In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Can Mega-Bears Happen If Everyone Knows It’s About To Happen?. Here’s an excerpt from the episode:
Tobias: Were you here for the Eye of the– We were talking about the eye of the storm. Was it last week or was it the week before?
Bill: Yeah, I thought it was two weeks ago, wasn’t it?
Tobias: Do you guys think we’re still in eye of the storm or have we moved out the other side? Because it seems to me, there’s a little bit of vol around.
Jake: Will you quit reading my journal?
Bill: Yeah, I have no idea.
Tobias: Because if we were going to see, if this was like a mega bear, we’re nine months in if we measure it from the start of the year, mega bears run 18 months, two years. We’re coming into the back half, which will mean we’re going to see some waterfalls sometime.
Jake: Two-thirds of that now.
Tobias: This is the nasty period if we’re into it.
Jake: It just seems really hard to imagine though, because it seems the most obvious– [crosstalk]
Tobias: Everybody feels that way.
Jake: Everybody knows this is about to happen.
Jake: So, can it happen if everyone knows it’s about to happen?
Jake: I don’t know.
Tobias: I don’t know. I don’t think so.
Jake: And I don’t think so either.
Tobias: And every time I look at how you hedge it, all the hedges are bananas expensive, because everybody knows that it’s going to happen, which means that I think it doesn’t happen. And yet– [crosstalk]
Jake: And yet, how does it not happen if you push rates to– I don’t know, whatever, 6%?
Tobias: Well, that’s the thing that does it, right?
Jake: What’s cost capital? 8%?
Tobias: [crosstalk] you just automatically plug in 10 years ago and then since 10 years ago, I don’t know. [crosstalk]
Jake: Zero after that. It’s zero.
Tobias: 10-year plus some margin?
Jake: Well, yeah, I don’t know.
Tobias: I did some testing in a falling market like we had. I haven’t looked at this in a few years. But in the falling market that we had, paying up to the 10-year was perfectly fine at any point in time. You’ve been bailed out at every single point.
Jake: Well, here’s something that’s interesting. I don’t think I ever really quite put together, but he was talking about financial repression. And between 1945 and 1980, interest rates in the US and the UK average -3.5% in real terms. So, that created an annual subsidy to the US government equivalent to 20% of tax revenues, thanks to the lowered interest expense. And so, due to that repression, the US national debt relative to GDP declined by 75%.
So, we were able to basically de-lever by having negative real yields for a long period of time. Now, as you know from Buffett’s study that he did over 17-year time periods, there were some rough time periods in there for investors. So, I don’t know. Even if you do solve the problem by inflating your way out of it, that doesn’t mean that you’re going to have a good experience as an investor necessarily.
Tobias: Brian says, “If there’s a way for it to happen where none of the hedges work, that’s how it will happen.” Yeah, I agree. That’s how it’s going to happen.
Jake: Well, that’s yeah. That’s the tail risk issue that you have if it’s– [crosstalk]
Tobias: It threads the tail risk. It just never triggers the– the VIX never gets that high.
Jake: Never spikes VIX high enough to pay you out.
Tobias: It just slides. It slides slowly. Slow-motion crash.
Jake: The old man in the bathtub. [laughs]
Tobias: I think we’ve only had a fourth rally of this decline so far.
Tobias: 2007-2009 was 17 or 18. So, it’s fairly early days there.
Tobias: Maybe we [unintelligible 00:58:43]. I don’t know.
Tobias: You just got to be in the tera-caps and you’d be okay.
Jake: That’s what we figured out. It all come full circle.
Tobias: Just get back in the tera-caps.
Bill: Well, the problem is-
Jake: The water’s fine.
Bill: -if it’s economic driven and commodities driven, I don’t think that not being an– I don’t know man. You’re going to have to be really good. Small isn’t going to save you, that I’m uncertain of. Small is going to get shellacked on a business result basis. But the multiple maybe helps you. But I don’t know, man, I haven’t seen one piece of evidence in my life that thinks that when shit gets messed up, the small guy wins.
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