Chit Chat Stocks - Q4 Roundtable with Brad & Ian

Episode Date: January 6, 2022

This week Ian and Brad join us for the Q4 Roundtable. About once a quarter we want to share some of our biggest stories and opinions from the financial markets. Brett, Brad, Ryan, and Ian discuss topics ranging from inflation to the metaverse. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Inflation | (15:15) The Metaverse | (33:38) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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 recommendation. Now, please enjoy this episode. Before we get to the interview, though, we want to talk about our friends, our sponsor, Qarter, Q-U-A-R-T-R, no E. They are the all-in-one investor relations app. And you can listen to

conference calls. You can look at investor presentations, transcripts, all from a single app. It's really fun. It's fun to use. It's easy to use. It's pretty much the only way that I listen to conference calls nowadays. You used to have to go onto your computer and listen to it live and that just didn't really work. So this is a really easy way to do it. And you can do it on the go. You can do it in your car, on walks, anything like that. And it's 100% free. They've got it on iOS and Android. There's companies from all over the world. And yeah, go ahead, download it. There's no reason not to. Today, we have our Q4 round table. I'm here with Brad Freeman, Ian Gray, and Brett Schaefer, as always. And I'm Ryan Henderson. And so we've got a few

topics. We've all brought our own, and then we're going to ask a few questions. But before we get into the show, how has your guys' Q4 been? How has the year been? Let's start with Ian. Yeah, my year has definitely been a little bit of a down year in the market. it. Q4 has been hitting a little bit hard as well, but it definitely gets the juices flowing too because after a year where many things looked overvalued, coming into Q4, things are at least looking a little more reasonable. So it gets me excited again as an investor. Brad, what about you? Yeah, similar thoughts. I mean, I invest in a lot of the high growth, unproven disruptors that I've been getting absolutely shellacked over the last few weeks.

Just for people, just for context, we're recording this like hours after Jerome Powell just spoke and had the Fed meeting. And yeah, so hopefully when this gets published for New Year's, it'll look a little better. But I think my growth portfolio is down like 9% on the year. So pretty large underperformance after a couple really fun years. And then the value portfolio, Facebook and Microsoft have kind of just put the team on their back and, and that's a super concentrated portfolio. So that that's been helping a lot, but, um, yeah, just using the multiple compression,

uh, and really, uh, really like honing in on how the companies are doing is not, not to be a cliche, but separating the company from, from the stock and just using the multiple compression and the better risk reward to, to lean into these companies that are performing, um, and aren't really getting credit for performing. Um, but yeah, uh, pretty, pretty rough, uh, couple of weeks and hopefully when this kid's published, uh, it'll turn around. There's still time for the Santa Claus rally. Give it time.

Yeah. The, uh, this could, our takes on here, I should warn. They could be stale in two weeks. I hope they're not. Um, but you know, some stuff on here, you know, you never, you never know. I could have, you know, something we stand here, we could have some cold takes. So just be wary. This was recorded two weeks before we, uh, we opened, there could be some crazy thing

happens this is a new variant or whatever actually a good segue into your story so you want to get that is true yeah my segue is about um no market breadth uh which for everyone that doesn't know that just means that the stock market the actual constituents in the stock market are actually not doing what the overall market is doing and to explain that more deeply everyone's seen this chart one way or another writing of some of the other i'd say it's like uh there it's not a very deep roster no you got a few star players no one's really on the bench yeah kate cunningham and then the rest of the detroit pistons that's right for all the detroit list the uh but yeah so the market is near you know all-time highs like everyone's seen i think it's off a few percentage points

maybe but i don't have the exact numbers but really all the returns over the last few months have been driven by a few stocks and i think a lot of people have probably seen those charts floating around there's a few of them out there everyone's been you know kind of talking about it within the financial world and these are really the big contributors there are a few others uh but the biggest ones are microsoft google apple nvidia and tesla and then facebook and amazon haven't had the best years but you know they are still very important too because they are well i think facebook's market cap is under a trillion now but basically they're both you know trillion dollar plus market caps that can have a lot of impact on the overall market under

the hood, though, there has been a ton of carnage with, for example, stuff like Zoom Video down 46% year to date, and then Peloton down a whopping 74% year to date, among many, many others. As we know, a lot of ARK Invest portfolio holdings have been down a lot, except for Tesla, which has been an outlier for them. And just for example, Vanguard's small cap growth index is only up 1.6% this year, which is greatly underperforming the indices. I was going to have Coifin up, and it's dying on me. So I don't, oh no, it's back. All right. Year to date, NASDAQ's up 26.3% and S&P 500 is up 25.3%. Without going into too many numbers on this, two discussion questions here. We'll go around the table here. We'll start with Ian,

then go to Brad and go to Ryan. How do you guys think about these data points and how this bifurcation is happening in relation to managing your portfolio? Ian, what are your thoughts? Yeah, I think I actually tend to like when some of this bifurcation happens because it means that I can be a little bit flexible and find there are some opportunities for perhaps getting some deals when the entire market is just up or when the entire market's down. There's also some deals out there, but it's a little less clear. I think there's, like you said, when there's this bifurcation, I think that I'm willing to be fairly flexible in my portfolio construction and look for alpha in many different places. It doesn't have to be in

the one thing that I do and I've kind of shifted my portfolio over the years. And so, um, it gets a little more exciting for me when, when there's some things that I can dig into and learn about and maybe start some positions in Brad. Yeah. I mean, for me, just like, uh, I was taking a little, I'm taking a little bit of profit off of lemonade when it was at one 80 and upstart when it was going crazy. I'm not a market timer or a genius. It was like, it was like 10% of a position. So really not a large trim, but I tend to do that sometimes when multiple expansion to conversely to compression really is noticeable and aggressive. So with Microsoft, which is really the one name, or I guess Facebook too, but I haven't touched that. I actually have trimmed a little bit of Microsoft recently.

And it's using this another extremely cliche quote, fearful when others are greedy, greedy when others are fearful. And to me right now, the flight to safety and the risk-off appetite has really pushed everyone, pushed consensus into these six or seven names to a point where I really – we're talking a little bit macro now, which is a little bit outside of my main area of expertise. But yeah, there's not going to be very many buyers left at a certain extent or at a certain point. And with this federal reserve meeting that we were talking about, I'm not going to go too far into it because Ian's going to cover it a lot, I think. With this meeting kind of in line with expectations and all the fear that we've really baked into this Jerome Powell talking, you know, oh, no, the benchmark rate is going to only be a little bit lower or still a lot lower than the historically higher target rate. but, but I'm kind of going on a tangent, but, but, but I really think that this is the time to lean back into small caps and to lean back into the speculation responsibly and to not be kind of hopping on

the bandwagon when everyone else is doing so with the large cap. So long ways of getting my point. Yeah. It's like, I know it's such a cliche to just say like, well, your stocks are down, they're cheaper. If they're performing well, you should add to them. But I'd say in most cases, not in all cases, for the companies we own, that seems to be the situation. And if you do have that long-term orientation, you're gobbling up shares at cheaper prices. And not only cheaper relative to previous prices, but cheap relative, hopefully, to future cash flows. I don't know. I don't think, ultimately, what have we really

done with our portfolio. We've bought a lot of what we already owned. There's been a few situations where we added to something new, but it wasn't, I wouldn't say it was like valuation oriented. It was more business quality oriented. Wouldn't you say? Yeah. Yeah. Without getting into any details. Yeah. Do you have anything else, Ryan, or do you want me to? No, I mean, that's pretty much it for me. Yeah. The one thing I think about is I try to resist chasing. It can really incentivize you if all these stocks are doing well and all yours are doing poorly, you can kind of be like, all right, I got to catch up or some phantom target that you're trying to chase, which for a lot of

people can be the broad market indices. Resisting that is tough because I have to think about that a lot. And then with all these big stocks, I guess NVIDIA and Tesla are a little different because they clearly have, you know, really premium valuations. But when identifying a new investment, I tend to try to look at one of the FANG names. Google's kind of my go-to because I understand that the best personally. As your benchmark? Yeah, it's kind of, all right, do I think this smaller company has a better chance to, is it, could it grow more or whatever? Is the risk reward better than Google at the current prices versus whatever valuation it's trading at? I try look at that because if you're avoiding a lot of the you know fang or fan mag plus tesla and nvidia

if you're avoiding that you have to say you know all right well if i'm avoiding that that means i think that what i own can do better than them and you kind of have to i think making that comparison is is clear like it's something you kind of have to do either directly or indirectly but the second question i have is this is easier what stock has piqued your interest that you don't own that is way off its highs. Ian, what's yours? Yeah. The one that's piqued my interest is one we did a not so deep dive on a couple of weeks ago, Peloton. I think that being down nearly three quarters of what it was at, I think is when a stock's down that much that I think has an underlying good business, it definitely piques my interest. And so that's what I'm going to be

digging into a little bit. I think that there's, um, the, for me, the trend towards, uh, at-home fitness is not just a COVID trend. And so between Peloton being down that much, um, having kind of a cult following and, uh, just kind of feeling like that trend is the trend at at-home fitness is not a temporary trend. Um, those things have kind of combined to get me looking at Peloton a little bit. I don't have a position yet, but it's something I'm looking at. All right, Brad. Yeah, another one that we've done an episode on in recent months is Global E that I've actually been looking at. It's a cross-border commerce company that just helps enterprises and marketplaces and vendors expand globally and reduce friction and raise conversion rates. So another one of those businesses that I got really excited about when I was reading about it before it went public.

And then, I mean, I don't want to go into valuation too much, but it's come down off of its highs a lot to a point where I've started to kind of dig back into it. Sort of like a J-frog that I had to be a little more patient on when it IPO-ed and started building out a position a few months in. But it's a really promising company. I have a lot more work to do on it. The margins are pretty darn good for where I think it is in its S-curve right now. Um, but, but yeah, global E has, has piqued my interest. Yeah. I guess that's a good plug for all the historical shows.

If you want to hear the basics on them, go listen to that. It'll be right in the catalog. You're listening to you right now. Ryan, Ryan, what's yours that you have in your watch list? Uh, my, the one that's piqued my interest the most is probably Callaway, even though it hasn't really been that correlated to this recent drawdown. It is flat, right? Basically.

No, I think at one point it was at like $36 a share. It's around like 28 today. So it's not like a huge drop off its highs, but the Topgolf business that they acquired has been performing really well. And people are going back to the venues and they're spending a lot of money. And the valuation seems reasonable, although it is pretty capital intensive of a business. It's not like software, obviously. And the other thing that kind of got me really looking at it was last week, both the CFO and the CEO bought stock. It wasn't a huge portion, but they bought stock in their family trust.

And then the board announced a buyback this week as well. And the stock hasn't really moved since. So it just kind of felt like a bit of a vote of confidence. So still kind of looking at it and not to mention, I really like Topgolf. So that kind of helps. Yeah. How large was that buyback? It was probably 1% of the current market cap.

So tiny, but. All right. I'll hit mine then. It's Coupang. I think we've done a show on them in the spring, but it really got hammered after its IPO. It's now like 40% all time now. I thought I still have trouble. You know, it's a South Korean company.

It seems to be dominating its market. It's been on my watch list for a while. I think we have it on our portfolio watch list, but I don't know. I think it's a really good business. It dominates South Korean e-commerce. It has the vertically integrated system where basically the people that are just marketplaces can't really compete with Coupang and they're growing revenue per user at a super rapid rate in South Korea. Their market share in e-commerce is going up by a ton and they're adding on these ancillary services. I think they have a chance to be a dominant player in the Asian tech space.

However, the big concern with me, I don't know, the valuation seems reasonable here, but the big concern is I'm investing in a company from Asia. I kind of want to be rewarded more because of that risk of, I don't really know, you know, the culture and stuff like that. So yeah, that's one of my watch lists. Maybe it'll be on the watch list forever to my detriment, but yeah, that's what I'm checking out. All right. What's our next, who's next on here? Is it Ian? Yeah. Ian, what's your topic? Talking inflation. Yeah. Yep. The story for me today is inflation. And I want to specifically look at 1970s versus today. I think it's, can be fun to kind of examine how things in the past may be similar today to today or different from today. And so we'll dive into that a little bit right here. So in the 1970s,

there was an inflationary spike in the United States that's now referred to as the great inflation. To provide a couple of numbers on that, they're pretty staggering actually, but inflation peaked in 1980 at 14% year over year. And for over five years in the late 1970s to the 1980s, the inflation rate was above 5% in every single month, year over year for over uh, five years. And so, um, a lot of that time was, uh, during, uh, Jimmy Carter, the Jimmy Carter administration, which is known for a stagflation where the economy stagnated and you had inflation, which is just a really, a really tough spiral for an economy to compare it to today. The most recent year over year rate in November was a 6.8% year over year inflation.

And so definitely a higher number than what's seen in a long time. I think it was the highest number since 1990. And in a period over the last number of years, it's been marked by low inflation. This was definitely a change over the last year or so. At the time, in the 1970s, it was believed that moderately higher inflation could be used to reduce unemployment. And so that was kind of pushed by a lot of post-World War II economists. The Fed chair at the time was Arthur Burns, who did a lot of the research and a lot of the really great research on business cycles. And he kind of argued that inflation was a similar type thing, that inflation just kind of goes in these cycles and it's not really a big deal and that inflation is disconnected from

federal reserve policy for the most part. And so that was the mindset going into the 1970s while he was Fed chair. Additionally, you had a lot of federal spending. The federal budget was expanding significantly in the late 60s and into the 70s with the Vietnam War, social programs, specifically President Lyndon Johnson's Great Society, which really expanded a lot of the social welfare in the United States. And then the economy in the 70s was also experiencing a lot of supply shocks. In 1973, there was an oil supply shock. And then again in 1979 with the Iranian Revolution.

And so just a lot of stuff going on. And I think that there's some kind of analogous stuff going on today. The federal budget has definitely expanded over the last couple of years. I think that Fed policy, you know, everybody talks about modern monetary policy and that the Fed can just continue printing money and that it's not really a big deal is a different mindset, but a similar mindset to the idea that Fed policy doesn't affect inflation. And then we're definitely experiencing supply shocks today, too, with a lot of the supply chain crisis that everybody's talking about.

So I think there are some similarities to today. There was also some similarities coming out of the Fed messaging at the time. And so Arthur Burns, the Fed chair in the 1970s, he basically believed that there was exogenous factors, basically idiosyncratic factors, factors that were unrelated to each other, that were explaining the rise in prices in each of the parts of CPI. And so what he began doing was saying, we're actually just going to focus on CPI minus this cost, CPI minus this cost. And so he was stripping out things from CPI that he said could be explained by, you know, like oil could be explained by the oil supply shocks or these other things could be explained by these other events happening in other parts of the world. But the problem was that by the time he had stripped everything out of CPI over a number of years, only 35% of the original CPI basket remained, and that was still showing significant inflation. And so at that point, he finally said, okay, inflation is here to stay. Something has to be done. I think that exogenous is somewhat correlated to transitory today, that transitory may be the new exogenous in terms of Fed language. And so that over the last 12 months, we've been talking a lot about how things are transitory.

Oh, there's these other explanatory factors for why these prices are rising. It's not something that's endemic to the actual financial system. But in the 1970s, they had to finally admit that it was kind of that it was structural to what was going on. And I think that kind of with the recent announcements, that's that the Fed is also changing their messaging today. A couple of final notes is in the 1980s, Paul Volcker was the new Fed chair. I think he actually became Fed chair in 1979. And he started controlling the money supply and raising interest rates. Jerome Powell today actually announced that asset purchases tapering is going to they're going to double their speed of

reducing their asset purchases, which basically what their asset purchases do is artificially lower the cost of debt because they're saying they're willing to buy debt at a lower interest rate than the market would. And so this should cause interest rates to slowly rise, or at least rise, maybe not so slowly. And then that there also could be three rate hikes to the federal funds rate in 2022, and there probably will be at least two. So that's something to, I think, to think about as investors. The 1980s actions caused a recession, but then created an economic boom in the mid to late 1980s. And so it'll be interesting to see kind of what happens today with definitely some things that rhyme with the 1970s, at least as I've laid it out.

So my questions for you are, do you think inflation is transitory? And yes or no? And then kind of how do we get out of this inflation? Is it going to require these rate hikes? And how long is this going to take, do you think? All right, Brad, do you want to start? Any thoughts? That was a great overview. Yeah, it really was. So I don't want to use the term transitory, but I don't think inflation is a real, real concern, a durable concern for the economic growth and performance of my investments. And I'll highlight a few things. So, first of all, we're still dealing with some variance, and that leads to a lot of people having to stay home and not participate in the labor force, which Jerome Powell talked about a lot today. And this is creating downward pressure, continued downward pressure on labor participation, which I think is one of the sole reasons as to why we've had so much wage inflation and wage growth in recent months.

So pointing that out, and I do feel like as stimulus, as we get further and further away from stimulus, and maybe as the stock market or the most speculative pieces of the stock market kind of deflate a little bit, the bubble pops a little bit as it has in the last few weeks, that'll motivate people who have kind of, who have lived off of, maybe lived off of the stock market or not been able to participate in the labor force for other reasons to do So a couple other transitory maybe, but not super, or reasons why I'm not super extremely concerned about it. You talked about it a little bit, the mismatch of supply and demand.

We don't really have an economic playbook for exiting a pandemic. So it's natural to think that we're going to overshoot and undershoot a little bit when finding that equilibrium that will allow prices to stabilize a little bit. And I don't think we found that yet. And I do think we will find that at some point through a painful process of trial and error. which we're currently going through. And then the third thing, which I think is the most important factor to consider is that we're still comping year over year versus a period in which our economy was shut down and economic activity was essentially halted. So kind of like a company

such as Zoom had three or 400% year over year growth, and that was incredible. We have to consider that the two comparable periods are not apples to apples at all. So as we get out of 2021 and we come from 2022 to 2021, where the periods are a lot more similar, still not the same, we're still exiting a pandemic. I don't want to sound insensitive to that. But as that happens, I think these headline inflation numbers come down and we do get maybe two rate hikes instead of three rate hikes. I'm putting on my macro hat and guessing and I don't actually know what's going to happen. But yeah, that's why inflation does not keep me up at night at this point or preclude me from adding more companies with my existing cash position that I think are doing

well. All right. That was great too. Ryan, you have any thoughts? Yeah. I mean, obviously it's a really hard question to answer and I don't think any of us are going to know precisely what it's going to be. I mean, part of the question that you asked is like, how do you get out of inflation. And I think the historical diagnosis, which I'm going to talk a little bit in my topic, is to raise interest rates. But it feels, and maybe this is where that draws the parallels to the 1970s, that a lot of these aren't necessarily just liquidity issues, but more tangible issues and atoms-based issues, like the supply chain stuff. And so I don't think like i don't know how much fed action can change that maybe i'm wrong but that's the part where

it's kind of like where it feels less like controllable where you know they say it's transitory but it might not be up to them uh on the supply chain stuff but i mean i don't know brett what do you have um yeah and i think with the interest rate stuff they're hoping to maybe cut off demand a little bit overall. And hopefully that can help create the supply and demand thing where you have a little bit more supply and less demand. Hopefully that's a bit deflationary if you're in a more high inflation environment. But again, there's so many variables, it's hard to tell. The way I kind of think about it and moving into that next question you have, Ian, it's not really anything I do with my, or I don't think we do anything with this to manage our portfolios.

But when we had this supply crunch over the last, what, I don't know, is it a year, six months? I can't really remember. And then we had that combined with the stimulus, which may have been two and two together. Kind of the stimulus may have caused the supply crunch because retail sales and consumer spending were just totally off the charts, like five years of growth coming off of 2019 after demand had collapsed in 2020. I mean, it was just rocketing higher. I think that's probably what caused all the supply stuff. There's so many variables, but until that gets fixed, inflation. Until that gets fixed, inflation is likely going to stay high. I think it's probably a solvable problem over... It could be after this holiday season. Who knows? But once that happens,

this might be a bit of a hot take, but I think, honestly, it could be deflationary because we have too much... Everyone's focused on just supply, supply, supply, supply. And I think there's going to be some excess supply out there. I mean, it feels like... I don't know. I don't want to predict anything, but it feels like it's leading to almost deflationary. I'm not on Fed- Like 1920, right? Kind of. Yeah. We just did that for the small show that me and Riley did together called the History of Financial Markets. We covered that. The bullwhip effect, like Brad was talking about,

can happen and people don't really expect it. You increase supply, supply, you want to get as much as you can. And then when everyone gets too much, demand totally collapses and the inflation deflation thing reverses I want to say I'm not on team Kathy I am uh yeah in that regard yeah and I'm not on Fed uh whatever uh Jay Powell's payroll here this is what I'm thinking I'm not a Fed shill Brad is not a Fed shill either saying that stuff uh these are just our videos so please I know there's some Fed haters out there uh but I don't think I don't know I think yeah I like him too he seems like he does a fine job all right Ian did you have any other questions on this one? Yeah. And all of you kind of answered this, but just about does inflation

affect the way you structure your portfolio? And I might take 30 seconds to answer this myself too, but I think for me, inflation, I do think inflation is a concern. I think that it's not transitory. I think it's here to stay for at least the foreseeable future. And that we are, because of that, we are going to see these rate hikes and then we'll see what happens after that. But so for me, it doesn't affect my, you know, I'm very long-term oriented. And so it doesn't affect like my portfolio strategy over five, 10, 10 years, right? I'm buying companies that I'm hoping to hold forever, or at least for five plus years. So it's not affecting it in that sense. But how it does affect me is can my companies weather two to three to four years of an increased cost of capital? And so if they're very reliant on debt financing or if they're very reliant on equity financing, I want to make sure that my businesses are durable enough to actually withstand an environment where their equity is going to be less valuable or where the debt's going to be more expensive to raise. And so if that's if my, you know, it probably for my personal portfolio, I would tend to start looking towards things that are going to be a little bit more durable rather than things that are going to be less durable. And with the environment that we were in before, you know, I'm always looking for durable businesses to a certain extent, but but I was more willing to take chances on things that that didn't have rock solid balance sheets or weren't generating cash flow yet or things like that.

And and currently, if this if rates are if we're going to be in a rising rate environment due to inflation, I want to be a little bit more careful about that in some situations. All right, Brad, you have any thoughts on portfolio management with that? It makes me maybe rethink how much cash I want to hold as a normal position, more so than anything. And if I want to look look into into tips or something like that to hold all that cash in. But in terms of structuring how I go about stock picking or accumulation or selling, it doesn't really change much. And I mean, these public companies, most of them, hopefully the ones we're investing in are some of the best companies in the world with real pricing power. And I think that matters a lot in an inflationary period. And I think and I think and I hope that that I've invested in companies that have that have that coveted pricing power.

But I'll also point out that, I mean, I'm an investor in long duration assets and I'm still hoping for rate hikes in the in the coming years. Just just as an American, just as a human being, just because I mean, looking at the at the at the Fed funds target rate, it's it's at zero. It's way below where it's kind of found support over the last several decades, generations. And I think hiking three, four, five, six times in the next couple of years, both is necessary and leaves us in an extremely accommodative environment, which is good for long duration assets. And that won't be the primary determinant of my returns. I'm a firm believer that it'll be revenue and cash flow compounding, but that'll be

a small determinant of my returns. And I still think we remain accommodative for a long time to come, even though less so. And I think we're adjusting to that less so right now. And if you're kind of wondering what happens if they don't hike those rates, I'm going to kind of talk about that in a country where that hasn't happened and see what the outcome has been. But that's on the second half of the show.

So I guess as far as portfolio construction goes, just the pure inflation part doesn't really change the way I think about adding companies. But like supply chain problems, I guess, is a component of the inflation. And that's certainly something that I consider with companies. it's not like whether to buy or sell it's whether what numbers they're putting out now like how it relations to what it's going to be in a normalized situation right yeah and like i mean how do those in those particular supply problems affect their cash flow going forward so whether it's labor or uh i don't know i'm blanking on other ones but the other part with the cost of capital rising i just checked and i probably should have known this to

begin with, but every holding in our portfolio is cashflow positive. So they're not super reliant on debt. Some of them have debt and a lot of it's convertibles and it's been recent. A lot of them have gotten convertibles recently, but I'm not too worried, I guess. Brad, you had something? Yeah. I should say that the caveat is most all of my companies are cashflow positive and the ones that aren't like Lemonade and CuriosityStream just have years and years of cash on their balance sheet at the current burn rates, which are already becoming improving. So that's definitely an important caveat to make. Balance sheet health becomes a lot more important in this inflationary environment. And so as a really long-term investor, I try to hit companies with that

balance sheet durability so that I don't have to worry about adjusting in these times. Yeah. And I'll close things out quickly. We want to get to that break. We're going a bit long, but I try to manage it where, or think about it where I don't care if inflation happens, where I think if inflation was 0% or 10%, the holdings would be doing fine or the company, excuse me, the companies would be performing well. Yeah. I think it's unique for every company, but since inflation is something you can't control as an investor, I like to think of it as, okay, that uncertainty is there. Whatever happens, hopefully, you know, the companies will be fine. But let's hit the ad break. And then we're going to talk Brad and Ryan's topics,

which are the metaverse and trouble in Turkey, not Thanksgiving, the country. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust and move forward in a digital era? KPMG can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit reed.kpmg.us slash opportunities this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their

fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com okay welcome back in we had some serious topics before uh i think you know ones that a lot of people can get worked up on but we got a fun one from brad it seems like it's the metaverse here uh what are the notes they had in the discussion topics yet on that yeah just just the metaverse that that's all i know i'm just kidding uh but uh so a few months back i watched zucks or mark zuckerberg's uh keynote on the metaverse i think it was like last month actually and all the use cases that i found pretty compelling and pretty new and pretty interesting um a lot more compelling than in some of this nft stuff that i've seen and

and and other things that i won't get too far into but real tangible uh use cases with with with real, I think, utility, like playing a three-on-three hoops basketball tournament with friends from across the country or around the world, or like a medical student practicing surgery in a totally risk-free environment without having to put anyone in harm's way. And then obviously all the gaming use cases and then the buying real estate and the digital clothing and all that, that seems a little bit weird to me, but people already do that on Fortnite and all these other games. So maybe I'm just an old boomer and out of touch at this point. Um, but, uh, it seemed extremely interesting to me, not, not just for Facebook, but for

industries like advertising and cybersecurity, getting this, this whole new greenfield vertical really to tap, to tap into if this does, um, get fortified and materialize and actually happen. Um, so according to him, broad adoption for some of these use cases is less than a decade away. Uh, we're already, already some of the VR gaming use cases are happening, um, with Oculus, which Facebook owns and some other companies. and they're spending a lot of money, tens and tens of billions. I don't have the number off

the top of my head in additional operating expenses to make this happen and really to build this vision. So in terms of notes, that's all I have. But a few questions that I wanted to ask you guys is that do you find these use cases compelling or is this too weird, too out there for you to get behind? Ian, do you want to go first? Yeah, I can start. So my thing with NFTs or cryptocurrency or, or the metaverse is, I think that the metaverse makes more sense to me. I don't understand why it has to necessarily be tied to NFTs or cryptocurrency. And so to the extent that we're talking about the metaverse, I think the things that make the most sense to me in the metaverse are actually some of like, I think the advertising thing that Brad was just talking about

makes sense to me. I think that some of this digital real estate makes sense to me as well. and I could be crazy here, but it seems like it would be valuable, you know, and I, I haven't played too many, I don't play a whole lot of video games, but if you, if you could own real estate in the giant, you know, GTA world, you know, grand theft auto world, and then actually sell goods out of it or make some sort of money out of it, or have a game that was within the game, that makes sense to me. Or if, um, Oh, wait, let me say something. I think that GTA online is very close to that right now. They built something very similar to that. So. right and so and that's kind of what i'm that's kind of what i'm saying is that like whether it's

with gta whether it's with like mba 2k whether it's in these other worlds like there's this world now called decentral land um where firms are buying up real estate um that might be sorry sorry i hate cutting you off but that might be a bit of a bubble uh it could be spent yeah right they spent four million on that yeah yeah and but there's there's like sotheby's the auction house, just bought real estate there to have a virtual auction house that sells NFTs, which we can get it. Like you said, there's some things that seem kind of bubbly about it, but it makes sense to me. If you have some sort of world or game that people start using and companies can buy access to that game through this digital real estate and create their own experiences that they

can charge for or create advertising opportunities or things like that, that makes more sense to me than just randomness um i think uh i think that i think there are some i think the metaverse has a lot of outlets that are probably more bubbly don't make much much sense but i think there are some um uses as as brad outlined that that do make sense in the metaverse okay here's my problem the allure of physical real estate like say beachfront property is the scarcity factor there's like a finite amount of beachfront property isn't uh digital real estate technically infinite can you just like build your own little world or am i getting that wrong there could be uh i think the theory is there potentially could be a network effect of people all in the same spot but i don't

understand it right so like instead of i was just going to say instead of it being beachfront property now if you had property in the disney world you know in the disney metaverse that that would be like equivalent right like would you rather have to you know property that's on the because everybody's going to the disney metaverse so that's valuable can you just copy it i mean it has to be social that's what yeah i guess that's what i'm saying maybe it's too hard to copy or something i think i think the the bull case would be that it's network effects right that you get enough people on who are using it that if you have enough people there then you're going to have some uh some pricing power on the real estate yeah i guess why just screenshot it no yeah i mean you

to copy the code i think there'd be a quite a bit of code uh but it is outside of our um expertise i think the two things for me well one i i'm really anti the crypto and the nft stuff but separating that out um i think expanding away from just the vr goggles is going to be a big need they're too clunky right now they're not going to be any if they're giving you headaches after an hour i mean come on like it's not they got to improve that which i think facebook is spending a lot of money on and then second to move out of games i think it'd be interesting to do training education and possibly sports entertainment stuff living in it i think that hurdle is it's just hard to imagine for me but we'll see but those are kind of the two things

you need to move slightly outside of video games and expand the you are improved just is the VR goggle stuff. The form factor just seems tough. I don't see how it's a big improvement over the iPhone. I think there's a reason Apple hasn't released anything yet. They probably haven't gotten it right either. One thing I will say though, is Facebook's advertisements for the, whatever they're advertising are so bad. Have you seen the one word that says, this is going to be fun. That's on every football Sunday. Yeah. Hopefully they cancel that. what's worse that or the crypto.com commercial crypto.com commercial is hilarious yeah no with damon with matt damon oh damon basically the you're you're not brave unless

you invest in crypto i mean and it's just staring at the moon too yeah he's like well one man leaped and we go further and it's like it's like the moon it's like take the bold leap with me it's like all right but that one's funny the the facebook i don't think it was meant to be satirical i don't know i mean it's funny to me but the facebook one is like i can barely watch it where there's the people and there's one where they're like the photo yeah and it's the tiger and at the end it says this is going to be fun and you're like and you know what it's not facebook it's meta oh whatever meta platforms yeah sorry uh brad do you have any other discussion questions for this uh we kind of covered the second one so i'm just going to go that's the third one that i

have does this seem more innovative or dystopian to you i'll take innovative i'll go innovative ian yeah i'll say innovative for right now but i think it could it could turn the corner it's a dystopian pretty fast yeah oh yeah yeah i agree with ian there um hopefully it's nice but to be honest i don't want to spend any time there i don't know maybe it just seems like it's bad right now because everything looks kind of clunky and bad you know what i mean i you guys i'm having trouble describing it but you guys kind of understand what that means where it feels like it's not great people are overestimating it in the short term maybe underestimated it in the long term yeah it seems almost like autonomous vehicles though where they're like it's just some id you

got while you're high and you're like oh yeah autonomous vehicles that's gonna be sweet and then He never It never happens Where is this too complicated I don't know We'll see Facebook's going to be Spending tens of billions

To see if they can do it You know what I was thinking I was thinking maybe It was like that Bill Gates quote Where they overestimate Its impact in the long term And underestimate it

In the short term But I feel like They're overestimating it For both People are taking this To the extreme For both the short term And long term

Yeah I don't know I don't know if it ever Gets to that point Where we all live in this We all It's I don't think it's going to

Ever be ready player one Yeah I'm going to steal this from a bunch of people who write on this, but people kind of think about it like the Facebook idea is that they're going to merge real life and these online communities. But it feels like it's just separate, like your online world is separated from your physical world. So I don't really know the point of merging them, if that makes sense. But there's so many variables. I don't know. It's hard to tell.

All right. Well, I'm going to go to my story if we're all ready for it. And it's less happy-go-lucky, less exciting, less positive, I guess. But I'm going to take a stab at sort of trying to digest some macroeconomic news. I know we've kind of been talking the macro all day today. But I was turned on to this idea because there was a Wall Street Journal podcast that came out last week. And I guess for anyone that isn't familiar with this situation, Turkey's kind of in a

pretty serious economic crisis now. And I'm talking about Turkey, the country. And so to kind of provide some context, in 2003, Turkey elected a president by the name of, I believe I'm saying it right, Recep Tayyip Erdogan. Yeah, just call him Erdogan. So President Erdogan. And from what I understand, he was well-liked at the start of his presidency. He was really focused on growth. Turkey invested a lot in some big infrastructure projects, and they helped provide infrastructure to cities that really needed it and impoverished areas. They were able to attract a lot of foreign investors, and they encouraged businesses to take on more debt. So a lot of this spurred growth.

And in fact, by 2013, Turkey's economy was four times the size it was when Erdogan was elected 10 years prior. So he had a ton of success early on, but lately, his authority has kind of gone unchallenged. And I don't, it sounds like he almost has adopted like, I can't do any wrong attitude, or he's very confident in his abilities and his own economic policies. um and so in 2017 there was a bill that was passed in the turkish government that cemented his power so he was able to kind of remove anyone who opposed him um and so he started cracking down on a lot of forms of dissent whether it's from uh the media so they're kind of known uh it's been known that journalists don't always get the best treatment there uh whether it's political opponents or even um uh governors of the central bank which which this is the leading problem was he's been very against high interest rates.

That's kind of been like the principle of his economic philosophy is we're going to lower interest rates. And I think that's also kind of a staple of like Islamic culture, if I'm not mistaken. They kind of frowned upon charging interest. And so, but all this time, he's been kind of balanced out

by the governor of the central bank who when inflation kind of crept up, they were able to raise interest rates and kind of combat it. However, this was basically stopped because President Erdogan fired the past three central bank governors who began to raise interest rates when he said he didn't want them raised. And so now there's someone in there that is sort of a part of his political party and basically believes in the same economic philosophy that Erdogan does. There was some merit, I guess, to the idea of his economic philosophy, which was he was going to lower interest rates so that the lira goes down in value. They were going to

intentionally devalue the Turkish lira, which is their currency. Then a weaker lira, in theory, would make the country's exports more attractive. By devaluing the currency, that means it's cheaper so people would buy stuff from Turkey. Problem is, Turkey is also a big importer. All the input costs went up. And so inflation is rising. And so I think the example that the Wall Street Journal reporter used is they're one of the leading producers of hazelnuts for Nutella. And so the raw materials, the chemicals, the things you need in order to create those hazelnuts went up. And so it's kind of offsetting that. And previously, like I said, all those efforts had kind of been combated. So they've seen this inflation. And recently, three months ago,

one US dollar would get you eight Turkish lira. Today, one dollar gets you 15 Turkish lira. And so it's really causing these problems throughout the country. And there's a few quotes from a Wall Street Journal reporter that went over there. He said he took a flight to Ankara, uh, from Ankara to Istanbul, which is like an hour long flight. And in, in that time, in his transit, the Turkish lira lost five to 6% of its value. Uh, he also said people are no longer going on vacation. He said, if you used to put money in your kid's pocket before they went to school, you're not doing that anymore. Um, and there's also apparently huge protests going on as well. And there's long lines outside like discount bread kiosks. So I guess this is kind

have, I'm kind of just trying to report on it, but my questions to you guys are, how would your daily routine change if you were seeing this kind of inflation? If your dollars were worth less the next day, what, I guess, what would you guys do personally, like personal finances to kind of combat it? Let's start with Ian. Yeah, I would definitely be spending a lot more today than I currently do. I think, you know, the big financial decisions I'd make are probably, um, you know, I'd decide to, to try and buy some, some hard assets and, and lever up. Um, Oh, what are we talking? Yeah. I've never really bought gold before. I don't, I think I'd be more interested in buying, uh, like some real estate or something maybe, but,

um, then, then we'd be in danger of rising interest rates if they ever did rise. But anyways, um, I think levering up on some, on some stuff and getting some debt. I also, I've never used a firm or after pay or anything like that, but if the, if we were, if, if inflation was going, if inflation was really that high that in an hour long flight, it's five to 6% higher. And I could get any sort of, sort of the buy now pay later deals. I'd definitely be taking advantage of those and paying later with, uh, inflated dollars, but, that's, that's a couple of things for me. Yeah, that's true. The, if hyperinflation was, you know, around the buy now, pay later would be very useful, which is confusing that Jack

Dorsey thinks there's hyperinflation and he also had $30 billion buying a buy now, pay later solution. But if also, if you, if you're against charging interest, buy now, pay later is a great alternative. That's true. Interest free. All right, Brad, any thoughts on that? Yeah, that was a lot better answer than I think I'm about to give. I was pretty panicked, to be honest. I mean, I do hold some cash in a checking account for when I want to buy food or things like that. And seeing my purchasing power kind of get cut in half in three months. um for and with that purchasing power being for things that i can't like i mean maybe i would buy a lot of a lot of food yeah just buy it stock up on food and essentials and and all all that um stuff that i won't go bad and then and then use whatever remaining money i have um to take to again like like ian said get into i don't know art or rare coins or baseball cards

or something like that to just, just, and maybe, I don't know, maybe I would rethink the no margin, no leverage rule, because again, I mean, extremely high inflation makes, makes interest payments a little bit more palatable as time goes on. So, so yeah, just, it would completely change my, my entire life and, and lead me to be rethinking pretty much all of my decisions. Yeah. It's hard to think about though, because it's so unpredictable. Like you don't know what it's going to be like in a year from now i mean it seems erdogan seems to be a bit of a you know intent on not doing anything so maybe that's why people are panicking so much but i'll add that he's been he's kind of his approval ratings have shrunk pretty fast and they're kind of i

guess seeing this as a crisis and in response to this erdogan reconfirmed his approach and he said that i will never compromise um and that that's always good that's usually not good words to yeah i don't yeah i don't know what i would do i don't know i mean i would hoard right i don't know hoarding just it makes it if you can't it makes it worse though it makes it worse i mean if there's nothing there for everyone else i know you're focused on yourself probably um i guess i'm just glad we live in a democracy with an independent central bank yeah that was probably the biggest takeaway for me was how nice to see it is how nice to see an like an actual disconnect between the fed's actions and political uh i guess pushing uh paula politics kind of

pushing people to try or pushing uh certain economic actions versus the fed kind of being independent i know people say there's more overlap than that but it seems to me like it's a pretty independent body yeah i don't like well you know i don't like dictatorships i don't know i guess in general it's usually he was elected yeah well breaking news breaking news we're not a big fan of authoritarians on yeah money yeah yeah yeah what do you mean this is what i mean spotify is going to demonetize us because uh we're haters on uh we hate dictatorships well yeah i guess i'm i'm not that familiar with turkey in general it's just interest it's interesting to see i mean the three-month uh chart of the turkish lira is insane yeah i'm

very comfortable holding my assets in dollars very comfortable yeah i guess do you guys have any exposure to the country of turkey in your portfolio i'm guessing the answer is no um but But like I was starting to think about it. Well, say if you did, how about that? Yeah, I guess if you did, what would you do? No, that's probably a good answer. I was just going to say I did a little bit of looking on this. And I think I don't like have a lot of exposure, but I think that my Amazon, I own some Apple,

I own some NVIDIA, and I think all three of those companies sell into Turkey. So, you know, some very minimal exposure. And I don't think for me that's a major concern just because it's a minimal piece of their businesses. But I think the bigger concern would be if this crisis in Turkey would expand outside of Turkey at all, if it started to drag on some of the surrounding countries or started to drag on the EU or things like that and caused more of a recession more generally in Europe. Kind of knock-on effects, like what is there? Yeah, that's interesting. Brad, any thoughts?

Yeah, Brad, do you have any? No, just aside from no, I don't have any exposure. And if I was going to in the future consider any any exposure, this this blurb would would prevent me from from from doing so. And I mean, I do have an appetite for some macroeconomic and geopolitical risk. I own ozone, which is in Russia. But I view this as just an even more scary situation. And also, I think there's a large margin of safety with ozone based on trading at a single-digit gross profit margin and the growth it has, and then also being 50% owned by a Russian oligarch, which creates some cover. But other than that, yeah, no. No, I would not.

Yeah, that's interesting. when you're in say emerging markets i guess this is kind of basic stuff that everyone likes to talk about you want to be rewarded more because typically you're taking on more risk and one of those risks is that the country you're investing in turns into a turkey i don't know any turkish companies yeah there's i mean a lot of companies definitely have exposure there but either way i mean that if that happens i don't think there's anything people can do hyperinflation just kills not literally kills but just ruins everything i don't know yeah hyper hyperstagflation yeah yeah yeah i mean when when when the economy is not humming and you have to

raise rates to fend off inflation that that that's when it gets really tough which is why the economic growth that we're seeing right now is pretty is pretty encouraging um to me because we have room to give ourselves more bullets in the dovish and easing gun when we need it next because the economy is strong. So thank you. Yeah, we're not in stagflation currently.

It's been a short period of time, but it seems like it's not stagflation-y yet. I don't recognize any. Yeah, I'm looking up Turkish companies right now. I don't recognize any of them. I know they're popular for Nutella, but I guess that must not be publicly traded. Huh, that's where it's from?

Well, I think they're one of the major explorers of hazelnuts. Hazelnuts. So maybe someone else makes the Nutella, but. All right. Well, that's a good way to wrap things up. Brian, you want me to do the disclosure? Yeah, go for it. All right.

Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. We do these once a quarter. So if you found us, we have different types of shows, typically each week. Some people think we're funny. Yeah. I don't know why. I don't think we're that funny, but we do these rarely, once a quarter, but typically

we do stuff more on individual stocks. We should also know that Ryan and I are general partners at Arch Capital and Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. Brad and Ian, thank you for joining. We'll see you next quarter. Thank you.