VALUE: After Hours (S03 E21): LEAPs And Cash Hedges, Crypto And The Gold Rush, Growth Back On

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

  • LEAPs And Cash Hedges
  • Crypto And Lessons From The Gold Rush
  • Growth Back-On
  • Is The Shiller PE Still Relevant?
  • GDP Growth Collapsed
  • Buffett Dumps Stakes In $WFC & $CVX
  • FAANGs Closer To Value
  • SPAC Popularity Indicates Late Stage Bull Rally
  • Investors Get In At Highs And Sell Out At Lows
  • The California Dream
  • $PDD: $155B Market Cap In 3 Years
  • Investing In Global Shipping
  • Biden’s Tax Plan
  • The Incredible Speed Of Information
  • Long Commodities/Short Human Creativity
  • Upside Insurance

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: Preparing to live stream. Meeting is now streaming live on YouTube. All right, going to find out.

Jake: I think based on last episodes, we are officially live right now.

Tobias: We are live now.

Jake: So, let’s just– [crosstalk]

Tobias: I don’t know.

Bill: That’s right.

Tobias: Well, it’s Value: After Hours. It’s 10:30 AM on the West Coast, which means it’s 1:30 PM on the East Coast. I think that’s that works UTC. Sorry, guys, I’ve lost the horizon there. Australia, it’s 3:30 AM. Good luck to everybody figuring out what time we record this. What’s happening, fellas?

Bill: I was thinking the other day that I’m mad about our time zone difference now, because we can’t do our Thursday night hangouts.

Jake: Yeah, you messed that one up, Bill.

Bill: I did. Three hours is a big difference.

Jake: Yeah. Toby and I were– [crosstalk]

Bill: That’s what’s happening. You asked me, that’s exactly what’s happening.

Tobias: JT, you might have to turn your mic up a little bit. You’re little bit quiet there.

Bill: That’s what I’m saying, dawg.

Jake: I’ll just try to talk louder then, how’s that?

Tobias: Just get a little bit– Just [unintelligible [00:01:05] with it.

Jake: I can’t get any closer.

Bill: Yeah.

Tobias: Let’s see what’s happening, fellas? What are we talking about today?

Bill: Well, yeah, last week, I picked on the 30% cash position. So, this week I’m going to offer how to hedge it.

Jake: Oh, I’m all ears for that.

Tobias: Cyprus, what’s up? What’s good? I think you might be a first Cypriot. Welcome to the show. What about you, JT? You got some veggies prepared for us?

Jake: I do. I have a–

Tobias: Baby carrots?

Jake: Yeah, it might be a fun one. So, my kids are in homeschool this year, lamentably.

Tobias: [laughs]

Jake: Where I live is about a half an hour drive from Coloma, which is where they found gold for the Gold Rush in California in 1848.

Tobias: Wow.

Jake: So, we did a little field trip last week up to Coloma to talk about the gold rush, and after I found some parallels that might be interesting for us to talk about. So, I’ve got some good stories to share on that.

Tobias: Well, that sounds good. It’s Goob’s asking, “What time it is?” It’s 10:32 on the West Coast. You have to figure it out from there. What about you, BB? What have you got?

Bill: I just said what I was going to do.

Jake: It’s hedging.

Bill: I’m going to offer the hedge to the 30% cash.

Tobias: All right, that sounds good.

Jake: [crosstalk] 60/40 Tesla-bitcoin? Is that the hedge you are– [crosstalk]

Bill: Yes, it actually is something similar to this. Yes, that’s exactly right.

Tobias: I’m going to talk about– I think growth got crushed in Q1, but growth has had a nice little run for the last month, which means that value has been treading water a little bit. I don’t know what it means. I just want to test the crew, test the audience, see where we’re going from here. I want some predictions carved in stone, written in blood.

Jake: Glad to see those guys finally catching a break.

Tobias: Isn’t it good? You like to see that happen.

Jake: Yeah, it warms the heart.


Tobias: Nah, nah. Who wants to go first? Who wants to take the arrows?

Jake: Hmm. I do want to hear this hedge that Bill’s got.

Tobias: All right. Let’s do it then.

LEAPs And Cash Hedges

Bill: Well, yeah, first of all, I stole this from my man, Alex, but I think he’s right. We were discussing, if you are worried about valuations– Okay, let’s say that you’re concerned about valuations being too high. There’s a world where you can say, “Okay, well, I’ll buy some puts.” There’s also a world that you can say, “Well, I’m going to hold some cash.” But if you go to 30% cash, that’s really kind of a market call. So, his thought was, “You should buy YOLO calls on the fastest running stuff to offset your cash hedge or a cash position.” I actually like that idea.

Tobias: Yeah, I like that too. We talked about this a little bit, I’m pretty sure we did this on the podcast, but one of the things, hedging the right tail, and if you’re going to cash up, I think it was something that– what’s his name, and it’s just escaping me, the Google– Rishi, it was Rishi’s idea, right? Get some cash in Q1 2020.

Bill: Yeah.

Tobias: Then, buy the LEAPs. So, if the market doesn’t fall over and it rockets from where you are, you’ve already got a little bit of exposure, but you’ve decided how much you prepared to lose if it goes the other way.

Bill: Yeah, I like that. I don’t know. I think that there’s instances in the market where I’m like, “This doesn’t make any sense.” But Adam Robinson, when he once said that, “Things that make sense and things that don’t make sense are where you should look,” because a lot of the times, if you say something doesn’t make sense, it’s your version of the world that actually doesn’t make sense. I like the idea of using a small portion to hedge what I think is correct in the off chance that I’m not omniscient, which is obviously a false assumption, but I do like that. It’s intriguing to me.

Jake: Do you think that those are mispriced? Right tail insurance?

Tobias: Calls?

Jake: Yeah.

Tobias: LEAPs? It would seem to me they’re not in this sort of market.

Bill: Yeah.

Jake: I wouldn’t think so either.

Bill: Yeah, but by definition, you don’t think so if you’re 30% in cash, and this is all a hedge on your own mind.

Tobias: But it’s also the way– you’ve also got to– There’s also this principle that you’re trying to buy stuff that’s undervalued. So, I try to be a little bit guided by that. So, I think that the time to buy crash insurance is often, when the markets ripping like that, crash insurance is cheapest at the tops.

Upside Insurance

Bill: I’m talking about upside insurance.

Tobias: Yeah. I think it’s a good idea. I do think it’s a good idea, because it does force the humility. You’re just saying, “What if I’m wrong?” That’s literally all what you’re saying.

Bill: Yeah. I know that it’s nuts, and I understand that as a value person, that doesn’t make a lot of sense, and I get that’s not what Buffett did. I’m just like I’m not Buffett, and at the end of the day, if I underperform for six years, it’s going to hurt me emotionally. So, is that a way to hedge that risk and make myself more rational? It’s just a fun theoretical discussion.

Tobias: Isn’t that why you invest… emotionally? [laughs]

Bill: What?

Tobias: To get hurt emotionally. That’s why you invest– [crosstalk]

Bill: Oh, yeah. Well, that’s true. That’s a good point. Yes. It’s a good pursuit for people that hate themselves.

Tobias: [laughs]

Jake: It’s kind of– it’s FOMO guardrails.

Tobias and Bill: Yeah.

Bill: It is FOMO, but on the other hand, it’s also like– there are things that happen that– I don’t know. There are paradigm shifts in the world that occur that are not just FOMO related. So, I don’t know.

Is The Shiller PE Still Relevant?

Tobias: Well, it is tough. I look back at– 1996 is a big inflection point where previous to that time, if you’re using a cyclically adjusted PE, something like that, it had been trading around 15 times, moved in big waves, but 15 times was the median in 1996, which is coincidentally when Shiller publishes his paper on the Shiller PE. Since that time, it’s been consistently a long way north of 15. It’s probably 20 or 22 for the last 25 years, I guess.

So, that’s a paradigm shift. I don’t know if it’s permanent, but 25 years is getting pretty– That’s a generation. That’s pretty long. It’s hard to see how we go back to a long-run average Shiller PE of 15. Having said that, market Gods strike me down, please show me my lack of humility. Let’s go back to a 15 world.

Jake: Yeah, to get back to a 15 mean, that’s going to be a rough 25 years.

Tobias: Well, you could just trade around it. Yeah, but you’re right. It’s going to be while we’re losing the tail of this long period. Yeah, it’s going to be cheap. But when you look back over the Shiller PE of a– like it has spent lots and lots of time under– I think the long run mean is now 16.6 or something like that so. So, it’s spent roughly half the time below that level. It’s hard to believe.

Bill: Yeah, and the other thing that I think is hard to believe is even though– Look, there’s one world where you just say, “Well, it’s all been multiple expansion”. So, this is all tenuous, but I don’t know. [crosstalk]

Tobias: [crosstalk] businesses, like Google, Amazon, Microsoft at scale are clearly much better businesses than anything we’ve seen before. They’ve got very extremely high returns on invested capital at this level. But basically, they need no capital in those businesses. They could just be trading on infinite numbers. And then, they’ve got gigantic margins and they’re going to be difficult if not impossible to replace another big chunk of the index too. So, I can see how you could get to an argument where you would expect the higher Shiller PE given the composition of the index.

Bill: Yeah, I think that’s right, given the composition of the index. The other thing that is really hard for me to see where– we talk about dispersion a lot, and I guess that part of– I don’t know whether or not it’s mispriced, but these big companies, they have a lot longer growth runways than a lot of the previous sort– I think that they can reinvest for a long time and they’ve demonstrated that.

Tobias: It turns out– Look at Amazon, 48% on $100 billion, what?

Bill: Yeah.

Tobias: It’s hard to believe.

GDP Growth Collapsed

Bill: Yeah, and you’re comping that against the US real GDP growth from 2000 to 2009, was 1.8%, and from 2010 to 2019 was 2.3% despite all those deficits. There’s just no growth there. So–

Tobias: What’s that over the full history? Yeah, that’s low growth. You’re saying that’s low growth.

Bill: Yeah, it’s almost nothing. It’s anemic. What you’ve got– We’ll start at 1940 just because whatever, I’m happy to go back a little further, but 1940 to 1949, 5.4%. 1950 to 1959, 4.3%. 1960 to 1969, 4.4%. 1970 to 1979, 3.3%. 1980 to 1989, 3.1%. 1990 to 1999, 3.4%, then 1.8%, then 2.3%. So, it’s like growth has just collapsed.

Tobias: Yeah. But why do you think that is? Just the size of the– you just can’t grow at those rates forever, or what’s the reason?

Bill: Well, I guess some of it’s probably that we’ve pulled forward a lot of the growth through debt and whatnot, I guess. I don’t really– [crosstalk]

Tobias: But wouldn’t you’ve seen that? Wouldn’t that mean that you had high growth, or you saying that up until 2000– [crosstalk]

Bill: I’m saying you’ve seen it. You’ve seen it from 1970 to 2000, or really 1940 to 2000, right, is maybe what’s gone on. But I honestly don’t know. That’s outside– The skin too hard for me.

Tobias: But then– Sorry.

Bill: No, I just think that your returns on capital matter, but your reinvestment rate does too. If your economy is only growing 2% average, you’re somewhat limited in what you can reinvest, but these big tech companies are not like they’re global which helps.

Tobias: Right.

Bill: So, the dispersion of them– I can understand why assets would be attracted to those businesses relative to the rest.

Tobias: And it’s a big difference between when the top– the biggest company in the S&P 500 used to be XOM, Exxon. That was 40% of the index. I think at one stage 40% is just insane for something as cyclical as that. I can clearly see how that index is going to be a lot more choppy than the current one which is, I think that the biggest three or four are like 20% of the index, and they’re always tech companies that have got subscription-style revenues and very wide moats.

Bill: Yeah, now somewhere, there’s value investors screaming at their screen. So, I will shout you out this. You would think that with those low growth rates, presumably some overcapacity was built in the 90s, and some of that– this why I like some of these commodity ideas, even though, I’m not going to touch them, but I do understand why people would say, “Well, the industry has been forced to get rational.”

So, on the back end, you’re going to have supernormal profits, through a capital cycle theory. You’re going from people built in 1999 thinking there was going to be a ton of growth, and then you just had just 20 years of just shit returns. Commodities, I think on this this same thing, Modest Proposal had this thread, but I’m pretty sure that commodities real returns have not been positive over any. Yet, on the last 100 years, the CRB index was negative 1%. Last 75 years, negative 1.7%. Last 50 years, negative 2%. I mean they just– [crosstalk]

Tobias: It’s that by virtue where we are? Is that the end date that creates that, like the end price?

Bill: Probably, yeah. Almost certainly.

Long Commodities/Short Human Creativity

Jake: If you’re long commodities, you’re short human creativity.

Tobias: Yeah. We’ve been getting better and better at pulling stuff out of the ground. When you look at oil, increasingly heroic efforts to pull it out, that’s where you get the deep-water disaster, because to find it, it’s a long way offshore and that’s really, really deep and it’s like, we were doing some special stuff to get it up. It’s amazing that we’re still able to do it.

Bill: Well, and then you got fracking, which I think is a pretty heroic– That was quite creative, to be able to frack a well. Now, people will say, “Relied on debt,” and I’m not making an argument for whether or not it’s economic, but the engineering feat of fracking is pretty impressive.

Tobias: Plenty of equity got ripped up in that too. [chuckles]

Bill: Yeah.

Tobias: Shoutout for the equity investors in the show.

Bill: Yeah. So, not a game– I wouldn’t want to be perpetually long oil. I wouldn’t mind flipping the assets, but it’s not a game that I would just be long.

$PDD: $155B Market Cap In 3 Years

Tobias: But you look at China, just to go back to where we were before. I was talking to Stig Brodersen over the weekend, and he said that Pinduoduo was the fastest-growing Chinese-listed company, and I think you said from a standing start to where it is now, it’s three years, and it’s $155 billion market cap, I think. It’s just growing at 100% a year. 100% a year.

Bill: Yeah, that’s nuts.

Tobias: I say it’s China’s farmers only. It’s not quite– it’s an interesting– It’s China’s–

Jake: [unintelligible [00:16:17].

Tobias: No, it’s like the Groupon. It’s China’s Groupon, except they do it right.

Bill: When you’re looking at something like that that’s growing 100% a year, if you put a 50 times sales multiple on it and drives 85% gross margins, that’s maybe not that crazy. To me, the question becomes, “Okay, well, if it’s a $150 billion market cap today, can it become a $600 billion market cap in 12 years or whatever?” That’s tough.

Tobias: I think you’ve almost–You’ve got to throw out those old like that– Whatever you think of as being the cap, or whatever you think of as being a big company, that definition is always going to change over time for two reasons. One, because we’re just pumping out a gigantic amount of money into the– everything’s being denominated in more and more dollars, so everything’s going to go up on that basis. But also, because these businesses, they’ve really got one interface with the customer. So, they can spend all their time working on that single interface, which means that everybody gets that white glove. Everybody’s experience with Google is the same for good or ill. It means that mistakes are worse.

Jake: Yeah.

Tobias: Good topic. Whose topic was it? Was it yours, Bill? [laughs]

Bill: That was. That was me.

Jake: [unintelligible [00:17:45]

Bill: I don’t know if it’s a good topic. It’s just one that I’ve been thinking about. I’ve gotten less confident that I’m right over time, and it was just a fun thing to bat around in my head. And again, it’s Alex’s idea, and we’ve talked about protecting to the downside. So, it’s not novel, but it was just something I was thinking about today.

Tobias: You want to do the veggies, JT?

Jake: Absolutely.

Tobias: You’re a little bit quiet. We’re getting consistent– folks, you might have to shout at.

Bill: People, don’t worry. I told him this before it started. I’m on your side. I’m the man of the people. Well, Toby is too.

Tobias: You have to subscribe to hear Jake’s audio. [laughs]

Bill: [laughs] Yeah, we’re putting Jake behind the paywall today.

Jake: Is that any better that I took my mic out?

Bill: Yeah, much better.

Tobias: It’s definitely louder.

Jake: All right. I think my mic’s broken or something– [crosstalk]

Bill: We’re going to put you on OnlyFans just for the day.

Jake: [laughs] Get that real money going.

Bill: Yeah, you sound much better now.

Crypto And Lessons From The Gold Rush

Jake: Okay, good. All right. So, like I said in the intro, this is the Gold Rush edition of veggie segments. Let me start by painting a little picture for you. It’s 4.5 billion years ago, and the earth is in its early formation, and this heavy molten iron is sinking to the core from the gravity, and with it, it pulls along most of the planet’s precious metals, like gold and platinum. It’s estimated that there’s enough precious metals in the core of the Earth, that if they were taken out and put on the surface, that it would be four meters deep around the earth. There’s that much gold and platinum inside of the core.

Tobias: It’s about 12 feet.

Jake: Thank you for the conversion. Toby’s, like a Farmer’s Almanac.

Tobias: Well, I had to learn all that stuff so if I had to translate, because, well, I think of feet and meters.

Bill: Do you think in meters still?

Tobias: Yeah, mostly. Yeah, it’s same thing.

Bill: But they’re not though. It’s slightly off.

Tobias: Yeah, yards are a bit smaller. Meters make a lot more sense.

Bill: 1500 meters in a mile, right?

Tobias: 1600.

Bill: All right. Okay, I thought it was 1650 yards. Anyway, my bad.

Tobias: Four stadia.

Jake: [laughs]

Bill: Oh, snap.

Jake: Oh.

Bill: How’s that for veggies?

Jake: Yeah, that’s deep. Deep cut there.

Tobias: How many cubits is that?


Jake: There’s also some recent research to suggest that a cataclysmic meteor event that was roughly like 20 billion-billion tons of asteroid hitting the earth, deposited most of the gold that’s in the mantle of Earth. When you think about– [crosstalk]

Tobias: Is it the mantle, or the crust? What’s the mantle?

Jake: It’s like the in between the very outer crust and the inner core, or outer core.

Tobias: I did not do geography, or whatever this is, geology.

Jake: Yeah, geology. The idea that gold is formed inside of a neutron star, and then hitchhikes its way to the earth, it’s kind of its own amazing astronomical feat. But let’s fast forward now, and it’s 400 million years ago, and you’re on the ocean floor, and this volcano is erupting, and it’s spewing the internal part of the earth out onto the ocean bed floor.

Tobias: It’s very metal.

Jake: Yeah, these tectonic forces then thrust mountains up out of this ocean, and we get an ice age, and– Eventually, rain is pounding these mountains, and it’s eroding the soil away, and it’s causing these rivers that then carry little bits of yellow metal that were buried that came out of the middle of the earth and thrust from the oceans into the mountains, and it washes them and deposits them quietly into river and streambeds.

Now, let’s fast forward and it’s 1834. This 31-year-old man, he flees Switzerland to run from basically debtors’ prison. He leaves behind a wife and five kids, travels around all around America, eventually ends up in in Honolulu for a while, and then finds his way back to Alta California, which at that time was actually possession of Mexico. It was a territory of Mexico.

Now, this man whose name was Johann, but then changed to John Sutter, he persuades the governor of that province to give him 48,000 acres in what is now today, the Sacramento Valley. He starts building a fort, and unfortunately, he’s terribly abusive to the native population, enslaving them basically, treating them quite shabbily. But he has these dreams of creating this kind of agrarian utopia here in California.

Tobias: Not for the natives.

Jake: Not for them. No. To go back to why I talked about the mountains being thrust out, what we were zoomed in on was the Sierra Nevada mountains that California at one point was in the ocean in a previous geological cycle. So, that’s where the all the gold in the mountains came from, was through volcanoes at the bottom of the ocean that then got thrust up to become these mountains.

Tobias: I think there’s a lot of people who’d like to see it go back that way too.

Jake: [laughs] Yeah, back under water. So, 1848 and California becomes a US territory now, and now all of a sudden, Sutter, he’s in the US, he was living in Mexico before. He hires this guy named John Marshall to go build a sawmill about 40 miles upriver from where he was at his at Sutter’s mill, which happens to be in this little town called Coloma, which I mentioned at the beginning is about 25 minutes from my house.

One morning, Marshall gets up to inspect the tail race, which is the output part of the mill, and he finds these gold nuggets in there. He brings Sutter in, and they look at it, and they do some really rudimentary tests, like putting it in lye, and they realize, “Oh, my God, this is gold.”

Bill: Putting it in what?

Jake: Lye.

Tobias: Lye.

Bill: What’s that?

Jake: It’s what people used to use to clean their clothes.

Bill: Okay.

Jake: It’s a very, very strongly basic solution.

Tobias: Good for getting rid of dead bodies too.

Jake: Yeah, apparently.

Bill: Thank you, Dexter.

Jake: [laughs] So, Sutter is really anxious about this gold, because he doesn’t want people to know about it, not because he wants to gold, but because he wants to build this agrarian Utopia, and he’s worried that it’ll mess up his construction and farming plans. But like any good news like that, it gets out, and this man name, Samuel Brannan, who is actually the founder of the first San Francisco newspaper. He hears about it, and he runs through the street yelling, “Gold, gold found up the American river.” By the way, before he did that, he bought all the picks and axes and shovels and pans in the city. He paid 15 cents for a pan, and then sold it for $15.

Tobias: Yeah. [laughs]

Jake: So, he was like crying gold while he had all those supplies to give away, and he became California’s first millionaire by the way.

Tobias: So, literally, the guy who sells picks and shovels to the goldmines is the first millionaire.

Jake: Yes.

Tobias: It’s great.

Jake: So that’s in March of 1848, is when they discovered gold. It isn’t until August of that year that a newspaper in New York publishes a story about it. It took five or six months to get from the West Coast to the East Coast. Now, once it gets published, it’s on now. Everybody in the world hears about it, and 300,000 people soon arrive in the area, and they’re called 49ers, because they came in 1849. That’s so that’s where the San Francisco 49ers football team came from.

Tobias: That’s how the Rams get their name. No, I’m just kidding. It’s the 49ers. [chuckles]

Jake: Yeah. At that time, there’s this little sleepy village called Yerba Buena. In 1848, or 1846, it has like 200 residents.

Tobias: That’s good herb, by the way.

Jake: [laughs] is it well– [crosstalk]

Tobias: I think so.

Jake: That little town is now called San Francisco, and in 1852, six years later, there’s 36,000 people there. It’s the port where everyone comes in to then try to go get gold. People came from all over the world, about half of them came from the US, most like the East Coast, and to get there, I don’t know, if you realize that that time was a huge ordeal. There’s no easy way to get from the East Coast to the West Coast, or vice versa. You had to sail down around the tip of South America, and it took five or six months for you to get from one place to the other.

Now, there was a shortcut where you could go and sail down to Panama and then ride a mule first for a week and a half through the jungle, and then take another steamer up to California. But it’s incredibly difficult to get here. What’s even more amazing is all these supply ships that are coming to San Francisco, the guys who are the crew ended up just leaving the ship, they can’t ever sail them. They’re basically shipwrecked at that point, because they all go looking for gold.

Bill: Hmm.

Jake: So, there’s a bunch of stuff that supposedly might have been built out of these old ships in San Francisco. There’s supposed to be a restaurant that was built from a ship that got crashed, because no one was just using it anymore. Anyway, here’s another interesting little tidbit. There’s so many men involved here, lots of men and not very many women. They end up doing the social mores given what they are, the freedom of it, there’s a lot of cross dressing actually that happens, and the men would then do– they would like– some men would wear a handkerchief at these dances to be the woman in this social interaction. There’s some theories that think that the social fluidity of San Francisco, and it’s a clear history and heritage, might have come from that initial relaxation of social mores.

So, people are panning for gold, and you can find it relatively easily. But soon, that’s all gone. Now, they have to– the technology has to advance and you have to get more invasive to actually get the gold out of the mountain. It actually goes corporate. You need capital formation, and they start placer mining and hydraulic mining, which is basically just shooting a firehose at the mountainside and washing it away, eroding it, and then capturing the runoff and filtering through it to get the gold nuggets out.

Well, unfortunately, also a bunch of heavy metals are released into the environment when you do that, and there are still parts of the Sacramento Valley that won’t grow plant life, because of the runoff from all this hydraulic mining.

Tobias: What is it? Mercury or what did you find in it?

Jake: I think it’s mostly, yeah, mercury, but I don’t know what other– So, for basically from that time until now, there’s been about 3700 tons of gold take it out of the mountains, which is about 2% of the 187,000 that had been produced basically from the beginning of time. Now, what was the average experience economically of people who are making this huge move? About half of them made a modest profit, not really much to write home about, but most of the late arrivals were completely wiped out. All the gold’s gone, everything’s expensive. Most of the merchants eventually end up failing too, the ones who popped up to service this population. Save for a few notable exceptions like, Levi Strauss, who created denim overalls that were very popular, and so Levi’s is still a brand today.

The California Dream

Now, there’s some interesting social implications that came from this gold rush mentality, and it really gave birth to the California Dream. Before that, the old American Dream was a Puritan’s version, Benjamin Franklin, get a little wealthier everyday type of mentality. Well, now, it’s like you get rich quick, and it’s usually some combination of audacity and good luck that come together to get you super rich overnight. We saw that in agriculture in California at later periods. Oil drillers, like Getty, obviously, Hollywood and movie making, and people coming to be actors and actresses and wanting to get rich overnight and famous. Airplane manufacturing, and then, computers and chip manufacturers and Silicon Valley when you look at it– and dotcom, obviously, that dream, that California Dream, it’s been unicorns all the way down since then.

Tobias: [laughs]

Jake: So, it’s interesting. Let’s maybe tease out then some interesting things today, which I think sort of relate to actually cryptocurrencies, which might be a similar modern day gold rush. Whereas it’s a get-rich-quick-dream that everyone is on. I tend to think that the majority of them will probably not get rich quick. I think it also shows it can be a distraction from the real creation of economic value of goods and services for people. Because just like gold– Them finding gold in the pan and in the river didn’t create goods and services. Neither does bitcoin create goods and services necessarily. It’s just a means of transacting.

Interesting enough, the actual Sutter’s mill, the one that was built, the miners came, and they tore it down, because they needed the wood to make little shanties and burn it to stay warm. So, we took productive capacity of like, “Hey, we need a lumber mill to create things,” and we went a step backwards in advancement, which gets a callback to one of the segments we had quite a while ago on Eugen Böhm von Bawerk’s work on the margin utility of grains of sack, I don’t know if you guys remember that one.

Tobias: Yeah.

Jake: They took a lumber mill that could produce lumber and we had to burn it to stay warm basically so that people could go looking for little shiny bits of metal in the river. And then, the last thing is maybe both of them have trashed the environment in ways that’s an eerie parallel. I have one more discussion point, but anything you guys want to talk about in the last 10 minutes of me rambling?

Tobias: Goob is saying, “Listen to Bill and Preston podcast, and then see how you’re wrong Jake.” So, Bill, you better give us the summary.

Bill: I never said anything about anything.

Tobias: No, there is a comment.

Bill: I understand it. I understand. I am not the arbiter of bitcoin truth. I think Preston has a very articulate and thought-out answer, and people should listen to Preston for Preston’s opinion. I do not know anything about bitcoin for real.

Tobias: Can’t summarize what he said?

Bill: It’s hard to summarize two hours of really thoughtful discussion in a quip. I think if people are into it, they–

Jake: One tweet. Go.

Bill: Yeah, look, I’m not a hater or a lover of bitcoin. That was a conversation I wanted to have, because I think Preston’s an interesting dude. For me, I view bitcoin as the similar idea of basically just like short fiat or short-term currency that it’s priced in. I understand the elegance of the math, and I don’t have many deeper thoughts than that. I wish I had this great answer, but look, if you don’t like dollars, I don’t mind a system that was created to allow people to keep their wealth in a mathematical formula. If that’s what they want to do, then that’s fine. If it all goes away, though, that wouldn’t shock me. If it explodes higher, that wouldn’t shock me either. I don’t really– I don’t know.

Jake: Doesn’t it sound like a lot of storing of wealth if you have these really large bookends on where it’s going to go?

Bill: Well, I think Preston would say that you don’t. I just haven’t done the work to have an informed conversation about it. I know that it’s incredible for ratings, and if I truly ran a media company, I would talk about it nonstop. Outside of that, I have no strong opinion.

Jake: That’s fair. Go ahead, Toby.

Tobias: I was just going to say that the parallels between gold and bitcoin, I think, are fairly similar in that it’s like gold getting pulled out of the ground is a fairly useless activity, because we don’t use it for anything, which is one of the reasons why it’s a good currency, because it’s not consumed like silver, which is used in lots of technical applications.

Bill: Can I just say one thing real quick? Somebody says in the comments like, “It’s used for criminal activities makes it immoral for me,” then don’t use cash either.

Jake: [laughs] Yeah.

Bill: That I don’t buy.

Jake: Yeah.

Tobias: That’s true. That’s true of anything. That’s a unit of exchange. It’s going to be used for good things and for bad things. You can’t hang it for that.

Bill: Yeah, I don’t know. Dalio buying it like– I don’t know. When somebody says something like that, what does it even mean? What percentage of Dalio’s net worth? How much marketing dollars did he get out of buying it? I don’t put any meaning in reading that somebody bought it.

Jake: Agreed.

Tobias: But it’s just another currency. From my perspective, I’d say it is a currency if you don’t like the way that the dollar is being treated by the Fed, because they’re pumping so much money. Yeah, you can get out of it, and you can get into Bitcoin, Ethereum, or one of the other shit coins, whatever you want to do. I just don’t have a view. I don’t know where it’s going to go, and if I don’t know where it’s going to go, it’s hard to kind of invest in it.

Bill: Yeah, I think the answer is some of these– It’s not, but it’s like some of these tech valuations where people are just like, “Well, it doesn’t really matter what happens between now and the next five years and five years, they’re going to be higher.” I guess if you structurally think the dollar is destined to go down forever, then bitcoin could be the store of wealth, I guess. I don’t know.

Tobias: But can’t you achieve the same thing by using– You buy shares in a company. Aren’t you achieving the same thing?

Bill: Yeah, my answer is I buy Charter, which the bitcoin miner has to link on to their connection in order to mine it, and then I get the benefit of John Malone using leverage to charge people whatever currency of transaction there will be later, and then we use that currency to buy in shares. That’s my answer. Do the same with Disney. Y’all bitcoin people get super rich, that’s cool. I hope you spend all your money at Disney, because park prices are going to go up, and I’ll take bitcoin as well as fiat. That’s my answer. It’s only the answer I know how to think of.

Jake: I like that answer.

Investors Get In At Highs And Sell Out At Lows

Tobias: There’s an interesting– Sorry, dude. There’s an interesting phenomenon in the gold that you were discussing that we passed over that, we should talk about, all that gold rush in the sense that is the first half of people may be moderately covered their costs made some money, probably there were definitely groups of people in there who made a fortune. A small group of people made a fortune.

But then by the time the vast bulk of people come into it, and you can see this in any fund that does really well, the cash-on-cash returns tend to be bad. I read about this in Quantitative Value, but it’s not his fault. But the CGN-focused fund, Ken Heebner’s fund for that period of time, was a decade and at the end of the decade, he was Morningstar Manager of the Year, and he had compounded at an 18% CAGR over that full decade. The average investor in his funds lost 11% compound over that full period as well, because they rush in when it’s high, and then rush back out again when it’s low, doing the opposite of what you should be doing. It’s just true of any phenomenon, where there’s a gold rush, the people who show up late, they all lose money on it. If you can‘t see the parallels of bitcoin, then I don’t know what to tell you.

Bill: Well, I guess, this is what I would say in defense of it. The idea that it’s late innings, I think you can still make an argument that it’s early innings. But I say this as someone that doesn’t own it and isn’t comfortable owning it.

Tobias: You know anybody who doesn’t own it or know what it is?

Bill: I don’t own it, and I still don’t really think I know what it is. I guess, I just have a hesitation to have a strong opinion on it because what I will tell you about the conversation with Preston is, that guy’s done a ton of work on it. Now, does that mean he’s right? No, but I wouldn’t call his thesis easily dismissible by somebody that’s done the amount of work that I have. That’s the only opinion that I really will continue to articulate.

Tobias: So, if it has this price that it has to get to in the future, why doesn’t it just go to that price in the interim?

Bill: Because you’ve got a discount what that price is going to be in some interest rate, right?

Tobias: [crosstalk]

Bill: Some discount– [crosstalk]

Tobias: 1.7%.

Bill: Yeah, I don’t know.

Jake: All right, last piece of kind of–

Bill: I should just say something highly inflammatory for rating, shouldn’t I?

Jake: Yeah.

Tobias: We’re already doing it.

The Incredible Speed Of Information

Jake: [laughs] So, this this whole idea of the speed of information and how it traveled then, taking five months to get from one coast to the other. Now, if Elon has a thought that pops into his head, within 10 seconds, it can be in 50 million other people’s heads like that, and-

Tobias: [chuckles]

Jake: – of virality of information right now, it’s gotten so extreme that I don’t know exactly, I don’t not sure we know what all the repercussions are of that, but it’s– One thing I’ve been thinking about is, maybe we just have booms and busts that play out just really fast, and you just have to be really agile right now, because things will go crazy, and then they’ll disappear, and then it’ll be the next thing, and maybe the speed of the cycles is picking up, because of this virality coefficient.

Tobias: Yeah, that’s an interesting point. When I was reading about Commodore Vanderbilt, who put in the Commodore, that’s a very grand name for him. He was Cornelius Vanderbilt, Commodore, by virtue of the fact that he had a whole lot of ships. He was involved in the creation of the Panama Canal and did that trip down. We had to be dragged across the rocks on donkeys, and then or you can carry your boat over as a variety of different ways you could do it. They had to paddle steam– [crosstalk]

Jake: Non-pleasant.

Tobias: Yeah, non-pleasant. That’s right. You’ve died of dysentery. You died of mosquito bites. There are lots of different things that could kill you on the way through. The invention of the paddle steamer accelerated all of those trips. You could get from the East Coast of the US to England in a reasonably short period of time. There was no telegraph until 1841. So, that was how fast information went. You could be arbitrage, you could do gold arbitrage by trading in one place and buying in one place and selling in another, but the arbitrage took months to play out. Whereas now, it’s you know-

Jake: Milliseconds– [crosstalk]

Tobias: – it’s faster.

Bill: Well, there’s less money in, plus the competition. [crosstalk] There is less risk in it. Harder to make money arbitrage doing something over months than a couple seconds.

Tobias: My heart’s not breaking for the HFT guys, I think they’re doing okay.

Bill: Yeah.

Tobias: They are going to be all right.

Bill: It’s true.

Jake: Thoughts and prayers.


Tobias: Yeah, good topic, JT. I guess it’s mine.

Growth Back-On

Tobias: We had a good little value rally from whenever you want to pin it, September, November, last year, and it ran through until about a month ago. So, for the last month, there’s been recovery in the techie-type names, like Ark has bottomed out at $109 about maybe a month ago, maybe it’s a little bit less than that. It’s had a pretty solid value here. Tesla, too.

As a result, I’ve noticed that all the value stuff’s been sucking wind for a month, I don’t have a view on whether that’s necessarily the end of the value rally, although based on our experience over the last five years, there’s some evidence that might be the case. Once you get a three-month rally in value, it’s all over and then it goes backwards. But there’s also the experience in 1999, 2000, and through 2002, was that there were many, many rallies in the techie or growthier stuff that then ultimately turned around and turned into busts. So, I’m just wondering if you guys have any view on where we are, what’s happening?

Jake: I’ll let Bill take this easy one.

Tobias: [laughs]

Bill: Well, I really don’t. Here’s the thing that’s hard for me to understand. I think that the market can get way crazy. I think we’ve all been fairly consistent saying some of these names will be winners. We don’t really know which ones. I don’t think anybody has promised to be the person that can pick the one. Otherwise, we probably wouldn’t be on a podcast doing this shit. We’d probably just be on the beach.

Tobias: Well, it hasn’t happened yet.

Bill: What? That we’ve made it to the beach? This is the problem.

Tobias: The winner hasn’t come in yet.

Bill: Yeah, well, I agree with that. What I was going to say is, there’s a lot of names that are down 50%. Could they go down 90? Yeah. Could they go down and 75? What’s the old joke about a stock that’s down 90, was down 80 and then halved? So, I don’t know. I’ve never really bought the inflation comments. I’ve always thought it’s transitory. I think if that passes, people are going to buy long-duration assets. These things are probably going to resume growth as the sales forces can get– not sales forces in the ticker, but as the salespeople can get it back out on the road. I don’t see why it should stop. I just don’t know where else the money flows to. Growth is so scarce that if you’ve got an asset that’s growing 50%, 60% with 85% gross margins, I think you can tell yourself any story you want.

FAANGs Closer To Value

Tobias: The only point that I was going to make is that the successful tech companies like Google, Microsoft, Facebook probably, throw that in there. The FAANGs, FAAMGs, they’re already sort of– I was going to say they’re already pretty mature, but then they are growing at very high rates still, but I regard those, they’re almost more in the value bucket these days that they’re not super, super expensive. They’re trading on fundamentals more than anything else. Is that fair?

Bill: What are?

Tobias: Microsoft, Amazon– [crosstalk]

Bill: Yeah. I think they’re closer to value than anything.

Tobias: Yeah, but they’re not really caught up in the wreck, and if you look at the way they’ve traded recently, the complaint last year was that Google hadn’t done anything for a while.

Bill: Yeah, that’s right. Even I don’t know when I said that Tyler was arguably value or something, but that’s pretty much flat, despite– it had a run and now it’s down. I think shit just got a little nuts. I think for a bit when you hear Fastly pitched as a software company, and it’s a CDN, which requires capex, it just got a little nutty in certain areas, but a lot of those [crosstalk] is sold off. Yeah, that’s right. That’s SPAC bubble and stuff, but I don’t know– [crosstalk]

SPAC Popularity Indicates Late Stage Bull Rally

Tobias: A SPAC is a rare creature. A SPAC is– The market is so hungry for equity, that people are prepared to just take their equity backed by cash and promise to do something. So, basically, you’re just exchanging your dollars for 80 cents on the dollar, with a chance that there’s going to be some pop that they going to do some– [crosstalk]

Jake: With a lot of ticket stapled to it.

Tobias: Yeah. That’s good enough for me. With the idea that as soon as they announce the deal, it’s going to 10 bag or something like that. That kind of behavior, I think that’s super speculative behavior that you really only see right at the tail end of a bull market. So, I would have thought that was one of the indicia of the late-stage bull. Dying bull.

Bill: Yeah, I guess it depends which SPAC. If you’re buying a SPAC that has 10 bucks in trust for 10 bucks, then I don’t think that’s crazy. If you’re paying $16, you got some air under it. If you’re hoping that somebody SPACs some space company, and you’re paying a 60% premium to trust, then not a game I’m comfortable with.

Tobias: But even in the ordinary course, you wouldn’t go and swap– People would, but you wouldn’t. You’re not going to do the SPAC deal before you see what they’re going to do. Would you?

Bill: I own one.

Tobias: That’s a good point.


Bill: It’s trading below trust and the warrants are going to separate in 45 days or 40 days. So, if I get free warrants, and I can sell a close to trust, then I just picked up free warrants. If I can’t, then I get to put it back to the SPAC sponsor, [crosstalk] some interest.

Tobias: So, it’s an arb. Yeah.

Bill: Yeah. I don’t think that’s super speculative behavior.

Tobias: No, it’s just–

Bill: It’s just like, what the fuck am I going to do with cash? Sit there and collect 50 basis points? And if it’s close to trust, I think I should be able to liquidate it for pretty close to trust. So, I’m just trying to harvest warrants.

Tobias: Yeah. Your downside is nothing and you’ve got some warrant kickers if it works?

Bill: Yeah, that’s how I think about it. I’m just trying to collect warrants in that particular situation.

Tobias: I’m just trying to work out what inning we’re in.

Jake: [laughs]

Bill: I don’t know man. That’s the fun part.

Jake: Bill, you are the scorekeeper.

Bill: I don’t know. I think we might get ready for another run here in some of the crazy stuff, but what do I know?

Tobias: If you have some questions throw them in, guys. We’ll chat about them now. I saw some–

Jake: We will ignore them.

Biden’s Tax Plan

Bill: Here’s the tough thing about tech, and tech investment, I saw somebody in the comment mentioned Biden’s tax plan. These guys aren’t going to pay much taxes. They don’t run at profits. Taxes actually hurt mature cash-flowing businesses more than these growthy names. So, if you were long the growthy names and then taxes came out, I’d even argue that that’s more of a reason to get long, because you’re just further deferring your tax expense.

Jake: Or you’re in Dublin, or–

Bill: Yeah, it’s weird, I don’t know. Any scenario that you can tell me other than valuation compression, I could argue tech wins. So, that’s why I think a lot of people just keep buying it until they won’t.

Tobias: If you have an income stream that’s very material, it’s like a public company big enough to be a public company income stream, and you can convert that into a company that you then sell a portion of it to the public, and so you get your money, you’re just converting your income into capital gains in that instance. It makes complete sense to do it, because the long-term capital gains rate is so much lower than your marginal income tax rate. If that gets changed, which I don’t know exactly what the tax proposal is, but isn’t there some talk about increasing the capital gains tax rate or getting rid of the long-term rate?

Bill: Yeah, probably. I don’t know about getting rid of it, but increasing the capital gains, certainly for people, I think that make over a million dollars or something.

Jake: You think the carried interest will skate through again?

Bill: Yes.

Jake: Too many rich people like that?

Bill: Yeah, 100%.

Tobias: I just wonder if that’s– [crosstalk]

Jake: [unintelligible [00:51:33]

Bill: Well, part of me is like, okay. So, let’s say that the tax rates go up on capital gains. To me, the incentive is to further avoid things like reratings, because then you’re playing a rerating game, then you have to sell the rerating, then you have to pay more tax. So, then I’m saying like, “Well, I guess I should just buy an index, which can perpetually on a tax-advantaged way recycle itself, or some of these more compounder-type names that you don’t have to sell for a long time.” I don’t know. Taxes to me aren’t the thing that brings the house down.

Jake: Yeah.

Tobias: At the margin, though, it should change your behavior, shouldn’t it?

Bill: Well, I guess it’s what I’m saying. I would actually argue that maybe it would push me into riskier behavior at the margin or more long-duration assets. It’s just nuts.

Jake: Powell wins.

Bill: What?

Jake: I said Powell wins.

Bill: Yeah. Well, that’s not Powell.

Jake: I’m joking.

Bill: That’s the government. Yeah.

Tobias: We didn’t talk about Burry’s Tesla puts. Do you guys have anything interesting to add there?

Bill: No, it’s not a stock I’m worth listening to.

Jake: Those are all notional values that get quoted anyway. I’d rather know what the real underlying amount was, and it’s probably some tiny portion of his portfolio. So, it’s a non-headline to me, but whatever.

Investing In Global Shipping

Tobias: Somebody says he’s getting into shipping. I don’t follow his 13Fs that closely, honestly.

Jake: Burry’s getting into shipping?

Tobias: Yeah.

Jake: I didn’t see that.

Tobias: Is it late to the party to be getting into shipping? It felt like shipping was huge last year, but– Maybe that’s when he got into it. I don’t know.

Bill: The part of the shipping idea that I understand is these environmental standards that are coming down the pike, potentially restricting the amount of ships that can possibly be produced, and then you get into the structural shortage, I could see that.

Tobias: What’s been the issue with shipping over the last 12 months? It was an issue before– [crosstalk]

Jake: Canals not working.

Bill: Well, it went nuts when oil was in negative and then they could like jack prices through the roof, because there was no storage, because oil kept getting pumped and nobody had any demand, because the world shut down. That was a little bit too complicated for me to figure out. I think the historical problem with shipping is it doesn’t generate any cash and a bunch of schmucks have run the companies.

Tobias: Yeah, I think you want to own the steel rather than the equity. That’s what I’ve been told by folks in that business.

Bill: It seems like an incredible business to lend to.

Tobias: But it seems like it’s a pretty good growth– In terms of secular growth, shipping’s got to be– We’re just going to be sending more and more stuff around the world over time. So, it’s got to be a pretty good–

Bill: I don’t know, man.

Tobias: Whereas the problem that the supply is so constant, but you don’t really ever make any money out of it.

Bill: I could argue that supply chains get more localized and train freight or something is the beneficiary over time.

Jake: Did you mean goods or armies?


Jake: [unintelligible [00:54:53].

Bill: Yeah, I don’t know. Shipping’s hard to me, but it could work. [unintelligible [00:54:59] did a lot of work on it. People seem to like to cite him. So, that’s where I’ll direct people to. That’s how the echo chamber works.

Jake: Yeah. [laughs] Well, there’s the definitive answer. It’s on Twitter.


Bill: Yeah. I was on one name I asked for feedback, and a couple of people gave me feedback, and it all came back to the same guy. I was like, “Okay, these are not varying opinions. It’s just one guy.”

Tobias: That’s how it all works.

Jake: Big patient zero.

Tobias: You’ve got to track it back to patient zero.

Bill: Yeah, that’s right.

$PYPL Added A New Customer Every Second Last Qtr

Tobias: PayPal added a new customer every single second last quarter. Lower regulatory risk than any big tech. Any thoughts on the stock?

Bill: Nope.

Jake: [laughs]

Bill: Next.

Jake: Nope. [laughs]

Tobias: JT?

Jake: I don’t know enough to have an opinion at this point.

Tobias: Yeah, neither do I. A few people have been talking about though. All that stuff is always going to be a little bit expensive looking to me, but I can see how, it’s a great business. I bet that eBay is kicking themselves that they got rid of it. Probably wish they’d gone with PayPal.

Bill: Yeah, I don’t know. I’d ask Elliott Turner. I go to bet at two again, you’re $305 billion business. So, let’s see what JP Morgan is not that they’re the same business I get. They’re not the same business. So, it’s 35.50 of JP Morgan. Do that math, 70% right. I don’t know maybe could work.

Buffett Dumps Stakes In $WFC & $CVX

Tobias: We think about Buffett tipping out of Wells Fargo completely and Chevron, dumping half the stake.

Bill: I said he was wrong when he did it. That was 70% ago. I think he’s been wrong on that. I don’t think he and Charlie– Well, Charlie held Wells. I don’t think Buffett’s right on Wells. There’s something in his mind that I think that fundamentally misassessed that situation. Including when he held it, and it was clearly run like a shithouse, and he defended them.

Tobias: It’s funny, because I didn’t realize it had such a long association with, since 1975 or something like that?

Bill: Yeah, I mean, this is not the question for me, it’s a question for what’s his name? Mead? The guy that was on your pod?

Tobias: Adam Mead.

Tobias and Bill: Yeah.

Bill: It’s a question for him, but I think Buffett has had good success with banks when he bought them and they could grow. When you think about the Wells that he bought in 1975, there were a lot of locations that they could still open up. It was a constant strategy that didn’t have a lot of disruption risk.

Jake: I think he bought most of it in early 90s, after California state crack up.

Bill: Yeah, no. That’s right. He didn’t do that.

Tobias: It’s probably [crosstalk] 75.

Bill: M&T Bank. What else has he owned? US Bank, I don’t know– [crosstalk]

Jake: Salomon.

Bill: Yeah, that wasn’t a great one.

Jake: [laughs]

Bill: So, I don’t know. I think the problem with Wells is it’s big, and it’s hard to see how they’re going to continue to grow other than like– They could grow on a per-share basis by eating themselves, but their North American focus, how are they going to continue to grow and they should arguably take in branches, I don’t know. I think that’s probably what he was thinking.

Tobias: I just think, he never sells. Very, very rarely sells. It’s grown pretty substantially. So, there’s a pretty big tax hit. That’s about as loud as he ever speaks on anything if he just ships it like that.

Bill: Yeah, well, he was wrong.

Tobias: But you don’t know what he’s– He is got other considerations besides just what the stock’s going to do, right? He’s thinking of something else.

Bill: I guess, man. I don’t think we need to defend him on this. He was wrong–

Tobias: I’m just interested to know.

Bill: I’m just telling you what I think. I thought it for a long time. I think he defended a previous management team that when I read that house report from the Republicans on Wells Fargo, it was shocking how bad that bank was run, and he defended them the whole time. Then, Scharff came in, and I think something in his head was like, “Well, this guy doesn’t want to even live in San Fran. So, I don’t trust this guy,” or something. Meanwhile, Moynihan did the exact same thing at Bank of America. Now, Moynihan is some genius that everybody wants to be associated with.

Something’s wrong. Maybe it’s because he thought that the culture is rotten to the core, but why he thinks it now and he didn’t think it three years ago is just very, very hard for me to understand, because that’s when the culture was actually rotten. Now, that all of management is turned over and the entire board is turned over, he finally sells? That doesn’t make sense to me. Win, by the way. It was like $130 billion on $15 billion normalized? I don’t know. I don’t get it. Never have.

Tobias: All right, on that note, folks, that’s it. We’ll see you next week.

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