Chit Chat Stocks - Investing Power Hour #36: Holiday Spending Data, $TSM Bets Big on AZ, BREIT Halts Redemptions

Episode Date: December 11, 2022

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. All right. Welcome in, everybody. This is our Chit Chat Money Investing Power Hour. I am joined today by my co-host, Brett Schaefer. Let me make sure I always botch the audio. That's

a guarantee. That happens every episode. I'm joined by my co-host, Brett Schaefer. the structure of this episode is we can talk anything financial markets. I guess it's a fairly busy week. So anything's fair game. And then these are live on YouTube. So if you just YouTube Chit Chat Money on Thursdays at 4 p.m. Pacific time, 7 o'clock Eastern time, you can catch these and ask questions if you want to. I know most people just end up listening to this in podcast format, so to each their own. But if you ever want to get some questions in,

we love getting them. We have a couple of actives that are constantly there, so always appreciate them. Brett, how are you today? Doing well. Weather's awful up here. And yeah, it's getting to the boring part of the winter, but no one needs to hear about the local weather.

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us a nice review um and a five-star comment because that can help more people go to the show but i'm going to tweet out the link uh to this episode and ryan do you want to talk about our sponsor who's doing a great deal to towards the end of 2022 as we wrap up the year here Yeah. I think pretty much everyone that's listened to this podcast knows the name by now, but it's 7investing. They're exclusive sponsors. And I've said this now on a couple of episodes, but I know not everyone listens to every single one. So it bears repeating. They have a deal right now that you literally get the whole service for free. So it's a one-week trial for a dollar, but if you use the code money, you get that dollar off. And then you also can use money again

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free. So free week, go ahead, check it out. But that's going to do it for the sponsor. Let's talk financial markets. Anything big this week that like anything glaringly obvious that I missed? I don't think you missed it, but I have the huge thing with the semiconductor plants in Arizona with Taiwan Semiconductor, Apple, AMD, NVIDIA. And I'll hit that on my topics. But besides that, earnings have been kind of slow we're in what the software period so if you're kind of in that you know we had some mongo db report snowflake a few others retail one today was big retail chewy lululemon uh that's right sign reported today let's see how abysmal those were i think it was up actually but expectations have been quite low that is a bombed out stock so yeah no it's actually

So, I mean, it's like a great core business, but that's just one where like, talk about COVID resetting expectations. There is, if I'm reading the Glassdoor reviews, right, it sounds like the entire sales staff failed to meet their quotas this year and quit. So, or at least that's at least what the disgruntled employees made it sound like. And then the CEO obviously left as well. So it just goes to show how important it is. I think maybe more so than anything else, the role of a CEO is to manage expectations.

Maybe that's, I don't know if that's number one, but... Strategic direction too, but... Yeah, I'd say capital allocation is number one, but managing expectations is definitely important. It's got CFO written all over it. I think you want, well. Maybe for internal investment, CEO, capital allocation matters, but run CFO, run buybacks. Yeah, well, it's more than just buybacks. Yeah.

It's more than just buybacks. All right. Should we get started here? I've got some pretty interesting news, but I'm trying to pull it up on the computer that I am doing video on. So let me get there. uh, block had basically this, um, I don't know what to call it. Sort of a Monday, a cyber Monday, black Friday review. Cause they, you know, they, they work with so many retailers and so they kind of gave

this comprehensive review, except it, it was like not all that comprehensive, but it was a lot of, it was a lot of pieces of data that like, didn't give me a very good glimpse at what was actually like happening in the retail space. So the news was Square and Afterpay sellers. So between the two ecosystems, the sellers that are associated with each one saw more than 61 million transactions during Black Friday and Cyber Monday shopping weekend. That is,

they didn't say whether or not that was up or down from last year. Maybe it's because Afterpay wasn't integrated last year. So it's hard for them to tell, but it sounds like a lot, I guess. So that's good. The other thing I mentioned, Square payroll labor data shows a 19% increase in holiday staffing with employees clocking 3.8 million labor hours. Sounds to me like margins are compressing, but – What – oh, say that again. Basically, they said labor was up 19%.

Employees during holiday staffing was up 19%. I assume that's year over year. It doesn't actually say that explicitly. The other thing they mentioned here, transactions of buy now, pay later methods through afterpay grew 120%. And then I was like, wow, I can't believe it's still going that fast

compared to pre-holiday across online and in person. Well, yeah, that's got to be an easy comp. I wish they would give to last year during the same time period. October, November, just totally different periods for retail, as we all know, especially in the United States. Yeah. And then I guess a couple of other, okay. So I don't know if this is year over year data. I think it is, but if they're comparing

this to pre-holiday, I don't know. It's such a meaningless comp. All right. Fastest growing after pay item categories. You may have seen my tweet, but can you guess what the fastest growing category is? Well, I just clicked your link, so I have it up. So spoil it. I don't want to spoil it. Tell the listeners what it is. Okay. Food and beverage use of after pay for food and beverage items was up 251%. Would that not concern you if you were a lender?

Maybe. It depends on what. I guess it would be hard to get this data and you won't know until it is concerning, but maybe people are just using it in general and they kind of have their two week periods that they're replacing it with a credit card for where people don't really scoff at people using credit cards to buy food and beverages. So maybe it's not that big of a deal. And yeah, this is going to definitely drive revenue growth. But yeah, if people feel the need to do layaway on a sandwich purchase, that's not... I guess we'd have to see more data, but it's potentially

concerning, right? Yeah. Yeah. Maybe I'm overthinking it. I probably am, but when I read that, I think, okay, they need

an installment loan to buy their cup of coffee. I don't know. It doesn't have to be need. It could be need. It could be them just replacing their credit card. Yeah, that's true. That's one way to look at it. But why is it just outpacing every other category so much?

A lot of advertisers out there. I suppose. They're putting in a lot of marketing dollars. Who knows? It seems like there's just a narrative out there that younger people don't like credit cards. And this is basically the same thing with different terms, right? But younger people seem like our age seem to like this better. uh it's showing up in the data but uh who knows it's kind of pick your poison right you're still taking out a loan to buy a consumer item yeah you're deferring expenses all right uh this is

maybe a little more interesting trending after pay search terms the most the highest trending were PS5 number one, gift cards what that's not even, no Nintendo Switch was the second, sorry they've got these out of order, Nintendo Switch was the second Xbox was the third

those were all up basically double and then toys and gift cards 30%, 40% it bodes well for video game industry at least and we saw some data

we saw some purchasing data around the Switch console the PS5 console and the Xbox console and all seem to be doing really really well compared to last year yeah I can maybe find that data for the United Kingdom yeah

I guess that was just the UK yeah but the that's we own a couple of video gaming companies and anytime you can see them actually meet in demand it's a little more satisfying. It's still one of those areas where

so many people can't get it despite the desire to get it. Yeah. The supply is just going to be slow. There's not much else to discuss there, right? You can't build 20 million

computers, which is basically what these are, computers that are built for gaming. Within a month, it's gonna take a lot of time and once you get that backlog i think it's really hard to come out of that because it's not like you can just oh double it in in a quarter you have to really really ramp up and then even ramping down is slower so it's gonna have to just be over time and hopefully this holiday season is the end of it uh just for the gaming world i mean kind of normalized but we'll see it seems like supply is still a bit constrained um and let me try to find that well

if you keep going if you have any more info here no i mean that was basically the justice report i think you get probably a lot more from adobe's cyber monday black friday weekend wrap-up because they they kind of have analytics on basically the entire e-commerce space so it's a little more useful potentially the only other uh item that i brought to the table and oh yes it wasn't the newsiest week for me but the uh airbnb i don't know if you saw this but they launched like an apartments tab i did or it's like a part partnership right or something like that yeah it's like a section where you can find apartment airbnb friendly apartments so in a way it's kind of going after a new demographic of of renters as opposed to just like

for vacationers, where you can browse. If you're looking for a place where you want to be able to rent it out for two weeks out of the month or a week out of the month, and you want to have that flexibility, a lot of apartments don't allow it. But Airbnb has basically created the dashboard to go find it. My thought here is that this is going to encourage apartments to be more accepting of it which yeah because it's competitive where renters are going to want this option yeah and now they have a directory to find them i definitely want this option i actually looked up the seattle area not really there's only a couple so limited supply right now which i guess is to be expected but for both of us as two people

that don't have um we're not tied down to any you know in-person work we would have the ability to leave and maybe take a month somewhere else and live somewhere else probably an airbnb maybe one of the other platforms and then rent out uh your apartment you're not you know paying double rent and stuff like that yeah and i mean it just makes i don't know makes living there more affordable especially if you have like a two-bedroom and you're not using them both that's a good point didn't think about that as as well it can really help with just i think it can really help with supply and demand issues as well i know airbnb has been people complain about that being bad for supply um because people lock up places that they only use for short-term rentals in certain areas

and then long-term stayers and renters and homeowners kind of get a restricted supply but i think with this it can it can really help out because there's definitely a lot of people in our our shoes as well who could who could utilize these features yeah i agree i hope it makes renting more affordable for a lot of people um plus it boosts inventory on airbnb potentially if more apartments adopt this this uh solution the other thing i was thinking about with super hosts and i see this all the time because there were a lot of people that took advantage of the low rates, where they basically levered up, bought a whole bunch of places, rented them out via Airbnb.

How do you think a rise in rates impacts not only those people, but Airbnb ultimately? Ooh, well, this is an impossible question to answer, but I think we'll try to work through it. I think their average nightly rate could come down. It's gone up a lot over the last year or so, and I think that's just with housing and whatever, affordability and all that stuff going up a ton as well. I think they could definitely be impacted in the short run if there's a lot of supply out there. Wouldn't this hurt supply, potentially? What do you mean? Rates?

Yeah, rise in rates. well I guess assuming that they financed them at low rates and it's not variable well you mean hurt supply

for who like would supply be going up or down my the amount of places on Airbnb with wouldn't they go down

isn't that that's kind of my thought maybe but there also could just be a lot of the people that came on giving out big discounts, which would lower the daily rates.

So we'll see what happens. So I think there's a lot of variables at play there. So I think in the short run, daily rates could get hurt. But we'll see. We'll see. It seems like that whatever it was,

I think it was a 30% or maybe 40% bump in average daily rates will be definitely not sustainable. And I wonder if it's going to revert back. here's a question though. Do you think that one of the hardest questions

I think investors have with Airbnb, and I don't think anyone can answer this, is how many, if you could ask and make any sort of prediction, how many dollars in GMB will be flowing through their platform

in 2030? You could easily envision a world where it's a trillion a year, right? I think they're at like 130, but I'll confirm it. But there's also a world where it's maybe only 200 billion, depending on how people adapt. And I guess a lot of it comes down to the company execution. But I just think it's really interesting to follow this business,

even if it's building out its own. It's building out its own. It's not replicating anyone. This is a whole new business model. So we don't know how large this market is. They're untammed. yeah good point

the also I think it's kind of dependent on rates would be my guess per volumes yes I mean I don't think people are going to be buying as much as many houses

and just flipping them and making them available on Airbnb when you have to do it at an 8% mortgage maybe but i don't know if that means their daily rates are going to go up no but i'm saying that that's going to hurt their ability to get to a trillion in gmv if there's less if there's just simply not enough supply yes but i'll i think that's logical but i just don't life will find a way i guess that's how i'm trying to describe it if

there's demand it'll get there they'll force it onto the market yeah i suppose i like airman b don't like the price but slightly expensive yeah uh let's see last quarter just for reference for the listeners g gross booking value of oh no it's 100 100 billion uh it was 15 billion last quarter so they're at about maybe well there could be some seasonality uh let me look at q4 last year but they're at about 60 70 billion maybe all right let's talk chips yeah okay yeah under 50 billion dollars last year yeah we'll get to my topics really came in with a lot of notes here ryan today i forgot some talking points all right uh there's also a fun one i have at the end i'm also what was the other one i have the blackstone's uh reet called breit it's a weird name but we'll

get to that very interesting story and then also uh there's something there's a good tweet about ponzi schemes that had a funny response okay but this is a good serious one probably the most interesting topic from the last week and that is apple tsmc and other chip designers banding together in arizona um tsmc which is taiwan semiconductor the largest semiconductor manufacturer in the world um along with the president of the united states announced an expansion to $40 billion of investment into the state of Arizona for factories, while the previous number was just $12 billion. The first plant is set to begin production in 2024. The new plants will actually have more advanced nodes than previously thought. They will have a three

nanometer one by 2026. And right now the leading edge is five nanometers. So these will be pretty close to the leading edge. And if we look at their customers, Apple, AMD, and NVIDIA are going to be committing to purchasing from these factories. And for reference for the global supply, this will be enough supply for current US demand for computer chips. Now in 2026, 2028, US demand for computer chips is probably going to be higher. We'll see, I guess. But it's a sizable amount. And this doesn't take into, in fact, Intel, other companies that are manufacturing the U.S. Intel's committing, I think, $40 billion

as well to Ohio to build up factories there, as well as Arizona. I can't remember the exact numbers, but they're in Ohio and Arizona. TSMC is just in Arizona. I think the big thing here is there are $52.7

billion worth of potential subsidies because of the CHIPS Act taxed by the U.S. government. And I think that is just why TSMC is going aggressively here because they're hopefully going to get some free, whatever it is, tax stuff, however they're going to get this money, some of this $50 billion, and it'll help them build out these factories at even better returns on invested capital. I also saw that TSMC founder

Morris Chang, he did a speech there. It seemed to be a who's who. You had Chang, President Biden, tim cook uh what's the amd what's what's her what's her lisa sue i think she was there i'm sure the nvidia guy who is a very uh loud man man he was probably there doing a nice speech but the tsmc founder morris chang at his speech said that globalization is quote almost dead get a comment going to hear from Matt H who again is leading the chat thank you for being the one person that watches on YouTube he says how pissed is Xi about this referencing Xi Jinping I think he's probably quite pissed and this seems like an interesting counter move for Apple TSMC from all these China worries that have been popping up so any thoughts on there before we go into I have a couple

questions about these companies from an investment perspective? No, I just simply don't have any takes on the semi-manufacturing space, just because I feel like it's always that area where I'm disadvantaged in terms of what I know. But I have to imagine that President Xi doesn't feel very good about this. And do you think this would have happened had it not been for him for being aggressively saying that they're going to or leaking or

reports out there that they want to reunify quote unquote Taiwan this decade I think TSMC and Apple are probably talking like alright you guys seeing this like we need to get you know these factories take multiple years to get ready we need to do this now

commit the dollars the US government is going to give us a boatload of money let's go yeah to me it's I think she is pissed about this probably but at the same time like he probably forced

this or at least forced it many years in advance but I don't don't you think it's more costly in the US or the subsidies going to get rid of that we'll see I mean it's not semiconductor factories are not based

off of low-cost labor it's all about technological science you know the reason that tsmc's core factories in taiwan are so good is because they have the smartest engineers within that space there they have the smartest scientists and all that stuff and they have the contracts with asml who do a lot of the r&d i guess for them essentially so i don't think there's low-cost labor isn't a thing low cost energy is probably important right which the u.s has some of the lowest cost energy in the world yeah don't you say arizona has a water problem and i did tweet that but someone figured someone i wanted to i tweeted that out so people would maybe respond and show that it wasn't a big deal i think these there's a lot of numbers that get thrown around about

these plants using a ton of water but since they're a lot of it just gets recycled so some of those numbers are inflated but they do use water um but again arizona i i would think that apple tsmc would have that sorted out so i think they have these water treatment plants and these recycling facilities uh for them but they're they're super energy intensive so you want low cost energy us has that and especially in the southwest there's tons of renewable potential um and then you have you just got to get the scientists and engineers over here i would think tsmc would be able to bring those over to the united states and there would be enough from american colleges to fulfill that although we'll see so what are the what are the investing

implications yeah so these are the questions i wanted to ask uh does this make you more bullish or bearish on first one apple bullish i agree what what um i think it's pretty obvious but I want to see if you have the same thoughts as me. I mean, it takes a huge... The component in their supply chain is the risk is... Assuming that this gets up to any sort of level to what they have in Taiwan, it completely diversifies away the risk geographically

from being in Taiwan. Yeah. Yeah. Now I think 90% of their manufacturing or assembly is in China still. So it's going to take a lot of work to get them out of the country if they really want to. It'll probably take multiple years. But yeah, I'm in the same camp. It would make me more bullish. However, though, you can maybe flip that and say, in the short run, they are exposed. So they're making the right steps but it's because they made mistakes seven years ago yeah i also wonder how this now puts them at potentially a not so

beneficial relationship with president g or maybe not as uh amicable i should say yeah in conflict yeah yeah which if that's where i think this would really hurt them in terms of gross margins would be if their actual like labor side was had to be repositioned somewhere else yeah we saw that foxconn stuff yeah that's a lot of people would be getting google pixels potentially except they're probably manufacturing over there too yeah i think uh a lot of people wouldn't be upgrading that's that's the thing a lot of people yeah a lot of people wouldn't be won't be upgrading that's a it's just a huge risk and i just don't again everyone loves apple i've said this many times but i don't understand the multiple gets because of these risks

um i i really think it deserves like 10 times earnings but i'd take it at 10 times but yeah there is some risk it is like if anything in their operation ceases them from cutting out

upgrades at the same pace you're going to see a huge crunch in the multiple yes yeah yeah like if there's god forbid one day president Xi said we're done manufacturing your phones or he pulled an h&m and said basically i don't know what they did but they oh i i've read into that yeah yeah where they cut them out of like all search

yeah something like that and even more they have the really authoritarian state um internet capabilities and stuff you guys listeners know what i mean there where they can basically influence everyone to stop buying that's whatever what h&m i wonder if they could do the same as apple apple's got a stronger brand than h&m but i think that could be a risk in retaliation because one china wants to make homegrown semiconductors and two the more people are buying iphones from them if the manufacturing isn't in that country they're not benefiting because all the profits are going back to united states corporation um i don't think he would like that but again we are not in a conversation with xi jinping so who knows for

sure he may not um be thinking that at all all right next one does this make you more bullish or bearish on taiwan semiconductor tsmc that one feels like a no-brainer bullish yeah already at 10 times earnings ish well it popped after buffett bought it so maybe it's a higher now. The big risk was the China invasion, and it seems like five to seven years from now, they could really mitigate some of that risk.

Yeah, 100%. I feel like that probably... The China invasion risk, I think, I'm guessing cut their multiple in half of what it would have been had the risk just not been present. Yeah, because the market share, the almost

monopoly... It's far more... And correct me if I'm wrong, and you might not know the answer, but it's far more durable and less cyclical than being the chip designers. Yes and no, I think, because they can... No, that's interesting. They're still at the whims of what the end market demand is. So if smartphone demand goes down, or cloud demand goes down, or AI demand goes down, if that all goes down at once, then they'll be hurt. But yeah, like an NVIDIA on its own, who might have a subsection of the market, they were being exposed into cryptocurrencies, that would impact them way, way more.

How far? That could be much more cyclical, where I think TSMC is exposed to almost all ends of the semiconductor market, at least all ends of the advanced semiconductor market. Isn't their backlog huge, though? yes but the backlog there's a lot of companies that double order um to try to get preferential treatment stuff like that so pull back on it also it can still be cyclical remember when earlier this year we were talking about backlogs at and supply at all the cars manufacturers right and how that can get fixed really in a shorter time than people think but tsmc yeah it's cyclical but they have a it seems like they have a strong but we don't need to go through

the investment can you guess what tsmc's revenue kegger has been since 1994 oh i think i know this 17 correct i guess it's on their it's on their home page yeah that wrote enough earnings have not outpaced them. No, they reinvest so much. They are in a huge capital cycle. But margins are up significantly. I think

it's impressive what their margins are. Their ability to negotiate with people, even like Apple, is impressive. They paid $9.5 billion in dividends in 2021. What's their yield?

It's like 2% right now, I think. Something like that. They don't buy back any stock. I can see why Buffett liked it, though. It went down into his 10 times PE kind of strike zone. Yeah, the share count's flat. They reinvest almost all operating cash flow into new CapEx, though, which has worked out wonderfully because there's just an insane amount of end

demand to grow. All right. All right. Let's take this question. Is Google search dead? Oh, or should we say, should we say how it's spelled is,

is Google search dead with little sarcasm in there? The, uh, no reference referencing the chat GPT. That's right. he's referencing the chat thing i saw a favorite um bear porn the most popular bear porn twitter accounts say that i used gt whatever gtp3 open ai and they said google searches long for this world or something like that and i couldn't help but laugh because when the bear porn people are

out there doing it usually means we're at the top of the hype cycle or something and i saw them like they're like what do you mean by that he's like the the account goes well i used it for five minutes and then it was pretty clear it's like okay thanks but i think it's important to consider these uh as a threat to google because they could try to build a search engine type thing we'll see what happens but i'm pretty confident google's you used it what uh yes no i actually was testing it out to see if it could write something like we do writing

I was testing it out to see if you could do writing and have any sort of investment writing, investment articles and have it make sense. It made no sense. It wasn't helpful at all. So they have not conquered the clickbait

investment article writing yet. And to be honest, I was at first I was impressed, but I think like everyone else using it I became unimpressed because a lot of the facts are wrong. So you can't trust it. I feel like these things are so gimmicky. People use it for like a week or two, and then they go back to their old habits. Plus, I had to Google it to get there.

Yeah, well, that's fair. That doesn't matter. But the point is, it's always going to be the first thing I go to. Yeah, well, 90% of the internet. To be fair, to be fair, that Yahoo is the place a lot of people started out at and went to Google back in the day. So that is maybe if people are going to Google and then going to chat, whatever it's called, GPT-3 or whatever it is in general, that would be a threat. because the most valuable thing is searching for stuff. But it's not, write me an article about Dropbox's competitive position.

It's hotels in Cancun, insurance policies, Seattle. It's nothing. All right. Blackstone's REIT, which I kept seeing that acronym. I didn't know what it meant. B-R-E-I-T. I thought that had something to do with Brexit. it but yeah that when i was searching it it started um to come up with brexit stuff but

i would if you see in the document ryan you can click that twitter thread it can maybe help you out a bit but i'll try to go through summarize some of the points for the listeners it's a long twitter thread maybe we'll if anyone's interested check that out but blackstone is going through taking a ton of heat this week for limiting withdrawals um on breit which is b-r-e-i-t it's their fund. It's not publicly traded. At first, I thought it was an ETF, kind of like those other publicly traded REITs or whatever it would be, but it's not. Apparently, it's private. It has $69 billion in assets, and the REIT is focused on the private markets. Now, the big question is, why are they limiting withdrawals? Well, we have to understand how the

fund works first, because it's a weird fund that Blackstone kind of invented over the last... I don't know when it started, but I'm sure this concept has been around before, but just stay with me. So this is not just for BREIT, but for all the private REITs out there. So a private REIT is the same as a traditional REIT, but do not have public price discovery. So a REIT is a real estate investment trust. They invest in real estate. They have to pay out dividends. I believe it's a 90% rate and that's what qualifies you as a real estate investment trust. But the private ones are different because they do not have public market price discovery. Now, what this means is that- So what, the investors are just general partners and they're just getting paid out the

cash in hand privately? Ish, or limited partners, I think you mean, but ish, sort of like that. you can envision it like that. But what that means is that their NAV or the asset value of the fund is set by recurring appraisals, which quote unquote smooth the quote unquote volatility that would be there in public markets. So within this fund, performance has been great. And that's why they've accumulated $69 billion in assets. We had low interest rates, rising rents, et cetera. They focused on... They weren't in commercial real estate, which was smart. So people really loved them. And they went into the stuff that was doing well, data centers, industrials, rents, I believe is what they were saying. And that's why their NAV has been soaring.

And fees for Blackstone have been great. I wouldn't even describe it as great. I would say absolutely fantastic. So they have quite a bit of fees. So they have a 1.25% management fee. And then a 12.5% performance fee after a 5% hurdle, which isn't that bad. Each of those isn't that bad on their own, but I kind of combined it a little bit. That's a lot to have both of those. And then they have a hefty selling fee, which we don't need to get into the details there. is when you sell, there's also a flat fee that gets taken out. And that is equated to... At any time or is that after a lockup? Say, if you take out your money, I believe it's at any time. But again, the thread and all the information I found didn't confirm that.

So I think just say there's a selling fee. And from what I should say, the thread person's name, Phil Bach, who's a great follow on Twitter, knows this space extremely well. He said from his calculations, again, just maybe it was back of the napkin math, but it's just roughly right that these combine to 3.6% annual fees each year, which is a lot. But again, some of that is because their performance has been good. And then on that $69 billion in assets, that is $2.46 billion in high margin annual fees for Blackstone. So the big question is, is you have an investment fund who invests

in real estate, but real estate is highly liquid. What happens if investors want to sell? So BREIT investors, or excuse me, the fund, they could sell some of their liquid mortgage-backed securities. And then typically they just use inflows to offset redemptions. But right now, the real estate market is totally drying up because of rising rates. Inflows are drying up and redemptions are heating up. So investors have tried to redeem at this high NAV because remember, they only appraise, I don't know if I mentioned it, they appraise the NAV or the asset value of the fund once a year. So right now the NAV is stated at a much higher performance compared to all the publicly traded REITs. If you look at a chart that was shown in the thread,

vnq which i believe is a vanguard let me just confirm the name for everyone vanguard real estate etf so just say a really broad-based vanguard type etf that performance used to track fairly closely sure screen sure screen oh yeah okay i'll show yeah smart also uh smart some comments some comments in the chat by john or bijan says appreciate the content you guys make a good podcast much appreciated then we've got a question from tropical storm which we can uh take after this. Okay. Yeah. I'm almost done, but it's important because I think it's going to be a great example of asset liabilities mismatches. So if you look at this chart here, I have to zoom in. The publicly traded one, VNQ, has totally fallen off a cliff this year,

not as sharply as during COVID, but again, pretty sharply, but the BRIT NAV is only going higher. So real estate investors or REIT investors have tried to get out of this because they're saying, okay, they're seeing the writing on the wall. It's pretty obvious interest rates are rising, real estate prices are falling. The NAV is going to decrease once they do their appraisals. So they try to redeem, but Blackstone has decided to gate redemptions and investors now have to wait in line to sell their stakes. At the same time, and Ryan, you're going to get mad when i say this i know for a fact you're gonna get mad blackstone is still taking fees out on this artificially inflated nav so first question that should be illegal that should

be illegal well see i told you i knew you're gonna get mad uh not talking about the morality maybe we can get to that later uh can blackstone sell properties at these appraised prices will this lead to a you know run on the bank you know with a timing liquidity mismatch we got a question from Matt H how do you protect your piece with 500 tab is open yeah it's how I go I think it's I think it's mentally

insane but that's how my computer is big it's only 20 that's insane that's so I want to be able to focus especially now they've got like the notifications that pop up on the

tab uh i only got one open at one time it's criminal all right to answer your question though no obviously i don't think who are they going to sell them to at appraised valuations the only people they could sell them to is another subsidiary or fund that they start yeah blackstone's their own fund so the question is what like what happens it seems like they're just delaying the inevitable um after they i don't know they conclude their quarter they will let The redemptions go once and then they'll guide down. Yeah.

They'll take the nav down and then people can sell. But let the quarter conclude, make the quarterly results look good. Set expectations for next quarter. Say it's the macro environment and then guide down and let the redemptions come out. What do you think Blackstone is thinking here? Are they just betting that interest rates aren't going to rise more?

Because I just don't see a way this doesn't end poorly and their investors getting... Either they lose a lot of... Blackstone loses a lot of money, I guess it would be after earning a lot of fees, or B, their investors get pissed at them. I would say B is a very likely scenario. I don't understand how they're still taking fees.

That's the part that really pisses me off. And then... Well, at the high price, yeah. Aren't there protections? There has to be protections for LPs in these scenarios where they can take it even if they have to have a high seller's fee. I wonder if they're completely holding withdrawals or redemptions, or they just have a ridiculously high early redemption fee. uh i think that would have been talked about in the thread so i doubt they have a ridiculous early redemption fee but i think it's the liquidity it's the clue i bet that was part of the contract that the investor signed it's the liquidity where they could get a run on the bank if people try to redeem it they wouldn't have the cash there it would all be in real

estate assets that you can't sell overnight but who cares if oh oh they just can't give them the money yeah exactly Blackstone hasn't okay that's why I think that's why this just takes them from the parent company yeah well I don't know if that's legal but well I don't know if this why who thought this is a good idea I I don't we're talking to John Rotante on Monday about Blackstone yeah that'll probably come out later in December um or I know it'll come on later December we'll see um if he has any thoughts on that he knows the company better than us but it's just one of their funds okay here's the here's the question though i have here's the question though i have that's more broad does this is a concept that comes up a lot does illiquidity deserve a premium

valuation people say it does why because it has smoother volatility it's a lower risk because of that it's not no risk until it zeros the ryan that is the consensus i'm only speaking what is the consensus out there no of course it deserves a discount i know but it's crazy that people think that public markets deserve it doesn't deserve a premium it gets one because they give it to themselves exactly i i agree with you but that's That's what they claim, that because it's lower volatility, it deserves a premium valuation, which doesn't make any sense to me. I guess it is lower volatility when anything non-public is lower. I guess, but maybe that comes back to the definition of risk.

Volatility is not risk. So, that just shows, like, it just, I think, is a clear example of why volatility should not matter, unless you're leveraged, obviously. What's the expression? Volatility is not risk. Volatility is opportunity. Volatility is fees for Blackstone, or lack thereof. Lack of volatility, low vol. Yeah, well, speaking of that, they had a whole thing with low vol funds, I think, a few years ago, but that's a story for another day. Okay, let's take Tropical Storm's question. It says, what pond is more exciting to fish in right now, consumer staples or consumer discretionary?

That's a good question, actually. That tells me staples. Yes. I think this is a good time to start loading up discretionary ones for your watch list and then hoping they get cut in half. I see how sometimes I think recessions are fairly predictable

once you see the momentum going there. Maybe I'm wrong. Maybe that's a very naive take. I haven't really been through one. But you can see the cycle I mean more of I suppose but that felt

more flash in the pan. It feels like once you start seeing the layoffs, layoffs affects the purchasing power, purchasing power affects the top lines of the businesses, the stock stock line, the wealth effects takes... Yeah. Operating leverage goes down, margins go down. Yeah. Well, what's interesting is that the market does seem to predict it because I believe there's some studies out there that stocks start going up well before um the recession or all the negative trends and for the global or the or the whatever you know macroeconomic trends you're you're tracking so i think you

are probably right and that's shown up in a lot of studies that people talked about i'm saying if i'm going into if okay judging from kind of what i'm seeing anecdotally which is people reining in spending slowly but it's happening layoffs I mean we're seeing them at a lot of businesses I think purchasing power

is coming in a little bit my gut would say go with cigarettes over luxury couches yeah and speaking of which Matt has a comment here I cannot wait to listen to the doom porn from the RH

ceo on the call after this he is very entertaining that is that is a good point he is um unlike a lot of ceos unlike 90 of them he is unafraid to just say what's on his mind which i think can be very insightful because he's not trying to bsu um he'll let you know how the company's doing i think it's pretty fun to watch although they are they do sell very overpriced furniture um yeah the consumer staples just i think seems safer in general when i'm looking at a consumer discretionary stock unless it's someone like an apple or a nike who have multiple decades of brand dominance i'm gonna want a discount yeah the discretionary stuff i don't know i don't know any discretionary business that i love that's that i think is like insanely durable if it hasn't proven to be durable

for like the last 40 years yeah okay tropical storm says i asked because my view is everyone already knows about the consumer stress and it's reflected in the valuation to many staples names where discretion is that discretionary is valued lower for the same reason yeah that's right staples are staples are high multiple hershey's really you know it's had a high multiple it's one of my favorite ones I've looked at and on the watch list it's way above 20 times

earnings I'd say but at the same time it's it's pretty realistic to potentially get an environment where earnings earnings decline for several

years on some of the discretionary yeah it might be trailing multiples obviously case by case but trailing multiples might be misleading here

that is yeah that is true they could be pricing in the earnings and And especially the discretionary businesses that have been taking price over the past couple of years that aren't able to do that, that to me is going to be, that's going to hurt operating leverage. Yeah, I think it's a tough one. I think it's a tough one where if I'm looking at consumer discretionary, it's not something I typically like in general, but I do have some on my watch list and I'm really just waiting for a big, big discount. And then consumer staples, I'm looking for, well, it's a case-by-case basis depending on their earnings growth, but for staples, I'm looking for something that's entirely discounting.

I think it's really tough. It's really tough. Because again, if you find a good consumer discretionary one, Nike, Apple, whatever, I mean, that could be a hundred beggar. so there is a lot higher but again Hershey is also a hunter-bagger so

it's really it's really tough for me I like I like Staples more as well I also don't less downside risk

it feels like I don't like stuff I always discount we talked about this before but I really discount stuff that's in the physical world as opposed to

the digital world just because you probably have more labor costs, you probably have energy costs coming in, commodity costs Real world's outperformed though

That's right, it has been the return of the real world but that's probably because Revenge, revenge of the real world Alright, let's Yeah, we'll close this out for the last five minutes but just before we say that, that's because the discounts or excuse me

The spread between the digital in 2021 and 2020 was so absurd, but generally all else equal. I would like a digital business better, but yeah. All right. Let me pull this up. Is there another comment there, Ryan? What do we think about highly or higher leverage companies with durable free cash flow that will be able to buy back their debt if their credit markets bomb out here? Yeah. I mean, that's-

Ooh, interesting. Yeah. Love that. We're looking at a company. I was looking at a company today. The companies that raised in 2020, I would say any company that's raised below 4% or their total cost of debt was below 4% and they're sitting at 10% for cash flow yields right now, I think, yeah, those companies are going to have really good returns for the next five years. If someone raised in 2020 and 2021, that's an indication to me that the CFO thinks with a capital allocator's mindset or CEO and CFO. With the one contingency being that they generate durable cash.

And I guess Matt mentions that here, but there are a lot of businesses that raised at really cheap rates that don't generate cash. whether that's by choice or whether that's by default that makes i mean then then it's terminal then the credit sucks for the lenders but uh yeah carvana carvana carvana could have been that example um cannot believe people are still in that thing but that's we don't have time for that okay here's but it does give i mean there there are a lot of i would say really good forward returns on companies that are out there like that. I think just a few, I mean, we're talking about GoDaddy tomorrow. They did that in a really good way. They've reduced share count by, I want to say like more than 10% over the last two years. They've got reasonable cost debt and

the business is pretty durable. I was just looking at that all day. So it's the first when it comes to mine. No, GPT-3 is going to disrupt them. And to Matt H.'s point, that's something Michael Brewery tweeted about a long time ago. He deleted it too, but he said coming out of this,

the companies with low cost debt, durable cash, there's going to be plenty of good returns for investors to have. Yeah. All right. Here's the tweet. Don't know if it was serious or not, but what are the biggest potency schemes

that almost no one wants to admit? And then they did the thinking emoji. Super cool. Someone said taxes. Someone said social security system in the U.S., the U.S. dollar. And then they gave a nice face with someone like going kind of like, oh, I didn't see it right. But anyone's watching.

The taxes, crypto, Bitcoin. It's very, it was very funny responses. um there there's someone just the biggest galaxy brains out there where someone says did you know before the formation of the u.s federal reserve it was illegal to pay taxes scary part the federal reserve is neither controlled or owned by the u.s government that's just everyone yeah a lot of just not that's just false just nonsense all right the uh social everyone kept saying social Securities. Ooh, someone said private equity. I'll take this one.

I'll take this one. Cooking. Cooking. Biggest Ponzi scheme out there. You spend hours prepping your meal and it takes like 10 minutes to eat it. I think it's unfair. It's unjust. Hours? What are you making over there? Hours. Okay, maybe not hours, but it always takes longer to cook

it than eat it. So it's always the struggle and not enough reward. That's nonsense. What's more nonsense, that or the Federal Reserve? as the biggest Ponzi scheme that is definitely more nonsense although I guess by definition

people talk about the Fed being a Ponzi scheme it's not the US the government has a monopoly on printing money it's not a Ponzi scheme they can just print it that's it's actually not a scheme

they're very outward about it we've got another comment here the chat is quite active today Arpen Karana I hope I'm saying that right It says, hi, fellas, love your work, especially the deep dives. Any interest in deep dive on garbage companies or any chance you plan to cover railroads? Those are interesting. We'd love to look at those.

I'm admittedly kind of a novice when it comes to railroads and garbage companies. We should do a theme. Industrial garbage and railroads. We should do that as a theme for a month in 2023. Let's mark that down. Credible moats on those railroad businesses. That's what I hear. but I haven't looked into them.

Also, we're talking about inflation and cooking and Ponzi schemes. Matt says Chipotle is now $50 a meal, so rocking a hard place on the cooking. That's a great callback from one of the tweets of the week. When someone... I think that person that tweeted that

is very smart, but someone tweeted out that a two-person meal at Chipotle is $50 now, which is not remotely true. I guess if you got a side and a drink, it would be like $30. five six extras of chicken yeah if you got doubled meat guac a side and a drink which again you don't like a side and a drink that's just you don't have to get that also no one's forcing you to

go to chipotle it's like people talk about chipotle and how much pricing power they have like people are just forcing them to eat there well people go because cooking's upon this scheme so much quicker well right you should get long you should get along some robotic uh cooking robotic cooking what's the one that chipotle on the chippy chippy might have to fish in that pond yeah all right it's like you really really hate that so it's five o'clock pacific time so that is going to do it thanks everyone for tuning in thanks for all the questions in the chat really appreciate we do really appreciate it we do this every thursday at four o'clock pacific time seven o'clock eastern time although it's going to be monday next week because you are on

vacation ah true yes it will be next monday let me actually make sure i get the time right so everyone can tune in if they feel so inclined. It will be three o'clock Pacific time. So six o'clock Eastern time next Monday, and then typically Thursday is four o'clock Pacific time. All right. Thank you everyone for tuning in. Reminder, Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you next time.