The Compound and Friends - It Doesn't Matter Until It Matters

Episode Date: February 4, 2022

On episode 32 of The Compound & Friends, Michael Batnick, Peter Boockvar, and Downtown Josh Brown discuss: the state of the economy, rate hike consensus, venture funding, $30 trillion of US debt, the market's reaction to Facebook and Spotify earnings, and much more! This episode is brought to you by Masterworks. Visit https://masterworks.io/compound to skip the 10,000 person waitlist. See disclaimer at mw-art.co/x. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

I mean, the stock's been tough. 30 plus percent AWS growth they'll need. I think with the retail business. They'll get it. The retail business, the problem with the retail business is that everyone else is getting good at it. They're great, but their competition is getting more intense. Amazon?

Yeah, I'm saying like Walmart and Target. Shopify is out there. And, you know, Chewy and even from Petcare. Yeah, Shopify. Just they're great, Amazon, but their competition is getting really good. Guys, yo. Absolutely. So Amazon has underperformed the S&P over the last three years.

I believe that. Yeah. Did nothing since the pandemic. I knew it's been going sideways for a long time. I think it's the retail business. It's a low margin, tough business. And now they're experiencing labor cost issues and shipping issues. The stock's down 7% going into earnings.

I mean, it's going to tank. Yeah, expectations are low. So I wouldn't be surprised if it had a bounce. It's going to open down 14%. I mean, holy smokes. Yeah. Holy smokes. Wait, what happened? I'm just saying. Not yet. I'm just like, holy smokes. Yeah. Holy smokes. Wait, what happened?

I'm just saying. I'm just like, holy smokes. It's down so much already. I know. It's down 7% today. The setup is good. Why do we think there's so much more room to fall? I agree.

Also, all these people selling, what are they? Then what? If you just blew out of Facebook, what are you doing with that money? Theoretically, your mandate is you're investing it in large cap world stocks. Yeah, for those managers for sure. You can't do nothing. Gutter cats. No, but really, what do you do?

Well, it's still – I mentioned the mic. In a mutual fund, you're not buying gutter cats. Yeah, those guys are stuck in it. I'm saying that the sell side, I looked today on Bloomberg, 59 out of 59 analysts have it as a buy. Facebook. Yeah, not one whole – no, no, Amazon. Not one whole, not one sell. Even Microsoft, Google.

You have the wrong headphones on. And Apple at least have a hold from an analyst. Damn it, Duncan. Duncan, this is the second time. Which is shocking. Now I have – This is your first time. Which is shocking. Now I have Mike. This is your first time. Remember the scene in Happy Gilmore?

Wait, I haven't seen it in a month. Where are you going? We're happy guys to the caddy. Where are you on that one, dipshit? Did you see his post a couple weeks ago? Happy Gilmore? Yeah. Oh, Shooter, what did he do?

Like a happy anniversary to Happy Gilmore. Yeah, yeah, yeah. That's the role of a lifetime for that guy. What's his name? Christopher McDonald or something. He was in Thelma and Louise.

I saw that recently. It's like, oh, shoot him a Gavin. Wait, what is seriously? What is his name? I don't shoot him a Gavin. That's it.

That's he adopted the name. That's now his legal name. No. But what is his name in real life? Christopher McDonald.

Christopher McDonald. So Facebook is going to lose around 30% more in market cap than the worst market cap decline ever. It's about 200 billion. 240 right now. The biggest one was Apple and was it Apple and Microsoft or something like that? Each lost 180. In one day.

And like, I think it was March 2020. It must have been. Oh, yeah. And Facebook's down 240 right now. Hold on. It's all right. So it's March 2020. It must have been. Oh, yeah, yeah, yeah. And Facebook's down 240 right now. Hold on. All right, so it's the biggest. Paste. It's the biggest single day market cap loss for any stock ever.

By a lot. Yeah. What was the worst day for Lehman Brothers? Probably 10 billion. The scale of these companies now is so much bigger. That's the incredible thing, the scale of them. How big was Bear Stearns a year before

March of 2008? It was probably under $100 billion. The market has gotten so much bigger. I was talking to Ben about this this morning. The market cap, I know, adjusts for inflation. Even if it's triple or quadruple what it is now. In 1987, the market cap was $2.5 trillion of the entire market. Well, in 1999, they all topped out

at about $500 billion. Cisco, Microsoft, Intel, all at about $500. The market is so much bigger now. All that is, though, is the growth of 401k assets and IRAs. No. Of course it is. The passive definitely has helped.

It's not new money coming from another planet. It's created money by the Fed, which then is getting into the real economy somehow. And then in the real economy, people are paid this money and they're deferring it for retirement. Of course, that has an impact. And also the structure of the S&P being a market cap weighted index that just naturally as those get big, more money goes in, buys high and buys higher.

So that argument is lost on Michael and I because how do you explain GE and IBM? Because those were large index components. Yeah, no, fundamentals at the end of the day will play out. Why isn't this working? I'm just talking about it feeds on itself on the upside and can do so on the downside. So my point was why it's so much bigger today.

It's not a mystery. These companies are making so much more money than any. Like we were talking about this with Kai maybe. General Electric could never have scaled to a mystery. These companies are making so much more money than any... We were talking about this with Kai, maybe. General Electric could never have scaled to the heights that these companies are, where they're generating this much revenue with this much margin. It's software. It's not a mystery. What were Google's numbers?

What's interesting, Microsoft though, in 1999, had a market share bigger than any of these companies today. They had 85% of the PC software business. That stock still did nothing for 13 years. Right, because you were already paying for that. Right, they grew earnings and revenue every year all through the 2010s.

People blame Bomber, but he grew that company every year in the 2000s. Bomber's tenure at Microsoft, I think earnings tripled and the stock flatlined. Yeah, I think it waspled and the stock flatlined. I think it was 2013 before it got back to... And then he leaves after 15 years of that. And he got a bargain now with the Clippers compared to... But the day

he left, I think the stock rallied like 15% and it's never looked back. That stock has never been back to bomber era levels. Because at the tail end of him, what was the name of the phone that they made? Oh, no, the Zune. Was it the Zune? Yeah.

And they asked him, why Zune? And he goes, oh, it's a cool name. No, it's not. We're not cool. The name's not cool. Oh, man. But sometimes you just need a change. Yeah, absolutely. like sometimes it almost and and a change from i mean he was old school just because he was there

from the beginning that's what i mean yeah like a change yeah culture change too yeah because cloud the cloud computing division started while he was still the ceo right like that it's no joke right um michael just had to run and go do another podcast and Right? No joke, right? No joke. Michael just had to run and go do another podcast, and he's going to be back to this one. Where is this kid? All right. Okay.

So basically, Amazon's going to come out in the next minute and possibly become the whole show. See what happens. Do you own any? I own it. I don't. I just need to look at a quick chart just one minute to get in

not that there if there are any technicals with it being down so much I don't even it broke support already what

I think Amazon's breaking low well interesting pre-COVID it was around it got as low as 1800 I'm sorry

yeah pre-COVID it was about 3000 3000 has been support since july 2020 what are you talking about amazon yeah it's got it's capping lower yeah i mean this is very simplistic on cnbc.com but it can go to 24 25 hundred yeah i mean if it breaks yes i'm not saying it will but i am i'll say it peter yeah i can't wait to see this stock up 400 points i hope listen i hope it does i don't want to i can't wait to see this stock up 400 points. I hope it does.

I don't want to go lower. 20 for 1 split, spinning off AWS, once to shareholders. Once Walmart said that they can do same day for no prime fee, they can just ship from the store, that changed the competitive game for them. I also don't think they're doing a great job

in prime video. It's not a great job in Prime Video. It's not a great product. Compared to Netflix and the others? They're not going to lose users over it. It's not good. Most of the stuff I watch has not been on Amazon Prime lately. Can you think of anything that you watch on Amazon Prime? No. Now I'm watching Dope Sick.

Dope Sick. Oh, Hulu. That was Hulu. Michael Keaton. The Pam Anderson, Tommy Lee will be on Hulu. I have to get this Hulu. I think I have to get it. Just watch Ozark. That was Netflix, the new Ozark.

Somebody was telling me the prequel to Yellowstone. 1883. I haven't started watching Yellowstone, but that's next after Dope Sick. Okay. I just started Ozark season four. It's honestly like one. Yeah, we just watched, my wife and I, all sevenark season four. Yeah. It's honestly like one. Yeah, we just watched my wife and I

all seven episodes last weekend. It's so good. So good. Yeah. Is Amazon out? Is it right at four or is it like 4.15? Let's see.

Do you ever drink bourbons? Yes. You do? Yeah. I mean, the S&P is close at the low. It's like sweeter than whiskey. Oh, Amazon's up. It's up 12%. This is a bourbon. Really? Yeah. I mean, the S&P is close. Is that what this is? It's like sweeter than whiskey. Oh, Amazon's up. It's up 12%.

Really? Yeah. All right, saved. So it's back over 3,000. What's the number? All I see is... What was the EPS estimate? No, it's real.

Are we live? It can't be real. What is this? Turn that show... I can't hear it. Slack's up 13%. Are we doing? It can't be real. What is this? Turn that shit, I can't hear it. Slack's up 13%. Are we doing this, Duncan? Or is this like a practice?

Actually, they missed revenue estimates. But this was definitely a good setup going into a print. You have to understand, there's just one person doing all this today. Yeah. Duncan's a one-man band. We usually have two people, Peter. Oh, yeah.

Yeah, so Duncan's doing it. Shout out to Duncan, by the way. The Compound and Friends. You've got to say it like John says it, though. The Compound and Friends, episode 32. Welcome to The Compound and Friends. All opinions expressed by me, Michael Batnick, and our castmates are solely our own opinions and do not reflect the opinion of Ritholtz Wealth Management.

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is brought to you by Masterworks. Go to masterworks.io to learn how you can invest in art. I never thought in all my years, Duncan, that I'd be able to have like a Picasso, like actually own a Pablo Picasso painting. But I do. I bought the homeostasis thanks to Masterworks' technology.

I'm able to, like, you could own a piece of art. How cool is that? It's very cool. It's not on my wall, but it's in my portfolio. If you want to learn more about how you can put art in your portfolio, listen, not to brag, I also have a Cecily Brown, Duncan. I've got a basket. I've got two baskets. How about that? Go to masterworks.io to learn more and please visit the disclaimer at masterworks.io slash disclaimer.

I really do. I really do. All right, listen. Peter Bukvar is here. Everyone's going to be on their best behavior. Peter Bukvar. All right. Not to start this off on the wrong foot. Is it Blakely or Bleakly? Bleakly. Like something is bleak.

Bleakly. Yeah. Okay. There was a guy named Bleakly like 30 plus years ago. Not a great name for a firm. No. Why isn't this Bukvar Securities? What are we doing here?

It was a guy from 30 plus years ago. His last name was Bleakley and they just kept the name. Okay. All right. So you are basically the investment guy, the economy guy. You're the face. You're doing all of the things. So I help the advisors with their portfolios.

I manage two strategies myself with bond stocks, commodities, and so on. And I write every day on macro, obviously. You have the job that you should have. It's perfect because I love to invest and I love to research the macro and write about it. It's the perfect gig. And where are you guys based out of? Fairfield, New Jersey. But over the last couple of years, we've added advisors in different cities.

By the way, Amazon up 15%. Did I nail it or what? Did I call that? Did I call that? I said. What was the EPS number? Because I saw they slightly miss revenue, but Amazon doesn't do numbers. They don't do earnings. Because they never give an estimate. Did they announce a split?

27.75. Wait a minute. 27.75. The estimate was for 3 077 3 077 cents was somebody was there a typo on that maybe something unusual on that yeah i guess can i tell you something that you you know why i hate the stock market because alphabet's numbers were so amazing and it gave back almost all of the gain because of Facebook. Right. Now the slate is wiped clean.

Amazon has numbers probably as good as Alphabet's, but it doesn't pay that same penalty or maybe it already paid it intraday today. How do you figure that out? Well, I think what we're seeing here is you look at all the fangs. Yeah. At least in my own opinion,

Google has the best business model. Yes, I think what we're seeing here is you look at all the fangs. Yeah. At least in my own opinion, Google has the best business model. Yes, I agree with that. You know, Apple is dominant in that because it's Apple. But Apple, at least their biggest phone business, they need to resell another phone every year just to replace a lost one. Only the services part is recurring. Amazon, we talked about. AWS is amazing. But the retail business is highly competitive

actually Microsoft is probably close to Google but Microsoft constantly has to come up with something new but Google has to sell Android phones they need people to sell Android phones the click advertising search business is probably one of the greatest businesses ever

Google has 10 different businesses that are a billion dollars plus revenue a year. It doesn't exist in the stock market. Only Berkshire Hathaway. Or Procter & Gamble. I've got the report. We're not going to dissect all this right now, but this is interesting. Free cash flow decreased to negative $9 billion for the

trail in 12 months compared with positive $31 billion. I heard Gavin Baker on Patrick O'Shaughnessy's podcast said they spent more on CapEx in the last 12 months than in the last 20 years. Because they're building out their delivery business. They hired 500,000 people last quarter.

And that too, yeah. Which a lot of that also with respect to their delivery. Did they give any guidance to the following quarter? Let's see. It's a new CEO too. Net income, $14 billion in the fourth quarter. Again, $27 It's a new CEO too. Net income, $14 billion in the fourth quarter. Again, $27.75 a share compared with $7 billion

or $14.09 in the fourth quarter 2020. So net income doubled. It's usually a good sign. That's a pretty good sign. So they, one out of every 153 Americans works at Amazon. Did you know that?

One out of 153. So they're probably closing in on Walmart as being the largest private sector employer. 1.3 million employees. Actually, maybe they passed Walmart because I think Walmart was about a million. Either way, it's enormous. Up 16%.

Let's go. Is it up 16%? AWS up. Christmas is saved. AWS up 40%. Which I think is better. 18 billion. Mid-30s. 18 billion.

What would that be as a standalone business? That would trade at a set multiple, right? It would be the NASDAQ 100. 18 billion of revenue they're doing? Quarterly. Quarterly. Is that a full year number? Is that 70 billion plus of revenue?

I'm looking, I'm looking, I'm looking. No, it can't be that big. No. That seems too big. That might be 2021 i mean that's at least a well now with reduced multiples maybe a 10 time 10 times sales uh multiple 15 times maybe like tomorrow would be nine times can't find it should i play waiting music on the podcast no we should we should we should actually we should actually do the show. We're going to get into more of this stuff on the show.

But I want to give Peter a very warm introduction. So I read you every day. Your email blasts are essential for me because you speak plain English about tons of different economic data series that come out. And you really digest everything. Is there anything you don't read? Is there any economic data that you're like, no, this isn't important?

Because you're encyclopedic to me. Well, what I try to do is it says, okay, if I'm going to look at the world from an investing standpoint, what am I going to care about? Okay. And I say, okay, I'm going to write about what I care about. I hope others care about the same thing. Yeah. I know to talk about, like, let's just say we talk about Asia. So I'm getting up in the morning.

I'm seeing what went on overnight. I know South Korea is a pretty important country right now. Samsung making semis. We know they make a ton of cars. We know Taiwan is hugely important because of their semi-business. So what their exports are now relevant to the rest of the world. That's right. What the Philippines says, I'm really not that interested in because it's just not relevant. Right. Singapore is now a growing, important country because people are

moving from Hong Kong and it's becoming a bigger presence in Asia. So that's not relevant. But what happens in Malaysia? I'm not necessarily... Now, Malaysia, of course, has a semi-business, but it's not on the same level. Okay. Yo, guys, sorry to interrupt. So AWS, $71 billion annual run rate. Oh, it is that? Okay, so 10 plus... So Facebook trades at eight times sales before the plunge. AWS would probably trade at 10 times sales. 10 times sales, but theirunge. AWS would probably trade at 10 times sales. 10 times sales.

But their retail business is probably a fraction of that. 100%. So AWS as a standalone business could legitimately be bigger than Facebook. Right now, yeah. That's nuts. Does Facebook run on AWS? I mean, they must, I would think. That's actually a good question.

I doubt they're using it. Maybe they use Microsoft. So AWS could be bigger than Facebook as a standalone business. Yeah, at least right now. Wow. Okay. So you're crunching all this stuff and then you're trying to write like two or three paragraphs, not bury people in data for the sake of data. Right.

And you do the chart and it's amazing. Because I know we all get flooded with stuff, particularly in the morning when your email box just blows up. Dude, the sell-side stuff alone, it's unbelievable how the volume of research. I still see 150-page reports in one sector. I'm like, why do this? I mean, there's a lot of charts and numbers in there, but who's going to get through the first couple of pages? So I just try to make it relevant for a couple of paragraphs. And if it's not in there, I don't find it relevant.

Okay. So give us like, give us like the 10,000 foot view, the state of the US economy, as of winter 2022. Like, where are things right now? Because I don't think everybody agrees. So I think right now, the US economy has characteristics of, of being in like the sort of the seventh inning of a recovery in the sense that usually you have a recession. You have eight to ten years of runway, of growth, and then you run into an issue. You have a recession and you have another eight to ten. With the unemployment rate, 4%, that's sort of late stage. With inflation, late stage. There's so of late stage. With inflation, late stage. There's so many late stage characteristics,

even though this stage is unlike any other. So I naturally can't compare. Because it kind of started in the summer of 2020, and we're late stage. Right, that's the whole thing. We did a whole cycle in under two years. Right. Okay.

The whole thing is where we put the economy in a coma, then woke it up and said, go back to work. And everything got jumbled. And it's hard to use this data versus like historic comps. It's all so weird. Without question. Because everything's getting screwed up now with the inflation story and the supply story. So on the demand side, consumers are getting hurt.

I posted a chart this morning that the CRB food index is at a record high. Now, if we have to pay an extra 50 cents for a box of cereal, it doesn't matter to us. But the average person who's making 50 grand, it matters to them, and it starts to impact their behavior. And even taking that one step further, if you're making even more but the standard thing that you usually are used to being this price ends up being that price, you start to react differently. Even if you can afford it, it's no big deal, you notice it. We know if you're in sales, what does somebody like?

They like a deal. It may not even be a real deal, but if they hear that it's a deal, they respond to a deal. So there are no deals anymore. Things are getting marked up and they're responding to that. I got punched in the face this summer with my lease on my Tahoe.

Basically, I wasn't going to be up for a few months, but I started getting nervous that maybe by the time I'm up, there won't be another truck. Right, and you have to wait. So I went into my kid and I'm like – I did a car with him last time and I'm like, listen, what's the situation? car with him last time and I'm like, listen, what's the situation? Because the situation is you could put an order in now and if you're lucky, in six months, I will call you and say it's available. So I did it and I gave them money. And then a month later, he calls back. He goes, listen, forget about your truck. You're never getting it. I got another truck that somebody ordered and doesn't want. And you're my third call and you picked up a phone. If you come in right now, we could do this deal. And I'm great what's the price he goes the price is whatever the price

is and no offense there's no manufacturer uh rebates now normally how much over msrp was it whatever it was it was i'll tell you this it was 15 or 16% over my last lease. That's not even that bad. It's not even that bad. It could have been way worse. And he explained most of the time there's something coming from the manufacturer where they just want to move it. He's like, now they'll gladly keep the truck. So there's no deals anymore for anybody. So I said, listen, TJ, you won this time.

But I'll be back in three years, and I'm going to punch you in the face. So I said, listen, TJ, you won this time, but I'll be back in three years and I'm going to punch you in the face. So it was, it is what it is, but I agree with you. Of course I grabbed it. But that you're right. That sticker shock changes the way you behave in other aspects of your life. And you talk about sticker shock and housing. So what do you mean by that? You talk about first time buyers. they're like, what the hell is this? Right. So when you look at sort of like a chain within the housing market, you have that first-time buyer that allows an existing homeowner to trade up if they choose. Right. And whether because they got a starter home and they want to sort of graduate to a bigger home because they have a family of kids.

Without that first-time homebuyer, it sort of clogs up that chain. And now you have home prices that are up. Now they're receding a little bit in terms of rate of change, but 18% more expensive than a year ago. It's completely offset the benefit of low mortgage rates. Yeah. Actually, it's worse. It's actually worse.

The down payment is crushing people. But now you have mortgage rates going up to three and three quarters percent. And while maybe your monthly payment may not go up that much, it's still a shock because you also have to pay up 18% more on your down payment. But on the other hand, you're seeing rents going up for new leases at 18 percent, renewals going up seven to eight. So people are juggling like do I rush into a home and lock in that mortgage rate or do I suck it up and pay that higher rent? It's really a shame and one of the – obviously the consequences of low mortgage rates and cheap money. But it's unfortunate that a lot of first-time buyers- You talk to- It's difficult.

So we talked to Logan Motoshami and he knows housing. When you talk to him, he explains, yes, of course, dropping interest rates and then flooding people's bank accounts led to a massive boom in real estate. But it just sped up one that was going to happen anyway. Because we have three and a half million fewer homes than we need.

The boomers are competing with their grandchildren at this point for that. They're not leaving. And we're not building more homes at the rate that we normally would because it's too expensive. You can't get labor. You can't get materials. So it's going to be like this

for a while. It doesn't really matter that much where the mortgage rate goes. I think the fiscal response is not the fiscal response did not do this, right? It might have jump-started it. No, it didn't. The stimulus checks did not help people come up with gigantic down payments.

I think it's people wanted to get into a house. It was low mortgage rates. It's low mortgage rates, no doubt. And it's 75 million people like me that need to get into a home for the first time. This is, I think- People leaving cities too. This is, I think, the important part

about this whole inflation discussion. But also COVID screwed up the whole supply of existing homes. You know, if you're trying to get through COVID and your kids are out of the house already, you're an empty nester, where you would be sort of a natural downsizer. Maybe you move into a 55 and older or just smaller space and you would sell to a first-time buyer. Well, COVID kind of threw that up in the air and maybe you stay for a little while. That's right. But when you think about monetary policy, that's what it does. It pulls forward behavior.

It doesn't grow the economic pie. It just alters the timing of it. You look at the late 1990s. Yeah, at some point, we were going to need all that fiber optics that were planted under the sea. But because of the bubble, it all happened in two years. We would have needed it eventually. Eventually.

Housing in the mid-2000s, we would have needed it eventually. It just got grouped together because the Fed encouraged you. Because that's what the Fed does. The Fed says to everybody, I'll make a deal with you. I'll lower your mortgage rate today to make you buy that home today instead of you waiting to save up and instead of you waiting to save up and instead of waiting six to 12 months. I'll encourage you to buy that car because I'll finance for you cheaper if you buy it

today instead of waiting till tomorrow. So that's what monetary policy does. It just alters the timing. So that's what's different about a bubble in houses versus a bubble in stocks. First, you buy a stock at the wrong price, you can't live under it. It doesn't protect you from the rain and the elements. It's a stock.

You buy a house at the wrong price, but you can afford to stay. You still end up with the house. It's too, like to me, it's like- But there's a similar characteristic though. Which is the pull forward. And your time horizon. Right.

That's the key to investing is your time horizon. I mean, Warren Buffett just had a higher, longer time horizon than everybody else. Right. So he therefore invited declines. If you were going to live in your house for 30 years, it doesn't really matter what you're going to pay today. Okay.

So the rate of change is coming down because home prices were up 19% in November and then 18 and a half and now 18. So we're going to lap the second half of 21 in the second half of 22. And those rate of change numbers will collapse. And maybe home prices will be up four or 6%. Is that reasonable?

That's where it can potentially settle out at. And that's going to be the same for all of inflation. Inflation will peak probably February, March, just on a rate of change basis. And then we'll start to moderate. The question is, is how quickly does it moderate? Can you explain this to the audience? Everyone – the thing that I keep hearing is like, oh, no, you don't understand.

Inflation is not going away because wage – wages are sticky. Yeah, we get that. Like somebody doesn't get a raise and then lose the raise because inflation cools off. We understand that. But the rate of change is the thing that matters. Why? Because if you have to pay somebody $18, Amazon is paying $18 an hour for all these warehouse and logistics workers. Fine.

and logistics workers, fine. If they have to do a raise for all these people, commensurate with inflation of 7% every month forever, then of course the company will cease to exist. But that's not the rate at which the demand rises. It rises much slower and then eventually levels off. So everyone that got a raise in 2021 to come back to work doesn't just get one in 2022 because they feel like getting one.

Right. We'll have to see what the circumstances are because that 7% raise may not be replicated right in the next year. So look at the 80s and 90s where inflation came off this peak in the late 70s. But inflation kept rising every year. It was just the rate of change that slowed. Duncan, you're not getting another raise next year. All right? Yeah, but I guess the worry is that if prices do keep increasing, then people will demand raises.

Well, yeah, that's the question. And I think the question also is we know the rate of inflation will slow. But it's how do central banks respond to wherever it settles out at? Where do valuations settle out wherever it is? Something that I've written about is that when you look at the global world, we kind of partied like inflation under a circumstance where

inflation was low, 1% to 2%. I always like to say that central banks when inflation is low basically have a hall pass. They can do anything and they can go anywhere they want. They can experiment with policy. They can go to negative interest rates. They can expand their balance sheet, whatever. But once inflation sort of becomes an issue,

they have less flexibility. So like let's just say that- And they have to speak differently too. Yeah, let's just say the 10-year yield was 4% to 5% today, which historically would have been normal. And the Fed funds rate was 2%, 3%, 4%. If inflation was 3%, I would say, OK, not a big deal. Interest rates already sort of reflect that.

It's just the context at which this inflation is coming with negative rates and zero rates and rates being general and the amount of debt. It's weird. And just the culture that has sort of fed off low rates. Private equity feeding off low rates. They're still buying assets right now. Right now, the Fed is continuing. So they announced a taper. They basically announced liftoff.

We pretty much know it's March. But as we speak in February, they're still buying assets in the open market. Is it $60 billion? Is it $40 and $20? Now they're down to probably $30 and change. And Brazil last night raised interest rates by 150 basis points in one shot. And Lagarde might actually raise rates at some point in our lives. Yeah, they may go from minus 50 to minus 40. Well, England did a 50 basis point hike.

No, they did 25, but four out of the nine members voted for 50. Oh, that's what it was. And they said they're going to start shrinking their balance sheet. Okay, so now I heard Powell say, I think he said it more than once. He was talking about like the pace at which he's going to move. And he kept saying that he wants to elongate the cycle. But if we pulled forward a full cycle's worth of demand for dishwashers and cars and housing and like is there even a cycle left to elongate? Is that – is he dreaming?

Well, it's one of the fallacies when we see with Japan of keeping rates low for a long period of time where this forward guidance of the Fed or any central bank telling everybody we're going to keep rates low and they think that's stimulative. Fed or any central bank telling everybody we're going to keep rates low and they think that's stimulative. But it's not because after you get the initial rush of people taking advantage of low rates, then that sense of urgency ends. And hey, if rates are going to stay low for a couple of years, I don't need to act now. I should wait. So that's why this idea of central banks keeping rates low for a long time stops being stimulative. And then it starts to negatively impact bank lending. We take for granted that – Sorry. Snaps of 40%.

It was down 23% today. Oh, they reported also. It's up 40%. It's a casino. It's amazing. Did the fundamentals of Snap change by 23% negatively today? First ever net profit.

The stock pops 42%. I thought this was like a typo or something. I'm sorry. Peter, let me ask you this. Do you think, I am of the opinion, and the market could prove me wrong very quickly, that there is a natural cap at interest rates because the demand

demographics is so, the tidal wave will overwhelm interest rates rising. I don't know where that cap is. How much money there is that wants a risk-free rate of return. So where does it, how high can the 10-year get? If the 10-year went to 3%, 4%, I would be pretty surprised. Obviously not shocked oil went negative, but I would be surprised. Unfortunately, we're not going to know until we get there, until something breaks. No one had a prediction that in the fourth quarter of 2018 that a two and a quarter, two and a half percent Fed funds rate was going to freak everybody out. But it just got to that point. Is that the new ceiling though? We don't know until we, I think a big part of where – and I've talked about this in my notes that a key part of where US yields go on the long end is where European rates go.

Because where's the German 10-year going to go? It's 10 basis points now. It's now positive. Nominal or real? Nominal. It's 13 basis points today, Josh. It went up 10 basis points today. I know.

So if the German 10-year goes to 50 basis points or 1%, which is crazy low. And we could be 3%. Maybe we can go higher just because – I mean when you think about negative rates or negative bonds, I should say. It's the epitome of bubble in terms of the central bank turned what's an old school asset into a liability for the owner. The owner of that bond, it's now a liability. Peter, isn't it the opposite of a bubble? When you have people that are so nervous that they're willing to buy a negative yielding

sovereign bond, is that bubble-ish behavior? Well, I meant bubble in the sense that the only way you make money is to sell it to somebody else who's willing to pay a higher price. Yes. Because you can't make money from the yield. But to me, that was the – to me, more so than the stock market, there was a point where $13 trillion – I think that was the high. $13 trillion in sovereign bonds were trading at negative. No, it got almost to $20.

Okay. So let's say – let's use 20. So $20 trillion was such scared money that it was willing to pay an interest rate back to a government rather than be at risk. How could that coexist with a speculative mania? It almost feels like it can't. Well, a lot of that money also had to own them because they were considered high-quality collateral. That's right. So a lot of the European banks were sort of forced to own them.

And what the ECB did with the banks in Europe, they said, you know what, guys? I will pay you to lend money. And I will pay you minus or 50 basis points or 1%. So what the European banks would say, OK, I'm going to get minus or 50 basis points or 1%. So what the European banks would say, okay, I'm going to get one minus 50 basis points, and they would buy a German bond minus 30, and they would make money on that spread. I mean, our Fed is doing a version of that

when they're paying interest on reserves and they're incentivizing banks to park money. I mean, should that have been rethought this time around? What would you do if you were at the Fed right now? I think it will be rethought when the Fed starts raising interest rates and you're going to have members of Congress saying, why is the Fed paying banks billions and billions of dollars to park their money at the Fed? Yeah.

Isn't that money supposed to be doing something? It's supposed to be doing something. And what's happened in this country is that because of the robustness of our capital markets, if you're a big company, you had easy access to the capital markets. If you're a small business, less than 20 people, you need a loan from a bank, it's really hard to get one. And if you get one, you got to personally guarantee that loan. You got to put up your house. You got to put up whatever assets. It's really difficult.

That's what we had to do. We had to literally pledge our personal collateral. But if you're a frothy, high-tech company and there's no covenants in any loan that you're given and people are writing checks without even reading your business plan. Sell more stock. So there's quite covenants in any loan that you're given, and people are writing checks without even reading your business plan. Sell more stock. So there's quite a difference in that.

And I think a lot of that is because of what the Fed's done with the yield curve, it's hurt conventional bank lending. And that happened in Europe. That was one of the fallacies of negative interest rates is that if you damage the profitability of banks, well, then they have to build in a higher margin in their loan to you. And the net result is less lending. And that's why the European Bank Stock Index is down 80% from where it was in 2007. And 80% of the financing in Europe is from the banks. Yeah. Who did they think they were helping? Because if you crush your own banking sector and you make it impossible for them to earn a profit, why do you then expect they're going to turn around and start taking risk? And now what's turned into that policy of trying to and thinking that banks would somehow lend,

now the ECB is now just a financer for European governments. Okay. So getting out of that for them is difficult. And people can argue that the Fed has done the same with our trade. So I want to go to interest rates and the consensus. I think these people are going way overboard. But maybe I'm sure you disagree with me. But this idea that they're going to hike now at every meeting. Why do we think that they might that they would even have to if we know that we're going to decelerate inflation inflation. Like, we almost have to.

So let's put this up. Let me read this. In recent days, investment bank after investment bank has published revised forecasts. They all predict the same thing. Federal Reserve will raise interest rates at a quicker pace than anyone anticipated a week ago. The latest is Goldman Sachs, which now sees five hikes this year, up from four, joining Deutsche.

Bank of America thinks the central bank will be even more aggressive. It predicts seven 25 basis point hikes, which would be one for every remaining FOMC meeting. That would put the Fed funds rate at 1.75 to 2% by year end, essentially hiking up. All right. I don't think they can do it, even if they wanted to. And I don't think they can do it even if they wanted to. And I don't think they want to. What do you think? I think, right, the Fed is not sitting around saying, okay, what do we need to do this year?

All they're doing is saying, what do we need to do now? And they know we need to end QE in March. Yeah. We need to hike rates in March, maybe May. And then we'll see what's going on. Okay. Now, of course, raising twice, you still have a low Fed funds rate. But the Fed is going to just – is going to look at this in short-term fragments instead of saying, oh, I need to raise every meeting.

They're not looking that far in advance. What are they looking at? Personal consumption and expenditures? What else? S&P 500? So we are living in – and we have for years, a negative real interest rate environment. That's right. And as long as you have negative real interest rates, you're highly accommodated. So for the listener, seven, I know it's not really the inflation rate

anymore, but 7% inflation with interest rates at zero, basically, uh, in a money market fund, you are earning net – is this right? You are earning negative 7 percent of your money. So you are losing 7 percent of your purchasing power if that inflation rate persists. Right. If the Fed takes rates even to 1 percent and a 7 percent inflation rate persists, congratulations. You're only losing 6 percent of your purchasing. So that's real rates versus nominal. All right, go on.

So in the 1970s, real rates got as low as about minus 5%. Right. So just context of where we are today. So the Fed has to balance a bunch of different things. They have to- Get Joe Biden reelected. So yes, so an election year matters. I know that.

If you look at 2016, so Janet Yellen hiked rates December 2015. We went into 2016 thinking she was going to raise another three times. Yeah. Then there was a China slowdown and everyone thought, okay, then she backed away. I'm not going to raise.

We have to see what's going on with China. And then conveniently, she didn't raise until the month after the election. Right. So yeah, if we get to the summer and the economy is looking wobbly, stock market's wobbly, that's going to affect what they may do. Because we also know that new governors are coming on, and they're going to likely be more dovish.

They always come on dovish, right? They're going to be more sensitive to growth. But that's the difficult balancing act, is inflation's still going to be high. So how do you back off? But you don't want to hurt the economy. And where are markets going to be? Where are credit spreads going to be within this? Biden's ratings right now are as low as Trump's ever got. And I think almost all of that can be attributed to inflation.

Well, let's pretend for a second. Do you agree with that? Yeah, for sure. It's 100 percent. Because what else is he doing? He's doing nothing. It's inflation. That is what everyone is now paying attention to.

Right. But let's just say we're in a campaign meeting for Biden or for, you know, for going into November. Is it a better better sales pitch to say we got inflation down, but the stock market's down 25%, 30%? No. You stupid son of a bitch. Or inflation's still high, but the stock market rallied. That's going to be a big discussion here.

He loses either way. Well, that's why they're in a tricky place because also if they do go too quickly and the market falls apart, that could affect the economy. The Fed has made financial conditions that third mandate. And that went back to Bernanke. Bernanke said QE was meant to ease financial conditions, a.k.a. lift stock prices. That was a direct intent of the Fed. Outside of 08-09 when they were just trying to save the MBS market and the housing market, but QE 2-3 was specifically meant to raise asset prices. Two-year treasury in the last 12 months went from 15 basis points to 115 basis points.

How much of the Fed's work in tightening financial conditions has already happened? Like, are we 10% of the way there just on market movement? Look at what you just had up, Four to seven. Rate hikes. Well, we've already had four, essentially. You basically had four. We basically had four already. So it's in there. Those are market-enforced rate hikes.

That's what I'm saying. We did a lot of that already. But what's not priced in is what is the economic response to this? It's too soon. We don't know yet. Yeah. And we're beginning to see some inklings that inflation is affecting. Facebook crashing 25% a day.

What's the economic impact of that? If you're an employee at Facebook and your options are now partly out of the money. Yeah, one less Lambo this year. It's not going to be good. What's the economic impact of now inflation and falling real wages? Don't worry. Amazon added $200 billion in market cap, so it's a wash. Yeah, it's a wash.

They took it from Facebook. We're good. All right, so do you think seven rate hikes is a ridiculous call, or could it actually turn out to be? I think we're more likely to have a rate cut than seven. Do you agree with that, Peter? Is that the economy?

I don't know. I think that the economy is, like I said, seventh inning. You don't want to start hiking when you're in the seventh or even eighth inning of an expansion. So then terminal rates for this cycle might not get back to terminal rates for the last cycle, which we said was 2.5%. Right. And what could dictate how many hikes also can be where the S&P 500 is. Where's the high yield spread to treasuries? All right.

So that's important. I'm so glad you brought that up. Before we move on from this to treasuries? All right, so that's important. I'm so glad you brought that up. Before we move on from this topic, I want to get your take on that. But those aren't moving, right? Most smart people will say, and not without reason, the thing to watch more than anything else

is credit spreads. They're still on the floor. There's still too much money out there. So I included a chart here, yeah. So right now, if you look at the markets, essentially starting last year with a lot of the high flyers, all we've had so far is a valuation rethink. You know what? I don't want to pay 40 times sales. I'll pay 30. Well, that's a 25% decline in the stock. And then you know what? I'm only going to pay 20. Well, that's a stock that's got cut in half. And if you're Peloton, I only want to pay 10 times sales. Well, now you're down 75%.

Duncan, pull up this chart. So this is the spread to treasuries. And you can see we're beginning to curl up a little bit. This is high yield bonds. This is the Bloomberg high yield, high yield yield relative spread to treasuries.

Over what you would get in a comparable treasury. These are like forced buyers, right, Peter? Nobody's willingly doing this. Well, right. It's going Peter? Nobody's willingly doing this. Well, right. It's going up. It's ticking up, though. But it's beginning to tick up.

Okay. But we can't get alarmed just yet because you can see pre-COVID, it was about 400 plus, 500 basis points. But this is something we need to watch because if this starts to widen out, that means people are starting to get worried about the economy. But that's a real sign of stress in the economy. This could be the most important thing. Because that's people withdrawing debt financing for businesses that they're no longer confident in. That's what that would symbolize. But we're already beginning to see in VC, VC investors are now beginning to

tighten their valuation analysis, whether that's with a new investment or talking to their existing portfolio. For the growth companies, for sure. Yeah. I mean, I was reading the other day, one company was trying to raise an $8 billion valuation. Boom, it's already down to six. Now six is still very generous, but that was an immediate drawdown. We'll go in there next. Duncan, pull this global venture funding.

This is not going to affect the seed companies, I don't think. But the later stage companies. It affects the psychology. I agree with that. That if you're going to go into a pitch meeting now and show a slide deck and expect a certain valuation, that conversation is different than it was six months ago in terms of valuation. Sure. My point is I think companies can still raise $20 million. The companies that are raising

at $10 billion, those are basically public-private companies. Yeah. If you've got a business model, you'll still raise the money. It's just a matter of what valuation. So this is global venture funding. This jumps from $294 billion in 2020. Which is already a record. During a recession. Which is already a record.

It jumps 111%. In 2021, global venture funding hit $621 billion. That is one of the most insane jumps for any asset class that I can think of. This is actually from Galloway. In 21, startups around the world raised 621, 111% increase from the year before. There are now more unicorns than ever. 959 companies worth a billion in the private market up from 569 the prior year.

That's about to be 750. And put a real-life business behind those numbers. The beauty of at least the U.S. economy is the entrepreneurial culture and these amazing things that people invent. But are there double the amount of great businesses out there? No. Exactly. Of course not.

So you know there's a lot of money being thrown at less than great businesses at higher than should be valuation. But it's equity money. So in fairness, nobody's that worried about it. It's not debt financing in venture. The other thing is though, the great resignation was a big part of 2021. There's a lot of people that left Google

to start their own thing in 2021. We might not see that again. The big headline this week, Peter, was $30 trillion in US debt. And I know you wrote about it. So a regular person who doesn't understand that the size of the economy has grown somewhat commensurately, it's a shocking headline number, obviously. What do you say to people that don't eat, sleep, and breathe this stuff like you do when they read u.s national debt tops 30 trillion record-reading fueled by spending to combat the coronavirus comes as interest rates are expected to rise which could add to america's costs

it's it's it's not i don't think the articles are being written to be deliberately alarmist but that number is alarming. It's alarming relative to the size of the US economy. Right. But it's one of those things that it doesn't matter until it does. Okay. Like in the 1980s, people were going bananas over the exploding US budget deficit. Yeah.

And it was going to crowd out private investment. The deficit has not mattered in 40 years. Hasn't mattered. And it doesn't matter until it does. Now, it'll start to matter if interest rates go up, because now on that 30 trillion for every 100 basis points, that's another $300 billion. Now, that matters because the US government takes in a certain level of tax receipts. And if the interest expense component starts to go up by hundreds of billions of dollars, then budget deficits start to really go up. And that's when it potentially could matter. It could matter in where the dollar goes, because if you look at a 30-year relationship

between the budget deficit as a percentage GDP, there is a correlation with the US dollar. So if budget deficits don't contract at all and they stay very wide, the dollar could weaken, which could then influence inflation and can then have a ripple effect into the economy and so on. So it's one of those things that it sounds alarming, but it's been alarming for 30 plus years. So the MMT people, I'm reading in the middle of Stephanie Kelton right now, the MMT people – I'm reading in the middle of Stephanie Kelton right now. The MMT people would say Japan's debt to GDP for a long time has been like 200 percent or – where is it now? Debt to GDP. 250. 250 percent.

take out the spreadsheet and instantly convert the jgbs and all all that debt into yen with a with a with an entry in a in a ledger and really it's just it's just one out balancing out the other and the united states could do the same thing we could just decide okay there are no more treasuries we're swapping that all out here Here's your cash back. Like, it's, I think the way she phrases it is, dollars are green bananas, and treasury bonds are yellow bananas, and they're interchangeable. It can't be that simple, can it? No, it's not that simple. Well, first of all, the first fallacy with MMT is, they make the assumption that the government spending has a multiplier effect, more than one, and that it will be officially spent and will be economically stimulative more than just the short term. Well, I've seen enough studies that the multiplier in government spending for most spending is less than one.

So you're getting – in other words, you're getting less than a dollar back for every dollar of government spending you're getting. As opposed to a private business that's going to spend a dollar and they get multiples of return on that. So that's the first fallacy with MMT. Then the second one is, well, if we get inflation, then we'll just raise taxes to slow growth and now cool inflation.

Well, good luck with that. Good luck with that. Good luck with that. Right. And then they say, well, if that doesn't work, then we'll just cancel the debt. Right. Well, you can't just cancel it, especially when 35 percent of it is owned by foreigners.

You can't cancel it. You can replace it with dollars instead of an instrument where a return is required. You still have to pay back the principal of those bonds. I mean you're going to call up the teacher's union pension fund and say, we're not going to give you back your principal? Right. It's hard to imagine how any of that would work in real life. Yeah, I don't even know.

I can't even think through the logistics of that. Right. Okay. So, but you don't, you don't, so you don't think that this is something that's going to matter all of a sudden. If it hasn't mattered in 40 years with all we've been through,

the deficit I'm speaking about specifically, you don't see this as a 2022 make or break moment for that? It will if rates start to ratchet up. If the 10-year goes from 180 to 280, like I said, that extra 100 basis points is $300 billion of extra interest expense. If the Fed actually raises rates to 1.5 to 2 because the government debt, the average maturity of U.S. Treasuries

is only about six years. So the interest expense of the U.S. Treasury is very sensitive to what the Fed does. And they have to roll it. And they've got to constantly roll it and they're going to be rolling it at higher interest rates and that's going to be more costly for the government. And then we'll get to see how does the dollar respond to perpetually high budget

deficits. And like I said, if the dollar rolls over, that will then exaggerate the inflation story. It's interesting that the dollar is not so strong. No, no. All I'm saying is that the dollar will be sort of the thing that we have to watch in terms of the impact of excessive debt. 30 trillion is a hilarious number. It's literally incomprehensible. But those liabilities for the government are an asset for investors, right? So we're not seeing that side of it. And I just- Meaning what? It means those are treasury bonds that are sitting in people's accounts. Yeah, that people are getting interest on. So yeah, listen, if the 10-year goes up

meaningfully or the debt, the servicing costs go up meaningfully, it's going to matter. But if we look at interest expenses, the percentage of the debt, it's still pretty, pretty low. Right, because rates are so low. Servicing costs are very low. That's why it doesn't matter until you get a rise in rates. That's the only reason why you could do rounds and rounds of stimulus and then do build back better. The only reason any of this hasn't fallen apart is because you can finance it at the rate that you can right now. Right, because the Fed has rates very low,

and they've sort of enabled Congress to spend this, just as the Bank of Japan enabled the Japanese government to spend all this money for decades. Well, we also see, like, people that don't know about this might see $30 trillion that's bigger than our entire economy. How are we going to pay that back? Well, it's not a bill that comes due next January. You never have to pay it back. As long as you have a printing press. Your kids will pay it back. You're just going to constantly refinance it.

Just a question of at what rate do you refinance that debt? Hold on, but Peter just said the average maturity is six years. It's not like we're dumping all this on our kids. I'm just kidding. That's the thing that people that pretend to be conservative say, and then they authorize massive tax breaks for people. Well, guess what? You know what else they don't show when you're talking about 30 trillion? They don't show the assets of the consumer. Consumer finances have never been in better shape. Total assets, according to JP Morgan, this guy to the markets, 162 trillion. Let's say that's elevated

because stocks, real estate, whatever. Fine, if it's only 130 trillion, 110 trillion. People never talk about the assets when they're talking about the liabilities. Right, and the same is also with Japan. Japan is a net creditor of the world. They own more of the rest of the world than the rest of the world owns of them. But the US is the largest debtor nation in the world. Foreigners own more of us than we own of them. Oh, but China's been selling our treasuries.

People say, what happens when they go to dump it? They have been, right? They've been selling where they've been letting things mature. They just haven't been expanding it. So they're about 11% of the treasury market. So they may not outright be selling, but they're just letting it roll off

and they're just becoming less. Japan is the largest holder of US treasuries. Right, but China's treasury ownership is not the same as we owe China money. They're taking our dollars, right? Like this is trade-related because they sell us more than we buy from them. This is not a debt-y, debt-er situation. As long as we have a trade deficit, you'll always have foreigners that recycle those dollars back into treasuries, always.

Of course. Okay. I want to go to the re-rating going on in the markets right now because I'm doing this a long time. You're doing this longer than me. This is one of the most violent and sudden re-ratings that I think we've ever seen, which makes sense because everything is superlative these days. Just the sheer amount of money and the speed of software, everything is bigger, louder, faster, scarier than it's ever been. And that'll probably not change. Facebook lost $200 billion today. $240 billion. A quarter of a trillion dollars in market cap just came out

of one stock in one day. Somehow the world didn't come to an end. If I would have told you that we would see that five years ago, you would say 1929, would you not? So this is what we have to watch for when we look at the rest of the year in terms of these market cap. So we talked about how the lower income person is very sensitive to consumer price inflation. Yes. The upper end is very sensitive to consumer price inflation. Yes. The upper end is very sensitive to asset price inflation.

Yes. And like, I don't know the exact step, but I think it's like the top 20% of wage earners spend 40% of consumer spending. Yeah. And that top 20%, yes, they obviously depend on their income, but they also depend on their stock portfolio, the value of their homes. So if this becomes a drawn outout process in the stock market,

then all of a sudden, you know what? Maybe I'll wait to get that boat. Do I really need the private plane if I'm only going to Florida twice a year? Yeah, it's nice when I'm making this much of my portfolios here, but do I need to tighten my belt? So where the stock market ends up through this tightening cycle

could then have a direct effect on consumer spending. So I'm 100% with you. And when I'm on the air, on my closing bell or whatever, and they have somebody on that says, no, the Fed is not worried about the stock market. Well, it should be if it's not. And I don't believe that it's not

because the Fed has to know that the stock market has replaced the single family home as the biggest driver of consumer sentiment. It has to know that everyone has a 401k. Anyone that could buy durable goods, anyone that could make a decision, I want a new dishwasher, basically is in the stock market. So the Fed has no choice but to at least notice when something like the last two weeks takes place in the NASDAQ, for example. So I don't know to what extent that shapes policy, but it has to be in the back of their mind, right? Yes, but they tend to be very reactive to it. Like they'll say, you know what, I don't mind markets fall. I only mind if they fall to a point where it starts to impact the economy.

That's what they'll tell you. What is the lag between a stock market event and seeing that? Where do you see that first? Retail sales? Where would that appear first, if you had to guess? The sales of higher-end stuff. Apartments?

If Tesla all of a sudden is selling less $80,000 cars, because maybe someone wants to only spend $50,000, that's where we'll watch for. But the thing with the stock market is- That might be more of a crypto signal, though, than a stock market signal. It very well could. But it's still the same.

I've made a lot of money in assets, and asset inflation has benefited me and has directly impacted my consumer spending decisions. So Snap fell 23% on the day. But thanks to this move in the after hours, which is 55%, it's now up 18% on the day. What did they say? What was their number? I mean, it must have been like really good. Do you have a Snapchat, Michael? No meaning i have one it's inactive i don't have any real friends it turns out

the the only way to use snap is people have to actually want to hear from you and then respond back which is why it's limited to people like under 30 right there's nobody to talk to if you're like me like a strapping 44-year-old man. Nobody wants to snap with me for any reason. Yeah, I've only seen it with our kids. Including Mike. So you can't make friends on Snap. You have to have friends on Snap.

It's not good for me. Spotify, 400 million subscribers, 158 million of them are premium, $3 billion in quarterly revenue. Sounds like a nice business. The problem is maybe it's not a $50 billion business. So that's what I mean by re-rating. They had a good earnings report. Joe Rogan shit, whatever.

They are genuinely doing pretty well. The problem is the market cap they already have going into it. So that was a $400 stock that's now – where is – I don't know where Spotify went up. It was a $70 billion company. That's now $30. $70 to $30. Now does $3 billion in quarterly revenue – does a $12 billion revenue run rate with 400 million subscribers, is that worth $30 or is it worth $10? I don't know anymore.

And that's a really big sea change in the market. Right, and we talked about it before the show started with Microsoft. Microsoft in the year 2000 had the most dominant market presence of any company I know of with about 85% of the PC software business. Monopoly.

Greater than all these others combined. Maybe Google with their search businesses is probably the closest. And not even close, really. And not even close. But because, well, the world did change and obviously the internet started to pick up steam, but Microsoft grew their earnings and revenue

every single year through the mid-2000s, but the stock fell 50% plus and didn't get back to where it was in 2000 until 2013. They were paying those monster special dividends. Special dividend did nothing. They implemented a dividend because they didn't have one in 1999. One of the first big tech companies to do a dividend. Right, and it did nothing because it was a valuation rethink.

Okay, so starting valuation has not mattered for a long time. Really, really matters now. And it has nothing to do with how well or how poorly Spotify might be doing. This is bigger than that. This is bigger than that. And just, like you said, we've been doing this long enough. We know sometimes there's a good stock

and not a good company and a good company and not a good stock. They're not always in sync. You know what's so funny about that? Two years ago, that they were completely in sync. Two years ago, the market was taken over by retail traders.

And that's exactly the way they invest. They say, I love my Peloton. I'm buying Peloton. Sort of Peter Lynch-like. My girlfriend loves Lululemon. I'm buying Lululemon. Every f***ing one of those trades worked. Like the more obvious, the better the performance.

And that went on for a full year. Nobody waves a flag and tells you this environment's over. But that's what happened. Now great companies doesn't really matter. Also, it gets to the importance of doing also fundamental investing. Whenever you buy a stock, you're buying it because you think the prospects are good. But for those of us doing this long enough, you say, okay, what's my sell point?

Well, your two choices, do I sell it when it gets to a certain price or do I sell it when I feel like the fundamentals have changed? And I think there's a lot of retail investors that aren't looking for that inflection point when something may change. Like we know Peloton was a direct beneficiary of everyone being at home. And once things started to open up and

you started to go to the gym, well, that story started to change. And as a fundamental investor, you have to change your thesis on a stock if the fundamentals start to change. But we know people just overstay their welcome because the stock had worked. And while it's working, I'll just continue to ride it. Yeah. They start getting possessive over the stock. To me, this is the most interesting question is where are we in the re-rating cycle? So Facebook was trading 25, 30 times earnings for the past couple of years in that range, 35 times. It's not even a lot compared to the rest of the market. And now it's 17. On a forward basis, it's 15. I mean, you could easily make the case that Facebook is cheap. I think it's

more difficult to make the case with a company like Netflix, for example, who has done so much in the last five years and the stock has just sucked because investors were paying 200 times earnings five years ago. The business is obviously much, much, much bigger today, but the market cap is smaller because now they're paying 35 times, which you could argue is still too much. So the question is, where are we? Where are we? But if it's not innings, but it's more like, I can't tell you where we are in this rewriting cycle until I know when the Fed is done. Isn't that the answer? Absolutely. Because if you're an investor right now and you're looking at this year, you're like, oh shit,

excuse me, am I allowed not to say that? Duncan, get him out of here. You're looking at I have the end of QE, then I may have QT along with higher interest rates, and all these other central banks are doing it. I'm not going to get that far in front and try to guess where the bottom is. I'm going to wait to see how things go because that monetary tailwind is now a headwind, And we just don't know. We saw in 2000 to 2002, things just got cheaper than you would ever think. No one thought that NASA would fall 82%. They got more expensive on the way up.

And they get more expensive on the way up. So Facebook did $100 billion in revenue for calendar 2021. Nobody's really reporting that number. That's a big deal. First time ever. But so now it's a $650 billion market cap? Yeah.

Like I would say 16 times is cheap. The question now is like I said earlier, let's see how the economy now plays out here. 16 on the way to 13. But there are different levers. Or maybe it stays at 16 or 17 but that earnings number starts to fall. I mean right now you look at the earnings estimates. They're still stuck at $220 for the S&P 500. It has not changed a penny. Facebook is now too big of a platform to not succumb to the overall business cycle.

So it used to be they were small. And if advertising budgets were shrinking, because the economy wasn't good, Facebook was still eating into them at a rapid rate. They are the advertising budget now. So it's like, remember Cisco? At a certain point, they could only grow at the rate of global GDP because that was basically the size of that business. But so there's Facebook and these behemoths

and then there's Shopify, which you could say, okay, one of the best businesses in the world is gonna be the best, has a giant tailwind that it's back for the next decade. The stock has been cut in half. You could say, oh, one of the best businesses in the world has a giant tailwind that it's back for the next decade. The stock has been cut in half. You could say, oh, it's $200 billion. Now it's $100 billion.

That's cheap. Okay, but the stock is still trading at 25 times sales. Now it could easily grow into that, right? In five years, Shopify could look very stupid cheap right now. But how do we know? Amazon stock from the peak in 2000 to 2002 fell more than 90%, but their revenues doubled during those few years.

Yeah, because it wasn't about the fundamentals. So you could get the fundamentals right and still get creamed. Right, but to Josh's point with Facebook, and it's going to affect Shopify too, let's just say the economy slows. Well, small business is a big customer for them. You're a small company.

Facebook is your only avenue for broad reach advertising. And if your business gets crimped, well, then if you just cut back your advertising spending 5% to 10%, that's going to directly impact Facebook. It's meaningful to Google too. And during the pandemic, they were citing like we don't have travel. Travel turned out to have been a very big part of search uh revenue like meaningful like 10 or something right so so but all of these companies are now too large to be set quote secular growth stories in in a global economy that's not cooperating right it would be impossible for them not to feel those effects at this size that's exactly right so it gets right so Facebook's PE may stay at 16, but if the earnings number starts to fall,

because at the end of the day, that's it with stocks. It's earnings, the trajectory, and pace and exact number, and what multiple you pay on it. Now we know we pay a lower multiple on it. Well, what happens now to the EPS number? What's interesting is that that multiple contraction started at the beginning of 21 and continued through the course of the whole year. Right. It peaked in February when the mean starts peaking. Well in advance of the Fed even thinking about tapering. So something in the market was telling people that these companies were not worth paying as much for those fundamentals. Right. That January, February last year was the ultimate in euphoria.

So JC Parets talks about that being the sentiment. That was the apex of euphoria. And then started the summer when Powell at the June meeting said, we're thinking about tapering now. Yeah. That's when the yield curve started to flatten out and the multiple compression continued pace once he started to that. And then it sort of just progressed. Can I say something? I think it would be a good thing if stocks chill out for a little bit.

I don't think it's the end of the world if stocks go flat to sideways, maybe a little bit down for a year or two. We just went up like 18, 31 to 28% in three years in a row. Is it the end of the world if stocks go sideways and we catch up? That would be great if that was the scenario. But the problem is sometimes when you get an extreme to the upside, markets don't correct by going sideways. Just the pendulum swings the other way. The pendulum doesn't stop in the middle. I also think there's enough new investors, young investors that are – I'm not that they're more afraid than another generation. They're

definitely have less muscle memory of having bought stocks in a, in a slowdown and have that work out for them four years later, because they haven't been here for four years. So it's a little bit harder for them, I think, to get through this without maybe doing some. Maybe I'm asking for too much, but if the market could just fall 5% this year and 11% the next year, and the economy not fall apart, I think that would be very good for investors. That would be a victory, especially coming off great years

over the last couple of years. Right. I mean, you guys are in the money management business. You know that clients have very short memories. And when they look at performance, either it's in a quarter or a year- I always say it's one year. They don't put it into context.

That's right. So if you're down 5% in a quarter or a year. I always say it's one year. They don't put it into context. That's right. So if you're down 5% in a quarter, they may complain, but they may forget that they were up 20% the year before. They don't put it together. Michael always says to clients, like, if I gave you this deal at the start of 2019, I told you, you get 27, then you get 20, then you get 30. And then the next year you get minus 10. Would you take that deal? Who says no? Nobody would say no. But in the moment, you don't remember that. You just say, why am I down 10% from two months ago? Well, also, and then once you're down 10, you think you're going down 40. Well, that's a whole- You think it's going to be all given down.

That's a whole other thing. What are your favorite stocks right now? Nobody's- Everybody knows this is not advice. Peter's not giving you advice. Don't buy or sell anything based on what he says. I like Duke Energy. So the way I try to pick my stocks is

I try to find- Like you pick your women? No, we actually have very similar viewpoints on how we view stocks in the sense that- Because I notice when you talk about an individual name, you're looking for a business that has a tailwind to it.

Running a business- Make your life easier. Running a business is hard enough. Yes. It makes it easier if at least the industry has a tailwind to it. Like running Bloomingdale's is a tough business, but then having to be in that industry makes even that much more difficult. So I know one of your recent picks was Dutch Brothers. Yeah.

So I know Dutch Brothers because my family goes to Arizona every year and we've been to Dutch Brothers and it's a great concept. Have you done it? Like you've gone through the drive-thru, you got the drink? I went out of my car and went up to the window. There's nothing like that. Yeah, it's a great concept. And so having a business tailwind makes it owning that stock that much easier. Now, valuation, putting that aside, valuation is always valuation.

But I try to find businesses that have a tailwind. Like one of the recent stocks that I bought was Petco. You look at the pet healthcare business, or pet business, we know the demand side. Michael's a dog person. Up only. We know that industry has a natural demand tailwind to it.

What's the best way to play it? Obviously, you can buy Chewy, you can buy Petco. I looked at the two, and Chewy's just really online. Petco is now delivering not just online to compete with Chewy is just really online. Petco is now delivering not just online to compete with Chewy, but veterinary businesses within their stores and grooming.

They just announced a joint venture with a company that I forgot the name, Rover.com, where they'll walk your dog. They're now the one-stop shop of pet healthcare. I know I got the secular demand. What's the ticker for Petco? It's woof. I know I got the secular demand. And what's the ticker for Petco? It's woof. I know I'm only paying nine times EBITDA, where Chewy's trading at like 300 times EBITDA. It's trading at about one time sales.

Chewy's trading twice that. Why is Chewy so much more expensive? Because it's online or because it's growing faster? It's a new company. It's growing faster. Younger. And it's online. Yeah.

it's online or because it's growing faster? It's a new company. It's growing faster and it's online, but they can't compete with Petco because of all the other services Petco is offering. When I look at the stock market, yeah, maybe the market falls, but I just know their business will continue

to grow. There's a secular tailwind. Then I think another way that I like to invest is more cyclical plays like the commodity space, where it's more like a Well, you follow the commodities very closely. So I've been long energy stocks, but I can't wait for the day when I sell them. So that is just a rent. It's on the quarter, by the way. You know what I read this morning, Peter?

It's a rent to stock as opposed to an investment in a stock. Peter, this morning in the New York Times, this is incredible. this morning in the New York Times. This is incredible. Booming prices for oil and natural gas propelled Shell's profit in the fourth quarter of 2021, lifting its adjusted earnings to 6.39 billion,

up from 393 million a year earlier. It's like Salesforce. So I'm long, Shell. Six billion up from 300 million. So I'm long, Shell. And that'll never happen again. I have to clap for him. You don't even hit the button for that guy.

Show some respect. But at some point, you know, the stock will be a sale and you have to view a cyclical stock in a different lens than you would a secular grow where you want to own for many years. Is there a such thing as any commodity based company or deep cyclical? That's a Warren Buffett-esque, like, I hope I never have to sell it. Does that really exist? There are few and far between. No, those will not. The only ones that are, are the stocks that rally in an upturn will obviously get negatively impacted on the downturn. But as long as the

downturn is at a higher level than their starting point, and then they can grow. So they sort of make like a stock chart where they make higher lows. But that means you have to sit through a drawdown in a recession. There aren't that many of those. Is that caterpillar and deer, basically?

Who would that be? Well, deer has proven to be. Caterpillar has been much more cyclical. Deer has been much more consistent because agriculture is just a more consistent business. As long as you have a growing world population and an ever-growing global demand for food. That equipment is. Deer has some more of a secular nature to it than just the construction business. Deer turned itself into a SaaS company.

You can't operate the equipment if you're not a user and logged in. Like they literally, they are making these things into technology. Look at this chart. This is energy versus ARK since pre-pandemic. Energy is outperforming ARK. That's wild.

Is that the XLE? Yeah, since February 2020. And you've gotten great dividends too by owning the big oil stocks that are trading, that are paying four to 5% type dividend yields. So you're in oil, but you're waiting for the trade to end. When does it end? When crude gets to 100 or when crude falls to 50?

Well- In your mind, when does that end for you? So these stocks, like take Shell, for example, is still below where it was pre-COVID because people still don't believe that oil prices are going to stay at these levels. Yeah. At some point, that will change and people will start to believe and then these stocks will get re-rated further and that's when I want to sell. Okay.

Did you ever think in your whole life you would see the price of oil go negative? No. To me, that's the craziest thing about the pandemic. But we also know that that was just the quirky dynamic of owning. You're right. It was wacky. I never thought I would see negative interest rates. Yeah.

Who would be stupid enough to invent negative interest rates? When somebody's like never or always, like the image that pops into my mind is crude, negative $30 a barrel. Yeah. Kiss my ass, never. Right. A a barrel. Yeah. Kiss my ass never. Right. Astonishing. There's nothing that's never in the financial markets.

We're going to do favorites and then we're going to let you out of here. Does that sound good? Yes. Have you brought us any favorites? In terms of like what I've read lately or what I've seen. Peter's a big fan of the show, obviously. No, I read the thing you sent and i watched packy uh last week packy was great right yeah packy was good yeah you're on the other side of most of packy's trades

like not not deliberately but just the way you think about markets well i will i don't know packy personally but i've seen him you would love dan nathan but i am trying to learn as much as i can about this whole crypto world yeah and I remember we spoke at, we had dinner and I'm trying to learn. We didn't do any Bitcoin stuff today because we've been doing a lot of that lately. And I want to learn from people that know a lot more than I do.

Same as me. I'm still the same smart-ass skeptic about a lot of it, but my mind is not completely closed to the fact that just like I was saying, ha, ha, ha, never. This is the same thing. I could, I, all of my past experience, my turnouts be completely irrelevant when it comes to that. So I'm trying to be open-minded. And Mike, I know you've gotten into the top shot. Like I collect top shot, Mike Batnick. So as a kid, I've collected

baseball, memorabilia, and baseball cards. So now I'm seeing essentially it's digital baseball cards. Same thing but worse.

Same thing but worse. I like holding onto a card. Thank you. I like to hold it. I don't collect anything, but if I did, I would want to hold it. Call me,

call me old fashioned. You're old fashioned. That's fine. I'm happy to be old-fashioned. I'm reading Sebastian Malaby's book, The Power Law. He wrote an amazing book that – oh, I did this last week. Now I'm getting day job. I just did this.

He wrote that book, More Money Than God, which is the best book ever on the history of hedge funds. He did the same thing for Silicon Valley and it's awesome. Really good. What are you reading now? So the book I just finished was called – and it's actually good timing because of what's going on with Russia and Ukraine. It's a book called Putin's People. It was written by a woman who's a Financial Times reporter. And how the transition –

I'm just covering our bases. I'm just covering our bases. I'm just covering our bases. But you start to learn about the psyche of what he's thinking, about how it starts really when Putin and the KGB essentially took over Russia when Yeltsin gave Putin the keys. Yeah. And how they've run that country. Yeah. And the level of corruption and how everything ends up to Putin's steps. And you can see how all this plays out, and it's a fascinating behind-the-scenes look because it interviews so many people that have been in and out of his circle since he came to power. Right.

So you get a sense of like – not that it's going to help you at all, feel better about what's going on. I own Gazprom going into reading that book. And about halfway through the book, I sold my Gazprom. Okay. I watched this last Duel thing. And it's not a favorite. I understand why it bombed. And I felt very bad listening to Ben Affleck.

It was great. I love that movie. Okay. I'm saying it was a technically good movie. But it's about dark shit, like rape. And movies about rape don't generally become blockbusters. And I'm surprised that nobody – who produced this? Ridley Scott did it. Ridley Scott was the director.

No, but was it for Netflix specifically or did it just end up there? No, no, no, no. No, HBO. It was Time Warner. Okay. there no no no hbo it was uh time warner it was okay i'm surprised nobody like at any point said to ridley scott with all due respect you're a genius you're one of the greatest filmmakers of all time stipulated let's maybe not get matt damon ben affleck who else they wrote the script adam driver they wrote the Driver. Yeah, but let's maybe do something different with this cast and with this money.

They wrote the script. I understand. So what are you saying? I'm saying they should have made a different movie entirely. Don't make a rape blockbuster. Is that controversial? But it's not one of the movies that you say, oh, I need to see this again. No, I love that movie.

I didn't love it. I'm not seeing it again. I thought it was a great movie. Oh, actually, and it has this device in it that I have never liked in any movie I've ever seen. And they put it on screen. They put it right in your face. There's three characters. They tell the same story from the perspective of each of the three.

You don't know that. So they say chapter one, so-and-so's point of view or whatever. And they do 30 minutes. And then they go right on screen. Chapter two, the other character's name. And then they start replaying the scenes slightly different. And you're like, oh, no, they're not doing this. And then they go, chapter three.

And you're like, oh, now I have to watch it. I might have to get out of this. I'm very much on the other side of you. I don't want to watch the same movie three times. And that's what they did. And then it's, again, it's dark shit. It's not funny. There's not even a moment of levity.

I just thought of the previous book, which is also timely. And I know you're a basketball fan. Is it The Last Duel? No. Okay. Actually, this is going to be on the exact opposite. So on Showtime, there's a new sort of mockumentary on the 1980s Lakers. Yeah.

Adam McKay. For Showtime. So Jeff Perlman. Yeah, Showtime. Jeff Perlman wrote the Lakers book called Showtime about the 1980s Lakers. And that was one of my few books ago. So to go from that type of movie or Putin, and you want something lighthearted,

you get through really quickly, ahead of watching it on TV, read the book Showtime by Jeff Perlman. Okay, love it. Did you have fun today? Great time. Did you have enough bourbon? Have you even been able to sip the bourbon yet?

I'm usually a red wine guy, but I didn't. All right, we're drinking, by the way, if anyone's curious, Breckenridge whiskey, and this one's called Powder Hounds. It's good. I don't really know what that means. It's pretty damn good. It comes from Colorado and people should give it a shout.

All right. What are we doing? We're wrapping? Can I just ask you one thing about Last Door? Was it just me or did Matt Damon not have like an old English accent like everyone else? It just sounded like Matt Damon talking like Matt Damon. It was ridiculous. Everyone else had an accent.

It was not one of his better performances. It kind of took me out. Ben Affleck did, first of all, they're not even in England. It's in France. Who cares? So having an English accent in a movie about France. I would have preferred it in French with subtitles. Can I say one more thing?

What? Because I know you guys like to do, what have you heard over the past week or so. For investors, whoever's listening, and you're right about the macro, I think there's nothing more valuable than listening to a company conference call. Oh my God.

And hearing what the CEO or CFO says about what's going on in their business. Are you using the quarter app? Are you using the quarter app? No. Peter. So what have I listened to the past week? I listened to a lot of conference calls.

How are you listening to conference calls? I go into the website. No, no, no. Peter, this is the app. Quarter. The transcript. You could skip to Q&A. You don't need to listen to the prepared remarks.

This is the app. Q-U-A-R-T-R. It's conference calls in podcast form. All right, I'll have to get that. Every company. Because I listen to about 50 a quarter, which is 50 hours plus, and it kills a lot of time. You listen to 50 hours of conference calls? Peter, Peter, Peter, Peter.

You could speed it up. Stocks I own and a couple of other things that I think are relevant for the macro. 1.5 times speed this is the app okay that's good to know then you could do 75 it'll save me some more

yeah exactly it'll save me some more time where can people follow you you're at pbookvar on twitter yes and if they want to read my daily missives they can go to

bookreport.com and it's B-O-O-C-K yeah there's a C before the K report.com what's that about what kind of freaky deaky old European Jew

yes I respect that you respect the extra C I got a C I'm a European Jew myself that's true that's true

okay so we're gonna we're gonna go to bookreport.com B-O-O-C-K report.com at P Bookvar on Twitter

and what is your is that it you're doing? And bleakly.com. bleakly.com. Is our company website. Awesome, man. You crushed it today.

We're so happy to have you. Thank you, Peter. First time we saw each other since the end of the world? Oh, Barry. Oh, it's right. I didn't know for Barry's birthday. All right. Well, it's great to see you again.

Same here. Thanks for having me, guys. Hey, if you want to watch video from today's show, go to youtube.com slash The Compound RWM. We'll see you next week. Duncan, you're a European Jew. That hill, you got three L's in that? Yeah.

It's the third L that gets it away. So book far in Russian actually means like reading tablet. But it's Dutch. Is it Dutch? Why would I get that if it's Russian?