In their latest episode of the VALUE: After Hours Podcast Jake Taylor, Tobias Carlisle, and guests Porter Collins and Vincent Daniel discuss:
- Wall Street’s Blind Spot: Acquirer’s Multiple – Uncovering Hidden Gems the Market Ignores
- The Future of Value Investing: From Stock Picking to Self-Help Stories
- Wall Street’s Dirty Secret: Why Bond Yields Must Stay Low, No Matter What.
- Fed Fears Trump & Supreme Court Timing: Can it Derail Trump’s 2024 Run?
- Amazon & Walmart’s Skeleton In The Closet: How Buy Now, Pay Later Could Crash
- Low VIX, High Hopes? Vincent Sees Challenges Ahead for Equity Markets
- Banks on “Unlimited Funds”: Did the Fed Create a Financial Fortress or a Looming Bust?
- Consumer Fatigue: Why the Next Year Might be Tough for Growth Stocks
- Office Space Slump: 50% Occupancy Here to Stay, Experts Predict “Rolling Impact”.
- OPEC Losing Control? Impact on Energy Stocks and Market Sentiment
- Fed Toothless? Market Sniffs Out Implicit Bailouts, Volatility Cascades
- Beyond the Tightening Talk: Understanding the Fed’s Liquidity Play for Tech
- Market Mayhem to Immaculate Recovery? Decoding Wall Street’s Confusing Consensus
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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Transcript
Tobias: This meeting is now live. This is Value: After Hours. I’m Tobias Carlisle, joined, as always, by Jake Taylor. Our special guests today are the Seawolf’s gents. Porter Collins and Vincent Daniel, how are you?
Vincent: Doing well.
Porter: Yeah, we’re good.
Vincent: No complaints.
Jake: Good to see you boys, again.
Porter: Yeah.
Tobias: It’s very good to see you guys, again. What is going on in the market?
Jake: Easy question.
Tobias: Let’s just start there. Give your softball to start.
Vincent: Porter, you start first on that one. Go.
Jake: [chuckles]
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Consumer Fatigue: Why the Next Year Might be Tough for Growth Stocks
Porter: Well, I said this morning, I think the whole world is now on the same side of the boat. I think the whole world has figured out that we are in some sort of soft landing, inflation is coming down, the Fed’s going to cut rates and save everything. I think that’s it. I probably disagree with that. I don’t know, if I disagree with it, but I think that the long-term rates are going to have a harder time coming down. That’s generally my view. I don’t know, if I’m all that bearish on the market, per se. I just think you got to really pick your spots and grow.
We’ve just been talking about this growth has had an unbelievable run this year. And growth versus values are back again to its absolute highs versus value that peaked during the pandemic, and then peaked again at the end of 2021. So I just think it’s going to be a large task for the S&P and for growth to really keep going from here. Apple’s multiple has gone from 20 to 32 times this year. That’s the market. It’s been all large cap growth. And so of course, people who don’t really play in large cap growth, it feels a little bit different to us. And so I think we like a lot of stuff. We look for value. We look for margin of safety. We look at this stuff and a lot of stuff we see we like. The harder stuff is the catalyst and what’s going to happen from here.
So I actually think that people want inflation to come down, so the Fed can cut. The problem with that is that a lot of the earnings growth has been because of inflation, because of being able to raise price and so.
Jake: Yeah. It’s not unit volumes.
Porter: Yeah. And volumes have stunk. I think that’s because the consumer is stretched and they don’t like the price on the screen or anywhere else. So I think that probably growth is going to be a little bit slower than people think next year. Nothing disastrous, maybe, but we’ll see. You’re not getting a bargain by the S&P here.
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Beyond the Tightening Talk: Understanding the Fed’s Liquidity Play for Tech
Tobias: What do you make of that three peaks for the growth rally again this year after–? If you look back at 2000, it ran up once and then it collapsed. And this time, we’ve had three in a row. We’re back now, as stretched as it’s been. What drives that?
Vincent: I think it’s liquidity, to be honest. I think it’s liquidity, and I think you’ve had a non-tightening Central Bank policy since October of 2022, generally speaking. So they were tightening in narrative and on tweaks on the margin. But in general, I think they allowed liquidity to run free again or run free or not super free.
The catalyst, I think we’ve said this before in the past. I think the catalyst that created that was concerned over what happened in the UK in terms of definition. I think there have been concerns, and rightfully so about the US banks, as well as the debt and the deficit. So I think in general, while they’ve had a tightening narrative bias, I think they’ve had a loosening when we need to. I think the market picked up on it. When you allow the pipes to flow water into the equity capital market system, that liquidity, those flows, that leverage finds itself in large cap mega tech companies. So I think that’s what we had, which then bags the question, are we going to continue to have that in 2024? And the answer is maybe, because to a certain extent–
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Market Mayhem to Immaculate Recovery? Decoding Wall Street’s Confusing Consensus
The one thing I wanted to talk about during this podcast more, because I’m so non-committed in terms of what’s going to happen from an economic perspective in 2024. I’d rather talk about the variable that I think is the most important one, and now is the time we have to start talking about it, is the election. It is such a big dynamic that I think is going to have such an impact on markets. I’m not saying bullish or bearish. I’m just saying because it’s very path dependent how it happens. But I think the election is going to be a talking point for all of us over the next 9 to 10 months, and we could start talking about it now. It’s just talking about the potential paths it can take.
Porter: The other thing I would say about that why is the growth versus value different now versus 2000. I think that you’ve had these companies, whether it’s Amazon– Amazon destroyed almost everybody else on the planet in terms of retail. Look at the infrastructure they have. They spent 20 years buying planes, buying cars, buying factories. The AI they’ve built been able to map routes of drivers being able to get all these products for people. And so they’ve just destroyed everybody else. They deliver more packages than UPS and FedEx. It’s simply amazing what they’ve done. And so you’ve had this real concentration at the top of these big companies, and they’ve just killed everybody else. That’s why I think that the step level is so much bigger than it was in 2000.
From here though, I think in this more recent range, growth again is at the top of this– Growth versus value is at the top of this range. And like I said, everyone’s loaded in these AI growth names. I think it’s going to be, usually, the market messes with people and it’s going to mess with people again, I think.
Jake: I saw that hedge funds are pretty well tipped completely into the Mag Seven right now.
Porter: Yeah. And it’s worked. It’s working, right?
Vincent: I was telling my guys we used to work with and saying, “I’ve always looked forward to upcoming idea dinners, particularly towards the end of the year.” And keep in mind out, we made our bones in the financial services industry and I told them, “Stop going to these [unintelligible [00:07:50] only idea dinners,” because who needs to know who’s long bank America versus short Goldman Sachs or vice versa. It doesn’t really matter. Not only that, most of the people that speak at these conferences are so couched in this crowding factor that they’re really not probably telling you exactly what they’re going to do. Instead, go to a generalist or a macro. Go to many.
I’m just trying to rewind the clock a year ago and put us in this camp as well. Everyone, the sentiment last year was the world sucks, the S&P has to go to 3,200. And at 3,200, maybe you can buy the market. We’re also short tech, but we’re long energy. That was generally the prevailing sentiment, and it was wrong as wrong it can be. And I told them, “Just go to every dinner and walk away and find out what sentiment is, if there’s a prevailing sentiment or not.” And I don’t know, if there is at this point in time, but just try and figure it out. And no matter how much you agree with it, no matter how much it feels good to you, don’t do it if you’re with the crowd, because it’s probably more likely than not going to work. So I don’t know, what the sentiment consensus is.
If I had to bias, I feel like people are expecting some form of an immaculate recovery, which is somehow, some way we get a 100 basis points of rate cuts, yet nominal growth really doesn’t slow down all that much. And yeah, we know what, it’s not going to last that long but it’s going to feel really good for four months type of feel. But I can’t say that I feel that as strongly as what it felt last year in terms of what sentiment is.
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Wall Street’s Blind Spot: Acquirer’s Multiple – Uncovering Hidden Gems the Market Ignores
Porter: I just don’t think that Powell’s cutting like everyone, like, the market assumes. I don’t think that’s going to happen. Could the market retest the highs? It’s only 4% from here. So that’s not that big of a stretch. So could you see the retest of highs? Probably. I think from there, I think it’s going to be a bigger battle.
Before we started, we were talking about back to our screens of what we see and back to– I’ll call it what The Acquirer’s Multiple screen that we’ve named on our Bloomberg here. And it looks awful usually. The only companies that are included are of course the two, Ford and GM, Alibaba, every international oil company and some rogue shipping companies or not rogue, most of the shipping companies.
Tobias: They’re rouges
Jake: Yeah, all rogue.
Porter: All rogue. The funny thing is is that all those balance sheets are unbelievable. Look at Alibaba’s balance sheets. Fantastic. Look at the international oil companies balance sheets. They’re really good. Look at the shipping companies. It is ridiculous. Like, people hate. One of them is on there, we don’t own it, but we used to is this company Danaos, DAC, D-A-C. And if you just look at what the debt and the cash have done over time, they’ve gone like this. Everyone’s bearish on shipping and volumes. They’ve just quietly, totally reversed the course on their balance sheet, and it’s really good. And so, we’ll see what happens.
A lot of the stuff that we like are idiosyncratic names where we’re still in this Peabody Energy, BTU. They’re buying back 15% of the float a year at this point. And earnings are going to better than people think this quarter. People are going to better than they think in 2024. And so we have a stock which we think beats earnings and buying 15% of the float back.
The other one that we’ve owned for a while is AMR, the met coal producer. They’ve just shrunk the share count. You see what the stock has done, it’s gone vertical as just that– They’re just narrowing the share count down. I think that the value guys have learned this, or a lot of the value guys. I can’t get included into the gates of the S&P, where my stock goes up every day and in an algo. I have to control my own destiny, and so they have to bring the debt down to a level and build up the cash and say, “Hey, I’m just going to buy back my own stock.” The Acquirer’s Multiple list is everything under six times EBIT. And if you’re buying your stock back like Peabody is at two and a half times EBITDA, that usually works eventually.
Tobias: Eventually.
Vincent: Eventually.
Porter: You got to play the long game. You got to play the long game.
Jake: This is what Einhorn was lamenting, that you’re not getting a multiple re-rating right away when you go buy your cheap thing. But yeah.
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The Future of Value Investing: From Stock Picking to Self-Help Stories
Vincent: Those days, in my opinion, it’s funny. I speak to friends and it’s like, “The stock picking market is coming back.” I’m like, “I don’t think so.” I really don’t think so. I think it’s going to take a market where flows stop coming in the door, which we all do not want, or a change in rule of law, which probably is not going to happen unless the markets go down a heck of a lot, and people figure out that market structure is a little weird and funky. But it’s working for them right now. So rather than hope that I can buy something and it’ll go up the next day because I saw value and other people will see value and so on and so on, I’d rather own the self-help stories that Porter was talking about.
Whereas even if I don’t have help coming my way in the form of other institutional or retail investors, management’s doing the right things and has enough of a capital allocation strategy where it’s really going to help you out. But it’s an arbitrage that’s not going to narrow in a day like your typical arbitrages. It could take a while. It could take a long time.
Porter: Back to that this Acquirer’s Multiple lists that we have. The interesting one on here are the Chinese stocks. To me, intellectually, Alibaba is on here, JD.com is on her. Alibaba is arguably the cheapest large cap growth stock in the world. It’s four and change times EBITDA under 10 times earnings. That’s the interesting one. Whereas everyone thought that Meta was completely dead and gone. It did the v-bottom and tripled off the bottom. So intellectually, we look at it every quarter, watch it. The earnings have been fine. It’s just whatever it is that– I don’t know what it is, whatever algo it is, but it been going down every day for a month and a half now. Maybe it’s just the turn of the calendar, I don’t know.
Jake: I think there’s been a lot of institutional money leaving China as much as they can get out.
Porter: Yup. And so at a point, that’ll be okay, that the selling is gone. Once the selling is gone, that’s when guys like us come in. Because essentially, that’s what we do is we’re value investors. But as a value investor, you have to look for the inflection point, because if you don’t find the inflection point, you’re just going to sit on some cheap bucket of whatever. And so you have to finally see where the take off point is. And usually, the markets are smart and everyone else gets on board and buys these inflection stocks. But like Vinny said that most of the stock pickers are dead at this point.
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Banks on “Unlimited Funds”: Did the Fed Create a Financial Fortress or a Looming Bust?
Tobias: The Silicon Valley Bank blew up earlier this year, supposedly because the Fed balance sheet was being shrunk. It bounced back up again when they, I don’t know, how they brought up BTFP or whatever that program was. I think that got included on their balance sheet. But I checked in it again the other day, it looks like it’s shrunk considerably beyond that point where it had been before. And it’s now quite a bit smaller than it was then. Why is it that that seems to be shrinking and yet, we do seem to have so much liquidity? And it’s not just showing up in the stock market. You do see it in the stock market. But it’s also, housing is back to where it was. We haven’t seen any banks really blowing up. How can you reconcile those two ideas?
Porter: The interesting part about shorting– You need a margin call liquidity event. You obviously got that where everyone pulled their cash and we’re out of here. But what the Fed did is they put a floor underneath it. They said “Under our watch, this is never happening again.” And so they allowed all the banks to go in and say, “Unlimited funds, here you go. Never happening on our watch again.” And so that put a floor in the market. Not the first time it’s happened, but they did it again where they don’t want any cascading of asset prices. That’s just off the table. And so that program will fluctuate here and there depending on the capital markets now, I think.
Vincent: But specific to the banks what I think happened– This is over the last two, three months, which is probably accelerated even more. With the decline in the 10-year, what are we going on now? 70, 80 basis points from the peak or close? That gave the banks the ability to trim their balance sheets on the security side. Take losses, but not as severe as the losses they were going to take when the rates were materially higher, which then relieves you of the need for funding from your high-cost funding, which is BTFB and probably incremental deposits. So it’s funny.
One of the things that we talk about a lot in financials is– I’m scared to short traditional financials right now, because if we do have a period of time where we have a soft landing, the traditional regulated financials have underperformed the market for two years in a row by a decent amount.
Porter: One of the only groups in the S&P has done that.
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Vincent: They’re not expensive by any stretch of the imagination. So if we have a period where the world seems okay– I’m not sure I completely subscribe to that, but from an economic perspective, you could tell me an economic environment and I might say to you, “Yeah, I could see that.” I’m so non-committed on the economic path, probably absent the extremes that I could foresee a thing where the KRE is outperforming tape by 10%, starting off the gate. We all know how institutional managers who are hugging an index, and they’re probably severely underweight or underweight financials, it could create an upstream. Now I don’t love the financials, but from a technical or flow perspective, I’m scared to shorten.
Porter: No one owns these things.
Vincent: Nobody.
Porter: Nobody.
Vincent: Nobody.
Porter: They dumped them all in the summertime or in the springtime. So that’s what I said. Usually, where everyone’s one side of the boat when the calendar turns, that’s usually not the trade. Unless it is obvious earnings are going up, they’re going to beat, we’re going to keep going. It just doesn’t feel that way.
Vincent: Have you guys been dipping in financials or not? Just curious.
Tobias: I’ve got a bank. I’m a little bit wary. I’ve got one and I don’t love it. But that’s okay. I don’t love it, anyway. [chuckles]
Jake: Per grants, last 12 months annualized rate of growth for the Federal Reserve bank credit is -9.4%. So that’s a decent amount of reduction on the balance sheet.
Vincent: Yeah. I don’t think that’s really where the credit skeletons lie. They will have elevated charge offs. There’s no doubt in my mind if that’s the case, if we have something worse than a soft landing. But that’s not really where the credit lies. It lies outside the banking system. So that’s why I come back that if we have a harder landing, I would not want on the banks. I apologize for this, but you’re pissing into the wind. Whereas if the economic tape is a little bit better, they have giddy-up and go potential, this coiled spring potential.
Porter: I’m looking at one of your other financials in here is Virtu. You look at Virtu recently, this stock has bottomed out and it’s starting to go up again. If there is some sort of volatility and volatility comes back again, that’s a stock that’s going to do well. And so, I can see what your screen does. It says like, “Hey, I know everyone else hates it, [Tobias laughs] but I like it.” Because the balance sheet is good too, and so yeah.
Tobias: Yeah. I get to be wrong by myself.
Porter: That’s all right.
[laughter]Tobias: Virtu is being [crosstalk]
Vincent: We know the feeling. Yeah.
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OPEC Losing Control? Impact on Energy Stocks and Market Sentiment
Tobias: If the trade last year as we came into the year was long energy, short tech, is it the other way around now? How do you feel about it?
Porter: Well, if you see what’s happening with energy, people are freaking selling like crazy at this point.
Tobias: What do you think of OPEC’s prospect of actually controlling that? When older versions of OPEC in the 1980s and 1990s, they just they always had defections that would talk a good game and then–
Porter: Vinny and I have been bullish energy, but we were never $100 energy guys. We’ve always said that, “Hey, if energy stays from $65 to $85, [crosstalk] that’s sweet spot for these companies.”
Vincent: Probably gone up a little bit more with inflationary costs, but still, typical, contrarian us. Whenever oil gets to $100, I get scared and energy, because the world doesn’t like that.
Porter: But when it goes to $65 and everyone’s like, “Oh, it’s going to $45.” It’s in there. I don’t get scared.
Vincent: Yeah, but to answer your question, I don’t know. Is OPEC losing control? Maybe.
Tobias: I don’t know if they ever have control. I think that’s [crosstalk]
Vincent: That’s where I am kind of, “Did they ever really have tremendous control?” What seems to be the issue right now is that the Americans in Porter’s neck of the woods down in Texas are drilling like mad. It’s probably mostly the privates where once again– We don’t have the history in this sector like we do financials, but once again, they did in 2013, 2014, 2015, regardless of where the price of oil dropped, they are dropping the rig count, but the actual output in production is staying high. I think unlike 2013, 2014, 2015, I don’t see a tremendous rope surge in the reserves that are underneath the ground because you’re not having another shale revolution. You’re just having improvements in technology to extract more that came out of shale. So I don’t see this lasting five, six, seven years and the balance sheets are completely different.
That said, from the sentiment perspective, yeah, I feel better from the sentiment perspective being constructive energy, because if you mention it in a room, they’ll all look at you and laugh. Whereas last year, you would have said, “Well, you’ve–”
Jake: There’s consensus there.
Vincent: I have five other names that are even better than the one you just mentioned. Now people will be like, “Yeah, great, still long energy, move on.”
Porter: You have had some energy M&A and talk about other names in The Acquirer’s Multiple list is, in shipping, you had the two biggest dry bulk companies merged together today. No one fucking cares or freaking care, whatever, [Jake laughs] but that’s another point. But again, these stocks are not expensive. Dry bulk has been out of favor since I was in diapers. So it’s just interesting. I think this M&A is good, just further consolidation of oversupplied industry.
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Wall Street’s Dirty Secret: Why Bond Yields Must Stay Low, No Matter What.
Tobias: How do you feel about rates from here. Jim Grant had this thing over the weekend that I tweeted out where he said– I’ve looked at this. I know nothing at all about rates, but I can look at the rates– Rates are high in 1982, and then they’re low in 2022. That’s 40 years. They seem to move in very long cycles. And to be fair, I think that’s the extent of Jim Grant’s analysis too that it’s a long cycle. I don’t think he had anything else in there other than that.
But I don’t really know what happens here. Maybe we get some sort of cyclical reason to cut rates in the short-term. But it feels to me like rates probably are going up or going back to where they normally are over a very long period of time, and that should change the complexion of the securities market, stock markets pretty substantially. Probably, it’s a value trade from there. But there’s a lot of– [crosstalk] [laughter]
Jake: Lot of wishful thinking.
Tobias: I like to call it [unintelligible [00:27:09] [laughter]
Porter: Look, you’ve had one of the longest ever yield curve inversions. We’re going on almost–
Tobias: Yeah, it is the longest ever.
Vincent: Yeah.
Porter: It’s like a year and a half now, yield curve has been inverted.
Tobias: I prefer the 10-3. The 10-3 has only been since October 25.
Porter: Same thing.
Tobias: Yeah, 10-2 probably better.
Porter: Yeah. Since the rally in markets, it’s become more inverted.
Tobias: Yeah. That was because it was the bull steep enough for a while there. The 10-year ran up and it almost got back to it normalized by the 10-year running up. And then the 10-year got to 5, saw its own shadow, ran back to 4.3 or wherever it is now.
Porter: Most of the bulls are laughing at the bond bears and saying, “Oh, it was never about supply.” Well, okay, I disagree. But the supply of bonds coming from the Treasury in our lifetimes will never go down, up and to the right. We will have deficits as far as the eye can see. It’ll be different stagger, but the deficits will never end. That’s the one thing you can– In our next year preview say, “Oh, there’ll be a deficit this year.” And so we’re getting to a point where it’s got to be a problem.
I think this year you’ve– listen, 10-year went to 5 because of indigestion. You’re just going to keep have rolling periods of indigestion in the market that maybe, whatever they did in the end of October, beginning of November, whether it was the Xi meeting with Biden to change the currency, I don’t know. Whether it was Yellen who funded everything, the short-term, or the immaculate 30% decrease in healthcare costs that drove the CPI down. They had to get bond yields down. They had to.
Vincent: We’re in a screwed-up world, right?
Porter: Do you think it’s real? Like, none of this—
Jake: [laughs]
Vincent: On the one hand, I say to myself, “Well, rates have to go higher for a host of reasons.” One which Porter just said, which is probably our biggest reason, which is just supply demand to paper. Who really wants to own long duration paper when the people issuing that paper is basically telling you, “I’m going to debate you over a 5 -to-10-year period. Don’t worry about it, I’m going to do it hard too, if I need to.” Combined with the fact that I think the wage genie is out of the bottle. I don’t know if that changes acts on a severe economic slowdown.
But on the other hand, I say to myself, “Well, look what happened when the rates were getting to five and a quarter to five and a half.” This world was cracking, and it couldn’t survive higher rates because we just have too much debt that needs to refinance and roll, and we can’t have this stuff rolling at higher rates because profits are going to come cascading down. It’s all collateralized by stuff that is on leverage. And if that happens, then we have a massive deflationary backdrop. So I’m of the crazy mind of saying, “Well, rates should go higher, but they need to go lower, because if they don’t go lower, the world’s not going to work.”
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Porter: People forget about all this commercial real estate that it’s got a role.
Vincent: Right. It just got a helping hand, Porter. [crosstalk]
Porter: It did. But it’s still way above–
Vincent: But still way above.
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Beyond the Fed: Why Main Street Inflation Matters More Than Wall Street Numbers
Porter: Way above where they issued it. And so equities are going to have to come to the table or they’re going to have to extend to pretend or whatever. But rates are a real problem. There’s a lot of corporate debt coming due as well. It’s going to come, I think, at higher yields than it did before.
Vincent: So what I think we just had, if I put on my bull hat for a second, sorry, you had the makings and the ingredients of a short-term, let’s say short-term is six-month immaculate recovery, which is rates are down 70 to 80 basis points. Let’s think like bulls for a second, guys. Rates are down 70 to 80 basis points. [crosstalk] The cost of gas at the pump is down a lot. So consumers have a little bit more wallet room. And at the same time, growth is slowing, so I don’t have to worry about rates for four to five or six months. Now, I think the market has already priced a good portion of that in.
And heaven forbid, which is the saddest thing in the world, if economic activity does pick up after we’ve had a massive loosening of financial conditions, which it will, I just don’t know when, then all of a sudden, we have to worry about rates again, which gets back to your point, Tobias, and gets back to Jim Grant’s point, I think, is that are we just going to relive the 1970s? The 1970s is a full decade. It just takes a long time for all of this to transpire. It just doesn’t happen in two to three weeks because we are thinking about it right now of how it’s going to play out.
Porter: That said, we are fully cognizant of the fact that the government is trying their best to get, for all of our sakes, the interest cost down. They got a big problem, and they’re going to need interest rates down because their costs are exploding on them. So I think it’s going to be a battle.
Tobias: Inflation does seem to have come down, or putting aside that 34% reduction in healthcare costs, that was necessary, that was good timing. But inflation seems to have come down. That might justify lowering rates a little bit. Somebody made the comment in here. I just lost it a little bit at the moment. But if Powell sees the stock markets at all-time highs, housing markets at all-time highs, what incentive does he have to cut at this point? What reason would he have for cutting?
Vincent: He doesn’t. That’s why I think gets back to Porter’s point, in that, I think the market started pricing in way too many cuts, given the fact that– Given the structure and the leverage associated with markets. we priced in a recovery and just bypassed any slowdown fairly quickly. Maybe he has 25, 50 cups before we go into a presidential election cycle. But it’s hard to see the cuts. Given the data that we’re looking at right now, it’s hard to see the cuts people are expecting. I assume tomorrow, because we’re taping this on Tuesday. It’s Tuesday, everyone’s live on Tuesday. Tomorrow, he’s going to try and give a message, “I assume that we’re not cutting anytime soon and we could tighten as quickly as we can cut.” I’m not necessarily sure if the market is going to believe them all that much. We’ll see.
Tobias: JT, you looked at the inflation in the 1970s, just those attempts to raise rates, and they always came off too quickly. Do you want to talk about that a little bit?
Jake: Well, my observation from doing some research around that was that, just trying to put myself into the lived experience of sitting there day to day and numbers coming in– There were multiple waves that happened years apart, and you had to have thought like, “Oh, we’re on the other side of it. We’ve conquered it. Oil has put back together now everything’s good.” And then it just came back with a vengeance, and it got even worse. I don’t get the sense that people are really thinking in that kind of–That things could get worse. This seems like a lot of Pollyanna sort of bias to me.
Porter: Again, no one believes that inflation is going to really come back. I think there are a couple of us probably that are higher for longer, but I don’t think the market really believes it’s going to re-accelerate here.
Vincent: Here, there’s also the proverbial lines, “The stock market ain’t the economy,” right?
Jake: Yeah.
Vincent: Well, “Main Street inflation ain’t Wall Street inflation by any stretch of the imagination.” You speak to some friends or just look at your own wallet. My expenditures are probably up in price this year, and I think everyone else, 10%, 20%. I joke around on Twitter a lot that the CPI doesn’t calculate any of the crap that it needs to– That’s a normal. Anyone who looks at their auto and home insurance. The other great Wall Street definition I love is that, inflation is up, let’s say from COVID to now, 30% to 50% to 60%. But because we’re only up 3%, inflation is killed, so let’s knock down rates to 2%.
Jake: Yeah. Right. Cumulative.
Vincent: The [crosstalk] has just jacked up. It’s jacked up for everyone. Whereas the wage increases are a little bit more fine as to where people have improved on their wages. Most have, but not to the extent that prices have gone up. So yeah, I’m with all you, guys, or I’ll say it for myself, I think we probably relive the 1970s because I think we kicked inflation and do the aircraft carrier. If you’re not getting rid of this liquidity in the system, it has a high potential to come back and it’s going to feel bad if it does, particularly when Main Street inflation starts translating into Wall Street inflation again. But I think we’re a few months or several months off from it.
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Fed Fears Trump & Supreme Court Timing: Can it Derail Trump’s 2024 Run?
Porter: I’ll piggyback on what Vinny said earlier is that, it’s going to be a very odd year because of the election. I have to think that the Federal Reserve doesn’t want any part of Trump. How many times has Biden criticized the Fed?
Tobias: Not that I’ve heard. Yeah, not that I’ve– [crosstalk]
Porter: No. And Trump was in there every day saying, “You really guys doing–” [crosstalk]
Tobias: Low rates. [crosstalk]
Jake: Yeah, I’m a low rates guy [laughs]
Porter: Yeah. They don’t want any part of Trump. Yeah. “Porter, that’s going to get political.” Yeah, of course, it’s going to get political. So the Federal Reserve wants no part of Trump.
Jake: What does that mean? They juice as much as they can, like, adrenaline shot to get the patient through the election cycle?
Porter: People have to be more cynical rather than less cynical, by the way. People aren’t cynical enough about this shit.
[laughter]Vincent: Let’s take another path, because I was actually at a dinner about two months ago, and it was with a bunch of, let’s call them old Reagan Republicans. And the dinner was in New York and they were talking about how big republican money is stacking. The first flavor of the week was DeSantis, but now it’s Nikki Haley. They’re doing everything in their power to overthrow Trump before the primaries. Let me give a what if, because this is where my stupid brain goes. What if Nikki Haley, what if the oligarchs win and they get Nikki Haley in, even though Trump is winning the primaries? What happens to 35% of the population, the cult that follows Trump? What happens to this company or this country from a society perspective, if they feel like their guy is getting not a fair shake?
Again, I’m not putting a high probability outcome on that, but it is a path. What if Trump is the nominee, which it looks like the polls are suggesting it is? Anyone listening, I’m from Queens, just like Trump’s from Queens, but I do not like him. But I’m just looking at the polling and saying, “He’s going to be the Republican nominee.” And the polling also strongly suggests that he has a good chance to beat Biden. What happens to markets as that manifests? I’m not saying it’s bullish, bearish. It’s just follow. [crosstalk]
Porter: Well, Vinny, if Nikki Haley does beat Trump, the market’s going to fucking rip.
Vincent: I agree.
Porter: Rip.
Vincent: Because she has a very good shot of beating Biden. So this is where I think– [crosstalk]
Porter: She’s going to crush Biden. Biden doesn’t have a shot. The only votes Biden get are anti Trump votes.
Vincent: Correct. That’s my view. So I just think the election is going to be a volatile creature that we’re going to have to deal with. Probably, it works well for your Virtu, by the way. [crosstalk]
Porter: And the Supreme Court’s going to get political too, by the way. Because there’s all these Trump court cases coming. Do you think they’re going to wait? Because Trump’s whole strategy is push him out to the election or past the election, “I’ll win the election and I’ll wipe everything clean. I’m good.” So the Supreme Court, if they say, “Oh, no, we’re going to hear these cases before the election,” it changes the election. So I think that people need to be more cynical about all this crap that’s going to come down the pipe this year.
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Fed Toothless? Market Sniffs Out Implicit Bailouts, Volatility Cascades
Jake: How do he have VIX at 12 with all this? [laughs]
Tobias: That’s exactly where I was just going to go. I don’t know what’s going to happen. I just think that there should be more volatility. But we’ve seen VIX is squash. JT and I were talking about this before we came on.
Porter: I think that’s more institutional money managers like suppressing. That’s the output of all these vol funds together and they suppress vol. It is 12 today, right? It’s back to pre-pandemic levels. Like, officially, you took pandemic out of the picture and you’re back to 12 vol. And so I don’t know, I don’t have a great call on that.
Vincent: What that does mean though, just in general, just in terms of how markets work, because aside from passive ETFs, the other big elephant in the room that dominates markets are the vol targeting regimes. So just by definition, if volatility is low, the gross capital notional deployed by these vol targeting regimes is extremely high. The lower the volatility goes, the more capital they deploy, generally speaking. So that leads me to believe that volatility is probably severely underpriced.
Again, when that manifests itself, I don’t know, you can’t time it. It’s just that when you have that much capital coming and an election, I would want to be long volatility. It could be that markets go up and rip. Generally speaking, they don’t. I’m just saying that I think volatility will probably at some point in 2024 be on a material rise from where we are right now.
Tobias: I saw that you could hedge a long book of SPY for like 6% for a year or something like that, just seemed crazy cheap. What do you think is causing the volatility? Is it those zero day to expiry options or is it the–? Wait, Jake sent through an article that said it was the covered call strategies had gone from being like $3 billion to $60 billion over the course of– Was it 12 months, JT?
Jake: Yeah, I think it was like year to date or something. Huge.
Porter: No. That stuff is way too above our pay grade in terms of the options market. I wish I knew it better, because every time you think the market is going to go down, the VIX sellers come in and market pops. I think it’s the tail wagging the dog more so than the other way around.
Vincent: I also think keeping it simple the way I like to think about it. This is shockingly a bit more cynical. I think the market has figured out that the Fed really has no teeth. When we get to the 2-3 standard deviation events], the Fed blinks every single time and people notice that. And so all these structured shortfall strategies get more and more comfortable knowing that at a certain point, the non-bank, too big to fail capital markets ecosystem is too important to the system to allow Powell to show some real teeth and go through price discovery. That’s what I think we’ve seen time and time and time again over the last– It’s not just two years, but five years. But the Fed will blink and they do.
They’ve gotten better at not blinking explicitly. I’ll give Powell credit under the Biden administration. He doesn’t blink explicitly, but it’s implicit. And the people who are in know know that it’s an implicit bailout somewhere, somehow. That’s why I think volatility just continues to cascade down.
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Low VIX, High Hopes? Vincent Sees Challenges Ahead for Equity Markets
Tobias: When you guys say you get a market rip– We’ve already got stock markets almost back to where it was two years ago, housing markets up. Where does it all go? We’ve not had– [crosstalk]
Porter: I don’t know that the housing market is back to or where it was before. You’ve had a lot of–
Tobias: Well, the single-family housing is where it was.
Vincent: Not units though.
Porter: No, but in prices, he’s saying.
Tobias: Prices. Yeah.
Porter: But I think a lot of it is new home sales, and the builders, the mortgage buydowns. So there’s a lot of it odd. The incentives are in there. But if the average person goes to sell their house, I don’t think it’s anywhere close to where it was at the peak. It depends on the price level obviously. [crosstalk] upper hand, I think it’s tighter. It’s harder to lose more like, sort of call it– There’s nothing like $500 to $1.5 million. I think that moves better. But the higher you go up, the less it moves.
Tobias: When we were chatting a couple of years ago in Newport, we were talking about this expectation for a flush. Like, you would probably need a flush to clear this market at some point. We really didn’t see that, even though we had 2022 was very weak, and now we rallied back, which I would have said was pretty classic bear market behavior, where you get the weakness and then the rally, and then after that, you finally get this. People realize that nothing’s gone, nothing’s been fixed, and the market flushes.
Porter: Maybe that was the flush.
Tobias: Which one? SVB?
Porter: Oh, yeah. Or the end of-
Tobias: 2022?
Porter: The end of 2022.
Tobias: October, 2022.
Porter: Markets were down a lot.
Tobias: Bigger than 25%, peak to trough, something like that?
Porter: Apple got down to 20 times. Is that peep? Maybe. But now you are again 32 times. What I think, a lot of China risk in there in terms of competition coming in. And so I don’t know that that’s not where I think you want to add money. If you just look at the Apple versus the Qs or Apple versus XLK, it’s starting to underperform here.
Tobias: Nvidia looks pretty strong. I’ve been growing at exceptional rates. There’s a few YouTube videos floating around suggesting there’s a little bit of channel stuffing going on or they’re funding some of it– [crosstalk]
Porter: Vinny, what’s the stat about two or three customers are 30% of sales?
Vincent: Well, yeah. But a lot of them are the typical customers you would know that would be two or three. But it is a very concentrated revenue stream. I was at a conference the other day, a bunch of idea pitches, and I would say a quarter of them were AI related. It is clearly–
Porter: Long and short though.
Vincent: Long and short. But it’s clearly the growth element of the world that– I guess getting thin with those Ozempic.
Jake: [laughs]
Vincent: I tend not to quarrel with secular growth stories. Not secular, long-term cyclical growth stories because just money of all times flocks to it whether we like it or not, regardless of valuation, it doesn’t matter. The only counter I would have right now is that, you got really low VIX, you’ve had multiple expansion, the flows into markets are going to be– They’re probably going to be decent, but I don’t know if you’re going to see a massive positive rate of change. And a Fed that probably can’t cut as much as people would like them to cut, regardless of what’s happening to the economy. So there are challenges and headwinds coming in 2024. We’ll see if the market recognizes them or not. We’ll see.
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Tobias: You think they do some token cuts just for the– Just it looks good, you’re starting to cut, even though they know they can’t really cut too far.
Porter: Possibly.
Vincent: Possible. I’m not ruling it out.
Tobias: Is that enough to get the patient through to the end of the election?
Porter: Yeah.
Vincent: Who’s the patient?
Porter: The economy.
Vincent: The economy? Yeah, maybe. Let’s just go down the conspiracy theory of–
Jake: [laughs] Yes, lets.
Vincent: -what if Trump’s the nominee? Do you get more than 50 or 100 bits?
Tobias: What if Trump’s the nominee, and he’s also been convicted of– or I don’t know how much of it is criminal, how much of it is civil. But if he loses it, so he’s incarcerated and the nominee. What if he’s incarcerated and the president?
Jake: All banana Republic achieved.
Vincent: Jake and Tobias, I’m really, really not looking forward to this presidential election.
Jake: Oh, no. [laughs]
Vincent: As an American, it is not all of these paths to me are possible, and it’s all nasty because there are cults on both sides of the equation that are going to go apeshit.
Porter: When he was president, it’s the day to day watching of his Twitter to figure out what he’s going to do with markets. Like, that was the more annoying thing of like, “Oh, God, I got to listen to this guy,” actually.
Tobias: Before the whole cycle started, I thought that there was a reasonable chance that we’d have three presidents in a very short period of time. Because you have Trump going to Biden, Biden hands it off to maybe Newsom or someone like that, maybe Newsom loses an election and then it’s the next president like that kind of. And that volatility or that quick changeover in leaders has been common in other countries around the world like that. Britain has done that repeatedly. Australia has done that.
Porter: Frankly, I’d be pretty happy with Nikki Haley as a president. It’s about time we have a woman president. I don’t know, it just feels like America needs a change rather than these two donkeys running things.
Tobias: Yeah. It seems the only options are Biden or Trump, who we’ve got just based on the polling.
Vincent: The sad thing is the polling would suggest we’re not going to get our wish border, which is-
Porter: I know.
Vincent: -the change element. I was at another conference where it was more left leaning and influential. They felt like Newsom could not win an election, because he could not carry the flyover states. Like, a California Democrat cannot carry flyover states. So we need somebody different. Who that is other than Biden? Don’t know.
Tobias: Get a good running mate. Is that enough?
Vincent: I don’t know. Here, you think about certainty. We’ve talked about a lot of probabilities and non-committed stuff during this podcast. The one thing I’m fairly certain of is that, we could criticize Biden for a variety of different things. But the one thing he knows how to do is win an election. I’m not even talking about crooked stuff that has alleged him. [Jake laughs] I’m talking about he’s going to spend money like a drunken sailor, like he did this year. Bidenomics is basically 6% to 8% fiscal deficits.
Porter: Yes.
Vincent: Just plow over every other issue that is– And pray to God the bond market doesn’t call you out on. [crosstalk]
Porter: I would say, Vinny, though, it’s unlikely that the fiscal impulse is as going to be as strong in 2024 as it was in 2023. That’s why I don’t know that the S&P earnings are going to be 11% like the market thinks it is. With inflation coming down, you know–
Vincent: Well, Biden might just tell you, “Hold my beer,” because the last thing he wants to do is lose to Trump. The last thing in the world he wants to do is lose to Trump. So I’m with you, Porter. The math gets really hard and it gets difficult, but we’re going to spend a lot of money next year as well.
Tobias: What’s your read on the economy with all of the–? The deficit spending is material, that inflation reduction act is clearly massively stimulatory. The consumer seems to be in pretty good shape. But all of the metrics that– I’ve got this little running thing on my Twitter page where I just grab any negative prints, and it just seems like businesses are in a little bit of trouble, particularly small businesses, all seem to be shrinking and all of the statistics look as bad as they go back to depending on where the data starts 1995, 1965. How do you reconcile those two?
Porter: Well, look at corporate bankruptcy filings, right?.
Tobias: Yeah.
Porter: If you look at the chart of the bankruptcy filings, post pandemic, it dips. I think you’re going to see a reversion to the mean upwards of clearing not only all the crap from the pandemic, but the higher rates are going to kill a lot of business as well. So I think things are going to be very uneven in the next year and a half.
Vincent: I think that’s the key word, uneven and mixed.
Porter: Yup.
Tobias: Maybe that’s what we’ve already seen. Maybe that’s why.
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Office Space Slump: 50% Occupancy Here to Stay, Experts Predict “Rolling Impact”.
Porter: Yeah. There’s going to be just a natural reversion of the mean. There’s a steady state of this stuff. I think there’s going to be a lot of cleaning out of all this pandemic era businesses. There’s just a lot of crap like all these SPACs and–
Tobias: Plus, office? Like, offices, 50% occupied. And really the occupancy is 50% of the 50% because nobody’s offices fall.
Porter: I think that’s going to be a rolling five-year issue.
Vincent: Agreed.
Tobias: It’s been amazing to– [crosstalk] .
Vincent: Rates are not low enough to clear that stuff right now. I agree with Porter on that. We track consumer delinquencies and charge offs on a monthly basis through the big card companies. What you’re seeing right now is a path to normalization. We’ve had incredible consumer credit for quite some time for a long, long time. So it’s really difficult to say that we’re going into something catastrophic, as opposed to if you go further back into the charts and look at further years out, you’re just getting back to norm, which is a return to normal.
On the other hand, if you’re an employee that’s living off the government, if you’re a healthcare worker, you’re feeling pretty good right now. You’re not in bad shape.
Porter: The funny thing about some of the underwriting over the past couple of years, the banks have been pulling back. Maybe it’s because dumb luck and they had trouble funding. But there’s been a lot of guys, these fintech lenders, they’ve been with no experience lending very aggressively.
Jake: Yeah. Buy now pay later.
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Amazon & Walmart’s Skeleton In The Closet: How Buy Now, Pay Later Could Crash
Porter: Yeah. Listen, that’s going to be one of the most interesting case studies. Because if you look at the volumes of a firm right now, the buy now pay later, they’re off the charts. If you’re doing business with Amazon and Walmart, you know you’re not getting a good deal. Amazon and Walmart are doing it to drive volume. They don’t give a crap if the credit goes bad. They already bought the G.I. Joe. And so I think you’re really going to have an interesting case study of what happens to this stuff next year.
There have been a lot of aggressive debt consolidation loans, and you’ve just seen huge growth in a couple of these companies. It’s going to be very interesting how it turns out. My guess is not well, but we’ll see.
Tobias: I think it’s one of the most confusing mixes of economy, market rates, politics that I’ve ever seen.
Porter: You would agree?
Vincent: I wound agree.
Tobias: I don’t know.
Porter: And so you go back to what do we own? We own very idiosyncratic. Cheap is always the bottom word. I wish we could find some of these compounders. We talked with one of our good friends, and that’s what he looks for. He’s like, “I can’t find them at the right price here.” And so we see plenty of value. The question is, can you get some commodity movement or can you get some inflection in some of these names to keep working? So I like where we are, but shorts haven’t worked this year at all. They’ve been terrible. I do think the shorts will work better next year. That I’m actually fairly certain of. It’s been so bad this year. So I think the shorts will work better if that makes sense, and some of the value longs will be okay.
Tobias: And on that note, gents, thanks so much. Vincent Daniel, Porter Collins, Seawolf.
Porter: Great stuff.
Vincent: Awesome.
Jake: Good seeing you, guys.
Tobias: We’ll have you, guys, on again in the first quarter next year, just to call you out on all of the–
[laughter]Porter: And hopefully, you’re zigging in the right direction.
Tobias: There you go. Let’s hope.
Jake: Yeah.
Tobias: Thanks, fellas.
Porter: All right, guys.
Tobias: Thanks, everybody. We’ll be back next week for the last one of the year.
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