VALUE: After Hours (S04 E34): Build-a-Bear Workshop; The Gini Coefficient; and Graham on Margin

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

  • Build-a-Bear Workshop
  • The Gini Coefficient
  • Peter Zeihan’s Fractured World
  • Ben Graham Lost Everything Using Margin Leverage
  • President Joe Biden Set To Tap SPR In Historic Move
  • A Better Definition Of A Bear Market
  • The Next 9 Months Could Really Suck
  • Is Michael Burry The GOAT?
  • Buy When Markets Get Chaotic
  • Bears Get Ratings Like Crazy
  • Is There Going To Be A Big Short 2?
  • Europe: Rising Energy Prices Could Fuel Social Unrest

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 happening, fellas? Market’s in turmoil.

Jake: Ooh, I’m off to a strong start. I just spilled half my drink into my lap.

Tobias: [laughs]

Jake: So, I’m feeling pretty good.

Tobias: At least, you didn’t spill all of the drinking in your lap.

Jake: Yeah.

Tobias: That’s — [crosstalk]

Bill: That’s true.

Tobias: What’s up, Billy? You surviving out there in Flo-rida?

Jake: Yeah, man. I’m glad to glad this hurricane is going west, but hoping Sarasota dodges the bullet that appears to be coming at them. I got two friends there. Last time, they were tearing out a lot of their house after one. So, I’m just glad I’m not having to relocate with my grandmother to some other place, would be a fucking mess.

Tobias: How about you, JT?

Jake: Just living that sweet suburban– [crosstalk]

Tobias: Awesome street life?

Jake: Yeah, exactly. Strong into the baseball swing. So, it’s all happening. Baseball and soccer.

Tobias: Let me give a little shoutout. Samson in Dubai, Jack in Yorkshire.

Jake: Where are they at?

Tobias: Jonathan, Brandon, Mississippi. Tbilisi, Helsinki, Leeds. Sweet. What’s up, fellas? Nice to have everybody joining from everywhere. What have we got up on deck? You got an interesting backdrop today there, JT. What’s the perfect equality line?

Jake: Well, obviously, we’ll get into it. But we’re going to be talking about the Gini coefficient.

Tobias: Ooh.

Jake: Yes.

Tobias: Is that how you say that?

Jake: I believe so. I don’t know. Am I saying it wrong?

Tobias: Is that G-I-N-I, Gini? Gini?

Jake: G-I-N-I. Yeah.

Tobias: I’ve never heard anybody say it. I’ve only ever read it.

Jake: I could be saying it wrong. So, we’ll see. What you got?

Tobias: So, since August 15, the market has done a swan dive and we are now for the year or from the high technically in bear market territory again 23% down. When I was writing these notes this morning, we were actually up a little bit, but we’re down now. So, I just wanted to take a look at CAPE, the implied returns, my definition of a bear, what’s happened to earnings.

Jake: Uh-oh, put on your crash helmets, everybody. [laughs]

Tobias: I think it’s cheery to realistic once you understand what it implies, I think.

Jake: All right. BB, you got anything on deck?

Bill: Yeah, I guess, it’s probably along the lines of Toby’s. I got a tweet that had me thinking.

Jake: All right.

Bill: So, we’ll get into it.

Jake: Well, let’s start with TC, and then we can transition into BB, and then we’ll go to JT.

Build-a-Bear Workshop

Tobias: Let me give you some of the stats. So, CAPE currently 27. Nobody cares about CAPE anymore, but that is very, very high still. Long-run CAPE is now 17.4, which I thought was interesting. When I started doing this a long time ago, the long-run CAPE is 16. So, it’s crept up. And that’s running back for S&P 500 precursor data. So, the S&P 500 kicked off March 319.57. That was a precursor to that.

Jake: It’s pretty good to get a whole another turn after hundreds of years of data– or hundred years.

Tobias: Yeah, that’s right, because it kicked off in 1850. And so, this data runs back to 1850. I don’t know how good it is. But it seems to match up to what everybody else basically conclude. So, I think that the data, it’s roughly right. If CAPE goes to its long run mean, the implied level of the S&P 500 is about 20– Well, it’s 2328. It’s silly to quote at all those four digits, but say 2300 or 2350. That’s about the long run average.

Jake: Where are we at today?

Tobias: We’re at 36– Well, 3661 when I wrote it, 3620 just before I came on. I don’t know exactly right now, but we’re about 36% over.

Jake: Okay.

Tobias: That’s quite a long way to fall. I think it’s actually so far that it’s even if we got a 2007-2009 style drawdown here, I still think it would probably do what it did then and bounce reasonably high and then it would take another cycle for us to fully clear the deck. I just don’t see how. Maybe it’ll get there. But a crash of that size is almost unimaginable. So, the total return since 1850 is 9.1%. That’s made up of 4.8% dividends and the other portion of whatever, that works out to, 4.3% or something is index return.

It used the Hussman method. I use my own inputs, but the Hussman method assumes that you mean revert to the average over the next decade and you collect dividends along the way. You don’t immediately fall to the average. You drift down towards it. And there’s underlying growth as well in earnings, but that total return is 4.1%, which includes currently the dividend yield of 1.7%. So, an index return of 2.4% per year for a decade. That’s how it gets there. One thing, I’ve been talking to– Yes, 9.1% is nominal. Real, what’s that, -0.2%? And after tax– [crosstalk]

Jake: It’s more like 6, right?

Tobias: It’s even worse than that.

Jake: Yeah.

A Better Definition Of A Bear Market

Tobias: The definition of a bear, I always found really unusual. I’ve got a completely arbitrary definition of a bear too. But the current definition of a bear is down 20% from the peak and you can get these things like we had and you can see it in lots of assets, house prices, lumber, everything we’ve talked about on this podcast for the last few years, where it runs up a lot. It could spike and then fall back down. And really, it’s round tripped, but technically, it’s in a bear market. To me, that makes no sense.

Jake: Yeah.

Tobias: My definition of a bear is just to look back 12 months ago and see if you’ve done more than 20% from 12 months ago, then you know a bear.

Jake: Right.

Tobias: Now, I get that that’s as arbitrary as the other definition, but the difference is that you don’t get 2016 being called a bear. You don’t get 2018 being called a bear. The only times you get to call a bear are March 2020, then 2009, and the third and fourth quarter of 2008. And in 2002, it really only identifies the real generational crashes. So, when you get those events, the forward returns are very, very good. If you just wait, they only come around every 10 years. So, they’re very, very rare. So, it’s not much of a strategy just to sit around waiting for them, when they do pop up, the forward returns are very, very good.

Jake: Would you call this segment, Build-A-Bear Workshop?

Tobias: [laughs] I should have.

Jake: Oh.

Tobias: I will now. It’ll be up on the title. We are currently just trading a little bit above that level. So, we don’t have to fall very much. I think we’re at 18% down year-on-year.

Jake: Okay.

Tobias: The market last year bottomed towards the end of the year on October 1st and then it ran up 10% through the end of the year. What that means is that– And October 1st this year is a Sunday. So, next week and through the end of the year, we need to rally about 5.5% in order to avoid that my idiosyncratic arbitrary definition of a bear, which is down 20% year-on-year. And that’s a very, very rare occurrence. The last time, we had one month, March 2020, and then preceding that was 2009. So, that’s how rare they are in the S&P 500.

Jake: So, in years, we could actually go up a little bit from here. And if the 12-month was up higher, then we can go into a bear without actually going down to it.

Tobias: Right. That’s the implication.

Jake: That’s curious.

Tobias: It is. But we’ve fallen very rapidly this year. This is one of the worst years on record in terms of how quickly we’ve fallen. I saw a tweet the other day. I’m going to forget all of the dates. But there were only three dates that were worse, 2008, 1931, and there’s another one in there that I can’t remember off the top of my head. But those two, that’s pretty bad ones. 1931 was the depression, 2008 was the credit crisis and one of the worst drawdowns. That’s the worst drawdown, the S&P 500 down 56% year-on-year or from a peak.

Jake: Yeah. Now do 60-40.

Tobias: Yeah. Well, I don’t have that data. But yeah, that’s nasty too. I think the thing that’s driving it partially is earnings topped out for the S&P 500 in December at $210, $220. $210 for the index. So, index is at 3,620 earnings for the index or $210, which is how you get a single PE of 18 for the index– Sorry, and currently March 22, $203. They’ve fallen about 3% since the start of the year, which I think is probably what’s driven the decline in the market.

But I think that all of that put together means that there’s a reasonably good chance that we do go into my definition of a bear, which is the real drawdown. And then, typically what’s happened in the past when that’s happened is that the duration is about three to six months. So, it’s pretty short once you go into it. Having said that, that’s when all of the selling actually occurs. So, everything comes before then is a precursor. I have no idea where the bottom is, but if fair values around 2,300, then probably that’s in play. If 2300 is a possibility and it’s also possible to go under averages, even though, I haven’t seen that for long time.

Jake: Wait, wait, wait, are you saying that you can be under an average? I don’t know. I’m not buying.

Tobias: Evidently, that’s how you get the average. It’s going to be about halfway between the two. Well, I don’t know, I’ve never seen the other side of the average. Who knows what the market’s going to do? No one knows. But I feel you can’t get any sustainable returns until you flush the system, and we haven’t flushed the system for a long time. Every time we get close, the Fed turns around and lowers interest rates and pumps out a whole lot of liquidity, and it just drops everything.

Jake: Safe.

The Next 9 Months Could Really Suck

Jake: And I think that’ll happen again this time. I do think they’ll pivot. But if you have a look at what happened in 2002 and 2008, they pivoted a lot closer to the top and didn’t make any difference whatsoever, because it’s more psychological than it is actual. One possible scenario, worst-case scenario probably, is that we trigger that sometime before the end of the year. We have three to six months of chaos. We go down a lot through that chaos. And then we get a sustainable bottom, and hopefully from there, we rally. So, I would say that the next nine months could suck, but probably be looking pretty good about this time next year.

Jake: It sounds like a reasonable base case. I’m not sure everyone’s ready for that.

Tobias: No, that’s what I’m talking about, because I’m not ready for it either. I’m getting tired of selling off all the time and looking dumb. So, I want a rally.

Jake: Get those man-overboard plans created now before-

Tobias: Yeah.

Jake: -it’s too late. Come on, guys.

Bill: I don’t know.

Jake: [laughs]

Bill: I think you had to do it last year.

Jake: Well, fair enough.

Tobias: But you got time. I mean, you got time now.

Jake: The next best chance to do it is today.

Bill: Yeah, maybe. It depends what you own. A lot of stuff, it’s too late. Not to say that it can’t go lower, but the time to have it was six months ago.

Jake: I think we said it back then too about–

Bill: Yeah.

Buy When Markets Get Chaotic

Tobias: I think you can have lots of opportunity. I don’t think this is over by any stretch of the imagination. I think if you get three to six months of chaos, you really do get those chances to buy the very best stocks on sale for prices that you won’t see for another– Well, with any luck, 5 or 10 years, but entirely possible that we get something in between. I feel this might be a ’70 start thing where you get a big crash and a little rally, and you get another crash that finds a lower low, but it takes five years to get there.

Jake: Yeah, you’ll probably see those prices again, but it just might take a long time as you’re getting–You’re going to go lower than where you were to get back to that. [laughs]

Tobias: No, at least on a multiple basis. Hopefully, not on an index basis.

Jake: I’m just saying, don’t expect to bottom tick.

Tobias: Oh, yeah. No, impossible. You just want to make sure that you’ve– [crosstalk]

Jake: Just getting a lot for your money as you’re buying.

Tobias: Yeah. I think as the market gets really chaotic, the tendency– I saw this lots of times when I was talking to people as investors following 2009. There were lots of people who, when it got really chaotic near the end of 2008, beginning of 2009, that’s when they sold everything out, because they couldn’t take the selloff anymore. And then it was 2015, they are still waiting to get back in. I don’t know if they ever did since then. It’s entirely possible that the same thing happens. This time, you get this chaotic selling, and the chaotic selling is the signal to buy and not the signal to sell. [crosstalk]

Bill: There you have it.

Tobias: But anything can happen.

Jake: Easier said than done.

Tobias: I will let people know if we trigger those things and at that point, I’ll be ripping up the floorboards and stuffing them in the boiler, get that thing going as quick as I can.

Jake: Yeah, we may need real jobs so that we can have income that we can put to work. [laughs]

Tobias: Let’s not go that far. It’s not that bad.

Jake: Oh.

Bill: Yeah, I’m going to start laying tile. The guys that are quoting me to lay the tile at my house quoted almost $20 a square foot.

Jake: Ooh.

Bill: Yeah.

Tobias: Does that include the tile?

Bill: No. I just said, “Fine. We’re not doing the job.”

Jake: That’s just the labor?

Bill: Yeah.

Jake: Yikes.

Bill: Yeah. Now, we got a fucking hurricane coming, which is going to take every tradesmen in the state, they’re going to go over there to fix all that stuff. This is going to be a mess.

Jake: It’s good thing you got that flooring background.

Bill: Yeah, well, I just know enough to know I’m getting screwed.

Jake: [laughs]

Bill: I told the guy, the guy quoted, it was a $14,000 to do a shower. I’m going to have tall ceilings, but I said– [crosstalk]

Jake: 40– [crosstalk]

Bill: Well, I said to him, I said, “How many hours do you think it’ll take you to do a shower? You think 40 is sufficient?” He was like, “Yeah.” And I was like, “Okay, that’s 350 bucks an hour to lay tile.” He’s like, “Well, that’s not how I quote.” I said, “Well, that’s how I think about it.”

Jake: Yeah.

Bill: “So, this conversation’s over.” It’s wild, man. I told the builder, I said, “Just shut it down. You guys are all going to need work in six months and I bought a house, so that I didn’t have to be forced to make decisions. So, board it up and we’ll talk later.”

Jake: We found your inflation.

Bill: Yeah. I’m not getting bent over without at least trying to avoid it for a little while. So, we’ll see. It could backfire, but I don’t think it will. The tweet that I liked said Value: After Hours topic. I sent it to myself as soon as I saw it. So, I’d be prepared. It was from Shadow Stock. Shoutout to you.

Tobias: Oh, yeah. That’s John.

Ben Graham Lost Everything Using Margin Leverage

Bill: Yeah. 1930 thinking the worst was over. Graham went all in. He used margin leverage what thought would be terrific returns. But the worst was not over. The Dow collapsed. Graham had his worst year losing 50%. He personally was wiped out in the crash. And that’s from fa[unintelligible [00:16:25]. Big mistakes.

Tobias: I’m glad you said that because the thought had occurred to me that I might want to get long a little bit on margin through this. So, that’s–

Jake: [laughs]

Tobias: Thanks for the reminder.

Bill: Yeah. So, you got to make it to the other side. I am certain that there are things to buy right now. I am also certain that you can get squeezed out of them if you do it in a stupid way.

Jake: Margin. I’ve been wondering if you’ve seen some of the moves in the bond market lately? How if they’re not been more like leveraged bond funds, risk parity, blowing up with those kinds of moves? They’re just monster moves. I don’t know if we’ve ever seen those that fast in our lives.

Tobias: I felt the same thing.

Jake: What’s happening there?

Tobias: I don’t know the answer.

Jake: Do we have to wait for Pal’s book to come out, where he talks about how he saved– [crosstalk] Yeah.

Tobias: I thought the other day, these moves are amazing and there’s a counterparty to every single one of these moves.

Jake: Yeah.

Tobias: There is somebody on the losing side of every single one of these moves. And there’s been nothing. And all of those things, the moves in those are just astronomical.

Jake: And we know that these guys are unleveraged doing that, because the returns, there’s nothing there. The interest rates where they were in the toilet, you had to lever up to get any real kind of return.

Tobias: The moves are usually so small. Yeah, that’s it. You got to lever up to see get a reasonable return. Yeah, I’m amazed there hasn’t been more people blowing up yet. I guess– I don’t know. I don’t get it.

Jake: Well, orderly liquidation.

Tobias: Evidently.

Bill: When do funds send out their communications to shareholders?

Tobias: Coming upon on end of quarter here.

Jake: Couple days. [laughs]

Tobias: Yeah.

Bill: Yeah. So, we’ll see other redemptions like next month.

Tobias: Yeah, there’s a good comment here about– It just went past. I don’t really know enough to–“Speaking of CAPE and earnings,” this is from Matt Hensen. “How much do you think GAAP mark to market will affect Q3 earnings? Seems we’re in for a shock, no?”

Bill: I don’t think this stuff matters. I think the market’s smarter than that. I really do, especially in aggregate. I don’t know, maybe some computers will turn on and off based on it. That’s possible.

Tobias: That’s fair.

Bill: This is just fucking noise stuff, like that.

Jake: What’s the percentage of companies that have material marketable securities as part of their asset base that flow through into an income statement?

Tobias and Bill: Insurance.

Jake: Aftermath is not that much. Yeah, it’s insurance.

Bill: Well, I’d be interested too, how much do rates actually create some earnings on cash in the bank? There’s some offset there.

Jake: Yeah. It depends on your–

Bill: Your treasury management may actually get some interest income for once. So, I don’t know. This is like– [crosstalk]

Tobias: Not much. There’s not much interest in coming around.

Jake: 4% is a lot better than a 0.25%.

Bill: Yeah, and it has been.

Tobias: Nobody’s getting 4% a call, 4% on the 10-year. And then, you get duration [crosstalk] time.

Jake: Isn’t it 4% on the one?

Bill: Dude, it’s 4% on the one and it’s 3.5% on the 10.

Tobias: Yeah, that’s a good point. That’s a good point.

Jake: yeah. [laughs]

Tobias: That’s a good point. I keep on– [crosstalk]

Bill: You can get 3.5% on the six month.

Tobias: I check the yield curve every single day, every single day, because I want to be the one to call. I’m not going to get it, obviously, but I just want to see it happen.

Jake: 2-10, is that what you’re waiting for?

Tobias: No. No, 3-10. 3-10.

Jake: 3-10. Sorry.

Tobias: I think 2-10 went through. 2-10’s as deep as it’s been.

Jake: It’s been over backwards, huh?

Tobias: The three-month moves up, but the 10-year’s moving up so fast too, every time I check in. There’s a great, something like that, website that I use all the time. I’ll tweet it out. And you can pin the current curve and then you can put in any date and compare. So, I go back a month and I go back a year. And a year ago, it was normal looking. Well, it was very– [crosstalk]

Jake: Just laying on the ground, basically.

Tobias: Yeah. But now, it’s [crosstalk]

Jake: Now, it looks like a Russian gymnast? [laughs]

Tobias: That’s right. It’s look like a broken finger. I agree with you. That looks like a broken finger. But the three-month has been rocketing up. It’s just the 10-year’s going up faster. The whole curve is going parallel up. It’s going to be hard for– It is arbitrary whether three-month catches it or not, because you can see how arbitrary it is when you look at the whole curve moving. But it is one of the things that people track, the 3-10. That’s what Cam Harvey says, it’s a precursor to– Or it’s called every recession and hasn’t had any false negatives since he published in about, I must say, ’81 or ’83, something like that. Is it as old as that? That seems–

Jake: Well, how old he’d be what–

Tobias: Cam Harvey is not that old.

Jake: Three or four then, datapoints?

Tobias: There’s a few. There’s more than that. There’s a few. It might be eight, something.

Jake: Okay. Statistically significant.

Bill: I wouldn’t get caught up in this shit. Look at stuff– [crosstalk]

Tobias: I doesn’t make any differ– I agree. I agree.

Jake: Yeah. That’s not entertaining, Bill. Come on.

Tobias: I just want the trigger.

Bill: I’m just saying. Look, my beloved Qurate, I don’t own these. So, don’t think I like them. But it’s getting hard not to. The preferreds yielding 18% cash on cash.

Jake: Yeah.

Bill: You got to get paid, right? If it’s a zero, it’s a zero, but you got– par is 100 trading at 44.

Jake: Are those cumulative preferreds?

Bill: Oh, yeah, but they’re going to make the payments anyway.

Tobias: I would say the bigger risk as you get restructured. I don’t think it’s that they do something to get themselves out. I don’t think that Malone would want that.

Bill: Yeah, it’s possible. [crosstalk] Oh, I don’t know. Why not. He’s got all his cash out. That whole entity funded all the other investments. If it goes, it goes.

Jake: Is this the reef that finally catches the Malone raft that he’s talked about, he’s flooded over a few of them?

Tobias: [laughs]

Bill: Yeah, it’s an old company. We’ll see it. It had a lot of trouble. Yeah, it may be the thing that he takes an L on this. But I’ll tell you what, if my version of an L is I take enough cash out of something to put together a deal like buying Charter, I’ll take Ls like that all day.

Jake: Yeah.

Tobias: You want to be careful leaving too many bag holders in your way, really going to be blowing people up on your way through.

Bill: They are not bag holders. If you bought stuff now and you take a loss, you know what you bought.

Tobias: As a manager, you don’t have some moral obligation to not just burn everybody who else is left in the stock?

Bill: Well, I just don’t look at it as that. Look, we’re all big boys, especially if you’re trafficking in those names. If you’re buying those names and you don’t know what you’re doing, good luck.

Tobias: What about a few like shopping network? [crosstalk]

Jake: Yeah. What if your grandma– Who knows in her– [crosstalk]

Tobias: Peter Lynch.

Bill: Well, you should do more work than that.

Tobias: I’m a Peter Lynch investor. I like Home Shopping Network, or QVC, or whatever it is. Whatever that is.

Bill: Yeah.

Jake: Now, you’re going to hurt, grandma, because you just pulled gardening duty.

Bill: Yeah. Actually, I walked into my grandma’s house, and she was watching it yesterday for the first time ever.

Tobias: CNBC?

Jake: And then, you got tube sockes. [laughs]

Tobias: Oh, QVC.

Bill: I don’t know.

Tobias: Matt Hensen’s got a comment here about, “Did Burry told us to short long-dated treasuries a year ago?”

Bill: Yeah, I think he called this whole thing pretty right.

Jake: He deleted the tweet though. So, we don’t know.

Tobias: He always does. You got to go to BurryArchive. I was going to see– if someone could pull up that tweet where he said he sold everything. Was that August 15th? Could you just tell us how close to the date that he or– [crosstalk]

Jake: [crosstalk] topic.

Tobias: Just the prison.

Bill: Grantham called it right to Napier. He switched at the right time. There’ve been a couple of these guys that have been right.

Tobias: To be fair, those blokes are pretty bearish most of the time.

Jake: True.

Bill: Yeah. Well, that’s not why I didn’t pay attention, but– [crosstalk]

Jake: [laughs] Didn’t know.

Bill: Yeah.

Tobias: Has anybody been short–? Not short, but just bearish at the top?

Bill: Akram’s Razor. Akram’s Razor on Twitter.

Tobias: What’s the thesis?

Bill: Well, I don’t think it was macro. But that guy put out a podcast and wrote a newsletter, or an article, or whatever when SaaS was going nuts. And he basically was like, “Tell me what all these valuations imply. Sell it all.” I don’t know. He’s not perfect by any stretch, I don’t think, but he’s got some mental flexibility that I think a lot of people could learn from. And now, he sees opportunity. I like the way that guy thinks.

Tobias: I agree that there’s plenty of opportunity around. Just for bragging rights, I think we’re going to get some chaos here before this is all said and done.

Bill: Yeah.

Jake: You want the Romick better entry price?

Tobias: Yeah. I think that there are a lot of things out there that are just silly cheap at the moment. There’s good companies out there that are throwing off lots of free cash flow, high returns in equity way, way too cheap.

Jake: God, if only there was an ETF that– [crosstalk]

Bill: I’ll tell you what.

Jake: [crosstalk] that’s in a strategy. [laughs]

Bill: Yeah. We can’t– It’s like saying Voldemort.

Jake: [laughs]

Bill: You talked about the Malone thing. I tell you what would really make me actually sour on them is, if Charter turns off their buyback. If they turn off their buyback, I was wrong on them.

Jake: Oof.

Tobias: Buffett did the same thing. Well, didn’t not so much turn it off. didn’t really pull the trigger March 2020 on the buyback significantly and we debated that a little bit on this podcast. And one of the reasons that we concluded was that there does come a point in time where you’re like, “Well, I just got to make sure I’ve got some resources here. I don’t know how bad this is.”

Bill: This is not that.

Jake: Survival.

Tobias: They get some debt in there.

Bill: But it’s structured well, voluntary churn is at all-time lows, credit quality is at all-time highs. This is business cycle stuff. If they’re not willing to live through a down cycle, then I’ve got them read wrong.

Jake: They bought back a lot at higher prices, right?

Bill: That’s right. And I don’t have a problem with that as long as you keep doing it.

Jake: If they like it– [crosstalk]

Bill: If they turn it off, I’m going to be pissed.

Tobias: David Wilson says– [crosstalk] Sorry, go ahead.

Bill: That’s my whole argument about, like, these consistent buybacks, I don’t mind it that much, because as long as it’s truly consistent, I don’t really mind a management team saying, “Our business is getting bigger. We’re just going to dollar cost average over time.”

Jake: Yeah, that sounds intelligent.

Bill: If they start telling look to the stock market for clues as to whether or not their business is doing– well, I forgive COVID, because that’s different. But once you start doing that, that’s a problem.

Tobias: That’s a fair call.

Jake: Yeah.

Tobias: David Wilson says, “Is there going to another Big Short II movie?” I would say, 100%, there will be a Big Short II movie. I don’t know they’ll call it Big Short II. But there’s a fictionalized movie about how Spotify was put together. I can’t imagine that that’s a particularly interesting movie.

Jake: [laughs]

Is There Going To Be A Big Short 2?

Tobias: Sorry, Dan. I can’t do like your– I’m not really interested in watching that movie. Is there going to be Big Short II? Yes, there is going to be. I think one of the things that it should feature is Bitcoin, which– Bitcoin’s up 350% over the last five years. So, have you guys heard of this, BTC is the ticker? You guys ever heard of that?

Bill: I heard it’s sound money.

Tobias: It’s a pretty good run.

Jake: No. What’s the yield on it?

Tobias: [laughs] I couldn’t find it, honestly.

Jake: Okay.

Tobias: The PE, I don’t know.

Bill: It’s wild how the dollars absolutely kick the shit out of it after– [crosstalk]

Jake: Everything.

Bill: Yeah. I think it’s somewhat funny that a huge fiscal stimulus in the dollar is just ripping and bitcoin is less so.

Jake: Macro’s hard, it turns out– [laughs]

Bill: Well, yeah, it turns out that maybe the Fed does have a backbone.

Tobias: Yeah. I’ve been surprised that they’ve held on this long. I’m guessing that they’re waiting until they see the whites of the eyes before they reverse. This is what the orderly– [crosstalk]

Bill: Yeah, we might be pretty close. I don’t know.

Jake: You’ve already said, we’re not even back down to average valuations.”

Bill: You got to stop looking at the index.

Tobias: We are long way from it.

Bill: The fucking index [crosstalk] and it doesn’t pay taxes. You got to look in the internals, man. There’s carnage. Has been since 12 months ago, almost.

Jake: Yeah. [laughs] When did your portfolio start going down?

Bill: For real, it’s been about a year. So, another six months is 18 months, that makes sense.

Jake: Yeah.

Tobias: Well, if ARK had started in February 2021, they were 19 months in now.

Bill: Yeah, they were likely though.

Tobias: 19 months in now.

Bill: Oh, February 20– You think that was that early?

Tobias: It was $156 February 2021. I think it’s 40-ish at the moment, I think. I have to look at it.

Bill: No, they also fucking on pixie dust. So, I wouldn’t [crosstalk] on that.

Tobias: ARK could be 90% off peak to trough when it’s all said and done. That’s my– [crosstalk]

Bill: I’d be pretty shocked if it’s only 90.

Tobias: The peak was $156. Currently $37.78.

Bill: Yeah, get another 50%.

Tobias: 50% from here, it gets into 90%. Well, that’s that old Einhorn joke where he called the stock that’s down 90%, stock that was down 80% got cut in half.

Bill: Oh, yeah, that’s a– [crosstalk]

Jake: It’s a tough game. And she levered up to buy that back?

Tobias: Yeah.

Jake: Hope that works out.

Tobias: Speaking of Einhorn– [crosstalk]

Bill: Do you know?

Jake: I do, actually.

Bill: I know.

Tobias: He wrote about that New Jersey deli that had $100 million market cap. Did you see those blokes have been [crosstalk]

Jake: Did that work out okay?

Tobias: Well, they were doing a wash sale. So, they were the only ones trading in the stock to create the appearance of trading. Well, this is the allegation. And Einhorn wrote about it. I just saw today that they’ve been indicted. They’ve got three guys, father and a son and somebody else. The son is on the lam.

Bill: There are still a lot of– [crosstalk] There appear to be some big valuations on some things that I’m not sure.

Jake: Survive.

Bill: Actually, a business is underneath them.

Tobias: “Burry had an ARK shirt on.” Yeah.

Bill: Mike.

Tobias: Burry might be the only bloke who called the last crash, got longish, coldish crash. Maybe Burry is the man. “Amazon went down 95% and they had positive cash flow.” Yeah, positive cash flow is the nerve tonic that gets right to the root of your problems. That means you can survive. JT, do you want to have a chop at the perfect equality line?

The Gini Coefficient

Jake: Yes, sir. So, let’s start things off with a little quiz for you two. On a scale of one to seven, how well do you feel that you could explain how a flush toilet works?

Bill: Three.

Tobias: Yeah, reasonable. I would say, I don’t know, five.

Jake: Okay. How about how a zipper works?

Tobias: Is the zipper hard? Is it a scale of one to seven?

Jake: One to seven?? Yeah.

Tobias: Why is the scale one to seven?

Jake: Just go with it. All right.

Tobias: Seven for a zipper.

Jake: Okay.

Bill: I’m going to go with five.

Tobias: I’m setting myself up here for some humble pie but why not? Here we go.

Jake: So, these two psychologists, Rozenblit and Keil, did a study where they asked subjects to look at this list of everyday items like a flush toilet, like a zipper, a bicycle, and rate their understanding of each on a scale of one to seven. So, that’s why one to seven. Now, after recording their scores, they gave people a pen and a paper and they asked them to explain in detail how these everyday mechanisms work. And they couldn’t, actually. They realized that they didn’t understand these items at all. And the psychologists call this The Illusion of Explanatory Depth. And I think we all suffer from it to varying degrees. So, this is one why writing is such a good forcing function to force you to understand something. You have to explain it with a pen and paper, and you start to quickly recognize where your shortcomings are.

Now, we’ve all heard of the Gini coefficient, but can we all really actually explain how it’s calculated, how it works, what does it mean, what are its shortcomings? Before preparing for this segment, I would have given myself a five or a six on Gini coefficient. But then when I actually sat down to write it out, I was like, “Okay, I’m like a one or a two.” So, I think we’re all guilty of this.

So, let’s go through the Gini coefficient and dig a little bit deeper so that you can impress people at your next cocktail party. Imagine that you take all of the households, and you line them up from smallest income to biggest income. And we could do income or wealth, either one can work. And oftentimes, they will take those and they’ll put them into five quartiles. Imagine just sticking all these households into five buckets along an X-axis. That’s what my little background is going to be showing here. And then you plot the cumulative portion of income as a percentage for each of the different buckets along the Y-axis. And this creates what’s called the Lorenz curve.

This is for perfect equality, this 45-degree line along this, you take the poorest 20% of households and then let’s say that they would have 20% of the total income. And then, we take the two buckets there, the 40 percentile or the 40% of the total households and if they had 40% of the total income, we’re starting to have this perfect 45-degree line, right?

Tobias: So, that’s what’s behind you, right? That’s the perfect equality line behind you, if it actually reached that.

Jake: Correct. Yeah, once we get to the entire 100% bucket, it has 100% of the income, which makes sense. So, how do you calculate then actually the Gini coefficient from this Lorenz curve? And this is the part that I didn’t really understand before. You actually take the area between that perfect equality 45-degree line and the Lorenz curve that typically lives in between that– The Gini coefficient is actually a percentage of that area above it compared to the total amount of that curve or the area under the 45-degree curve.

Now that we know what it is, how it’s calculated, what does it actually mean? The textbook definition of the Gini coefficient is it’s the statistical dispersion that represents the income or wealth inequality within a nation or social group. And this was actually invented back by this statistician and sociologists named Corrado Gini, I think it’s Gini, we were not sure, [laughs] in 1912. So, like I said, a Gini coefficient of zero expresses perfect equality. You can imagine that that Lorenz curve follows along perfectly along with that 45-degree line. And therefore, there’s zero that’s above the line in the area and 100% that’s below it. That’s how you get to zero. That means everyone has the exact same income. And then a coefficient of one is actually like a flat line along the X-axis and one person on the far right has all of the income, and all of the area then is above the curve, and there’s none below, and that’s how you end up with one or 100%. So, imagine, it’s some despotic president, who gets all the income and leaves literally nothing for anyone else.

It’s a relative, not an absolute measurement. There’s a lot of shortcomings when it comes to that. The general trend of higher wealth for an income has been this positive slope for humanity for a long time here. And so, that’s not really represented. And you get some weird anomalies with it. So, Bangladesh, which has a per capita income of a little under $1,700, has the same Gini coefficient as the Netherlands, which has $42,000 per capita. They’re both at 31%. And it just has to do with the kinks and the weirdness of the Lorenz curve.

Tobias: Does that mean that the Netherlands is not particularly– doesn’t have a lot of inequality? Is that what that indicates? Or does that indicate that Bangladesh has–? I’m going to let you keep going.

Jake: Yeah, it indicates that there’s less inequality and both of those. However, one is relatively rich, and one is relatively poor.

Tobias: Yeah. Okay.

Jake: And there’s some other things that can impact this. There can be structural societal changes, like the number of households can have a big impact on it, because it leads to these measurement errors in comparing apples to apples and apples to oranges depending on how it’s measured. If the culture and the structure of society was such where you had a lot of multigenerational housing that counted as one and then people started living in single-generation housing, now, all of a sudden, we’re dividing by a bigger denominator and that can throw the numbers off. But just to give some numbers here, the UK is at 34%, China’s at 50%, the US is 42%, Finland’s at 25%. This often-quoted case of the richest 20%, having 80% of the income, like kind of Pareto principle, that gives you a Gini coefficient of at least 60%. So, it gives you some sense of where everything is. And globally, it’s actually 65%. So, there is probably an 80-20 look to global incomes.

But the Gini coefficient has gone up over time. In 1820, the global was 43%, which I think is saying that everyone was fairly poor together and now, it’s closer to that 65% like we said. I think my hypothesis is that specialization and globalization creates a lot more winners and losers, which then leads to higher Gini coefficients.

Anyway, summing that’s all up together, hopefully, maybe you understand the Gini coefficient in a little bit better level and you could actually write it down in a way that would dispel some of that illusion of explanatory depth that I think we all suffer from to varying degrees.

Tobias: So, zero would indicate perfect equality, one indicates one person has all of the wealth. So, perfect inequality.

Jake: Right.

Tobias: 80-20 would get us to 60%. Was that the number?

Jake: At least 60%.

Tobias: At least 60%.

Jake: Yeah.

Tobias: Okay. And generally, the lower the number, the less inequality. The higher the number, the more inequality.

Jake: Correct.

Tobias: And the global number is 42, did you say?

Jake: 65.

Tobias: 65. Okay.

Jake: Yeah.

Tobias: Okay. So, the US has less inequality-

Jake: Correct.

Tobias: -than globally. Where do you find the regions that have the highest levels of inequality that tend to be more corrupt?

Jake: It can be– [crosstalk]

Tobias: Strong man, totalitarian?

Jake: South Africa actually has the highest.

Tobias: Okay.

Jake: [crosstalk] highest.

Tobias: Well, why South Africa?

Jake: I think it has to do with echoes reminiscent of Apartheid.

Tobias: What’s the number?

Jake: It’s 63 or something like that.

Tobias: Okay.

Tobias: What’s the lowest? Only if you have it. I’m just– [crosstalk]

Jake: Yeah, I don’t think I have it on, but it might be– [crosstalk]

Tobias: Is it a Scandinavian nation?

Jake: I think it might be Finland at 25 or something.

Tobias: Finland? What’s Finland, they’re small and they’ve got lots of oil money or something like that?

Jake: Yeah. And I think it’s a relatively homogenous populations help– Like you said, there’s a fair amount of income smoothing that happens with those countries, like socialistic tendencies.

Tobias: Which country has the giant oil [crosstalk]?

Jake: Norway.

Tobias: Is it Norway?

Jake: I think Norway. Yes, all right.

Tobias: How big is Finland? I forget. They’re all much smaller than you think.

Jake: They are distorted on the map. They look much bigger on a Mercator projected map than they actually are.

Tobias: Is Mercator the one that makes Africa look really small?

Jake: Yeah, right.

Tobias: That’s interesting. Yeah. I’ve always seen the Gini coefficient compared as a ratio between two nations. So, I didn’t know that’s how it was calculated.

Jake: Yeah. And you could see how you could end up with very different areas between that Lorenz curve and the 45 to figure out a Gini coefficient can end up being the same number and yet, the curves look completely different. And so, they tell very different stories.

Tobias: Do you have the UK there?

Jake: I think the UK was [crosstalk] at 34%. You also have to be careful, because they’ll do pretax and post-tax ones.

Tobias: Oh, I see.

Jake: There’s a lot of apples to apple issues that when we’re taking country-specific data, they gather it– Everyone has their own methodologies for gathering it. So, it’s not consistent across countries. So, comparing them is actually a little bit of dangerous, probably.

Tobias: What about wealth and income? Do you find that there’s more disparity in wealth than there is in income?

Jake: I think that’s correct.

Tobias: Because you can stack up the wealth over generations whereas income is somewhat limited?

Jake: Yes, I think it’s a stock versus flow question and I think the stock can be a lot bigger than the flow typical.

Tobias: “Iceland has a population of 376,000.” It’s about the size of little surfing village that– [laughs]

Jake: [laughs] Yeah.

Tobias: Yeah, that’s interesting, dude. Thanks for explaining that. I didn’t understand that. But now, I’ll be quoting Gini coefficients. I think I’m going to be calling it the Gini coefficient too.

Jake: It actually works for other things too. It can be used for biology. Actually, heights can be put into a Gini coefficient. It’s a very small number. We’re all close to– There’s not a lot of dispersion amongst height relatively speaking, especially compared to income.

Tobias: It’s small bell curve then.

Jake: Yeah, right. It’s more of a normal Gaussian distribution.

Tobias: “Finland 5.5 million.” There we go. That’s quite big. Hit us with the question, dudes.

Jake: Yeah.

Tobias: We got a–

Jake: We’ve got some time for it.

Tobias: Head out this 15 minutes.

Jake: [laughs]

Tobias: How’s everybody feeling, generally? I’m certainly interested in that. The drip, drip, drip of lower prices can be a little bit wearing, but I started getting excited the other day. I think if we tip into that genuine bear market, my definition of a bear market, we’re going to see some chaos. And that’s a good time to get set for the next long period of time. They come around very rarely.

Jake: There’ll be bear.

Tobias: Yeah, but bullish. That would be a bullish signal.

Jake: Yeah.

Tobias: Yeah, mortgage rates popping up to 7%. You guys see that?

Jake: That’s wild, isn’t it?

Bill: No one’s taking them out anyway. Who cares?

Tobias: Yeah.

Jake: [laughs] Yeah. Volumes have to be just absolutely dried up on that, right?

Bill: Yeah. Mortgage industry is fucked, at least until the rates come down.

Jake: How mispriced are houses right now if mortgages stay at 7%?

Bill: They’re not going to stay there.

Tobias: Charlie Bilello had a chat the other day night that showed mortgage rates and just flipped it upside down and says, “This is what it implies with property prices.”

Jake: [laughs]

Bill: I don’t know that that’s true. I really don’t. I get why say, “Well, it has to be.”

Jake: What happened? They just [crosstalk] we get–

Bill: Well, you’re not going to have anything hit the market, why would you voluntarily sell?

Tobias: Jeff Weniger, who’s going– Oh, I’m going to get this wrong. Sorry, Jeff. I think it’s Wisdom Tree. Sorry, Jeff. He said that people who’ve got 3% mortgages aren’t going to trade, people that can’t get a mortgage aren’t going to trade.” But he said there is a very large number of people who’ve paid off their mortgages who will and that’s where the supply is going to come from. There’s– [crosstalk]

Bill: It’s just somebody that’s financially proven enough to pay off their mortgage voluntarily sells their house in a time when prices are lower.

Tobias: Well, they may be downsizing.

Bill: Just because–

Tobias: Well, they may be downsizing. They maybe– [crosstalk] going for retirement. I don’t know– [crosstalk]

Bill: Okay. So, you get some grandma’s house that trades at a huge discount, because it’s got shitty windows that haven’t been taken care of in 20 years and has wallpaper everywhere and then housing crash people–

Tobias: If you have to sell.

Bill: Yeah. There will be some forced liquidations. But is that the market clearing price of the average house? I don’t think so.

Tobias: I think it will trade down a lot.

Bill: We’ll see. I’ve bet against it and I’m pretty happy that I have.

Tobias: I suspect it’ll follow the stock market with a lag of about a year, because that’s traditionally what it does.

Bill: Yeah.

Jake: What about people on adjustable rates that all of a sudden just are going to get smoked–? [crosstalk]

Bill: There aren’t that many yet.

Tobias: Yeah.

Bill: There aren’t that many yet.

Tobias: That was smart– [crosstalk]

Jake: Really?

Bill: Now, you’re going to start to see the arms come out, because now the traditional mortgage is expensive.

Jake: Well, yeah, no one wants to lock in seven, right? [crosstalk]

Bill: Yeah, now, you start to get the cockamamie financing and try to get people into– I think this is when things start to get odd in underwriting land.

Is Michael Burry The GOAT?

Tobias: I’ve got a question. “Is Burry overrated as an investor?” I’m going to say no. He’s underrated.

Bill: I haven’t seen his return. So, I don’t know. But he’s got a sexy story. And if you call this one right, then it’d be hard to argue two big macro calls correct, plus sustained strong returns, he’s not among one of the best investors ever.

Jake: What did happen to all that water call though that he made? Did that turn into a good investment? [crosstalk]

Bill: It’s just early, Jake. Come on. You didn’t need to read more Bruce Berkowitz, bro.

Jake: [laughs]

Tobias: When he came out with that call, I went and had a look at J.G. Boswell. The moment that I saw it, I looked at J.G. Boswell and it was up 20% that day. I was like, “Damn it. Everybody else had exactly the same idea.”

Jake: Not run on me.

Tobias: Yeah.

Jake: What do they do? Or where they’re located, I mean?

Tobias: J.G. Boswell? That’s a cotton farmer and I think they’re in California and Australia. They’ve cotton farms, traditionally water intensive. So, they have quite a lot of water.

Jake: Okay.

Tobias: So, that was my reasoning.

Jake: What got you get in your first order– [laughs]

Tobias: Yeah. Look how slow I was getting there. Missed it. Then I was like, “Yeah, it’s probably it.” it’s just hard to get financials on them. They don’t publish purposefully. “Cheap stocks used to track them?” I don’t know if they do any more.

Jake: Interesting. “Where’s oil going?”

Tobias: Yeah, that’s a good question.

Bill: Lower than higher.

Tobias: [laughs]

Jake: Yeah? What do we got now? 83 or something?

Bill: Look, if mortgage rates are at 7, and you’re stopping the housing economy, and that’s got the biggest multiplier effect, then what’s the scenario where oil rips and we have a deep recession? How does that happen?

Jake: Yeah. Demand destruction?

Bill: Yeah. No, but– [crosstalk]

Tobias: Doesn’t that imply the other way around? Like, oil goes up– Yeah, so, oil spikes.

Bill: Well, oil’s already spiked. We’re on the backside of that. Everything’s already spiked. [crosstalk] all this shit.

Jake: Lumber round trip now, is it back to pre-COVID?

Bill: No.

Tobias: Is it all the way there? No. It’s still 50% around.

Jake: No?

Bill: No. Yeah. But we’ll see. This hurricane’s not good for lumber. Not great for everybody that can’t insure their house.

Tobias: Good ones implied.

Bill: [crosstalk] baby.

Tobias: Nord stream is down blowing methane bubbles in the ocean.” I saw that. What do you guys make of that? Somebody’s taking the submarine and going to put a hole in the Nord stream. I saw the German energy minister said, “You’re not allowed to speculate about that stuff.”

Jake: Oh, really?

Tobias: Not allowed to.

Jake: Or, what? They’ll send you a strongly worded letter?

Tobias: Probably get that same, that DMCA notice, take it down or something like that. I don’t know. I don’t know how they’re going to enforce that.

Bill: Yeah, I don’t know anything about these matters.

Jake: I don’t know, but that doesn’t sound good for Europe, does it, if it’s knocked out all winter?

Bill: Yeah, I should just lean into this shit on my podcast and have a bunch of bears on, get ratings like crazy.

Jake: [laughs]

Tobias: Why does everybody think that bearish– Bearishness does real ratings. But we can be bearish– [crosstalk]

Bill: They do. They are macro bear porn. People can’t turn away from it. It’s fucking crack.

Tobias: But you can be bearish for legit, genuine reasons.

Bill: Yeah.

Tobias: You don’t have to be bullish all the time about everything.

Bill: I don’t think I’ve had bears or bulls. I’ve unfortunately leaned into people that pick stocks. I think I should get into macro bears, hold myself out a little bit, take my shirt off.

Jake: Yeah. There you go.

Tobias: “Any of the FAANG stocks not a zero?” I reckon the G is pretty solid. I reckon Amazon.

Bill: Nah, they are all zeroes.

Tobias: Apple is going to be okay.

Jake: All zero?

Bill: Yeah, definitely, 10 PE stocks coming in the near future.


Peter Zeihan’s Fractured World

Jake: One thing I was thinking about. Let’s just play out Peter Zeihan fracturing world, just indulge me in that hypothesis.

Tobias: Can give us a little bit of background on that?

Jake: Sure. US pulls away from being the world’s police and the world’s navy, basically. All these long supply chains that depended upon no piracy and no empire grabs are now much more fragile to people just coming in and stealing the shit off the boat. That’s how most of the history was throughout. So, you couldn’t have a supply chain where you moved every little piece 13,000 miles on average to go back and forth all around the world to build it.

If you have a fractured world then, where it’s much more localized economies, it breaks up into– In Zeihan’s vision, the US controlling the Western Hemisphere. Asia fighting amongst themselves for resources. Europe trying to figure out how they’re going to get fed. All of these places, it’s about food, energy, labor, which the demographics for a lot of places are a little troubling. And then, progress and knowhow, basically.

Anyway, so imagine that it breaks up. And you’re Apple and you do all the design in the US, all the IP, smart, high value things are done in the US, but then everything else goes to China and the rest of the world. And if China is not the manufacturing hub for Apple like it is today, what do margins look like for them if they have to bring it more closer, more expensive labor? I don’t know. It’s an interesting– [crosstalk]

Bill: Get fucking machines to make all that shit.

Jake: [laughs]

Tobias: Yeah, I think that’s right. More automation, more 3D printing. But then, maybe China has to start patrolling the seas.

Jake: They don’t have a long-range navy capable of protecting much power outside of their coastline.

Tobias: Yeah. You just build that over time, don’t you? 100 years?

Jake: If you get there.

Tobias: I don’t think this is all– [crosstalk]

Jake: If half your population starves to death before that happens. I don’t know if that hundred– [crosstalk]

Bill: Hard to have inflation in that scenario.

Tobias: Are they importing food, currently? Japan’s doing it. Japan’s importing food.

Jake: Oh, big time.

Tobias: All those countries are importers.

Jake: They have very little resources, actually.

Bill: Yeah, except they own Africa.

Tobias: What’s the knowhow. Well, China. Yeah.

Bill: Yeah.

Jake: Yeah, might see some imperialism. When there’s no food on the table [crosstalk] and there’s no– Yeah, there’s no gas in your tank, you go looking for someone else’s stuff, then bring it home. That’s been history.

Tobias: Thunder blunder. [laughs] Master Blaster from Thunder Town. I don’t know, messed that up completely.

Jake: Oh, come on, you Aussie. [laughs]

Tobias: Sad.

Bill: Something I said on the Twitter machine the other day and I do mean this, this is actually advice. It’s outside the normal Value: After Hours topics, but I’m going through it currently. I would highly recommend people to have conversations with their parents about how they want to age, who does the power of attorney, who has signing authority on bank accounts, who has signing authority on healthcare, all that shit. They’re not fun conversations, but they are conversations that are very important when they’re important.

Jake: That’s a good idea. Don’t wait until some marbles are slipping and then you have to have that frustration.

Bill: Yeah, because you don’t have time. Yeah, if you approach it early, you can make jokes. I can still tell my dad like, “I’m going to put you in the old house,” and we can laugh about it, and we can– [crosstalk]

Jake: Lots of– [crosstalk]

Bill: I can let it sit and then I can talk to him about it. It’s not, “Hey, now, we have to make a choice.” I think if you get to that point and you haven’t had those conversations, it can feel really guilty.

Jake: I’ve made this mistake. I think I’m now the power of attorney or the executor of seven different trusts throughout of the family– [crosstalk]

Bill: Oh, that’s terrible.

Jake: Terrible situation.

Bill: It’s too many. Too many.

Jake: Stay away from that if you can. That’s my recommendation to you.

Bill: Yeah, you got too many, man. Two, you could maybe do, but seven’s a lot.

Jake: Do not be trustworthy is what I’ve learned.

Tobias: That’s good life advice.

Jake: Yeah.

Europe: Rising Energy Prices Could Fuel Social Unrest 

Tobias: “Europe might see some wild riots this winter with some 9X energy prices.”

Bill: Yeah, I think that’s a consensus view.

Tobias: Yeah.

Jake: True. No surprise there, huh?

Tobias: If they didn’t riot at this point, that would be the surprising thing.

Bill: Yeah.

Tobias: Maybe they’ll just be too cold.

Jake: That was one thing I actually wanted to look up, but I couldn’t find it in time, was what is the correlation between Gini coefficient and social unrest? And is there some magical number where it hits it that your chances of guillotine risk shoot up?

Tobias: I saw somebody quoting Icahn. So, I haven’t seen Icahn’s actual quote. But the quote was, “The US currently has levels of inflation that saw the Roman Empire fall.” Having spent a little bit time reading that history recently– [crosstalk]

Bill: [crosstalk] with a spoon.

Tobias: A long time to follow.

Bill: That is so fucking– [crosstalk]

Tobias: We could be a thousand years away from the empire falling. [laughs]

Jake: That’s when it started to decay.

Bill: Yeah, that’s exactly why the dollar is ripping. The empire is crumbling in its knees.

Tobias: Yeah.

Jake: I like Munger thought– He said this, and I think probably six or seven years ago at the Daily Journal meeting. I forget how it came up, but he said that, “There’s still a lot of joy to be found in a decaying empire.” [laughs]

Bill: They still own Fruit of the Loom, right?

Tobias: Berkshire has got a collection of decaying empires there.

Bill: That’s right. It’s most of the brands.

Jake: Dairy Queen.

Tobias: It is funny going to go into Omaha and walking around the big auditorium, where they had the meeting and seeing all of those brands from yesteryears.

Jake: [laughs]

Bill: Yeah.

Tobias: It’s collection of antiques.

Jake: They cashflowing.

Tobias: They do. Nothing wrong with that. Get the cash cows. You guys ever study that?

Bill: Good example of how long a decaying empire can stay around.

Tobias: True and grow and get bigger.

Jake: Good point.

Bill: Look, this isn’t my thought. This is somebody smarter than me sharing it with me. But I think this is why the Fed is so serious about taming inflation, because they’re not going to lose credibility over inflation. They’re just not. And if it means putting us into a recession, that’s what they’re going to do. But I don’t think this inflation is some existential risk to the US. But I’ve been wrong on it since the jump. So, I don’t know why anyone will listen to me.

Tobias: I don’t really think so, either. I think they’ll get it under the control– [crosstalk]

Bill: I should have Icahn on the pod. We can talk about how the US is going to die.

Jake: There you go. He can debate Peter Zeihan, who thinks that the US is going to be just fine.

Bill: Yeah, there’s nowhere else to ride. You got to ride with the US.

President Joe Biden Set To Tap SPR In Historic Move

Tobias: Given the Fed is still buying a whole lot of mortgage-backed securities, how is it that mortgage rates are flooding up to where they are? That’s how we’re going to fund the government mortgages, so you can have–? [crosstalk]

Bill: There’s not going to be any now.

Tobias: Yeah. Your mortgage is at 7 and you have your 10 year at 2 or your 30 years, whatever, and they’re going to be like a bank.

Bill: Yeah.

Tobias: They’re just going to split the difference.

Bill: And you got Biden trading the SPR?

Jake: [laughs] Day trading the SPR.

Bill: Yeah.

Jake: Oh. If they [crosstalk] buybacks some here– [crosstalk]

Bill: The further finalization of America. Good for us. Let’s fucking do it. I mean, in the White House.

Tobias: All right, fellas. We did it.

Bill: [crosstalk] were.

Tobias: we’ve made it. Where’s Jay Powell from? He’s Carlisle, right?

Bill: Yeah.

Tobias: Can he get those lever PE, goes in there sorted out, break it up, chop it up?

Bill: He’s probably got a bunch of friends that are going to go out and buy some assets over the next year and get some good carry in 10.

Jake: Ready up the balance sheet.

Bill: Yeah.

Tobias: All right, amigos, that was fun. I’ll see you guys next–

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