very interested in your takes because you guys are the OGs of this. I’m like a young buck in the game. [crosstalk] Would you be comfortable betting more on a good business that’s priced maybe a little bit ahead of where it is? Or like Wells-type situation where you think it’s priced– I guess, how do you think about sizing something? Does size matter? If it’s tiny, will you bet smaller? I mean size always matters, but it’s mostly how you use it, or how management does. The asset base, of course. But you know what I mean, how do you guys think you’re sizing? I guess, your fund, Toby, not that we can talk about it. But if we could say a hypothetical fund that you may create–

Tobias: Strategy.

Bill: Yeah, closer to equal-weighted strategy would be what you would favor?

Tobias: Well, let’s talk in a theoretical discretionary sense. You don’t want to lose money in big positions. That’s the first rule, and so you just want to look at the downside first and then I guess you just work your way up from there. If the downside is close to zero and there’s pretty solid upside, then that’s a bigger position.

Bill: Yeah.

Tobias: I prefer those kind of positions where there’s a little bit of hair on it and it’s undervalued, to one that’s going to grow into its valuation. I always feel uncomfortable doing that, which is why it’s been a tough 15 years for me. [chuckles] Not quite 15, but–

Jake: Ah, we’ve diagnosed the problem.

Tobias: I got to learn to pay up for quality.

Jake: Yeah.


Tobias: Do you want to do your topic, Jake?

Jake: Yeah, we’ve meandered enough for–

Tobias: I cleared my topic in that first 15–

Bill: I feel there’s a strong one back [crosstalk] complete disarray. People are coming at my camera, I see. I don’t like it either.

Tobias: Just say it’s a filter.

Bill: Some bad filter.

Tobias: Golden hour filter.


Cantillon Trillions

Jake: If you read the news at all, you see this concept of a trillion thrown around all over the place. I find it funny because I don’t think we have a very good intuitive grasp of what a trillion looks like. I thought maybe it’d be fun to sort of walkthrough that a little bit and see if we can wrap our heads around it a little bit more. The first thing is, it’s 2008, and the Fed’s balance sheet is under a trillion, it’s at $800 billion.

Tobias: Not even trying.

Jake: Not even trying. And by 2019, we’re at $4 trillion. And now we’re at $6 trillion, maybe 7, is going up. Right now, the June deficit alone for the US government was $864 billion, which is almost a trillion. So, one month, we’ve almost put a trillion dollars on. Well, let’s try to wrap our mind around what does a trillion dollars really mean.

You guys, you understand what like 1 mm looks like, it’s very, very small. A million millimeters is one kilometer, which is basically going down your street. A billion millimeters is 1,000 kilometers, which is about 600-ish miles. And then, a trillion millimeters is a million kilometers, which is 26 times around the Earth. That’s how big the scaling changes when you go from even billions to trillions.

Let’s do another one. A million seconds takes us back to July basically. It’s 12 days ago. A billion seconds takes us back to 1988, so it’s 32 years ago. A trillion seconds takes us all the way back to the Upper Paleolithic, which is 32,000 years ago. So, a trillion is a lot. It’s a lot and we have no real concept of what it means. Let me ask you guys a question. When we talk about trillions of dollars, what your definition of capital? What does capital mean to you?

Bill: I’d say it’s the equipment or resources that money provides.

Tobias: I’d just say it’s the equipment or resources. That’s capital. It’s productive assets.

Jake: Okay. I’ve always found it a little perplexing that we can describe so many different things with the word ‘capital.’ It reminds me of like, Inuits, I guess, have like 50 different words for snow to describe their different conditions of how wet it is or dry. And we have one word that is supposed to carry all of this freight. So, I developed my own little lexicon to help me sort out what does capital mean. I’ve added some different adjectives to it to help me describe it.

The first thing in my mind is this idea of hard capital. With that, I would say that’s like all of the atoms, whether it’s land, buildings, equipment, raw materials, you could even count energy, food, housing, cars, computers, all the physical stuff in the world that we use to satisfy all of our wants and needs. With that, I would also have what we call like soft capital. I actually tried to borrow a little bit from computer where it’s like hardware and software, use the same sort of terminology to describe a technology. Soft capital is all the knowledge and facts and IP, the relationships, the patents, code, mathematics, anything digital, languages, trust. All of these things that are nonphysical things that we can’t see that help us achieve all of our goals.

Then, the third thing I have is actually like financial capital. That is an abstraction that is a– it’s really a claim to hard and soft capital. It’s some abstraction that we all agreed upon, represents something that helps us achieve wants or needs. That’s like stocks, bonds, options, derivatives, gold, crypto, all of the things. I almost think about it like a baseball card. You look at a baseball card and it tells you all the stats about a player, what they’ve done during the game, but it’s not actually the guy playing baseball and hitting a ball. So, with all of that laid out–

Bill: Well, that guy’s labor, right?

Jake: Yeah, that guy’s labor. So, maybe capital is everything in the universe that isn’t human effort, I don’t know. It’s weird. But again, why do we only have one word to describe all those different things that I just named? I tried to come up with an analogy to help us understand. If we just dump a trillion dollars into the system, what does that do? What does that mean to what we just described? The first thing I got to thinking was, in the body, there are these things, sodium-potassium pumps. What those do is– your body will move salts around basically to keep the– it helps maintain osmotic equilibrium, which just means like water is in the right concentration inside of your cells. So, your body actually doesn’t really pump water. What it does is it pumps salt and then the gradient– the salt attracts the water to where the body needs to go to keep equilibrium. That analogy is probably a little too hard to work out. Let’s throw that in the garbage bin. I have a better one, I think.

Bill: Wait, wait, wait, wait.

Tobias: [laughs]

Bill: Hang on. First of all, you just told me, if I heard you correctly, that my body pumps salt and the salt attracts the water. Is that accurate?

Jake: Roughly, yeah.

Bill: I’m calling this fake news just because I’m ignorant. Two, wait–

Jake: You’re using a lot of words.

Bill: And then you want to be like, oh, that’s a throwaway analogy. That’s a good one. I feel like that’s shocking.

Jake: I have a better one, I think.

Bill: Okay. You blew my mind with the first.

Jake: Well, I’m trying to describe something that’s acting on something else to then like, make it change. Imagine that you have a giant table, that’s like plexiglass. And we have all of these metal filings, like little shavings thrown onto the table. And now, imagine that you have magnets underneath the table that you can move around. I don’t know if you guys have ever seen this before, like exploratoriums, and museums for kids, they’ll have these tables that are magnetic with a bunch of filings on it and you can move the filings around. You can create all these different little shapes and stuff based on what you do with the magnets.

Well, in this analogy, I view all of the capital in the world, whether it’s soft or hard, as the filings that are on top of the table. And the money underneath that we’ve just created a trillion dollars’ worth of new magnets basically that are going and pulling around all of the resources under the table that construct really the world around us. The government gives a trillion dollars to some big project that’s “shovel ready.” That turns into something physical in the world.

What’s interesting about it is asking yourself the question, “Well, okay, who gets the new magnets first?” Because they’re going to be the ones that are the strongest and able to move the most filings before more magnets come on.

Bill: What is [crosstalk] Ron Paul argument? What he said made so much sense to me, right? The first people to touch the trillions of dollars are the ones that get the richest. And as it trickles down through the system, the last person to touch it, just gets fucked, because that’s how inflation starts. Right?

Jake: That’s right.

Bill: And then their spending power is just so much lower than the first peoples.

Jake: This was described a long, long time ago by an economist named Richard Cantillon. They’re called Cantillon effects. It’s like who gets the money first matters. He described it as a stream bed– a river going through a stream bed. It doesn’t double the speed of the river, when you double the volume of water. It will show up in different places faster than other places depending on the structure. I guess one of the questions we’re trying to figure out is there going to be inflation or deflation. That’s a really hard question to answer because, okay, we know that we’ve added a lot of new magnets and they’re pulling things around as we speak. Whoever gets it first, all the little piggies at the trough are eating it up first before it gets down to– [crosstalk]

Tobias: You want to be a Banksy? that’s the place to be.

Jake: Yeah, I mean, becoming a billionaire without actually starting a business that’s–

Tobias: Two times.

Jake: Something’s a little off with that. One of the questions to answer is, how many shavings are we going to have because that’s going to matter as well in this whole equation. I read this interesting book over the break, it’s called The Price of Tomorrow, Jeff Booth is the author. He’s talking about exponential technologies and how we’re on the cusp of an exponential change. A lot of it has to do with Moore’s Law and solar prices falling, a million different little things that will turn into a ton of material wealth for us. And it’s hugely deflationary because even government printing won’t be able to stem that tide. What that’s really saying is we’re going to be dumping tons of filings, metal shavings on top of this table, and we’re all going to be wealthy. The magnets won’t even be able to overcome that.

I don’t know how true that all is. I find it to be an interesting thought experiment. I’m curious what you guys think about that. Or is it going to be the magnets that are going to drive–like we’re going to have inflation and the prices of all the things– We’re going to really move the filings around a lot with all the new magnets that we’ve created.

Tobias: It makes me a little bit nervous that we run the experiment at the same time as we’re sort of trying to measure the effects of the experiment. Nothing that the economists seem to think will happen once they do these things, seems to happen. Where’s the inflation? Stock market went up, so maybe that’s asset inflation, hasn’t come through the CPI yet, but then there’s a lot of hedonic adjustment, nonsense that goes on in the CPI figures, and they’ve got an incentive to keep that flattened down.

I think that any theories that I might have heard about how all of this stuff works kind of got blown up in 2008-2009. I really don’t know. It seems that you can just print an endless supply of money and stimulate fiscally as well, and it has no impact. Why the MMT is wrong? Why don’t we just stop paying tax and start printing money and buying bonds with it? But it seems to work. As a matter of logic, that makes no sense at all. But as a matter of practice, it seems to be working.

Jake: And yet here we are.

Tobias: Here we are.


Bill: I don’t know. I was talking to my buddy, Francisco, about this. I asked him would you want to own gold here where his equity is. We were just discussing it. And he’s like, “Well, I’d rather own equity because if you own gold, it is true that you would potentially increase your–” I don’t want to put words in his mouth, so I’m just trying to think about how he would frame it. You could potentially increase your ability to purchase more fiat currency. But owning equities over time accomplishes the same goal. We’re all purchasing stuff in fiat anyway, so we’re all debasing our fiat the same amount. I’m not sure that your relative purchasing power really matters as far as which fiat you choose as long as you’re choosing the right one.

The only other thought that I have is the Phantom on the Twitter machine, which is a great account that everybody should follow. I don’t know what it is. It’s Phantom with a couple numbers after, but that person is smart. They were talking to me about– they almost think that this $600 check is the way to back into a–

Tobias: UBI?

Bill: Yeah, but not even a minimum wage almost because it’s hard to attract talent to now come to your company without paying them more. You’re almost accomplishing a minimum wage goal via a different way. Fundamentally, I can’t understand how eventually this doesn’t turn into inflation. That said, I did think COVID was massively deflationary and I do think that we sort of just printed into a hole. My core sort of thought of why the inflation isn’t picking up is the wealthy are so wealthy that if they’re getting more money, the velocity isn’t going anywhere because it’s just accumulating in their bank account. Once you are that wealthy like– I get you could buy a bigger boat or whatever, but your incremental spend really isn’t that large.

Jake: Marginal propensity to consume.

Tobias: You could buy a trailer too. Jake’s bought a trailer, that’s the only point I’m making.

Bill: I do think that one of the things that’s very different about this round of stimulus that was not so in ’08, is this is actually money going to people that are spending it. So, it’s possible that velocity actually does pick up in time.

Tobias: It hasn’t yet though.

Bill: No, but you’ve got–

Tobias: It’s crushed. It’s the lowest it’s ever been.

Jake: It’s because they didn’t pay their rent or–

Bill: I know but if you look at the data, you know what it is, is the wealthy are too scared of the virus right now to go out and spend. You’ve seen the savings rate go up through the roof, but a lot of people are spending the stimulus checks. And I don’t know what that’s going to look like when you know the people that are saving right now come out to spend. I really don’t know. I know I own a lot of banks. If inflation goes up, I’m hedged.

Tobias: Folks, we’re going to have to do a truncated show because we’re coming up on– I’m running a little bit over time here. If you’ve got any questions–

Bill: First of all, on random stocks, I’ve seen a couple of these things. We’re happy to talk about little stocks. I tend to cover– most of my day is TMT and travel, airlines and stuff, and the supply chain. I’m not opposed to it if you guys want me to look at small stocks and– I’m down to look. I just don’t like flip through it all the time.

Technology-Driven Deflation

Tobias: There’s a good comment from Low Tide Investments about technological– technological improvements are deflationary because we get better at doing things more efficiently. Fewer people are required to get something done. It was difficult to make stuff 200 years ago. Now, it’s pretty easy to communicate. The telegraph was invented in 1844. I learned that a few weeks ago. So before then, information traveled as fast as the ship that you were on, which for the most part, was sail. And all of a sudden, information can get there sooner. That’s been magnified and accelerated. I don’t see why you have to print to correct that though. Why can’t we just enjoy that? Why do we have to inflate away all of those? I don’t get it. Why does that have to happen?

Bill: Yeah, I would agree with that.

Jake: Now you throw your pennies in the garbage because they’re a nuisance, but they should be buying all kinds of treasures.

Bill: Well, at least then if boomers can’t make anything on their retirement accounts, at least the account buys more every year. Because right now, it seems to me that if you’re looking at retirement, you’ve got a quite a predicament on your hands.

Tobias: True. Throw your questions in, folks. Happy to chat about anything really.

Bill: Oh, it looks like it’s @Phantom3434.

Tobias: There we go.

Bill: Yeah. Follow that account. That person did some breakdown of the oil sector that was crazy. And sometimes you just see stuff and you’re like, “All right, I am definitely not the smart money here.”

Tobias: What’s the energy? It’s like 4% of the index? Why would you bother?

Jake: It’s nothing.

Bill: He or she– I think it’s a he, but that was a while ago when it was a much harder thing to call. That’s an account worth following. I think that’s a good peek into somebody’s brain.

Tobias: Folks, I’m running out of time here, so we’re going to have to bounce but–

Bill: I’m gonna pass out, I’m so hot.

Tobias: We’ll be back next week, hopefully without all of the technical difficulties, so sorry about that. I’m going to say goodbye. You guys want to say goodbye?

Bill: Have a good one. I’ll work on my camera, sorry.

Jake: Bye, everybody. See you next week.

Tobias: Thanks, folks. See you then, bye.

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