VALUE: After Hours (S04 E33): Equity Duration & Inflation, The Nifty Fifty, and Vermeer Fakes

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

  • ​Comparing the PE Ratios Of The Nifty Fifty Companies With Today
  • Investing Lessons From Vermeer Fakes
  • The Argument Against Concentration
  • Indexing Is Harder Than It Sounds
  • Could You Live Through A Decade Of Underperformance?
  • When Will Inflation Get Back Under Control?
  • Median Mortgage Payments Up 66% From A Year Ago
  • Is The S&P500 The Next Nifty 50?
  • The Bull/Bear Case On Charter Communications
  • Shale vs Crude Oil Companies
  • Seth Klarman On The Lost Decade
  • PwC, KPMG To Host US Inspections Of China Firms In H.K
  • Tricking Your Brain Into Believing

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

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Full Transcript:

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

Jake: Hola, amigos. How are we doing? [laughs] And Bill left. Perfect. We’re off to a hot start.

Tobias: Speaking of hola, ami– Oh, Bill just jumped out. I didn’t see that. I was preparing something out the window.

Jake: He dropped for a second. He’ll be back, I’m sure.

Tobias: It was Chilean Independence Day, yesterday.

Jake: Oh. What did you do to celebrate, if you observe?

Tobias: Empanadas and some Casillero del Diablo [unintelligible [00:00:43]

Jake: [laughs] Bill’s back.

Bill: You can’t see me.

Jake: That sounded a little like appropriation to me there, TC, what’s [crosstalk]

Tobias: Chilena’s got to celebrate.

Jake: Okay.

Tobias: Got some Chilean music. Chilean National Anthem.

Bill: I listened to our recording, and I can understand why people didn’t love the recording quality. But I think some of you, at least 7 of the 10 are a little picky on what you’re expecting out of us. So, just to reset, we are not professionals, folks. Okay?


Bill: We were at the beach.

Tobias: Not in podcast production.

Bill: We were at the beach. We did the best we could.

Jake: It was an experiment.

Bill: [crosstalk] slightly better setup. Not pointing fingers here. Just saying that we were swimming upstream and you even got the behind-the-scenes footage of my iPad in my backpack.

Tobias: [laughs]

Bill: So, there’s that. Maybe got to eavesdrop on Morgan Housel, Jake Taylor, Bill Brewster, Tobias Carlisle conversation. So, you’re welcome.

Tobias: That’s a good one.

Jake: It ended up about getting hot.

Bill: If it is [crosstalk], you didn’t deserve to listen anyway. So, [crosstalk]

Tobias: There were 25 people still listening at the end there. [laughs]

Bill: Oh, God.

Jake: Yeah. I hope that didn’t make it to the live, did it?

Bill: Far more people than showed up in person.

Jake: [laughs]

Tobias: Yeah, I have reuploaded with the audio from– [crosstalk]

Jake: The real good recording?

Tobias: Yeah, from the better recording.

Bill: Maybe that’s the problem. I listened today.

Tobias: Yeah, that would have been the new one.

Jake: Okay. Good.

Bill: Well, maybe people aren’t as picky as I thought.

Jake: [laughs]

Tobias: Dubai, Caribbean– [crosstalk]

Bill: But yeah, we were up against Gundlach. Not the best draw in the world.

Jake: Yeah, that’s going to make it tough for us to get any asses in the seats.

Bill: And he was wearing yellow. But shoutout to Porter Collins for stopping by. Very cool dude. We got to meet with him. And who? Was it Vince?

Jake: Yeah.

Tobias: Yeah, Vince Daniels.

Bill: Yeah, nice guy.

Tobias: Danny Moses.

Jake: Danny Moses. Big short. Nice.

Tobias: Yeah, that was cool.

Bill: Shoutout to them for choosing us over Gundlach even if out of pity. We appreciate you all.

Jake: [laughs] Oh.

Tobias: Yeah, so that was the highlight, chatting [unintelligible 00:03:08] chat to the Seawolf guys, because they are brothers from another mother.

Bill: Did we have a chat to them, or did they have a chat to us, or did we chat with each other?

Tobias: A little bit of both. I don’t know. [crosstalk]

Jake: It was [crosstalk] consensual, Bill.

Tobias: [laughs]

Bill: Yeah, it was consensual. I don’t know, had it just been me, I maybe would have forced myself into the conversation. But with the veil of YouTube, it was consensual.

Tobias: I don’t know how much we were saying. I think we were mostly listening. But we’re chatting. It’s good.

Bill: Yeah, shoutout out to Mary. Thanks for saying that you listen. Shoutout to all the ladies.

Jake: Both of them? [laughs]

Bill: I think there might be four.

Jake: Okay.

Bill: Hopefully, more. But 4 out of 10 is pretty good percentage there.

Jake: We should give a shoutout to Niall for inviting us. He’s a good friend and a good dude. Thanks, Niall.

Tobias: Yeah, thanks, Niall. That was fun.

Bill: [crosstalk] indeed a good dude.

Jake: Yeah. All right, let’s get into the– [crosstalk]

Bill: I like the beach.

Jake: Beach is nice.

Bill: It’s kind of a better vibe than we have going on right now. Alas.

Tobias: Yeah.

Jake: Womp, womp.

Tobias: That was cool. What do you got up on deck today, Jake?

Jake: Well, a little dramatic foreshadowing with my background, which is– it’s a Vermeer painting. So, we’re going to get into– [crosstalk]

Tobias: Girl with a Pearl Earring?

Jake: Yes, correct. Good job, TC.

Tobias: Thank you.

Jake: You probably just saw the movie with Scarlett Johansson. [crosstalk]

Tobias: I just thought it was Girl with a Pearl Earring. I think just– [crosstalk]

Jake: [laughs] Just saying what I see. Yeah, so, we’re going to do a little art forgery, actually. So, that might be fun. So, we’ll get into that.

Tobias: Cool.

Jake: What do you got?

Bill: Nice.

Tobias: Jake’s pulling double duty today. He’s sent me an article beforehand, but it’s a good one. I would have found it, eventually, because I do like these guys. Sean Stannard-Stockton has written Equity Duration & Inflation looking at some of the Nifty Fifty stocks from– Everybody knows that the Nifty Fifty stocks were like you had to buy them– There was no price that you couldn’t pay that was too high and then they– [crosstalk]

Jake: One-decision stocks– [crosstalk]

Tobias: One-decision stocks. That’s right.

Jake: That was what never sell used to be called.

Tobias: Right. It was back in the 70s, and they had a fall from grace and they were smashed up through the 70s. But as everybody now knows that the coda to that story finally is that they were all such good businesses that they did finally outgrow the overvaluation. I think I wasn’t entirely sure what they were referring to, but by 1998, which was again, another pretty famous stock market-

Jake: Yeah.

Tobias: -Peak. So, I guess, you can call it there.

Jake: Peak– [crosstalk]

Bill: Through cycle is what they say.

Jake: Yeah. Through cycle.

Tobias: Through cycle. That’s fair, that’s fair. They’d returned about 12%. They’ve done about market performance. He draws some interesting conclusions from that. So, I’m going to talk about that a little bit.

Bill: You just don’t want to have to sell anytime in those 30 years and you want to have faith that you’re right.

Tobias: That’s right. You wanted to buy more, I think, as they got really beaten up. Because they weren’t– [crosstalk].

Jake: Yeah.

Bill: Never mind the fact that you may have lost your job.

Tobias: Yeah.

Jake: Yeah. That can be an unfortunate side effect.

Bill: Right.

Jake: [laughs]

Bill: Correct.

Tobias: Do you mean as a manager or just generally as an investor?

Bill: Oh, I think just generally.

Tobias: Yeah.

Jake: Or maybe he’s just regular working person in the late 70s, early 80s. That was a rough economic period.

Tobias: Yeah.

Bill: Definitely, as a manager, you got redemptions.

Tobias: Yeah.

Bill: There’s no way seven years into that, you’re telling your LPs, “Just trust me.”

Jake: It’s still a good business.

Bill: That’s right. You don’t understand– [crosstalk]

Tobias: It’s still such a good business.

Bill: Yeah, we’re just on the wrong side of multiple compression.

Jake: I just need rates to get a little lower.

Bill: Right. That works out for the first two years, or three years, or four, but seven is too long.

Tobias: Before we embark on that thing, do you think that that is a good corollary for today?

Bill: I don’t know.

Tobias: It’s just a stock market peak. That peak, and then the one in the late 1990s, and then I guess, again, today, they all seem similar-ish, right?

Bill: Yeah, but on the other hand, Microsoft is trading at 60 times earnings in ’99? This time, it’s 30. That is half.

Tobias: Yeah.

Bill: Half does matter.

Tobias: What was its peak?

Bill: But it’s a lot better now.

Jake: Yeah. What did revenue look like in ’99 versus today?

Bill: Yeah, it’s a much better business now or bigger.

Comparing The PE Ratios Of The Nifty Fifty Companies With Today

Tobias: Do you want to do this one now, because they make comments about the PE. So, Nifty Fifty 1970s, the names that he pulled up, Coke, P&G, Johnson & Johnson, Disney, AmEx, Pfizer, as a cohort, they had a PE of 42 average versus 19 for the S&P 500. So, they were more than twice what the market was. And so, he says it’s not fair to characterize it as a bubble that burst, because from that peak, they went on to generate 12% compound. I just– [crosstalk]

Jake: Wait, that’s a PEE that they’re measuring, right?

Tobias: Right.

Bill: That’s not 50 times sales or some of these other things. [crosstalk]

Tobias: Yeah, and it’s got a bottom line.

Jake: Yeah.

Tobias: That’s one of the things that if you constrain the universe and things that have got a bottom line, then you-

Jake: Maybe. Just wanted to point out that there are other levels to that game as well, as far as some stuff that got expensive.

Tobias: True. If you could constrain the universe to things that have free cash flow and you’re doing it for free cash flow multiple, then again, you’ve constrained that universe even more. Just by virtue of the fact that you require some free cash flow, you’ve eliminated a lot of stocks that you probably don’t want to hold.

But then, he’s got this interesting analysis where he says there are three drivers and returns. Earnings growth, your beginning PE and your ending PE, and any dividend that you collect along the way. So, he says, year one, $1 of earnings with a PE of 25, that’s $25 stock. And year 10, assuming that earnings grow 10% per annum, 10% per year, that’s a pretty high rate of growth.

Jake: That’s a lot.

Tobias: Yeah. But these are pretty good companies that collectively had done something like that. You get to 259 in earnings in year 10. He assumes that you get this multiple compression from 25 to 20 and you end up with a $51.80 stock when you started with a $25 stock. And so, your compound return is 9%.

Jake: Which is 9%.

Tobias: Did you just do it off the top of your head? [laughs]

Tobias: No, I knew it. I did- [crosstalk]

Tobias: Just make it look like it.

Jake: Buffett- “Well, you already knew have the answer, but you pretend like you’re doing math in your head.”

Tobias: That’s-

Jake: [laughs]

Tobias: Good one. And so, he concludes that at 25 times, that stock was fairly valued, because it then went on to deliver a market return. And if it had been a PE of 16, same stock, you would have had a 14.7% compound return in that period, which would have outperformed the market and so, it would have indicated that it was too cheap. If it had been a PE of 35, that would have been 5% per year. And so, overvalued. And so, he says that PE 25 was a fair value PE, because it delivered a market return.

And then, he looks at two specific examples. Costco from 2002 to 2015 had a PE of 15 and it delivered 15% to 20% returns through that whole period. And fair value for Costco would have been a PE of 40. And at that 40, it would have delivered only 9% a year. And then, he gives the example of Coke too. So, Coke in 1972 had a PE of 46 and it still went on to deliver 16.2% compound through that period. And I think Buffett paid 22 times for Coke? You guys remember that, off the top of your head?

Jake: Late 80s is when he bought most of it, right? It was after that New Coke snafu. I think it might have sold off some when he backed the truck up, but I don’t remember.

Tobias: My recollection is it was 22 times. But that might be wrong. Somebody in the audience might know that. And then– [crosstalk]

Jake: Bill might know it. He looks like he’s–

Tobias: Do you know it, Bill?

Bill: No, I don’t know. Didn’t they also have that movie studio at the time?

Jake: There were all kinds of capital allocation shenanigans that happened.

Bill: So, I don’t know what it’s looked through PE wise.

Tobias: Shenanigans going on. But on this analysis where you say the market does X, 9%. And then, let’s look at the PE that would have delivered a 9% return. He says that fair value for Coke in 1972 was 82 PE, it would have delivered 9% return. At 46, 16.2%. Big outperformance.

He’s got some other conclusions about probably what happens in the interim. So, for a decade, if inflation spikes all of these long duration type stocks that have got the high PEs probably get smashed up. But there’s a chart that he includes from Jeremy Siegel that shows how vastly undervalued they were by 1982, which is what then delivered the incredible run through to 2000 and probably where they got overvalued near the end. I thought was an interesting analysis. I’ve seen it before in relation to, I think, it was Walmart. They worked out what you could have paid in Walmart to get a market return from the– [crosstalk]

Jake: Early 70s or something.

Tobias: Yeah, and it was something– [crosstalk]

Jake: A lot.

Tobias: It’s like a thousand times or something like that.

Bill: Yeah. Got to be able to build a lot of boxes, if you’re going to pay that multiple.

Jake: That’s the thing. If you’re right about these businesses, then fair play to you. I think you deserve to do well. But gosh, if you’re wrong about any of them, the cliff you fall off of is pretty steep.

Bill: Yeah, I think it’s easy in theory to say, “Oh, well, these are noncorrelated bets. What does Walmart have to do with Coke?” or something like that. But if they’re all in the same factor or whatever from a portfolio construction perspective, you could have some real drawdowns. What it really probably is an argument against style drift. Like if you’re going to be a quality guy, you should probably stay quality throughout. Much like value guys probably should have stayed value throughout.

Jake: Let’s think about the businesses that came in that list that became these juggernauts. I think there’s a few things that maybe we can unpack that we can try to see. Does that make them then a good corollary for today? I would say, some of them are in the CPG space, which my understanding is that, because we had this very narrow, tight pipeline of media, where you had three channels, basically, there was a return to scale of advertising that you could do to build your name, if you were Tide, or Crest, or one of these staple, kind of home, ‘Procter & Gamble now owns you’ type of brands. And they got big, because you couldn’t advertise in a million different places. There were only certain places where you could actually get the eyeballs, because we only had three channels. Well, with the internet, that completely explodes that, that direct-to-consumer goods completely explodes that CPG little anomaly in the matrix, where you could build a brand to an extreme level, where you can charge 2X what everyone else was charging, and people would be willing to pay for it, because it wasn’t that big share a wallet, and you just want to go with the brand that you know, Tide, or whatever.

So, that’s a little bit of an anomaly historically, I would say. Whether that repeats today, I’m not sure. Some of these other ones were definitely huge beneficiaries of a rapidly globalizing world, where from the 1980s onward, we just saw tremendous amounts of globalization which allowed for– The profitability of businesses to really get into some extreme places that they couldn’t have gone before with their input costs being kept down.

Tobias: That was Buffett’s thesis for Coke, that it didn’t have any international saturation at all. It might have been saturated in the US, but it had lots of places to go internationally.

Jake: Right. If you are the believer of that maybe globalization might have peaked and we’re going backwards or at least the pendulum swinging backwards for a while the other way, which I don’t know, if you just look at war as a proxy, certainly, I think things are a little more geopolitically fraught today than they were the last 5 or 10 years. If you believe that, then it seems it might be harder to have that global growth that you experienced in the 80s and 90s. I don’t know. I’m not sure how good the corollaries are. I’m sure I’m missing something important that makes this obvious. But– [crosstalk]

Tobias: There’s not a lot of tech in there. That’s one of the interesting things from the names that they threw out. Coke, P&G, Johnson & Johnson, Disney, AmEx, Pfizer. I mean, Pfizer’s tech-ish, I guess, because it’s pharma.

Jake: Sure.

Tobias: But Costco too, not particularly technological. That’s missing Microsoft, of course and Google too.

Jake: [crosstalk] IBM. Is IBM on that list? I think they were.

Tobias: Probably, they were, but not in the article. To what extent is this resulting?

Could You Live Through A Decade Of Underperformance?

Bill: I don’t know. I think if you look at a basket, I don’t know that it’s any more resulting than looking historically at value and saying value should work. It’s just a different way to look at it and extend your time horizon. But it’s definitely picking top to top. I do think that you’ve got to ask yourself, if you really believe it, can I live through an extended drawdown of underperformance and not cheap styles?

Tobias: Let’s talk about how long –? [crosstalk]

Jake: [laughs]

Tobias: We’re talking like a decade, 7 to 10 years. That’s virtually impossible, I’d say.

Bill: Well, yeah. And this wasn’t 7 to 10 years. This was what, 30?

Tobias: Yeah, to get back to break even– [crosstalk]

Bill: To get back to ’99 or ’98. That’s three decades.

Tobias: Was it early 70s and–? [crosstalk] Yeah, it’s a long time.

Bill: Or two, right?

Tobias: But you were outperforming– The first eight years sucked and then you were outperforming thereafter.

Bill: Yeah. How many clients do you have after eight years?

Tobias: None.

Bill: And how much trust do you have in yourself if you underperform after eight years?

Tobias: None.

Bill: So, I think that’s the relevant question.

Tobias: I’m going to go back to ’12 and counting it– [laughs]

Jake: So, you’re telling me there’s a chance.

Bill: Yeah. Well, I think that’s a very real question to ask, because it’s one thing to read something in a textbook or look at it– He’s objectively right. There’s no way to argue with what he’s saying. But living that is different.

Tobias: Well, you had Coke at 46. And then, when Buffett’s buying it, I think somebody said 18. [unintelligible 00:18:54] said 18 times in ’89. 20 years later, the PE’s more than halved. That’s– [crosstalk]

Bill: Well, you got earnings growth and stuff.

Tobias: [crosstalk] businesses, right? I’ve seen all of it in real time from– The ones that stand out to me, because I was buying it in 2015 was like Walmart, a few of those names. I’m just blanking on a few of them. But they were so expensive in 2000, it took them until 2015 to catch up to– to get to fair value or to get undervalued in 2015. And people didn’t want to touch them, because they hadn’t done anything for 15 years. The stock price [crosstalk] 15 years.

Jake: Dead money.

Tobias: Yeah, dead money.

Bill: The other thing that sucks, man, is on those– What did you say Coke was as an entry multiple?

Tobias: 46 in ’72.

Bill: Okay. So, you’re making 2%, 2.2%, 2.1%, something like that?

Tobias: On the bottom line, yeah.

Bill: And then inflation ran at what?

Jake: 5% to 15%.

Tobias: Much higher.

Bill: Yeah. So, on a real basis-

Jake: On a real basis.

Bill: -you are losing a lot of money through that decade.

Tobias: Well, Volcker got interest rates to 20.

Bill: Yeah, so, that sucks.

Jake: Is that high?

Bill: No, I don’t know. I think that’s why a lot of the industry closet indexes, so you don’t have to live with this kind of thing.

The Argument Against Concentration

Jake: It might actually be– Let’s talk about portfolio construction a second when we look at that result that came from there. If you took out the top five names out of that, I think you did pretty bad, actually. There’s this return profile that’s generated that comes asymmetrically from the top performers. And so, this is a recommendation against concentration in this type of strategy, because you’re almost guaranteeing that you’re flipping a coin at zero or hero at that point. If you’re going to have these very asymmetric outcomes, you almost have to position size smaller and try to own a bunch of them so that you catch it. Otherwise, it’s game over. So, you’re taking tons of risk if you’re concentrating in that.

Jake: Talking David Gardner. Guy after my heart.

Tobias: Yeah.

Jake: Yeah.

Tobias: Because the right tail is so pronounced in these ones that win, that says to me that you’re better off having lots of small positions.

Bill: Yeah.

Tobias: You could get lucky and pick the one that wins and look like a genius. But your best-case scenario is just having a little bit of it in your portfolio, if it goes up a hundred times, then it doesn’t matter that it was only a few percent.

Bill: Yeah.

Jake: Doesn’t it seem difficult, though, that from that starting point, if you catch all the winners, you end up with market perform? But if you don’t, you’re smoked?

Tobias: Yeah, you are under.

Jake: That seems like a scary game to play to me.

Bill: They’re all scary games in the market. That’s what I have learned.

Jake: [laughs]

Tobias: Yeah. What’s your other alternative? S&P 500?

Bill: Yeah.

Jake: Maybe.

Bill: Right.

Tobias: [crosstalk].

Bill: Then you– [crosstalk]

Jake: Basket of dog crap. [laughs]

Bill: Yeah.

Tobias: There’s some good names. If you’re going to pick the next Nifty Fifty to do that, it’s already in the S&P 500. I don’t know which ones that is though. It’s probably– [crosstalk]

Bill: It might be software. What I thought was interesting is, my man, Exit Multiple on the Twitter machine, he posted an interview. It was a podcast of a company that was undergoing a SaaS transition.

Tobias: Did they put you under for that?

Bill: What?

Jake: Yeah.

Tobias: Did they put you under for that?

Bill: No, no. He’s actually a value guy at heart, I believe.

Jake: Have to get [crosstalk] valuation.

Bill: I don’t want to curse him.

Tobias: No, when they’re giving you the SaaS transition, did they give you a general anesthetic? That’s what I was asking.

Bill: No, I don’t think so. I think you have to take it fully alive.

Tobias: You have to be awake.

Bill: But what he was saying is, he said like you got to convince these customers that you have– I’m pretty sure these were his exact words that, what they’re paying $1 for today, they’re going to want to pay $4 in the future for. So, you’ve got to figure out how to deliver that value. And he was talking about how capital intensive the working capital transition is, because you go from selling something for $90 to selling something for, I don’t know, six bucks a month or whatever, $10 a month, whatever it is, and how much R&D goes into getting your product ready. And then– [crosstalk]

Jake: This is Adobe buying Figma.

Bill: Well, and then he made the comment where he said something to the extent. My takeaway was switching costs are much lower in that model. And that was what got me perked up. So, it’s like, okay, at least in that one company– I don’t know. I know that people say it’s a much more superior business model and I understand why they say it. At least according to him and his particular company, it’s a more competitive product that requires a higher sales process for something that’s easy to switch on. That’s not the greatest pitch.

Tobias: There’s a good comment here that I– [crosstalk] Sorry, JT. You go on and then I’ll read– [crosstalk]

Jake: No, that’s fine. I was just going to say that there’s a little bit of a clue there in the name as software as a service. You’re providing a service now on top of software. So, there’s this long tail of liability of delivering something as opposed to when they buy a one-off CD from you in a box and you upload it on your computer.

Tobias: But you pay for it along the way. It’s a better model, isn’t it? Some expectation that you support the product long term?

Is The S&P500 The Next Nifty 50?

Tobias: I like this. Ben DiMiero says, “Isn’t there a case to be made that the S&P 500 IS the next Nifty 50? Like the Nifty 50, people will buy it at any price, all of the time?” That’s a Michael Green flows argument. How do you feel about that?

Jake: Sounds right until it’s wrong and everyone wants to get out. And then what? I don’t know.

Tobias: I guess we’re not through the– I don’t know, when the bust bottoms– We were not through bust yet, but we probably need to have a bust before we can make a decision.

Jake: I’d feel that goes against thousands of years of human psychology and what has happened historically.

Bill: Hang on. Sorry, I have a construction person that just walked in. What is the question? My apologies. This is– [crosstalk]

Jake: Michael Green melt-up, still a thing.

Tobias: Is there a case to be made that the S&P 500 is the next Nifty Fifty, like, the Nifty Fifty people will buy it at any price all the time?

Bill: It’s just not trading that high relative to the Nifty Fifty.

Tobias: [crosstalk] 30 times. [crosstalk]

Bill: What were we talking about when we were talking in the hotel lobby where we thought interesting bets were? Exporting emerging markets, right? But, man, I don’t know, you got to be diversified in those bets and hope you catch a ripper. I think the US is so much more robust than everywhere else that, if you believe in deglobalization, there might be margin riskier like margin compression risk, but at least, we’re well equipped for war, and we can eat, and have our own energy.

Tobias: That’s all important.

Bill: I feel that deserves to trade at a premium.

Jake: Agreed. Go ahead.

Tobias: I’ve got a couple of questions. This is from Samson. I guess, if you got to pick the Nifty Fifty, give me three names. What’s your three names for the ones that in 30 years’ time is still going strong, bigger?

Jake: Bill’s smarter than me at this [crosstalk]. So, go ahead.

Tobias: Microsoft. Well, that’s tech.

Bill: Well, since it’s Samson, we’ll throw in Tesla for him.

Jake: Tesla. How’s that?

Bill: No, I don’t know.

Tobias: Maybe Tesla. I don’t know.

Bill: Yeah. As the world exists today, it’s pretty hard to argue against Apple.

Tobias: Amazon? Apple? Amazon? Microsoft>

Bill: Yeah, it probably be the tera caps.

Tobias: Yeah.

Bill: It’s not a sexy answer and I’m certain that there’s–

Tobias: Costco. Yeah.

Bill: This Camping World idea, I don’t own any and I am very lazy on my research on it. But I could see a scenario, where they consolidate over time, and they end up the big player.

Tobias: Does Camping World have the big pyramid or is that Bass Pro Shops? Bass Pro Shops, right?

Bill: Yeah.

Tobias: I love that comic that does the rounds on the internet where they have that guy explaining to the pharaoh– It had– [crosstalk]

Bill: What’s the other one? Ashtead? They are the auto group roll up, right? I think they are. I could see that doing pretty well. But that’s not Nifty Fifty stuff. That’s just share gainers.

Tobias: Visa and MasterCard?

Bill: Yeah, probably. Obviously, blockchain is going to undo all their stuff.

Tobias: Bass Pro Shop must be a mighty farer.

Jake: [laughs] Oh.

Bill: Yeah. We’ll see. I don’t know. Maybe Netflix.

Indexing Is Harder Than It Sounds

Tobias: This is the other one I wanted to ask. James L. “What does it take to reverse on indexing?”

Bill: I don’t think it will.

Tobias: I think that most people who index through their work don’t know what’s happening. Don’t know that that’s where the money’s going.

Bill: Yeah, I think that’s actually probably a pretty nice way to live. Why would you want to reverse that?

Tobias: At the end of the year, you get a note that says you’re up, or down,” you’re just like, “Whatever.” Or [crosstalk] retire.

Bill: Yeah, you just got to focus on making more money next year and doing the same thing. In over time, it’ll work.

Tobias: Yeah.

Jake: 100% true. I don’t know if that’s the psychological path that often happens there though. People get scared and they sell out. That’s how you get to a bottom, right?

Bill: Yeah. The last bottom was a long time ago though. It might be different. I don’t know.

Tobias: 2009? They’d been in 2016, 2018. 2020s.

Bill: Nah, those weren’t real.

Jake: Color me skeptical that everyone has the faith to ride out through trauma.

Tobias: I think it’s faith so much. I think it’s just inertia.

Jake: Yeah.

Tobias: It’s hard to change.

Bill: It’s also really intelligent. There is the potential that a lot of people that are indexing have actually figured something smart out and they just stick to it.

Tobias: Yeah.

Jake: 100%. It’s just harder than it sounds when it’s– [crosstalk]

Bill: Yeah. Well, nothing is easy in this thing.

Jake: I think it’s lower every single day.

Tobias: If you’re not watching it– well, I’m suffering the same thing.

Jake: [laughs]

Bill: Imagine owning cable. You’d have to be a moron.

Jake: Oh, my God, just kicked me in the nuts sack all day long.

Bill: Yeah, that’s right. I don’t know, owning individual companies is tough, sticking in index strategy’s tough. All this shit’s tough.

Jake: I was told that was just to the moon and you just enjoy your brodown.

Tobias: Yeah, a lot of that’s gone away, hasn’t it?

Bill: Yeah.

Jake: That’s gone away, huh?

Bill: I’ll tell you what was an interesting interview, Druckenmiller was at Palantir.

Tobias: [laughs]

Bill: That was a pretty interesting. He was actually interviewing that guy about their business. And he did say that he thought that possible for 10 years of stagnant markets. But what I found interesting is, he was doing VC and Palantir in 2008 or 2009. Turns out that it was a pretty good time to do venture capital. So, there’s real– [crosstalk]

Tobias: What vehicle? Just him personally or is he’s got some–?

Jake: Family office.

Jake: I think it was him personally. Yeah. I mean, I’m not sure.

Tobias: Does he have outside money these days?

Jake: I think he just runs a family office.

Bill: Yeah.

Tobias: Yeah. Smart.

Jake: Life is good.

Bill: Here and there.

Jake: No LPs. [laughs]

Seth Klarman On The Lost Decade

Bill: Yeah. So, I don’t know. That was an interesting interview. I also found, my boy, the Science of Hitting. Hang on, I got to pull this up, because it was a great quote from Klarman. And sorry, I don’t have it ready, but it’s something about how nervous he is. It says, “I’m more worried about the world broadly than I’ve ever been in my career. I’d be worried we’ll have another 10 years of zero returns.” And that was an interesting quote from 2010.

Tobias: Ah.

Jake: Oh, got us.

Tobias: Yeah. I’m glad you cut me off before I said anything.

Jake: [laughs]

Bill: Not such an easy game.

Tobias: To be fair in 2010, I guess, we’d bounced a little bit by then. Yeah.

Bill: If Klarman can’t get it, there’s not a chance I can.

Tobias: Oh, that was Klarman? Yeah.

Bill: Yeah. Because that dude is– [crosstalk]

Tobias: [crosstalk] Druck.

Bill: Way, way, way, way smarter than I am.

Tobias: Yeah. We just bounced off fair value in 2009. And then, we’ve bounced a lot. So, by mid-2010, it was already looking expensive on the Shiller PE basis in a long time.

Jake: This could be a total misremembering on my part, but I don’t remember wanting for ideas in 2010, 2011, 2012.

Tobias: 2012. Yeah. Shiller’s cheap in 2012 too, I thought.

Jake: Yeah. But who knows?

Tobias: The names that were being pitched in 2012 of Microsoft.

Jake: Just dogshit like Microsoft 2012.

Tobias: Earnings yield with– Not quite 2012– [crosstalk]

Jake: Five times earnings, revenue had already rolled over. Made no sense.

Tobias: Yeah. [crosstalk]

Bill: There’s some right now. They’re out there. I don’t know what they are.

Jake: [laughs]

Bill: People find them, feel free to people send them.

Jake: People say that they’re out there.

Bill: No, they’re out there. They’re definitely out there. They’re probably in foreign markets, but they’re out there.

Jake: Should we bang out some vegetables?

Tobias: Let’s do it.

Jake: All right.

Bill: Anyway, for real, check out that Palantir interview. I thought it was a good interview. Really interesting.

Jake: Yeah.

Bill: It’s corporate propaganda. But they’re talking about what they do.

Tobias: [crosstalk] everything is.

Jake: Yeah.

Bill: That’s right. did.

Tobias: Everything is talking about their book.

Investing Lessons From Vermeer Fakes

Jake: All right, this is the story of the fake Vermeer. And this guy named Abraham Bredius, I believe his name is. I could be mispronouncing that. That’s okay. He’s an art critic and a collector. And he’s one of the leading scholars on Dutch painters. Particularly, Johanne Vermeer paintings. And as a young man in the 1880s, Bredius, he made his name by spotting works that were wrongly credited to Vermeer. And so, fast forward, he’s 82 years old in 1937 and he publishes this book identifying 200 fakes and imitations of Rembrandts. He’s like this master expert when it comes to what paintings are real and which aren’t, especially Dutch painters.

And there’s this newly discovered work that comes out that surfaced. And Bredius has ruled that not only is it a Vermeer, but he thought it was Vermeer’s finest work. His quote was, “When this masterpiece was shown to me, I had difficulty controlling my emotions.” This dude, he’s into it. The painting soon after sold for $10 million equivalent at that time period. There were several more paintings that emerged in a similar style. All these critics certified them, museums exhibited them, and more than $100 million of that time, and this is like in the 1930s, changed hands. There was only one problem. All of them were fakes. May 1945, the Dutch authorities arrest this old man named Han van Meegeren, van Meegeren, I think, or it might be Meegeren, I don’t know. And they charge him with treason.

Tobias: Treason.

Jake: Treason. They accused him of selling Dutch masterpieces to the Nazis, specifically to Hitler’s right-hand man, Hermann Göring. After a few days in jail, Van Meegeren, eventually, he confesses. And he’s actually gloating. And he says that he forged these paintings himself and he sold them to the Nazis, and he was so happy with himself–

Tobias: Got him.

Jake: Yeah, that he fooled all these experts and the Nazis.

Bill: That doesn’t sound like treason. That sounds like getting a bunch of money out of a country for a bunch of junk.

Tobias: [laughs]

Jake: You’re getting there. So, how did Bredius, who’s this Vermeer expert, no one knows Vermeer better than this guy, how did he get fooled?

Bill: Can I hypothesize?

Jake: Please.

Bill: Is it because he wanted to find these things? It was all motivated reasoning?

Jake: Oh, my God, Bill, you’re so good.

Bill: Is that it?

Jake: You’re ready to serve the veggies. You’ve ascended.

Bill: The student has become the teacher.

Jake: [laughs] Bredius’ feelings were trumping his expertise. We have to rewind a little bit and go back into Bredius’ history to understand this a little bit better. In 1901, he ruled that this certain portrait wasn’t a Vermeer. And it turned out that it actually was, and it stung his ego, and he didn’t want to repeat that mistake again. And so, he was likely looking for a chance at redemption. He was also especially fascinated by the religious works of Vermeer, and there was this gap in Vermeer’s timeline where these paintings might have existed that were more of the religious nature. And so, this one that came out– Actually, van Meegeren, he knew that, and he laid a trap, and he included lots of little touches that only Bredius was likely to notice.

For instance, there’s a simple test. Was the paint soft? Apparently, it takes 50 years for paint to dry fully. Van Meegeren knew this, and he did some amateur chemistry, and he effectively added this early plastic before there were really plastics to resemble old paint, like it dried faster. And so, younger paint would have dabbed off and revealed that it was a fake, but you pass it off this way. Bredius was very motivated to find another Vermeer. And so, he was very emotional about it. Oh, by the way, all of this is from this book by Tim Harford, and it’s called The Data Detective. There’s a bunch of good stuff in there. But this is the most interesting story that I got out of it. So, apologies for stealing Tim stuff without crediting him sooner.

Bill: This is a very good story.

Jake: Yeah. So, a couple of quotes from Tim in this is, he says, “People with deep expertise are better equipped to spot deception. But if they fall into the trap of motivated readers reasoning,” cue Bill, “They’re able to muster more reasons to believe whatever they really wish to believe.” And then, he says, “Today’s persuaders don’t want you to stop and think. They want you to hurry up and feel.”

Bill: It’s like politics, man.

Jake: Oh, totally. So, van Meegeren, as you foreshadowed, he pulled an even bigger stunt. He had made a ton of money during this Nazi occupation by selling paintings. In fact, he threw these regular orgies with prostitutes while many Dutch people were starving, which is obviously not a good look. The Dutch were feeling bad about this five plus years of Nazi occupation, and van Meegeren was the ringmaster of his own media circus that was this trial of him. He spun this story that he’d only forged art to prove his worth as an artist and that he took a great pleasure in tricking the Nazis. He twisted his reputation from a trader into that of this patriotic hero, who’s getting over on the Nazis. And so, he basically told all the Dutch people this story that they wanted to believe, because they were feeling so bad about occupation. Van Meegeren was found guilty of forgery, but he was cheered as he left the courtroom.

Tobias: [laughs]

Jake: And he knew how to give people exactly what they wanted. He died of a heart attack before he served any time, but there was an opinion poll that was conducted shortly around that time, and he was found to be one of the most popular men in the country at his death.

Tobias: [laughs]

Jake: There’s some takeaways from us here. Don’t be emotional when you’re analyzing whatever it is that you’re analyzing. Think about do you have motivated reasoning and be very fearful of it. Recognize that others might be playing into your desires and giving you exactly what you want to be hearing. The smarter you are, actually the more persuasive you can be in talking yourself into something. So, you’re actually extra dangerous. And then, finish it up with a Kahneman quote here, which is, “Overconfidence is the most significant of the cognitive biases.” So, just check to make sure you’re not being too motivated in your reasoning. Don’t be overemotional. And recognize that it’s really easy to be overconfident in what you’re looking at.

Bill: The other thing I’d add if I could is, I think, it’s really important when you’re asking people. Particularly, I’m thinking about expert interviews and whatnot. But same can be said about, I don’t know, if you’re trying to figure out why management teams are doing something. Ask the right people for the right stuff. If you ask an engineer a question that should be asked to a salesperson, you’re probably not going to get a very good answer. So, I don’t know. I just thought of that, because I had interviewed somebody from Guidewire and I didn’t ask too many sales-related questions, but I need to, and I need to go back and ask a different person that. But he was an engineer, and I don’t think he’s well suited to answer the questions that I have from the sales stuff. So, I don’t know. It’s interesting.

The other thing that I was thinking about with what games people are playing is, I don’t know, somebody has a motivation to flip– I guess, what I’m thinking of is, my buddy that was in oil, he was telling me about the games that they used to play and how he thinks they would see people that would bid on assets around them to fake mark their book up, and then flip to another person. So, it’s really important to think about who is making the bid, who is telling you the information, what might they be thinking behind? And it’s annoying to think that way, but I think you almost have to.

Jake: Yeah. How does that fit into efficient market theory when you have people’s–? [crosstalk]

Bill: Well, at his level, I think he would argue there was a lot of inefficiency, which is why he made the money made and luck. But that was good veggies, Jake.

Jake: Thank you.

Tricking Your Brain Into Believing

Tobias: Yeah, I enjoyed that. It’s funny how often those artists are able to sell fakes, get fakes out into the world. There’s a few documentaries on Netflix about somebody– [crosstalk]

Bill: The Koch brothers. Didn’t he get tricked or was that wine? That was wine.

Jake: Oh, yeah, he-

Tobias: That was the wine one, wasn’t it?

Jake: -bought some knock-off wine.

Bill: Yeah.

Tobias: Are they assuming that people don’t drink them, or people don’t know when they drink them? Is that the–

Bill: Probably.

Tobias: Cellar it for 10 years at a minimum and in 10 years’ time, you drink whatever it is you dislike. I guess, that’s a 10-year-old wine.

Bill: This tastes like two-buck chuck. It is, sucker.

Tobias: Except it’s been– [crosstalk].

Jake: [crosstalk] What’s code on here?

Bill: Yeah, that’s right. It actually tastes like vinegar. That’s how you know it’s good.

Tobias: The funny thing is that there are all of those studies. I think I’ve put these in Quantitative Value where it said, put MRIs on people’s heads when they drink the wine, they’re just told, “This is from $100 bottle of wine,” and they drink it, and the pleasure centers of their brain light up more than the same bottle of wine where they’re told, “This is a $2 bottle of wine.”

Jake: Yes.

Tobias: They’re not lying about their experience. They’re genuinely experiencing more pleasure, because they think it’s a more expensive bottle of wine.

Jake: That’s right. Bad-tasting medicine works better.

Tobias: Yeah.

Jake: Bigger pills work better than smaller pills. There’s the engineering answer and then there’s often the human answer, and those don’t always necessarily go together. Credit to Roy Sutherland in Alchemy for that kind of thinking. He did the best job of really digging into that.

The Bull/Bear Case On Charter Communications

Tobias: Yeah. We’ve got about 15 minutes. Guys, you want to throw in some questions? One of my highlights from the Future Proof was seeing Steve Romic. What do you guys think of Romic?

Jake: Well, I hope I age that well.

Tobias: Yeah, doesn’t he look great? Coming up on 60s, he said.

Jake: Fit individual, looks like he’s just got all his shit together, doesn’t he?

Tobias: Yeah. And he was all over that book too, when he was talking through all the positions in the book, well and truly knew them.

Jake: Yeah, he knows his companies.

Bill: [crosstalk] on cable. So, not going to make it.

Jake: [laughs]

Tobias: Yeah. He’s got some Charter in there, hasn’t he?

Bill: Yes, he does.

Jake: Oh, boy.

Bill: Bound to die a sad death, but I will die with him.

Tobias: What’s the bull case in Charter?

Bill: There is none. That’s why the stock goes down.

Tobias: It’s very cheap.

Bill: Yeah. Dude, by the way, by the way, the low tick in COVID was $370, $170. Today, $365.09.

Tobias: Is that on the S&P 500? Are we through the–? [crosstalk]

Bill: No, that’s true.

Tobias: Oh, sorry, sorry, sorry.

Jake: You are calling out Romic.

Bill: Just following up on a question that I had asked.

Tobias: Do you want to tell that story?

Bill: No, I just asked. I said, “Charter at the COVID lows. So, how do you know you’re not wrong?”

Jake: He asked Steve this in live interview.

Bill: Yeah. And I guess, there was a debate as to whether or not I was right. But I was pretty right, especially on a buyback-adjusted basis. But his answer was correct. He said, “You focus on KPIs.” Look, I think that the bull case on Charter is if you believe in share cannibals and you think that fixed wireless is not a viable answer at scale, and you think that some of the data that’s coming out is maybe similar to some of these SaaS companies that are really small and are growing very quickly, but at maturity, will not grow that fast or won’t grow into their projections, and you think it’s hard to overbuild fiber, and you think inflation makes it even harder, and you think interest rates going up also makes it harder, then you own the infrastructure on the ground. But it may not work. [crosstalk]

Tobias: What’s the bear case? Too much debt and Wi-Fi– wireless is going to overtake– [crosstalk]

Bill: Yeah, I think from first principles, it doesn’t– If you just think about the way the world should be, why do we have any wires?

Jake: Chasing your own tail.

Bill: Yeah, this is what she does.


Jake: Oh, what a metaphor.

Bill: I think it’s like, “Well, why isn’t everything wired?” It’s kind of funny that she’s doing this right now.

Jake: Yeah. While you’re– [crosstalk]

Bill: And fiber’s just a better network. So, cable’s inferior. I just think there’s a lot of things that have to happen.

Tobias: When you say cable, it’s twisted-pair copper, rather than– [crosstalk]

Bill: It’s a hybrid. It’s fiber into the plant and then it’s coaxial to your house.

Tobias: When you say that’s the hub, it’s not fiber to the home. It’s fiber to the node or something like that.

Bill: Yeah, that’s right. Yeah, it’s like a head end and then it comes out. So, it’s a hybrid infrastructure. So, they need to get fiber deeper in and I guess you got new DOCSIS 4.0 is coming out.

Tobias: [unintelligible [00:47:03] is extremely expensive.

Bill: Well, that’s certainly what I’ve always read. So, we’ll see.

Tobias: Because the tech’s always got better. The coax has always got faster and faster at some point.

Bill: Yeah, there’s different ways to speed it up.

Jake: Is the bet really just the world will change slower than what other people might expect?

Bill: Yeah. And I think with Charter– I said at our thing. I think Comcast is probably, actually cheaper and maybe even safer given the balance sheet. But I think the thing that’s nice is you know exactly what they’re going to do with the buyback.

Jake: Money.

Bill: They’re going to continue to retire shares. So, shares have gone down a lot. I don’t know. We’ll see.

Shale vs Crude Oil Companies

Tobias: There’s some good questions here. I think you guys might be overestimating our powers, but I’ll throw them to you, guys, just in case. Here’s one. “I wonder if investing in traditional oil stocks has risk that newer shale companies could steal their market share in the future? Or are the traditional big guys likely to do most shale too?”

Bill: Jake?

Tobias: [laughs] Yeah. My understanding is that shale is still relatively expensive compared to a lot of traditional old finds. Therefore, it’s that marginal. But the amount of oil that they’re able to get out of these things that they couldn’t get before is actually quite astounding.

Tobias: Out of shale?

Jake: Yeah. You took from getting a thimbleful to getting barrels, relatively speaking. And so, it’s pretty profound, the technology, and quite a boon for humanity, if I think, if you want to think that way. Now, I don’t know the adoption. I’m sure there’s some ways that it gets cheaper as far as– A lot of it has to do with actually computer modeling of the geology to try to find where’s the right place to drill and have less dry holes drilled. That gets cheaper all the time, which is good as an input cost. But I don’t know. I just think we’re probably going to need– I don’t think you have to pick between. I just think we’re going to need oil for longer than a lot of people would probably prefer. And if that’s the case, then there’s probably a lot of money to be made over the next 20 years or so.

Bill: When did the shale bust happen? Was it 2017 and 2018?

Tobias: Earlier.

Bill: Was it that early?

Jake: No.

Tobias: I would say.

Bill: I think it went on.

Jake: No, I think the boom was ’15.

Bill: Yeah, I think the bust was ’18 or ’19.

Jake: Yeah.

Bill: I could be wrong, but I think we’re still pretty close to people remember getting burned on funding shale projects, which is closer to where the capital cycle you want to be investing is after people are burned as opposed to before they get burned.

Tobias: There was a stat from that period that more money had gone into it than had come back out. Is that still the case or was that the case? Is that true?

Bill: Shale?

Tobias: Yeah.

Jake: It could be. I remember Bethany McLean saying something like that at one point.

Bill: Yeah.

Jake: She’s usually pretty solid. Yeah, well, blame zero rates. You don’t want to lay ESG at the feet of the Fed, but there is a little bit of argument there that you probably wouldn’t have had as much of that being done if it wasn’t such cheap money.

Tobias: William Kim says, “The bust was 2015.”

Bill: 20– Ah, maybe. I don’t know. I think it was later.

Tobias: I think you guys got old-timers’ disease.

Jake: It could be.

Tobias: Time is passing more rapidly.

Bill: It’s very possible.

Jake: Definitely true.

Tobias: Aging.

Bill: Yeah, fair.

Jake: Definitely true.

Bill: That I just came off of a guy’s trip. So, my brain maybe– [crosstalk]

Jake: [laughs] A little pickled?

Bill: Like 85%.

Jake: How was Chicago, by the way? Did you have fun?

Bill: Yeah, man. It was super fun. We did some real Chicago stuff, played a lot of bags on a rooftop, had a crazy Airbnb, had a lot of–

Jake: Was it crazy good?

Bill: It was wild. It was a lot of pictures of naked females and musicians. It was really weird. I don’t know how to describe it. And if you just say it out loud, it sounds weird, but it was so well done. It was very artistic. Yeah, it was very artistic.

Jake: I’m going to need you to send me some pictures.

Bill: I’ll follow up offline.

Jake: Okay, good.

PwC, KPMG To Host US Inspections Of China Firms In H.K.

Tobias: I’ve got another question. I think this is a good one too. I don’t know the answer this. That’s an interesting– [crosstalk]

Jake: Don’t you have any easy ones, Toby? What’s this freaking–? [crosstalk]

Tobias: Not today. I’m only throwing at the stuff that’s hard. “This week US inspectors arrived at PwC, KPMG in Hong Kong for audit review of US listed China Tech – how will this play out?”

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

Tobias: That’s a good question.

Bill: Right. Well, good, bad, or in between. You’re welcome.

Jake: Yeah.

Bill: I have no idea.

Tobias: I’m with you. I don’t really know. I can see there– Yeah, I guess there’s a potential for a good outcome, where you remove some of the discount that’s hanging over that China tech.

Bill: I think it’s so naturally Western to just trust everything. And I think that there’s good reasons to distrust some of the accounting. But I don’t know enough to really have an informed opinion. I’m hopeful that they don’t find much. I think it would be good for the world if they don’t.

Jake: I agree with that.

Bill: I have no idea.

Jake: The world’s a lot better place, if China and the US are friendly coexistence. And if we can’t find that and we have these little friction points, accounting is one of them, which seems like a weird one to have. But boy, it’d be nice if we could just figure out how to bury the hatchet on some of this stuff and keep good relations up.

Tobias: How’s Charlie doing on his Alibaba position?

Jake: I don’t know.

Tobias: I’m just pulling up Alibaba now. I haven’t had a look for a little while.

Bill: [crosstalk] I think he’s too worry– [crosstalk]

Jake: Yeah, I think that’s probably south of what he purchased. What do you think?

Bill: Yeah.

Tobias: I think it’s at five-year low or something.

Bill: Yeah. Hard to purchase lower than a five-year low.

Jake: [laughs]

Tobias: Just having little bit– [crosstalk]

Jake: When you can, you want to do that.

Bill: That is exactly what you want to do. If you can purchase below the low, strong.

Tobias: That’s where you want to go. [laughs]

Jake: Definitely want to do that.

Bill: Yeah.

Tobias: Not got pulled up.

When Will Inflation Get Back Under Control?

Jake: Give me an easy one, Toby. I need to lay up here. What’s–?

Tobias: All right, here’s one. “When will inflation get back under control?”

Bill: Oh, boy.

Jake: You son of a bitch.


Tobias: Let’s get back to that China tech one.

Jake: Yeah. Oh, you have so many competing factors here from– Capitalism wants to solve this problem and provide us with more for less. Governments like to run deficits, especially when it feels there aren’t consequences. Deglobalization maybe is a factor pushing the not good for inflation direction if we have to rebuild supply chains and everything is just more expensive, there’s more friction in the world than there was, if you believe Peter Zeihan type of arguments. I don’t know, these are large gale-sized forces pushing in both directions and which one is stronger is really hard to say.

Bill: I actually thought Biden’s answer was not that terrible on 60 Minutes, which I’m sure people will laugh at. We’re going to do this real quick. Cereal and bakery products up 16.5% year over year. You don’t need them. They make you fat.

Tobias: [laughs]

Bill: Meats, poultry, fish and eggs, up 10, you need that. That makes you strong. Dairy and related products make you fart, 16% higher. Fruits and veggies up 10. Nonalcoholic beverages, you just need to drink water as a collective action, that’s 13. Other food at home, 17. That’s our 16:7. That’s tough. Energy up 24. I don’t see that doing that year on year but could. Energy services up 19. That’s not great. New vehicles up 10. I bet that comes off. Apparel up 5. Probably, it starts to come down. Although with zero COVID, who knows? Tobacco and smoking, up 8.8. You can count on that to go up and maybe higher. Airfare 33%. I don’t know if that continues. So, I don’t know, there’s some things that I could see coming down.

Jake: Housing was such a big component of this, what’s that look like?

Bill: Six.

Jake: Because that’s going to drive a big chunk.

Bill: Yeah.

Jake: 6% over year for housing costs?

Bill: Yeah, that’s what they say.

Jake: That’s the rent-equivalent shenanigans?

Bill: I think it’s rent and I think it’s actually housing. Hang on one sec. Shelter. Yeah. Rent of primary residence, 6.7 and owner’s equivalent rent of residence is 6.3.

Jake: See. I got a little feel that’s a little muted-

Bill: Understated?

Jake: [crosstalk] reality, right?

Bill: Yeah, I agree.

Jake: So, does that go up or down?

Bill: I don’t know, man. That’s the question that I’m really not sure on. Because if you believe that we have a supply problem, I do think that– [crosstalk]

Jake: Over or undersupply at this point?

Bill: Well, I think under, generally. But maybe we don’t. Maybe the amount of inventory that hits the market comes out and it really was a bunch of people that just owned Airbnb’s. That’d be good for inflation.

Tobias: I bought some plane tickets back to Australia for the end of the year.

Jake: My apologies. [laughs]

Tobias: I’ll be pushing back retirement about five years as a result of that.

Bill: Yeah.

Jake: How’s the second on your house to make that happen? [laughs]

Bill: I was looking at the listings around me and they have exploded. But the prices that people are asking are out of this– They’re crazy.

Median Mortgage Payments Up 66% From A Year Ago

Tobias: The stat that I saw today was that the cost of service, the-

Jake: Yeah, median home.

Tobias: – median home. Sorry. That’s not the stat. The stat was the same payment– I guess it’s the median mortgage payment, where a year ago that bought a $550,000 home. Today, that buys a $335,000 home, something like that.

Bill: Yeah, that sounds right.

Jake: So, that [crosstalk] another one.

Bill: I’m surprised it’s not high.

Jake: US median housing payment as a percentage of median income. This payment includes property– sorry, principal interest, taxes, insurance, PMI. It climbed up to 44.5% per the Atlanta Fed. And it was down in the 28% range in 2020. It was at 42% back in 2006. So, it’s a little bit of a scary chart there.

Bill: But I’m not sure what you take from it, because what I take from that is if you locked in lower rates, you’re just not selling your house.

Tobias: Yeah.

Jake: 30-year mortgage right now, 6.5% today.

Bill: Yeah, it’s not that high historically though.

Tobias: It’s about the long run average. That’s where it was in 2008. That’s where I saw that same stat, I think.

Bill: I think the thing that’s tough is, if you do think that housing is undersupplied, I don’t know where people are going to start selling their homes from. I don’t think there’s going to be a lot of voluntary trading at 3% mortgage for a 6% mortgage.

Jake: Well, you’re just going to turn it into a rental, if you have [crosstalk]

Tobias: Airbnb.

Bill: Yeah, actually, the Wall Street Journal had that exact article that people– Well, it was one person in California that was, he’s not selling– [crosstalk]

Jake: Fake news.

Bill: Yeah, that’s right.

Jake: [laughs] About selling.

Tobias: That’s it, fellas.

Jake: All right, we made it.

Tobias: We made it. Thanks, everybody. We’ll be back next week with more doom and gloom. We’ll– [crosstalk]

Bill: Shoutout to the ladies. Keep listening.

Tobias: [laughs]

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