VALUE: After Hours (S04 E023): Bear Markets, Acquirers Multiple and Net Nets; Buffett’s See’s Letter

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In their latest episode of the VALUE: After Hours Podcast, Bill Brewster Jake Taylor, and Tobias Carlisle discuss:

  • Lessons From The History of Bear Markets
  • New Record Number Of Net-Nets Since 1999
  • Learning From Buffett’s 1972 See’s Candy Letter
  • A Number Of Acquirer’s Multiple Deep Value Stocks Trading Cheap
  • How To Calculate The Most Predictive Price For Any Commodity
  • Rates Will Be Down In 5 Years
  • Is This A Bottom Or Bear Market Bounce?
  • Ignore The Facts Around Lumber
  • 70s Inflation vs Rates
  • A Basket Of Net Nets Would Do Well Here
  • Meta Saddled With Underwater Stock Options
  • 2023 The Year Of Deflation
  • Will The Housing Market Crash?
  • Thermo Fisher (TMO) – High Quality Business
  • Are Energy Company Earnings Sustainable?
  • Are Airline Companies A Good Investment Now?
  • Dalio Short Europe Stocks
  • Crypto Melt Down

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: It is 10:30 AM on the West Coast, 1:30 PM on the East Coast. It’s Value: After Hours. I’m Tobias Carlisle. I’m joined as always by Jake Taylor and Bill Brewster. What’s up, fellas?

Jake: Summer solstice on Earth here on– [crosstalk]

Tobias: Is solstice.

Jake: If you celebrate the Sun gods, then today’s your day.

Tobias: Winter solstice in the Southern Hemisphere. It should be.

Jake: Don’t discriminate.

Tobias: Don’t discriminate. Yeah, this is the holiest day of the year. Sacrifice the ball, watch the Sun go down.

Jake: Well, if you think about all of the chemical elements that create life, they came from inside of a Sun. So, it makes some sense to– All of the– Uh-oh, we’ve lost, Bill. All the energy basically that fights entropy for us on Earth comes from the Sun. So, if you weren’t going to worship, the Sun makes a little bit of sense.

Tobias: Some wild moves over the weekend in bitcoin. Bitcoin tried to fall off a cliff. It went through 18,000. Got to a 17,000 handle. I got a screen cap at 17,663, which I think was quite close to the bottom and it’s had a pretty substantial rally since then. It’s up 25% or something since then.

Jake: [laughs] Store value.

Tobias: Like Tesla, you say 11% on the day.

Jake: I think that’s what Bill said before we came on.

Tobias: Bill’s here. He’s just dropped off momentarily.

Jake: [laughs] He is taking a little nap. What to do with you, Toby?

Lessons From The History of Bear Markets

Tobias: Yeah, I spent last week looking at– Bear markets are completely unpredictable, markets are completely unpredictable. I just was interested to see some statistics. This is what I’m going to be talking about a little bit today. I learned this morning that this is the second worst start to a year ever. The worst start to a year was 1932. It was down about 40%, I think by this point and we’re down about 22%. And so, I went and pulled up my old chart of bear markets and looked at the number of every quite a few. This is the one that goes back to 1871. This is based on the Shiller data.

Jake: Shiller, I barely knew her. [chuckles] I’m sorry.

Tobias: I’ve forgot to count them up, but I think that are a dozen or something, maybe more than that 20% since 1871. The median drop is 38%, median time period is 24 months, so, two years. But the average is a bit longer than that. The average is skewed by two that are pre the 1932 crash that they were like 10-year plus bear markets.

Jake: Can’t do that. That’s impossible now, right?

Tobias: Oh, my God, I hope so.

Jake: [laughs] They probably didn’t have as long a bull market either though then, did they?

Tobias: I’m not sure. It was a lot more volatile.

Jake: Yeah.

Tobias: Pre-Fed was more volatile. I think there were more and I would have said shallower, but that’s not true. That seems like– I don’t know. Like a 10-year bear market, there’s probably a few cyclical bulls and bears inside that. This might be a secular, that might be secular bulls and bears.

Jake: Mm-hmm. So, what are you saying? Go long as you can right now or stay out? What’s the play?

Tobias: Well, I don’t know, I don’t know.

Jake: [laughs]

Tobias: We’re down 22%, median’s 38%.

New Record Number Of Net-Nets Since 1999

Tobias: But then more specific to value, I went and looked at the number of net-nets that are available.

Jake: Ah, yes.

Tobias: And there are a record number of net-nets available since 1999. [crosstalk]

Jake: Wow, it’s more than 2008.

Tobias: More than 2008, which I was surprised by. Yeah. This is just US only. This is US only.

Jake: So, the tide goes out and there’s just all kinds of garbage sitting on the beach, huh? [chuckles]

Tobias: It really is garbage. I want to have a look at this. Well, I shouldn’t say, there’s a lot of Pharma in it. There’s a lot of biotech that has raised money and has traded low down below. So, it looked like just eyeballing. It was 88% Pharma. But I had some people asking for all of Pharma net-nets and sub-liquidation. So, there are lots around.

Jake: If you had a certain and good ETF for that, that lives that’s just all the-

Tobias: Net-nets.

Jake: -net-net Pharma or the below cash Pharma.

Tobias: I think the index is what you’re looking for there.

Jake: [laughs]

Tobias: I think XBI.

Jake: I don’t get you. Oh, okay.

Tobias: I just make sure that’s true. What is XBI? Yeah, that’s the spider. S&P biotech ETF, it’s up 6% today. It’s 12.5% over the last five days. Yeah, I think that the index gets you pretty much there.

A Number Of Acquirer’s Multiple Deep Value Stocks Trading Cheap

Tobias: The other thing I looked at was the number of Acquirers Multiple stocks around sub three. So, three times EV/EBIT.

Jake: Yeah.

Tobias: Yeah, so I cut up the Chinese ideas out of the list. That was all domestic US, as far as I could make it. Here’s Billy.

Jake: Yeah, what’s better. Oftentimes, net-net will show up as inventory heavy or AR maybe heavy, or was it better to have it in the cash pile like a pharmaceutical? But who knows where it depends on whether you’re getting liquidated or not, huh?

Tobias: It does make sense. I’ve never looked at that specifically. I think if you have a whole lot of inventory and it suits that’s probably not what you want. Fast fashion inventory is not what you want.

Jake: Oh, suits are maybe making a comeback, though.

Tobias: Maybe you can shift it. I don’t know. Yeah, but it will be like that.

Jake: [laughs]

Tobias: The cut will be 10 years old, will be like flared.

Jake: Yeah. Real baggy, zoot suits.

Tobias: [crosstalk] [laughs] Yeah. Big shoulders. I guess that stuff comes back around. You just stick it in inventory from the 10 years.

Jake: Right. Yeah, keep moths out and you’re fine.

Tobias: Yeah, I have gone through the big suits and the skinny suits and I guess, we’re going back to big suits now.

Jake: I’m not a fan.

Tobias: Big suits?

Jake: Yeah.

Tobias: When we were in the skinny suits, the stovepipe pants, not that long ago. Five years ago, whenever that was, the really loose-fitting suits look like–

Jake: They look like a slob, right?

Tobias: You look like you got two yards of excess fabric on you.

Jake: [laughs]

Tobias: Yeah, so, the other things– [crosstalk]

Bill: The Hammer pants.

Tobias: The Hammer pants, yeah.

Jake: Yeah.

Tobias: He made them out of curtains or something.

Bill: Yeah, those look great.

Tobias: The other thing that I looked at was the number of– Just before you came, Bill, I was saying, I looked at the number of net-nets. There’s more net-nets available now than they have been at any time since 1999. Vast majority– [crosstalk]

Bill: You have to get bearish. Nothing to buy.

Tobias: Most of them are net-nets. Most of them are biotech– [crosstalk]

Bill: Yeah.

Tobias: So, they’ve raised money. I think that in 2008 that was a pretty good hunting space. They did pretty well as a group. Their rate of discovery is still going to be the same. Now, you’re just getting a bet on solid cash, which is probably pretty good bet as a– [crosstalk]

Jake: What, anything that stands out and looking at that list of the 3x EV to EBIT?

Tobias: I didn’t know them well enough. I just haven’t spent enough time digging around the net-nets. The thing about net-nets is though, they don’t really pay for much additional work in there, I don’t think.

Jake: [laughs]

Tobias: Too hard to predict.

Jake: Yeah.

Tobias: The sub phrase was interesting, too. I ran the Acquirers Multiple sub three times. Just as an antidote to where bear market, who knows? We could be down another 20%, 30%. Who knows? We could rally another 20%, 30% from here. No one’s got any idea. All of the news flow is really bearish. I just have a look and see what the value was beginning to look like, really deep value. So, three times EV/EBIT, there are almost a record number around. So, we’re very close to the last quarters of 2008, the last quarter of 2000– [crosstalk]

Jake: Q1, 2009.

Tobias: Yeah. I said according to that account, I thought the beginning of Q4 2008, which means it’s like, maybe there’re two quarters to go. Who knows? It’s good time to get hunting. Probably, a lot of volatility to come. Potentially, it doesn’t mean there’s not a lot of volatility good time to go on. Hoover up some cheap value. We’ll spend some time over the next few quarters hoovering them up.

Jake: Stuff like Lehman and October 2008.

Tobias: We haven’t really had a moment like that yet, have we?

Jake: No. Maybe crypto, you could say, yeah.

Tobias: The crypto had a few. I thought about that, too.

Jake: I don’t know.

Bill: I don’t know. Is it big enough to count?

Tobias: I don’t know.

Jake: [crosstalk] That was your whole net worth, I guess.

Bill: Yeah, but then you’re an idiot.

Crypto Melt Down

Tobias: So, what’s been smashed up in crypto? I don’t really follow that closely. There were two big ones, right? Two big busts.

Jake: Yeah, what Luna went– And then, what was this one last week? I can’t remember the names either. I try not to dig through the– [laughs]

Tobias: I’ve only got enough room for set number of tickets that I don’t like to have. [crosstalk]

Bill: Yeah, I don’t know. [crosstalk] I just know Twitter was very happy that crypto was melting down.

Jake: Yeah, some real schadenfreude that happened in there, huh?

Bill: Yeah. Which I said I didn’t really care very much, and that I would keep my mind open, and that made people upset.

Jake: [laughs] We need you to be closed minded, Bill.

Tobias: The tough thing is– [crosstalk]

Bill: Well– [crosstalk]

Jake: And agree with– [crosstalk]

Tobias: Celsius, Solana. Thanks, fellas.

Jake: Okay.

Bill: The only reason that I’d heard that I understand is I guess that people were telling other people to have fun staying poor. I generally don’t care when somebody that’s trading– [crosstalk] A coin named after a bodily function is telling me to have fun staying poor. Okay, whatever.

Jake: [laughs] Yeh.

Tobias: You don’t get it. Not in a way.

Jake: Not going to make it.

Bill: I’m not going to get rich if that’s what it takes.

Tobias: It’s amazing that we’re this far into a bear market or whatever it is. We’re six months in or 18 months in depending on where you’re going to, like, put the actual starting point. There’s still stuff around– What’s the Tesla rip-off? Nikola is still out there with a three and a half billion-dollar market cap.

Jake: [laughs]

Bill: Yeah, there’s a lot of that, I think still.

Tobias: Ark’s still getting flows. If we’re moving through Kubler Ross stages of grief, I feel we haven’t moved much beyond the very first one, which is denial.

Jake: Yeah. Maybe not even that.

Tobias: It’s when you get into acceptance, that’s when it’s time for a rally. I don’t know. I don’t feel none of that’s scientific, of course.

Bill: I’ve accepted. So, maybe my portfolio will bounce. Probably not. It’s probably going down another 30% or 40%.

Jake: But it’s the friends we made along the way.

Tobias: [laughs]

Jake: Yeah, we’ll see. Tell that to my kids when I’m hoeing myself out. I got to get in the gym so I look good when I have to do that.

Jake: [laughs]

Bill: I’m not trying to give stuff away.

Tobias: It’s the internet mate. There’ll be somebody out there who’s into that kind of thing.

Bill: You think?

Jake: Yeah.

Tobias: Niche. Yeah, it’s just niche.

Jake: Whatever [crosstalk] out there.

Bill: Sorry for what my Twitter feed is going to become.

Tobias: [laughs]

Jake: Yeah.

Bill: Soliciting pictures of my toes.

Tobias: [laughs]

Jake: Lot of brown sugar in that oatmeal. [laughs]

Bill: That’s right. Be whatever it needs to be.

Tobias: GameStop still out there. Yeah.

Jake: That’s a good point. Yeah.

Tobias: It’s funny how correlated all of that crypto is to the market. It’s very techy. It’s not correlated to gold, which you might as a store of value. Inflation hedge, you might think. No, gold hasn’t done anything. Has gold woken up, yet?

Jake: I don’t think so.

Bill: I don’t know.

Tobias: Still around 1800-ish.

Tobias: Gold’s not aware that there’s inflation going on yet.

Jake: Yeah, you think maybe– Is there some percentage of people– Let’s say, your worldview is that you don’t trust fiat currencies and therefore you don’t want to participate and you just got obliterated on bitcoin. Do you go looking for something else and find gold to scratch that itch for you?

Bill: Peter Schiff, hope so. He’ll sell you the solution.

Jake: [laughs] How much does it cost?

Bill: I don’t know. I think I’ve never really looked into his solution.

Jake: Okay.

Tobias: Astrid Wilde says, “​We’re up to a half dozen liquidations in crypto now. Celsius, 3 Arrows Capital, Luna.” Yeah.

Jake: One, we can’t say.

Tobias: AMC long gold. We can’t say that one?

Jake: Oh, what Bill was referencing earlier.


Jake: Yeah.

Tobias: Jesus.

Jake: Come on. [laughs] This is a family show.

Bill: [crosstalk] Those are real thing. In case people forget, that was actually a thing. It’s not something we made up.

Jake: Did they just say that one on CNBC at any point?

Bill: I hope so.

Jake: Oh, we got to find a clip of that if they did.

Bill: Oh, it would hilarious.

Jake: That one belongs in the whatever the financials– [crosstalk]

Bill: Andrew Ross Sorkin trying to cover that seriously would be a very funny clip.

Jake: [laughs] Faces getting all red.

Bill: It’s an NFT that I would buy.

Jake: Now, you are talking.

Dalio Short Europe Stocks

Tobias: “Ray Dalio has 10 billion dollar short position on EU equities.”

Bill: Yeah, that makes sense.

Tobias: You never know what those things are. That could just be hedging something else up. I don’t know.

Jake: Yeah, is that nominal on option?

Bill: Well, they look at asset classes, right?

Jake: Yeah.

Bill: This probably why there’s value– [crosstalk]

Tobias: 15 uncorrelated asset classes.

Bill: Let’s say that you’re bullish on commodities and let’s say that you’d naturally skew bearish towards the economy and equities in general, the EU doesn’t seem to be the place that you’d want to go running to. It seems a reasonable place to short. [crosstalk] EU long like emerging market commodity producers that trade would make sense to me.

Tobias: Dylan Thompson points out it’s $140 billion AUM. So, not a huge position relative to the AUM. I’m amazed that they can get it on. That’s a big bet to get on.

Jake: and Bill: Yeah.

Bill: Yeah, they’re dealing with problems that I am not.

Tobias: Shortings not easy, even small amounts. You really stuck in a $10 billion. Well, if that moves against you, you just got to wear it. You’re Melvin Capital all the way through.

Bill: Yeah, I don’t know. Probably, I’ve something else.

Jake: Fair enough phone booth.

Tobias: How’s AMC doing these days? Don’t want to dunk on those guys too much, but– [crosstalk]

Jake: The Top Gun saved them. I don’t know.

Bill: That was a good movie.

Tobias: Haven’t they already transitioned to goldmine?

Bill: Yeah. No, they had that position in a gold miner. But I don’t know.

Jake: I think it didn’t make sense to me on that movie is, why do they have to fly the junkier F18s?

Tobias: Don’t give it away. I haven’t seen it, yet. Don’t give away the ending.

Bill: Yeah. No, I think– [crosstalk]

Jake: That’s not going to ruin anything.

Tobias: I’m joking.

Bill: No, I don’t know. But I think– [crosstalk]

Jake: Why can’t we have the most badass ones?

Bill: It has something to do with maneuverability, man.

Jake: Doesn’t anyone own Lockheed Martin? [laughs]

Bill: Because Tom Cruise needed it.

Jake: Oh, okay.

Bill: You haven’t seen it yet, Toby?

Tobias: No. I saw the first one. So, I figure I’ve got the idea of what happens in it.

Bill: No, you don’t.

Jake: [laughs]

Bill: No, you really don’t. I took my kids-

Jake: It’s not a remake.

Bill: and that [crosstalk] a decision. Though, my friend told me that the language is much better than it was. It was not as good as he made it sound, but I’m doing it again.

Jake: Like, there was bad words, you mean?

Bill: Yeah, the frequency. I was told that there wasn’t many, but there were more than I thought and the six-year-old picked them all up.

Jake: Listen, if you’re getting shot at– [crosstalk]

Bill: Giggling like a school girl every time the word shit comes out.

Jake: It’s titillating.

Bill: Yes. I don’t know how AMC’s doing.

Tobias: We should transition into some semblance of-

Jake: A show.

Tobias: -a podcast here.

Bill: Should we, though?

Jake: [laughs]

Tobias: What have we got?

Jake: Yeah. You want some veggies?

Bill: Yeah.

Jake: All right.

Bill: That’s a good thing to chew on.

Learning From Buffett’s 1972 See’s Candy Letter

Jake: This week my friend, Haren Bhakta sent me this 1972 letter that Warren Buffett wrote to Chuck Huggins, who was the president of See’s Candy. This is shortly after acquisition and it’s funny because it really is Buffett was this kid in a candy store and he went and visited one of the candy stores that [unintelligible [00:18:26] like LA. [chuckles] It was a little funny to read, because he is a kid in a candy store and he’s getting way down in the weeds of this, but I guess, when you dole out $25 million or whatever to buy it, you get pretty excited. But I thought I would run through some of the highlights of it and then maybe some of the takeaways. So, does that sound fun for you guys?

Tobias and Bill: Yeah.

Jake: All right. The first quote out of it is, “People are going to be affected not only by how our candy tastes, but obviously, by what they hear about it from others, as well as the retailing environment in which it appears,” which includes the class of the store, the packaging, and the surrounding merchandise. “The surroundings in which our candy is offered affect potential customers mental and even gastronomical impression of our quality.” Right away, this reminds me of Rory Sutherlands terrific book, Alchemy, which looks at really this idea that there’s an engineering answer for everything, but then there’s also usually a human answer as well that has to do with our perceived reality. He had this famous story, Sutherland did about. These engineers were looking to spend billions of dollars to straighten out part of this track to shave 30 minutes off of a four-hour commuter train ride.

Well, instead for 1/1000th of the cost, they could have put in big screen TVs into every seatback, and had models serving drinks, and you wouldn’t even want to get off the train at that point. The fact that it’s four hours doesn’t bother you. Buffett’s recognizing that even the taste of the chocolate is impacted by the surroundings around it and probably, every Michelin rated restaurant understands that all. That’s why there’s so much exactitude and sweeping the breadcrumbs up with the little brush, like there’s just a lot of attention to detail which makes everything taste better. So, Buffett was complaining about how stowers had in the display at this store was organized in an exclusive and attractive part of the store, and the See’s was just sitting on this counter with 25 other cheap offerings of cheap candy and this generic signage that the store had just written on the back of a napkin basically. I think he wasn’t very happy about it. [laughs]

Buffett said, “They have to be offered in a way that establishes them as something that’s very special and they need to be insulated away from inferior products.” They started talking about all this stuff requires small scale testing, which is interesting and there’s a book that came out probably five or six years ago called Little Bets that uses this idea of lots of little iterations of trying things out to see what works, and fail small, and never bet the farm. Then, he starts getting into, when they do take See’s outside of the existing territory, Buffett subscript suggested this writing up this descriptive material for it, this little story book, a booklet that might be called the most famous kitchen in the world. He talks about how Coors got a lot of mileage out of all of their beers coming from this one specific factory in Colorado with the best water. He said that there’s a mystique attached to products with a geographical uniqueness. He talks about this, maybe there’s this 80-acre vineyard in France that supposedly has the best grapes, but he said, “I’ve always had the suspicion that about 99% of it is in the telling and about 1% is in the drinking.”

Then he said, “It should be very hard to get available only periodically and then to the consumer, apparently only in limited quantities.” So, what this is telling you is that Buffett understood the McRib before it was a thing. He got consumer psychology way back in 1972 when he was 42 years old and he’s been playing the game ever since. I thought it was an interesting little– I love to get his real time thoughts in a specific situation at very early days just to see like, “Well, what the hell was that guy thinking about at that time?” So, that was that was Buffett’s letter to Chuck Huggins.

Tobias: That was fascinating. Do you visit See’s stores to buy chocolate or just to do a channel check or whatever?

Jake: I have been to a few several. There’s one two miles from my house. But I typically won’t go there to buy candy. I only buy See’s mostly at Berkshire meeting or actually, I have a fun tradition of buying a box usually in the airport and getting stiffed and taking it with me if I’m going to another shareholders meeting, especially with friends are I’m traveling with and making it a little bit of a festive event for us, but yeah.

Tobias: It’s a good idea. I’m always struck by a few things. One, there’s one near a house. My wife likes one of the dark chocolate peanut brittle.

Jake: Oh God that’s so good.

Tobias: Unfortunately, I go and get her some of those every now and again. It’s funny for a candy store. It’s huge for one thing. It’s much, much bigger, I think than it needs to be. It’s completely white on the inside.

Jake: Yeah.

Tobias: All of the chocolate is in basically cellophane bags or out on display in this little paper cups. There’s not much packaged up. But it’s always really busy, too and it’s extraordinarily expensive. So, it’s a good mix. It’s not intuitive to me at all, that’s the way that you do it.

Jake: Is it a pretty old store, do you think? Because it started down in LA so, I wouldn’t be surprised if it was one of the earlier.

Tobias: It can’t be that all. It’s in a reasonably newish sort of– [crosstalk]

Jake: Well, yeah. Okay.

Tobias: Yeah, like row of stores. But it’s off Hawthorne. There’s always a lot of traffic on Hawthorne. It is very busy road here. But there’s always lots of traffic in that parking lot as well. At any time of the day, I always try and sneak down at some time where I don’t think there’s going to be anybody there. It’s always busy. It just– [crosstalk]

Jake: Almost like sugar is addictive. [laughs]

Tobias: But there’s other easier options for getting this– I don’t know. I’m aware of See’s, but only by virtue of the fact that I’m like Buffett Berkshire See’s, not the other way around. And then lots of people know about it otherwise, I guess.

Jake: Oh, yeah. I remember getting it as a kid, really young, maybe three or four and it would just be only during Christmas. There’d be one box, you could have a half of a piece per night kind of thing. And so, it felt very special, and very exclusive, and quite the treat.

Tobias: I can see the margins as I’m walking around the store.

Jake: Yeah. [laughs]

Tobias: There are big margins on this stuff.

Jake: Yeah.

Tobias: I don’t know. Good business.

Bill: Never had an attachment. Ghirardelli was probably the closest thing that like a chocolate store that I had an attachment to.

Jake: Oh, yeah?

Bill: Yeah. My buddy, Alex was out at a couple of this. He said that it looks like they mean some reinvestment.

Tobias: [laughs] They really do. They’re utilitarian. But I guess, it works because it’s busy. The packaging doesn’t look expensive, either.

Jake: They don’t sell a ton more poundage wise than they did over the years. It’s just the price has just [sound].

Tobias: The price has gone up.

Jake: And guess what? It hasn’t gone up that much. The machinery to create it.

Tobias: Yeah, the prices are eye opening. Every time I’m in Omaha, we go to that little store in Omaha. It’s just mind boggling what they can charge, but they sell so much of it. If you get something out, good for them.

Bill: Yeah, well. Omaha is a little different. You can do a lot to your cult members.

Tobias: But it’s the same deal.

Bill: Yeah.

Tobias: I think that there’s a little discount in Omaha, isn’t it? Well, maybe there’s not.

Bill: I don’t know. I’m usually paying no matter what he’s charging there. Because I need to get something to bring home show that I was thoughtful.

Jake: $25 million have to buy it and I think it’s spun off now north of $1.5 billion over that time period. You just got to do that one time in life. Just find one of those. [laughs]

Bill: Yeah, it’s pretty good.

Tobias: Do that one time and then reinvest those numbers, just even at a SPY and that’s a very, very big number. [crosstalk] Spend the first 10 years reinvesting and then, go bananas.

Bill: Yeah. I’m going to retire if that happens.

Jake: [laughs]

Bill: I will not be working.

Are Energy Company Earnings Sustainable?

Tobias: Everybody think about energy here? Energy’s had a pretty good run and everybody seems to be just as the total segue from chocolate to energy. I don’t know.

Jake: [crosstalk] necessities.

Tobias: Yeah. The nature of the metric that I favor The Acquirers Multiple, we’re looking at EBIT, you need to have some flows before it shows up on the screens. And so, the flows haven’t really shown up much. There’re a few things around that are cheapish.

Jake: Oh, yeah. So, they’re going to show up, then you’re going to see a big jump in EBIT, and then therefore–

Tobias: Yeah.

Jake: Okay. Now, it’s showing up on the screen.

Tobias: There are a handful of names around, but not many.

Jake: Well, I think that you and I were talking earlier about the company, BlueLinx that does construction supply stuff. God, look at their EBIT over the last five years. It just was nothing really happening and then it just absolutely explodes. But enterprise value, if you look over that exact time period doesn’t really move much at all either. So, EV to EBIT went from 35 times two years ago to three now and it was all EBIT and no change in EV. So, basically, what that is telling me is that Mr. Market does not believe that this kind of earnings is anywhere near sustainable. I’d be curious to see if that similar dynamic happens with the energy companies when EBIT does show up for you. Does EV even notice?

Bill: Oh, I don’t think so. I bet EV would sell off if I had to [crosstalk] guess.

Tobias: That’s been true in the SteelX. United States, SteelX, I forget the exact number, but it’s two or three-times EBIT. Everybody’s just assuming that that’s a onetime blip.

Jake: But what if it lasts longer than what everyone thinks? Is that how you win?

Tobias: That’s what I wonder about energy. There’s a war going on which is one of the reasons and that’s impacting one of the areas where we get our energy from so. That’s one of the reasons why. And there’s some also some domestic policy reasons why energy is getting squeezed. But it doesn’t seem to me that’s a problem that gets resolved anytime soon. If anything, energy should just keep on getting more expensive. We’re anti any carbon dioxide producing hydrocarbons.

Jake: Why were people willing to pay three times price to book for Chevron back in whatever 2011-2012? Why is it different this time?

Bill: Well, I just don’t think– I don’t know. I’m looking what Chevron’s EV is higher than it’s been in 22 years. So, it cares about the multiple.

Tobias: BlueLinx stock ran from, it was four bucks to 80 bucks, I think from early 2020 to late 2021 or early 2022. It’s a 20 bagger.

Bill: Yep. I remember taking a look at that. I think I sent it to you, guys.

Tobias: Possible.

Jake: Would you buy it?

Bill: No, because why would I want to make money?

Jake: [laughs] Oh, send me your highest conviction ideas. [laughs]

Bill: Yeah, I remember we talked about it.

Jake: We did talk about it.

Bill: Because I had a bunch of leverage, but all the leverage is actually to fund working capital.

Jake: Yeah.

Bill: Yeah. I don’t know. There’s something like BlueLinx, you’re hanging around a $80 million market cap, flows can move that thing.

Jake: Yeah. The other thing too is it’s such a tough game if you’re in something really cyclical like that, and you’re managing it, and you have to decide, “Okay, well, my stock is super cheap. If the world looks like it did for the last year, do I hoover it up and then deplete the resources that I have available? If things go to pot then though, then I’m hamstringing myself.” That’s a tough hand to play, I think.

Bill: Yeah.

Tobias: Yeah, agreed.

Jake: How do you manage cash?

Bill: Yeah, I think the problem with that is, those kinds of names, I personally would always be looking to trade. I think whenever I’m looking to trade something, I should stand the quick to pull the trigger out, which you can make a lot of money doing that. You just got to know when to buy and sell.

Jake: That sounds hard.

Bill: Yeah, well, I haven’t figured it out.

Jake: [laughs]

Bill: Qurate obviously, I should have sold, right? That should have been a trade. But at the time, I thought that the business could stick, but obviously, I was wrong.

Tobias: What’s also complicated by the fact is, we discussed before, you get some weird comps, 1920-1921. To normalize for all of that is hard. But then we’ve had 2020 stock market crash, that monster rally through 2021, and now probably staring at a mega bear or we’re halfway into a mega bear.

Jake: Give a bear drop for us Bill-

Tobias: Maybe that’s familiar.

Jake: -on the soundboard.

Bill: No, I do not.

Jake: Oh. Yes.

Tobias: What do you got on the soundboard?

Jake: Yeah.

Bill: Hang on. It would be the most appropriate mega bear. Yeah, this would be– [sound] [laughter]

Bill: Kind of scary.

Jake: Whoa, chills down my spine.

Bill: Yeah, right. I guess, you could say, [sound]

Tobias: Yeah, that’d be okay.

Jake: [laughs]

Bill: No, that sounds, that’s mega beary.

Tobias: I feel we’re probably going to be in the higher energy prices for a while, right? There’s just no way of getting out of that.

Bill: Commodity complex seems tight.

Tobias: The funny thing is– [crosstalk]

Jake: What does that mean? Like supplies are tight, you mean?

Bill: Yeah. I was talking to my buddy. That’s the gas trader and he was just like, “There’s no inventory anywhere.”

Jake: Hmm.

Tobias: I don’t know so much about energy. I haven’t seen a lot of energy, but all the mineral like BHP, and Rio, and all those things, they’ve had pretty good years. They’re all cheap on a multiple basis. I don’t know what’s about– I think that’s more of the sign that people just don’t trust them. In 10 years’ time, we’ll be talking about saying, yeah, when they achieved, that was probably a good time to buy them.

Bill: Well, they were cheap a year ago, when Kramer said you can’t touch them. Now, he’s saying you got to buy them.

Jake: Oh, I hate to hear that if you’re long.

Bill: Yeah, you don’t like it.

Jake: [laughs]

Tobias: When was negative oil? Was that last year? Was that 2020?

Bill: No, that was 2020.

Jake: Yeah.

Bill: That was March 2020.

Tobias: Was it March?

Bill: Yeah.

Tobias: Jesus, time dilates.

Bill: Yeah, the world shut down, and all the oil was on all the tankers, and tankers were charging a shit ton for storage, because everything was filled up.

Jake: Filling up swimming pools.

Tobias: [laughs]

Bill: Yeah.

Jake: Swimming pools in Cushing.

Bill: Yeah.

Tobias: Didn’t have to hold it for very long.

Jake: No. Normally, you think that solved itself pretty quickly.

Bill: Yeah, well, negative oil will do that.

How To Calculate The Most Predictive Price For Any Commodity

Tobias: My econometrician Professor pointed out when I was in uni making the metrics that “The best, the most predictive price for any commodity in the year is its current price. The only time that doesn’t apply is at the extremes where you’re better off taking a mean reversion.” So, he’s right. Again, oil is one of the things he tracked.

Bill: Fed bailed that oil.

Jake: So, saying–

Bill: Imagine that.

Jake: So, is that saying then that there’s almost a gravity well around a normal price, but if you’re anywhere away from it, then that bet the other way?

Tobias: Well, he said that his point was it’s unpredictable. And so, taking the current price as the price in a year means you minimize the errors that you make. But the only times that doesn’t apply is when– And he would look at, I don’t know, whether it was the fifth percentile or the second percentile. But if it was out in the extreme moves [crosstalk]

Jake: Standard deviations of–

Tobias: Yeah. Then he would take a mean reversion. He used to track oil, gold, and I think maybe the Dow against each other or three of them that would tell him where to direct his asset allocation.

Jake: Did it work?

Tobias: Did pretty well. Yeah.

Bill: Interesting.

Tobias: It’s a futures trading.

Jake: Interesting, indeed.

Bill: I had a guy who claimed trade closed end funds and every class, he’d be telling us how he’d buy at the bottom and sell at the top, and I’d be like, “I don’t know if you’d be here, if you were really telling the truth.” But he claimed it, Bill Pugh.

Tobias: He’s clipping out 15% returns every time he does it.

Bill: That’s right.

Tobias: 15% discount.

Bill: Best investor of all time. The guy no one ever knew of.

Jake: Was he trying to liquidate them? How did he–?

Bill: No, he said that he would trade them. I don’t know. I stopped listening after couple that I saw that I didn’t believe.

Tobias: Actually, I think it’s not a bad way of doing it. Because when they’re at a big discount, probably the underlying’s pretty beaten up too. And then if you wait until I get to– I don’t forever actually get the fair value, whatever they get to. I guess, sometimes, they get to a premium, point out of them at a premium.

Bill: Yeah, every chart that he showed, he basically bottomed [crosstalk] and sold at the high. Yeah, I don’t know. [crosstalk] Yeah, that’s fair, that’s fair.

Jake: [laughs]

Bill: Yeah, I was too young to understand financial marketing at the time. I should have understood– [crosstalk]

Tobias: The marketing?

Bill: Yeah.

Jake: Being marketed to by one of your professors?

Bill: By the professor. Yeah, that’s right.

Jake: Wow.

Bill: I assume, Soros. The guy’s a savant. But if he is judging by the car that he drove, he’s definitely retired now, [crosstalk] not spend money.

Is This A Bottom Or Bear Market Bounce?

Tobias: Do you guys want to have a swing at–? Is this a bottom or a bear market bounce?

Jake: [laughs]

Bill: If I had to guess, I’d say a bear market bounce.

Jake: I think that’s probably a reasonable assumption as a base case given that we certainly are not below a lot of valuation metrics, macro valuation metrics.

Tobias: Cape or something like that?

Jake: Sure. Pick whichever one you like.

Tobias: It doesn’t matter.

Jake: Yeah, we’re not really in that what you would call generational cheap level. For most datasets, you do have to spend some time below the mean, as well. You can’t just live above the mean all the time.

Tobias: The only thing about Cape is that it really only came out in 1996. Since 1996, it’s been at pretty big premium to the long run average.

Jake: Yeah.

Tobias: 1996 might be the last time it was at the long run average [crosstalk]

Jake: Last time, it worked.

Tobias: Yeah.

Jake: [laughs]

Tobias: Since then, it’s been north of that. I think it would have told you to buy. You would have bought the bottom in 2000– maybe the bottom in 2009.

Bill: And you don’t have to work again.

Jake: Ah, that’s [crosstalk] got to average, right?

Tobias: Yeah.

Jake: It didn’t ever really go below it. If you’re waiting for the below, then you might not–

Tobias: You missed it.

Jake: You might have missed it. Yeah.

Tobias: But then on the metrics that I looked at the ones I was discussing earlier like net-nets that are more, net-nets are available, now, then they have been at any other time since 1999. Three times EV/EBIT is drawn close.

Jake: Yeah, I was trying to think about that like, is there any other reason why that population would be blossoming more than that would at other times? I think maybe there’s an argument to be made that low rates might have something to do with that.

Tobias: The net-nets of EV/EBIT.

Jake: Net-nets.

Tobias: Well, net-nets, the fact that they are predominantly Pharma, it tells me that they’ve had a pretty good capital raising period. And now they have sold them, and so that university should have to I imagined that it happened. I don’t know if that’s the case. That’s my guess.

Jake: Yeah, that’s what I was trying to back into, but you said it more eloquently.

Tobias: If three by EV/EBIT is another interesting one. So, if I limited that universe to positive EBITDA, it went from 905 names. This is in the Russell 3000. So, it went from 905 names out of the Russell 3000 to 58 names out of the Russell 3000.

Bill: Hmm.

Jake: Wait, how do you have three times–? You got positive EBIT, obviously, if you’re at three.

Tobias: Well, you could have a negative.

Jake: How would you have negative EBITDA, if you have positive EBIT?

Tobias: You could have negative EV. No, I don’t know. I’m sorry.

Bill: That’s a DA. You get that, right?

Tobias: Either way.

Jake: Can you unpack that for me, again, Toby?

Tobias: Sorry. I didn’t mean to change the metric. The metric was the same. So, three times EV/EBIT– All right. Sorry, I didn’t mean to say EBITDA, if I said that. Three times EV/EBIT unconstrained 905 times out of 3000 with the limiting that the EBIT has to be positive. It dropped to 58.

Bill: But how you have a three if the EBIT’s negative?

Tobias: You can have losing less than three times.

Bill: Yes, you’re saying they’re only– Well, how many did you say? 58?

Tobias: 58.

Bill: Oh, okay. With positive EBIT and a multiple of three.

Tobias: I find those numbers a little bit unbelievable. I don’t know how if that data’s messy, but that’s what came out.

Bill: Yeah, I don’t know.

A Basket Of Net Nets Would Do Well Here

Tobias: I would say that a basket of biotech net-nets would do pretty well. Out of here, probably, the index is what you need to do. XBI.

Bill: Yeah.

Tobias: There’s so many of them. As long as they’re in the index, I don’t know how the index works, if it’s got some other stuff in there moving averages or anything?

Jake: Yeah, I should probably look through that and see what the metrics look like.

Tobias: The other thing is, it’s hard for funds to buy those things. It’s usually a market cap cutoff of $75 million. Can’t buy below $75 million from ETFs.

Bill: Hmm.

Jake: Wait, oh, who can’t buy below–?

Tobias: ETFs.

Jake: Oh, okay.

Tobias: If you’re looking at an index like XBI, and then– [crosstalk]

Jake: Yeah, that’s a– [crosstalk]

Tobias: I don’t know if that’s the– [crosstalk]

Jake: The bigger dead fish isn’t that.

Tobias: [laughs]

Thermo Fisher (TMO) – High Quality Business

Bill: I had asked this question on the Twitter machine before. I think that the answer that came back to me on the best way to play this was just by Thermo Fisher.

Jake: Oh, yeah. Does it sell to all those guys?

Bill: Yeah, I’m pretty sure.

Tobias: And it’s gotten nuked, I assume then?

Bill: No, not really.

Jake: Oh.

Bill: It’s a very high-quality business. So, I don’t know that it gets nuked. Three and a half percent free cashflow yield out of the gate.

Jake: Okay. So, treasury.

Bill: Yeah, but it is growing. So, I guess I could understand why somebody convinces themselves to buy it. It’s a very good company.

Are Airline Companies A Good Investment Now?

Tobias: How do you feel about airline companies at the moment? Bill, you looked at that anytime recently?

Bill: No, the only one that I really looked at is Spirit because I think that deal is interesting, but I haven’t the really– [crosstalk] outcoming.

Tobias: As a merging– [crosstalk]

Bill: Yeah.

Tobias: Right.

Bill: Yeah.

Tobias: Because we’re still well below capacity. We’re like 20% below capacity, but they’re flying many [unintelligible [00:43:30] planes and flying smaller planes. So, when you fly, the planes are all full.

Bill: Yeah.

Tobias: When I flew six times between going to Sacramento and Omaha or New York. Every single flight, they said, “Check your bags at the door because this is a full flight.”

Bill: Yeah, they’re hitting me with demand destruction. I was looking at some tickets and I was like, “Well, I don’t think I actually need to make that trip.”

Jake: Really?

Bill: Yeah. Just forces you to prioritize.

Jake: Yeah.

Bill: What do I really want to do here?

Jake: Do I want to feed my kids or do I want to–? [laughs]

Bill: Well, yeah and the answer is I just want to hang out with my kids.

Rates Will Be Down In 5 Years

Tobias: I got a question. Kind of two embedded questions in this. “How do you guys expect the market to handle the next few rate hikes?” So, one thing. “Do we expect more rate hikes and two, what happens when we see them?”

Jake: I don’t know, man. Those are hard questions.

Tobias: Too hard. This is a podcast.

Bill: Those are hard questions. I’d say in five years I think rates are lower than they are today. I don’t know where I think they are in a year.

Jake: Spicy? Is it low growth? Is that why?

Bill: Yeah. I don’t really see anything that makes me understand why– The trend of rates going down is very, very, very long.

Tobias: That’s such a bullshit chart though. That one where they should be going back to medieval times or ancient Egypt, where rates were 19%.

Bill: Yeah, you’ve got lot of old– [crosstalk]

Jake: Like one king loaned money to another king at that rate. Well, there’s our database for that 100-year set.

Bill: I’m just saying, I think you’ve got lot of older people that need to generate income by buying financial assets. I don’t think that that’s going to change and– [crosstalk]

Tobias: But that’ll be net sellers, might they? They’re not saving anymore.

Bill: Oh, well, they’re buying debt.

Tobias: But they’re at the consumption point, the boomers are at the consumption part of the cycle that started a few years ago. That was part of Michael Green’s thesis is that you can see the effects of the sell off from 2018 being the first year that the boomers became net sellers. And so, that was the first year– [crosstalk]

Bill: Of equities or of debt?

Tobias: Equities.

Bill: Yeah. Well, but they’re going to buy debt. You want to fix your interest or your income, I would think. That’s what I would want to do. If I could get any yield on debt, I would be buying debt hand over fist if I was older. Then you’re in a higher security portion of the capital stack and you can actually bank on your income.

Tobias: You’ve got some duration risk and you don’t have much income. It’s hard.

Bill: Yeah, but it’s better than owning equities.

Tobias: Well, I guess, the argument for equities would be that the equities can potentially reinvest and grow, although. If you look at inflationary periods in the past, that was– Buffett has talked about– You get the world’s greatest capital allocator running Berkshire Hathaway leave at 1.7 to one versus Gold and Gold keeps up, or he just keeps up with gold for 13 years.

Bill: Yeah, look maybe. I don’t know. It just seems to me I can’t paint some rosy picture for growth on the back end of all this.

Jake: So, you’re saying there’s a whole generational de-risking that’s going to happen in financial markets, basically with that?

Tobias: We’re midway through it surely. 2018-2019, we’re four or five years into–

Jake: Why was there a melt up then in that whole time period?

Bill: Well, that was all just a liquidity explosion.

Tobias: I think that Michael Green’s thesis was that 2018 was the first year that they could take a distribution and they waited until the very end of the year to take it, which is why the market tanked when they all decided to pull it out. Then they got smarter over the following years and they did it a different either staged it through the year or that just sold off at different times. But I don’t know. I think they’re net sellers is overall. Yeah, why was there a melt up? I have no idea.

Jake: This thesis changes every time we talk about it.

Tobias: Well, it’s mind tempting– [crosstalk]

Bill: Or, we don’t understand it.

Tobias: To be fair, to be fair.

Jake: Yeah, I think that’s the real answer. [laughs]

Bill: Yeah.

Jake: User error.

Bill: Yeah.

Tobias: Yeah, why does it run up? Well, no idea. It feels like it’s expensive in selling off moment. Big bounce today. The bounce is a dead cat bounce over the bottom. I don’t know. Too hard. It doesn’t look like a bottom to me, but who knows.

Bill: Yeah, I don’t know. It looks great to break it out. Maybe they go higher. I have no idea if that says not.

Tobias: If you didn’t have the Fed with their finger on the weighing machine, then I’d say, it’s almost certainly higher.

Bill: But you do.

Tobias: But if you look at the experience of the BAJ and the ECB, both of which– I think probably just [unintelligible [00:48:47] a little bit further down the line. In both of those, interest rates are still anemic and they got negative. So, maybe that’s right. Maybe, we don’t stop until we see negative rates.

Bill: Yeah, I don’t know. Outside of wanting rates to go higher, I don’t know why they will go higher, I guess—[crosstalk]

Jake: Inflation?

Bill: I don’t know. I don’t know why. You could have a period of negative real return. I don’t know why Capital deserves real return. I understand well, because it does. What?

Jake: Easy there, ingles. [laughs]

Bill: No, I’m just saying, I just don’t know. It’s wherever things can get placed and– [crosstalk]

Tobias: It’s not so much that it deserves it. For a lot of people, they don’t like to put their money into things where they’re going to lose purchasing power over the period of time they hold it. And so, it’s not they deserve it. They just don’t– [crosstalk]

Jake: How dare they?

Tobias: Yeah. They just don’t invest until they get a reasonable yield for the risk and duration that they’re taking.

Bill: They don’t have to buy it.

Tobias: And that’s what creates higher interest rates.

Bill: Yeah. Unless-

Tobias: Unless, you have got the prices– [crosstalk]

Bill: -they just sit there and watch inflation destroy their purchasing power in the meantime.

Tobias: But you’re going to get destroyed in bonds.

Bill: Yeah, but she can earn a little bit more. Buying treasuries not making three and a half percent, or 3%, or whatever. That’s not the end of the world.

Tobias: Inflation is at 8.5% [laughs]

Jake: Yeah, does it matter if it get smoked by–? [crosstalk]

Bill: I think the inflation thing is a little overblown. I really do. So, let’s see.


70s Inflation vs Rates

Tobias: There was a chart yesterday of the 70s inflation versus rates. You can see them creeping up the rates to capture the inflation and just the inflation runs away. They do eventually put rates up to the point where it breaks the inflation but– [crosstalk]

Jake: But it took a decade?

Tobias: It did. I think the whole thing was 17 years or something like that or was. Something like that. Like 66 to 82, something like that– [crosstalk]

Jake: So, rates were just always a little behind inflation trying to [crosstalk] upward.

Tobias: At the start and then rates get scary high, rates get gnarly. I was looking at that thinking, I wonder where a lot of these names trade if we get real double-digit rates.

Jake: Oh, yeah.

Bill: Yeah, well, everything is fucked.

Jake: What’s the–? [crosstalk]

Bill: You own cash. You have to own cash in that scenario. We’re going into depression, a 100%.

Jake: [laughs]

Tobias: Well, that was a bad time to be, 66 to 82 was a rough time in the markets.

Bill: Maybe somebody is like, “No, you don’t. You can own oil. Fine.” Noted.

Tobias: Yeah.

Bill: But other than that, if you want to play the commodity game, I’d say more power to you. But I don’t think– If rates are going to double digits, the economy’s done.

Tobias: The risk is that it already is. We just haven’t recognized it.

Bill: Yeah, we are going– [crosstalk]

We’re Going To Be Doing QE & QT At The Same Time

Tobias: Nobody puts on rates, because they want to. The Fed is fully aware of what happens when they stick up the rates. It’s what they don’t want to do. That’s what they keep on saying, “QTs almost done.”

Jake: it hasn’t even started, yet. What are they talking? [laughs]

Tobias: We going to be doing QE and QT at the same time.

Jake: Yeah.

Tobias: Quantitative easing, quantitative tightening.

Jake: Yeah. This is like driving around with your foot on the brake the whole time, too.

Tobias: The verbal QT and the real QE going behind the scenes.

Jake: [laughs]

Tobias: FOMC is at their lone ship all by themselves.

Jake: QT in the streets, QE in the sheets.

Tobias: [laughs] The other way around, mate.

Jake: Oh, okay. Damn it.

Tobias: I don’t know.

Bill: Yeah, I think a recession is pretty much inevitable. How bad and we’ll see. But you can’t stop housing and not have a recession.

Will The Housing Market Crash?

Tobias: Jeremy Burns has given us a $4.99 tip with a question. “What do you see happening to housing?” You’d like multifamily?

Jake: Well, Bill, take this one.

Bill: It’s stopped.

Jake: Oh. What does that mean?

Tobias: Multifamily stopped.

Jake: What do you mean like–?

Bill: I think your cap rates are going to be screwed, but your rent growth might offset that a little bit, if you believe that there’s actually a housing shortage because I don’t–

Jake: You’re saying we’re not finishing houses right now?

Bill: Yeah, and I only think you slow down starts and I think that people that are in housing are not going to sell their house, I think mobility goes very, very low. And then you get the multiplier effect of all the construction jobs that don’t happen, and that goes throughout the economy, and that’s a bunch of people that spend money, and then you’ve got yourself a problem.

Tobias: There are a lot of layoffs at the moment in tech.

Bill: Yeah, fuck those. Not really. I don’t mean that.

Tobias: When there’s a high that’s a good thing– [crosstalk]

Bill: Well, a lot of those people can deal with it, a lot of them get paid three months, and they can find a job while they’re searching, and all that stuff. I’m not concerned about those people. I’m concerned about the labor that’s trying to put food on his table tomorrow, not the guy that makes 200 grand a year that is paid to search for a job.

Tobias: I think they spent it all.

Bill: Yeah, well, that’s on them.

Tobias: Well, if you live in San Francisco–

Jake: Yeah, minimum wage.

Bill: Yeah, I guess.

Jake: Living waging.

Bill: That’s not [crosstalk] about.

Meta Saddled With Underwater Stock Options

Tobias: But in terms of like, I’m worried about them in each individual personally. But I also mean more broadly, what that does to the economy if you take out a whole lot of hype. The minimum wage for Facebook, I think is 350 grand a year. That’s entry level at Facebook now. Because all of their options are underwater.

So, they’ve got to pay people to show up now. SBC is now running through the compensation line. That’s a lot of money. If they’re laying off people, not that Facebook has, but the tech complex lays off 5,000 people at a throw, 10,000 people at a throw, and they’re all high paid job. That’s a lot of consumption that disappears out of the economy.

2023 The Year Of Deflation

Bill: Yeah, we are going into a recession.

Tobias: I think, I’ve to say, last week though.

Jake: [laughs]

Tobias: In 18 months, then we’ll see the marks turn six months ago.

Bill: Yeah.

Tobias: The funny thing is the stock market is good at sniffing it out.

Bill: I just think–

Tobias: Sorry.

Bill: Yeah. I just think the question is how deep it is and what happens after?

Tobias: How deep is your love?

Jake: [laughs]

Tobias: You’d have to say that if you look at the size of the party that we were just in that the hangover is going to be pretty big too, right?

Bill: Yeah. Maybe policymakers actually thread needle that’s not so– Look, if you had told me we’re going to shut down the country-

Tobias: FaceTime for everything.

Jake: Yeah.

Bill: -I would argue it’s the second. We made it through 2020 pretty fucking well. We stopped an entire country and made it through. I’m going to give them a thumbs up on what they did. Whether or not there were negative consequences, fine. So, now you got to figure out the other side of it. I’d rather have this problem than austerity back then and not huge deflationary crash.

Jake: Yeah, it’s an interesting question to ask. You could give them some thumbs up for 2020, but then would you need as much of their intervention? Had they not done so much stuff the 10 years before that?

Bill: I don’t know. Why don’t we just remove them all and then we never have to worry about it? But that’s not the world– [crosstalk

Tobias: Well, that’s good idea. No, we are talking– [crosstalk]

Bill: Yeah, that’s not the world we live in.

Jake: That’s the world we have lived in.

Bill: Yeah, but we had depressions every 10 years back then. It wasn’t some panacea back then. Things have gotten generally better, I think, since policymakers got involved.

Jake: I’m going to guess that they were more localized, and less widespread, and less systematic or systemic.

Bill: Yeah, there’s definitely issues with it. Don’t get me wrong. I don’t think that as a group of commentators or market participants, we have accurately forecast any trend since 2020 and I don’t expect this one to be any different. I think you will not shock me– [crosstalk}

Jake: You mean the three of us specifically?

Bill: Yeah, it will not shock me if 2023 is the year of deflation.

Tobias: What do you mean? What’s your definition of deflation?

Bill: Look, if you’re stopping– I know we’re not actually stopping economic activity, but we are definitely throwing the brakes on. If say these gas inventories start to actually– Let’s say demand destruction happens, and the inventories actually get somewhat back to normalized levels, the stuff that I’m talking to my buddy about, then you have like this, I don’t know, potentially more of a market balance.

What if we slow down some consumption generally? Maybe everything’s not running as tight as humanly possible and all the retailers are going to start discounting because they overbought the same thing at once. Maybe that supply chain is not as tight, and maybe shipping rates come down, and maybe rail rates come down, maybe prices are lower.

Tobias: Yeah.

Jake: I like that. I think there’s a natural overshoot high and low of these types of equilibriums seeking systems. So, it wouldn’t surprise me for us to have gluts of things in a year or two.

Bill: We got them now.

Tobias: We’ve got some now. Yeah.

Bill: If you need to buy anything for your house, buy it now.

Ignore The Facts Around Lumber

Tobias: Lumber. Have we talked about lumber?

Bill: No.

Jake: Yeah, what’s– [crosstalk]

Bill: Lumber is absolutely– [crosstalk]

Jake: It’s down from insanity, but it’s not– [crosstalk]

Tobias: Yeah, 200 if– [crosstalk]

Bill: No, Jake, it is crashed, it is a flawed idea. It is crashed.

Jake: [laughs]

Tobias: It still like a 100% high than it was.

Jake: It’s still expensive compared to the– [crosstalk]

Bill: No, no, no, do not look at facts. It has crashed. People predicted the crash.

Jake: Oh, okay.

Bill: Yeah, it’s way higher that it once was.

Jake: Should I fix my fence or not? That’s what I want to know.

Tobias: Do it. Aluminum.

Bill: Yeah, I think you probably should.

Jake: Do it now?

Tobias: Aluminum.

Bill: Yeah, I think you probably should.

Jake: Okay.

Bill: Dustin Jalbert, he’s on the Twitter machine. He said $300 lumber for a little while. So, it’s possible that it goes a lot lower. But I don’t think it’s—[crosstalk].

Jake: I’m waiting for negative prices. That’s when I like to. [laughs]

Bill: That’s going to be tough.

Tobias: I just wanted a clarification on deflation before, because when people say inflation what they mean is, the stuff that I buy is getting more expensive. When they say deflation, what they mean is, the stuff that I own is getting cheaper. [crosstalk] going down. There’s should be CPI in [crosstalk] deflation.

Bill: Yeah.

Tobias: What’s disinflation rather than deflation?

Bill: I think its rated chain slowing.

Jake: Slowing now. Yeah.

Bill: Yeah.

Tobias: Are we looking for some disinflation through here? What was the last print? We still at a super gnarly eight and a half percent?

Bill: Yeah, I think so.

Tobias: Year on year?

Bill: Yeah.

Tobias: Housing’s, 20% year on year.

Bill: Yeah, housing had to slow down. I am totally okay with that decision to pump the brakes a little bit on that, but it’s going to have consequences.

Jake: I think it’s kind of destructive for your society to have such expensive housing costs.

Bill: Yeah, you don’t want that.

Tobias: You don’t want the Fed going from the accelerator all the way to the floor to the brake back on the accelerator?

Jake: Well, I definitely not think the Fed should have still been buying mortgage-backed securities. Just absolute white hot housing market. That one is getting me scratching my head.

Jake: Yeah, I agree with that.

Jake: Really? Okay. You know best, father.

Tobias: Yeah, that’s why you don’t have the PhD, mate. You can’t read the magic book.

Jake: [laughs]

Tobias: We made it.

Jake: Oof.

Tobias: It’s the hour. Thanks, folks.

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