The Compound and Friends - Warren Buffett doesn't care about stock splits, should you? Peter Boockvar on inflation and the bull market in gold

Episode Date: August 7, 2020

This week Josh does a deep dive into stock splits and talks with Peter Boockvar, editor of BoockReport.com and CIO of Bleakley Advisory, about the economy, stagflation, and the bull market in gold. Leave us a rating and review if you like the show, it helps a lot! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey guys, it's JB. I was in the midst of getting ready to record this podcast and then the power went out, but now we're back. It looks like Long Island Power Authority has been routinely shutting down different neighborhoods all over my neck of the woods here on the south shore of Long Island, trying to get restored fully. And I guess they don't want to work on the lines while they're live, but whatever. Looks like we're good. Let's get into it. We have something on the inflation shock to come that my friend Peter Bukvar is predicting. Peter thinks gold is about to trade substantially higher. He's looking at other commodity prices. He's following the Fed. He's looking at treasury rates. There's so much to talk about. Plus, if you're a shareholder of Apple,

you're about to receive a four for one stock split at the end of August. So we're going to talk about whether or not stock splits should even matter to you and what to make of all that. But first, music, please. Welcome to the Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their 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 investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Okay. While reporting its latest quarterly earnings, Apple announced a four for one stock split. So it's trading at about 408, 410, something like that now. So let's say on August 24th, it'll trade for closer to a hundred dollars a share. And you'll have something like, or you'll have exactly four times as many shares. So let's say it splits it at today's price. It'll be 102, but you'll have four times the amount of shares. Okay. Why would they do that? There's no real reason to split a stock, but there's no real reason not to either. So Apple said as part of its press release that they think it'll make their shares more accessible

to a broader base of investors. Clearly that that's a big problem. Not enough people own Apple. But Apple's done several splits before. And while this one may just seem like, for some reason, they want to get back to the number 100, the last one actually had a very good reason. It was in 2014, Apple did a seven for one stock split. So it was like a seven or an $800 stock and they split it and they got the price closer to a hundred. It was widely viewed at the time that the specific reason for that split was to make it easier for the index committee at Dow Jones to add the company to the Dow Jones industrial

average, which they ended up doing in 2015. So the Dow Jones industrial average is very different from the S&P 500 in that it's price weighted. That's the way Charlie Dow set it up in the 1890s when he invented the thing. The higher a stock share price, the more its price is weighted into the index. So the more its gains or losses affect the index's level. Apple has become a very important stock in the Dow, and that's now going to change. So here's Reuters on what's gone on since the addition of Apple into the Dow. Quote, Apple was added to the Dow in 2015, and the 230% gain in Apple stock since has been a major factor driving gains in the Dow.

Apple currently accounts for about 10% of the Dow. After the share split, it will make up only a quarter of that. So basically, Apple is going to go from being 10% weighting in the Dow 30, which means every up and down, it's mostly been up, has a big impact on what the Dow did for the day. Now it's going to be only the 18th most heavily weighted stock. So it's like going to be middle of the pack and Apple stock will have less influence in how the Dow Jones performs for better better or for worse, going forward. What does that mean for you?

Well, if you go from having 100 shares of Apple trading at $400, now you're going to have 400 shares trading at 100. Should you care? Probably not. But not everyone agrees with that. There is a whole subset of academic literature that's come out over the years on whether or not stock splits enhance the return for equity shareholders. It's complicated, but I think the true answer is sometimes, but not always, and probably not now. So I just want to go through a couple of these that I thought were interesting. The first is informed trading around stock split announcements.

So this looks like came out three years ago. This is fairly recent in the Journal of Financial and Quantitative Analysis. Essentially, what they're saying is that prior research shows that splitting firms earn positive abnormal returns and that they experience an increase in stock return volatility. returns and that they experience an increase in stock return volatility. So they're saying that options traders have not been able to anticipate the abnormal increase in stock prices. So in other words, they don't think that market traders, market participants have done a good job capitalizing, even though there are abnormal returns associated with splits.

They don't think that the evidence supports the fact that people who were betting on this kind of thing in advance actually get the timing right. There's another study from 2012, the market reaction to stock split announcements. They are linking stock splits to earnings momentum, which obviously makes sense. You typically have stocks with high prices that come about as a result of having grown earnings. There's not a lot of meat on the bone here, but I think what everyone's trying to do is say, is there some reason for investors to be buying a stock that they think is going to split or that has recently announced the split?

That they think is going to split. Or that has recently announced the split. There's a study from the spring of 2018. From John Carroll University. Looking at the propensity to split. And CEO comp. So they I think. Did the first and probably only paper. Linking whether or not CEOs.

Might be deciding to do a stock split. Because for some reason they think. It will lead to increased comp. Keep in mind, there's a lot of money involved when CEOs are highly compensated with stock and stock options. So is there a link? I think it's safe to say that it depends on the market environment. There are certain market environments that stock splits are what investors are looking for. And so CEOs will be rewarded. Here are some of the unique contributions to this paper. So they're saying, we show that the decision to split is directly related to the delta of the CEO's compensation portfolio. So

they're saying that the average or the median CEO wealth gain in terms of stocks and options is about $4.9 million as a result of a split. And then they say, to our knowledge, we are the first to examine the relation between CEO compensation and the propensity to announce a stock split. The second point that they try to make is the motivations. The second point that they try to make is the motivations, basically like why are they saying they're splitting it and do CEOs actually benefit from it more so than other shareholders? Obviously, that would be tough to prove. And then third, we find evidence that is consistent with the premise that executive compensation helps align managerial activities, in this case, engaging in a stock split that raises the share price and increases the volatility of the returns with those of stockholders. We find that the likelihood of undertaking a stock split is positively related to Delta. So the idea is like, how many of these things are just about juicing the share price? And do they even juice the share

price? There are a lot of very influential studies on this that go back and they're much older, which we're not going to get into. One study that Mark Holbert was looking at actually comes from a newsletter, but he was saying that it's about a 3.6% above market return for stocks that have split versus stocks that haven't. I didn't go back and try to replicate that. But he's basically saying there's a portfolio that the NYSE maintains a performance index of. It's a 30 stock portfolio. And what they're trying to do is have all the stocks that recently split their shares,

and then also include stuff like dividends. And then he says, hold the model portfolio for 30 months. He's saying over the last 10 years, this is the end of 2019. Over the last 10 years, this portfolio has beaten the S&P 500 by an annualized margin of 3.6 percentage points. And then its alpha over five years is about the same. So, and then it's alpha over five years is about the same. For year to date, meaning last year, that stock split portfolio has been doing double the 10 year average. It was beating the S&P last year by 6.8%.

So is there enthusiasm, at least in the short term for companies that do stock splits? Yes, but I don't think Apple is necessarily concerned with that. It's a $1.8 trillion company. I'm not sure how much more enthusiasm you need when you've got a price earnings multiple that over 10 years has gone from 10 to 30. That's about as much enthusiasm as any stock in the world should expect to receive. So you think about how operators historically have thought of stock splits. They tend to come

in and out of vogue, depending on the overall environment in the markets. But there are a couple of operators, CEOs of companies that just historically have shunned stock splits. And traditionally, they've come from the insurance industry. And I think a lot of that is because of the influence of Warren Buffett and Berkshire Hathaway. So Berkshire Hathaway has almost always had the highest price stock in the market. And the A shares of Berkshire Hathaway do today, they're 300 some odd thousand dollars a share. Nothing even comes close. So Warren Buffett was asked this question all the way back in 1983. Why don't you just split your stock?

And I thought his answer was a really good one. And if you're a shareholder reading this letter, which it was in the 83 letters, I guess you would have been reading it in 84, it was relatively early in a big bull market in which Berkshire and many other stocks started to do really well. So you had high share prices. Warren Buffett, quote, we are often asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro shareholder action. We disagree. Let me tell you why. And then he just goes on this epic rant about how Berkshire shareholders are smarter than the average stock trader. And he wants to cultivate

this group of people who are the shareholders of Berkshire that don't act emotionally and produce, quote, manic depressive valuations and other aberrations in the stock market. He makes this comment that theoretically, the same person can buy tickets to a rock concert as easily as they could buy tickets to an opera, but that those groups of people who would buy from one or the other event kind of end up as self-selecting. So I guess what he's trying to say is he's not trying to attract the type of investors that would give a shit about a stock split because he cares about who his fellow investors in the stock are because the behavior of those investors is going to have a big

determination effect about how the stock acts on a daily, weekly, monthly basis. What kind of people and what temperament do those people possess that are involved in my stock? And that's a quaint notion these days, but this is 1983. And so while it's a public company to the extent that he could, Buffett was actively trying to dissuade the, quote, wrong type of activity in shares of Berkshire. So this is back to Warren, quote, were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. Would a potential one share purchaser be better off if we split 100 for one so he could buy 100 shares. Those who think so and who would buy the stock

because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. So in other words, if you're the kind of person that comes into the stock because there was a split, you're kind of a putz and one of my higher quality shareholders would be the one that ends up selling it to you. And so I would lose a good shareholder and end up with a poor one. Back to Buffett. Could we really improve our shareholder group by trading some of our present clear thinking members for impressionable new ones who preferring paper to value feel wealthier with nine $10 bills rather than with one $100 bill. People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will

accentuate erratic price swings unrelated to underlying business developments. So he is very much focused on having a stock price that reflects the underlying business. And he's not interested in gimmicks that temporarily get people who ordinarily wouldn't care about Berkshire to become excited about it. This is the last part from Buffett. One of the ironies of the stock market is the emphasis on activity. Brokers using terms such as, quote, marketability and liquidity, sing the praises of companies with high share turnover. This is a great quote from Buffett. Those who cannot fill your pocket

will confidently fill your ear. God, I love that. But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise. And then he goes on to describe the ways in which higher turnover and more activity in the stock actually end up being a net cost on the typical holder of the company. And it's mostly mathematical. And I think he's right. So I think like liquidity and marketability, I hate that term. Liquidity is a real concern. If you're the CEO of a publicly traded company,

you've got employees who are compensated in stock. There's gotta be somebody for them to sell to. You've got investors that want in, investors that want out, investors that change their holdings from time to time. To the extent possible, you do care about liquidity, but not at the cost of having an imbecile nation as your stockholder base. And I think there's a point at which liquidity is no longer helpful, right?

So I don't know if Apple's at that point, but I think that's key. Buffett's not the only insurance chairman and CEO who has been reticent about stock splits. If you look at the list of the highest priced stocks in the market, you'll almost always find insurance companies on there, and you always have. Here's another one, Fairfax Financial. This is Prem Watsa. They call him the Buffett of Canada. Fairfax Financial is another insurance conglomerate that makes common stock investments with the float. And so a lot of Canadians have made a ton of money, American investors too, investing in Fairfax over the years. He's a value investor, et cetera.

This is 1995, Prem Watsa, quote, with our shares now trading at three digits, I guess it had recently broke above 100. We are often asked about stock splits for greater liquidity, higher stock prices, et cetera, et cetera. We have always replied to the negative. Our view is that stock splits do not make shares more or less valuable. They just increase the number of slices that you can take from a cake. Do not increase the size of the cake. Our focus is to increase the long-term intrinsic value of our company, the cake, and not change the number of slices.

Steve Markell of Markell Corp, which is another insurance giant, White Mountain was always an expensive stock. So in addition to the insurance companies, there's this group of stocks where the managers have just historically not been interested in doing splits. Berkshire is obviously the leader. Seaboard, which is above $3,000 a share. This is a company that does everything from agriculture and food to shipping. And this is a business that's grown through mergers and acquisitions. Started in the early 1900s, went public in 1959. The stock price just goes up and up and up. They never split it. NVR, this is a home builder. I

think they're based in Virginia. They also do some mortgages. NVR has got a $2,000 or $3,000 stock price all the time. Amazon is now $3,200. Clearly, Jeff Bezos has taken a page from Buffett on a lot of things. I think that's true of all of the giant CEOs in tech. An underappreciated thing about Buffett is the influence he's had on the founders and CEOs of the largest technology firms. So I'll give you a couple of quick examples of that. We talked about Apple before. Tim Cook last year just decided one day, we're not going to talk to Wall Street about how many phones we sell. Don't want to do it. It's stupid. We don't want to be pigeonholed one month to the next. How many phones? How many phones? That is not an important measure of how we look at the company and what's happening. So we're just not going to report that number anymore. And there was a knee-jerk reaction down in the stock. And I actually remember being on

CNBC that day. And the judge asked me about that. I said, look, you're asking me about an idiot who would sell the stock because they think the number of phones that are sold each month are important. Think about the size of the company services business now relative to phones and the app store, just the massive size. And now Apple TV and wearables, the AirPods, the watch, all of the things Apple does. The number of phones per month does not accurately get at what's really happening with the business. It's a data point. It probably was very important at one time, but the analysts, they get over it. Sure, they still come up with numbers,

but they just said last year, we're not going to do it. If you sold the stock on that day, I think you missed at least a double. Stock's twice as high now, and they're still not telling you how many phones. How about that? How about that? That's Tim Cook taking a page directly from Warren Buffett. Warren Buffett doesn't play these games either. You think he's telling people how many motorcycle policies Geico is going to sell next month? Nope. They release earnings on Friday nights. They have no interest in having their earnings call spotlighted on television. They don't even do the conference call rather. So they have like

an annual shareholders meeting. That's it. There's no congratulations on the quarter, gentlemen. They're not doing it. They're not doing it. And I think you'll find that of a lot of the stocks that have never split it themselves. There's something to that. Here's another example. Cable One. So Cable One has a stock price around $2,000. This was actually a spinoff of Graham Holdings Company. Graham Holdings Company is the company that originally was Washington Post, which Buffett served on the board. And he was the mentor of Catherine Graham, who was the widow of the man who ran the company and then became the CEO herself and went on to produce massive shareholder returns. So Cable won that legacy, that Buffett-esque and Catherine Graham-esque legacy of avoiding

regular conference calls with Wall Street analysts, avoiding courting the wrong type of shareholder. That's still alive and well. I want to give you a couple of other examples of tech founders who have been influenced by Buffett. Google, when they went public in 2004, the first letter they wrote to shareholders, and maybe at that time it was potential shareholders, Larry Page, Sergey Brin basically said, we want to be like Berkshire Hathaway when we grow up. That was their idol even back then. Like that was their idol even back then. So right now in 2020, that wouldn't be so strange. But back in 04 for a Silicon Valley, for a pair of founders of a tech startup in Silicon Valley extolling the virtues of how Berkshire talks to its shareholders, I find that to have been very prescient on the part of Page and Brin. to have been very prescient on the part of Page and Brin. But that's another example of Buffett's influence in a place where you wouldn't have thought he was highly influential even back then.

Of course, the influence at Microsoft, Warren Buffett is best friends with Bill Gates. They became very friendly when they were vying for, not that either one of them cared, but the number one and two richest man on earth, richest person on earth. They were jostling back and forth on that list year over year. And of course, now they've gone on to do philanthropic work and a real friendship has bloomed. Bill Gates has not run Microsoft for 19 or 20 years now, but he's still the largest shareholder. And I do think Buffett's influence on a lot of aspects of the way Microsoft has conducted itself is undeniable. And then, of course, Buffett's influence over Bezos.

Bezos is doing the annual letter, very similar to Warren Buffett. He's been doing that since day one. He talks about being a day one company in every letter. I think Bezos' willingness to not play the Wall Street game with how much you're going to earn this quarter, let's beat it by a penny, what's the revenue whisper number? Bezos doesn't give a shit either. He's playing his own game. And that game is whatever I need to do long-term for the company is what I'm going to focus on. And I really don't care what this quarter, next quarter looks like. And if you do care, you're welcome to sell the stock to somebody smarter than you who gets it.

So that is very Buffett-esque. And then of course, we can go down the list. There are a lot of other public companies, but it's interesting to see four of the most successful companies in history that are now the foremost dominant. all of them have very specifically, very directly been influenced by Warren Buffett. And as a result, they've stopped splitting their stock. So Apple, what they're doing now is actually bucking a trend that's been enforced for a while. And again, they split in 14 and 15 in that era to get into the Dow. But we really haven't seen a lot of technology stock splits. Here's another company.

This is technology booking. So booking.com. This, you probably know booking.com as Priceline. So booking.com right now trades at $1,700 a share. They show no interest in splitting whatsoever. Booking.com right now trades at $1,700 a share. They show no interest in splitting whatsoever. So why all of a sudden have stock splits disappeared? I think just people following each other's lead and seeing that Alphabet has not split its stock and has not been punished. It has not hurt the company at all.

And then seeing now other companies like Apple, like Microsoft rather, followed in its footsteps. So the splits kind of had their heyday in the late 1990s. And there were actually people walking around who were like specifically excited by splits. And I think that's because in that era, we were still somewhat constrained on trading by the hundred-share round lot. And that's the big thing that's changed now. The dollar figure per share no longer matters.

And Robinhood broke this wide open, and now Schwab and Fidelity and everyone's followed suit. Fractional trading has really changed the way people get exposure to companies to the point where it doesn't matter how much money a round lot of 100 shares is. So if you think about, let's say, late 1990s, you walked into a brokerage firm. Yes, that was a thing that people actually did physically. You walked into a firm and you said, I want 58 shares of Lucent Technology. Lucent back then was like, let's say, $120 stock or whatever. I want 58 shares. People would look at you like you just landed from another planet. Who the hell is this velociraptor trying to buy 58 shares of Lucent?

Buddy, what's wrong with you? I don't have a seller looking to break his lot into 58 shares. So come back when you get some scratch together and we'll sell you a hundred shares of Lucent. Like that's literally a way that things went. And so you can imagine why people would be looking for stock splits. So that's not really the case anymore. Computerized trading circa the turn of the millennium removed a lot of that uncomfortable reception that you would get for a non-round lot transaction. Nobody knows who you are anymore. It doesn't matter. They decimalized the way stocks trade anyway. Things used to be traded in eighths and three eighths. So round lots made more sense.

It's how they figured out commissions. Well, now there are no commissions. You trade for free. So what do you need a round lot for? So now you have Robinhood fractional trading. You have no commissions. And if you want to buy Amazon, it's $3,200 a share. And you have $700 that you want to invest in Amazon. You don't have to sit there with a calculator to figure out how many shares you could buy. And you don't have to get shamed by a man in suspenders that you can't buy 100 shares of Amazon. You tell the app in the privacy of your own palm that you want to buy 700 shares worth of Amazon, and the software just does it. That's it. In my own experience, there was a big rash of stock splits. The last one that we saw that was highly indicative of an overheated market. In 1999, there were some months where 20 or 30 stocks were doing splits at the same time. Literally,

you'd have 20 stock splits go off in a month. Qualcomm, one of the biggest and best examples of that bubble era, Qualcomm stock in one year went up like 1,500% in 1999. I know because I was in it with my tiny round lot. But Qualcomm did two different stock splits that year. They did one in May, and the stock kept going up. They had to do another one in December. It was totally bananas. But it was also a marketing gimmick because not every company was as high quality as Qualcomm, but they had rising stock prices and they all wanted to be seen as exciting. So you would see splits get announced just to market the company, which I swear people took this seriously. And you actually had investors on message boards trying to predict which split would be next.

And they would say, oh, I'm buying it to get in ahead of the split, like with a straight face. That would be their rationale for buying. And people get all excited. They'd be like, yo, MindSpring is about to do a three for one split. We got to get in ahead of it.

The stock doesn't even exist anymore. yo, MindSpring is about to do a three for one split. We got to get in ahead of it. The stock doesn't even exist anymore. But there were people buying it within our lifetimes. And the main reason that they were buying things like that was because they were about to split. They saw it as like a catalyst that would give you at least a short term trade. So as stupid as that sounds, I swear it's true. And if you're over the age of 40 and you've been in the market your whole life and you listen to this, then you probably remember some element to that. Found a great LA Times article, December 25th, 1999. This is like literally you could hear the Prince song in your head. This was the peak of that party, give or take. And the whole article is about how exciting it is that all these companies are doing splits. So Qualcomm did its two for one in May, and then they had just done in December another four for one split. So its stock was $466 a share by the time they were about to split it four for one. Oracle, they announced a split. The stock goes up 5%.

They announced a two for one split. GE did a split, try to juice things up. IBM, they report bad earnings. The stock sells off. The next day they go, oh, we're going to do a two for one split though. The stock shoots right back to where it was. And there are a lot of examples of that. There's a guy in the article quoted from JP Morgan. He's a managing director.

And he's talking about the difference between institutional investors and retail investors. And he says, quote, an institutional investor won't say, I want 500,000 shares. They'll say, I want a million dollars worth of stock. So he's basically saying the price of the share is not important. It's how much money you want to put to work in the company. What's interesting is that with the new apps now, you can just do that. It's not about how many shares you're buying. You can just say, this is the dollar amount I'm putting to work. There's a New York Times article from February 7th, 1999. And they were basically talking about the Yogi Berra anecdote. Yogi Berra was once asked whether he'd like to have his pizza cut into six or eight slices.

He said he was pretty hungry, so why don't you give me eight? This is literally what we're talking about. And in that year, earlier even in that year, companies that were non-technology, non-dot-com companies got the memo. So Pfizer did a three-for-one stock split. Its stock jumped $6 the day they announced it. It went up more than when they actually beat earnings a few weeks later. There were 359 New York Stock Exchange issues that had done two-for-one splits between 1995 and 1997. done two-for-one splits between 1995 and 1997. And in this article, they look at the average of 4% gains between the 20th trading day that preceded the official split and the day of the

split. And that's versus the S&P is only up half that amount. So these stocks had been running well ahead of what the market had done. And again, I think that's just kind of indicative of that environment, people coming up with any reason they could think of just to get excited about a stock. I think when you look at, let's say, a year like 2019, a year like 2020, we really are now focused on this situation where the biggest, most powerful, most popular stocks are the ones with the highest prices. And there are very few people asking for these companies to split their shares. It's almost like an off-the-radar thing. So I do think fractional trading and the lack of commissions and the lack of even an awareness of what a round lot is, I think that's probably the main reason why nobody really cares that much. There are a lot of high share price companies. So Apple at 400 is only the 28th highest share price company as of last week. And the most expensive in the S&P 500 is NVR,

which is a $4,000 stock. And we talked about that as the home builder. So there are a lot of other companies with higher stock prices than Apple that will probably not be splitting. Oh, here's another big one, UnitedHealth. So this is, I think, the Dow stock, $305 a share. No plans to split. I don't know if the index committee will ask them to split if it becomes too large relative to the average. I'm not sure if those are conversations that happen. But I don't want to buy something unless I could buy 100 shares of it, or I don't want to buy something unless I could buy 1,000 shares of it or whatever. But I think that's kind of an older generation. I don't think the new generation of investors really care that much. So the quote marketability of a stock that splits is probably not that important anymore. According to a recent Wall Street Journal article, 41% of all the stocks in the S&P 500 trade above $100 a share. So that's the $100 is like the magic number where historically executives used to say, let's split

the stock. But only three of that 41%, only three companies have unveiled share splits this year. In 1997, we're talking about that era, it was 102 companies doing splits. In 2016, there were seven stock splits. So now you have 40% of the index trading above 100, and only three of them are doing a stock split. So I think that's a very remarkable change in investor attitudes toward the prices of stocks. And I do think that's a thing that technology has fixed. By the way, why wouldn't a company just do a split? What does it cost them? It actually costs, on the administrative side, as much as $800,000. So in that same journal article,

they quoted the chief executive of Pepsi and his stock is like 130, 140. And he's just like, no, because why spend $800,000 on paperwork? So I think you have to get used to being in an environment where stocks have four digit, three digit and four digit prices. And that A, it doesn't really matter much to the investors and B, the influence of Warren Buffett over a lot of these new technology leaders and the old line technology giants, that influence remains today. And these companies are not looking for marketability and liquidity from retail investors. I think they like this idea that the share price grows. And so unless you're talking to them about index inclusion for the Dow, what would be the reason?

There isn't any reason. So if people say whatever happened to stock splits, I think that's what happened to stock splits. And probably a good thing on balance for the market. We don't need to have a whole bunch of $20 stocks that can move by 10% each day. I think it's good to have more mature share prices out there in the marketplace. And so we do. Okay. That's what I wanted to say on stock splits and what's happened to them. We're going to shift gears now and get into this conversation I have with Peter Bukvar. Peter is the CIO at Blakely Advisory and the editor of the Book Report blog. He's been talking a lot about inflation, stagflation, the dollar, gold. We're going to get into all that stuff right now. Peter is super smart, super well-read. He knows what's

going on. He talks to everybody. I think you'll like this a lot. Let's hit it. All right. First of all, Peter, I can't believe I haven't had you on the Compound channel yet. This is your first time with us, right? I'm excited. I appreciate the invite, Josh. All right. So I've been dying to ask you about this because I read your notes every day. You do a really good job keeping people informed of what's happening with macroeconomic data. And you have opinions, which is refreshing. It's not just here's the data. It's here's what I think it means. You're looking at the potential for stagflation. I think that's really the headline

of what you're saying. And it's been a long time since we've really experienced that, most notably in the 1970s. What makes you think that that's a very serious possibility going forward? Well, I would consider my thought like stagflationary light. I mean, the 70s was unusual when you had double-digit inflation, double-digit interest rates. So my definition of it today is more of just mediocre economic growth with sticky type inflation. So right now, what we're beginning to see, we're sort of getting a dress rehearsal. Like, let's just take a trip to the supermarket. Obviously, a lot of it related to COVID, but you had difficulty of food producers, whether it was meat or even general mills that had difficulty producing enough of it, of the food, getting it on a truck in a quick time

that can then deliver it to a supermarket. So we saw price spikes in different products at the supermarket, which tells me that we're early on in seeing some major supply disruptions from COVID. Now, we saw supply disruptions prior with the trade war with China, that you raise tariffs and you start shifting around supply chains. Now, over time, that's probably a good thing because companies get to diversify. But in the short term, you can't just snap a finger and move a factory from one country to another. It takes a lot of time. Not just that, it takes a lot of time to produce the product, get it shipped over,

and so on. I'm optimistic that we're going to have a workable vaccine by early next year. So take the airline industry, for example, that have furloughed and have laid off thousands of pilots, tens of thousands of flight attendants. They're not just going to bring everyone back. So while demand, it could come back quicker, supply side is going to take time as planes come back, pilots are going to come back, airlines get to see what kind of staffing they want to have. So you could see a jump in airline prices.

You try getting a truck right now to deliver something. Well, hold on. Let me push back a little bit. So I agree with everything that you've said, but I think a lot of the grocery-related stuff was just hoarding. And year over year, that's not going to be the same situation. When you look at demand for canned goods in April 2021, it's got to be down 25% or more. So I think that supply disruption that you're describing, while it's very real, is easily alleviated by one thing that you mentioned, which is people bringing their employees back.

But second, less demand. I don't think we're going to be hoarding food next year. Right. So the demand side still in a slow economy is not going to be robust. All you need is an imbalance between whatever that demand is with the supply side. Take cans, for example. I actually own Crown Holdings, which makes cans for beverages and food. They cannot make enough cans right now because of the stay-at-home. So they're adding capacity to existing facilities. They're creating new facilities. So there is a rush to meet that sort of demand.

I just think it's very temporary. Well, inflation typically is temporary. Over time, prices go down. You just have to look at technology, for example. The more efficient we are, the more technologically advanced we are, prices naturally go down because we just become more productive, more efficient. When you look back at history, inflationary cycles are more cyclical periods. Now, whether they last three months, six months, two years,

it depends. Eventually, we get back in control. Eventually, supply catches up with demand, and we normalize. So the scenario I'm really talking about is really just a cyclical situation. Now, also, you look at all the central bank liquidity. Now, in 08, 09, when the Fed created all this money, it was more tender for inflation. It didn't create consumer price inflation because a lot of those reserves that were created by the Fed were left at the Fed. and lending it out. You just gave it back to me. So it was sort of trapped. If you get a demand side type recovery where the government is obviously giving people cash, so that creates more of a static level of demand that we wouldn't have had if that person didn't get that transfer payment. You have the potential for banks that are getting squeezed on the net margin side, may say, you know what, I need to offset that by increasing loans so that cash is not left at the Fed. So there's tinder for-

So that scenario would produce inflation. Potentially. And that extra liquidity would potentially create inflation where it didn't create 10 years ago. And keeping the demand side pretty strong in the US, I mean, between the transfer payments by the government has completely offset the declines in wages and income. By design. Yeah, by design. You're going to start with a higher base of demand. And then if you get a vaccine, that demand could temporarily overwhelm parts of the supply

side of the economy. But wouldn't the transfer payments fade away more quickly in a scenario where there's a vaccine and natural demand comes back? Doesn't that take care of the potential inflation problem that the government then pulls back? It could, but if you get a quick snap back in the economy, you could sustain a level of demand. So if the government has artificially lifted demand, and then you sort of get a handoff, rather than seeing so if the government has artificially lifted demand and then you sort of get a handoff rather than seeing a dip and then maybe an increase, maybe you continue just to see that increase. All right. So that will spook the market and there will be a ton of money trapped in bonds.

And I want to talk about that next that are earning a negative real rate of return. So real rates of return, basically, let's say a treasury is yielding 4%, LOL, not anytime soon, but inflation is 2%. The real rate there that you're receiving is 2%. It's your yield after inflation. money basically being loaned to countries in the sovereign bond market, that's earning negative real rates of return, factoring in inflation. And that's obviously not sustainable forever, although the European version of that has been going on for a really long time now. In an inflationary situation, is that who you think has hurt the most, the bondholders sitting in 50 basis point yielding paper? Yeah, that'll be the think has hurt the most, the bondholders sitting in 50 basis point yielding paper? Yeah, that'll be the immediate impact. I mean, I said in my note today, just imagine the situation where, let's just say the vaccines have success and people start to see,

now the vaccines will first have success in the latter part of this year. It won't be mass inoculation until next year, but you can imagine- It'll be good enough. It'd be good enough for fixed income investors to say, wow, the situation I'm in right now is now all of a sudden temporary. And now I have to switch my attention to a world that will open up again. And should the 10-year yield be 55 basis points? Should the German 10-year be minus 60 basis points? Because central banks are doing what they're doing because they want to buy time for the economy until we get that vaccine. So imagine if we all decided to get that vaccine. So I actually, I'm super bullish on a vaccine. I think it'll come before the election,

FDA approval. And I know that they're making millions of batches of several versions of the vaccine. So I don't know who wins and how much will be available. I think it'll be enough. I think people will come out from hiding. Not that everyone's going to take it, but if they can get it to the big medical systems in Houston and in Michigan and in New York and in California, I kind of feel like that could bring about the scenario that you talk about, just the presence of a vaccine entering the system. I want to pivot to gold. Gold is up 30% this year.

It's actually up more than the NASDAQ. So all of those high-flying growth stocks everyone carries on about, they're up big too, but gold is up even more. The gold rally really quietly started in 2018, right? After bottoming in 2015, I think. Yeah, December 2015. bottoming in 2015, I think. Yeah, December 2015. Okay. So now it's on fire and huge demand coming into gold ETFs. And I think we saw $2,000 an ounce, which on a nominal basis is a new record high. And it seems to be hanging up there. I want to read something that you wrote a week and a half ago that I thought was really interesting, where you compared what's going on now versus the last time gold traded at these levels, which is back in September 2011. So this is Peter, and I want you to react to this. With respect to gold, now that it has reached a new high, surpassing the September 2011 peak, compare the fundamentals today versus then. Then 0% interest rates didn't exist.

And I don't believe it was even imagined as a possibility. Today- Negative rates, right. Right. So today you have $15 trillion yielding less than zero. The Fed's balance sheet in 2011 was under $3 trillion. Today it's about $7 trillion. In the meanwhile, US nominal GDP is up 35% since nine years ago.

Then you get into the ECB's balance sheet has tripled in size since then, Japan, etc. The five-year real yield, remember we talked about real yields in mid-2011, was negative 50 basis points between negative 50 and negative 1% versus negative 1.10% today. In the meanwhile, US national debt, 26 and a half trillion. It was 14 and a half trillion in 2011. The dollar index is lower. Silver was about 50% below its 2011 and 1980 nominal highs this month. So it still has a long way to go back to those old nominal highs. So you're bullish on both of the precious metals and you point out how much has changed from the last time we saw gold prices at these levels. And when I say changed, everything seems to be worse and would augur for even higher gold prices in this rally. Is that the point that you're making? Exactly. In our lifetimes, we had a bull market in the metals in the 70s. Then we had a 20-year

bear market. The bull market, you can argue, in gold started in 2000 when gold was 250. We went up 12 years in a row to 1900 and 2011. We had a 50% correction. And then now we're possibly, I think, resuming that bull market. It's a new bull market. Yeah. I mean, there'll be points on when this bull market ends and you want to sell your gold and silver. I can't wait to sell my gold and silver because I'd rather put it in other things, but there are times to own it and there are times not to own it. I think now is one of those times to own it. Now I could have said that a couple of years ago when gold was much cheaper, but the theme really is the same. And for the factors that you mentioned that I

wrote- Well, negative real rates drive demand for gold because when there's actually a yield on treasuries, you can earn something for taking no risk. You can earn something for doing nothing. And it's good enough for large pools of capital. But when you're actually losing money on risk-free assets, that drives demand to do something else. And that's something else frequently is gold. Right. So gold all of a sudden has a positive carry against $15 trillion of securities that have negative. And in fact, the negative yielding bond is no longer an asset. It's a liability because the owner has to pay to own that. And I look at gold as a currency, just as the yen, the euro. I mean, central banks own gold as a reserve. So that tells you that it is a form of money. Now,

it's not money that you take to the pizza place and you exchange a coin to get a slice. It's money from a monetary standpoint, and it does compare itself to fiat currency. Fiat currency, obviously, you can print an infinitum. It's not easy getting gold out of the ground. And that's why over thousands of years, gold and silver were perceived as money because it was difficult to pull out of the ground and refined. It was sort of limited in its nature and therefore could have been something that held value and could have been a medium of exchange. All right. So let me ask you a question about that. I had heard that argument leading into the top for gold in 2011. And actually what ended up happening was the ultra low rates found their way into mining projects. Mining companies were able to borrow and frankly sell equity to finance massive production,

which ended up putting a top into or helped put a top into the price of gold because of just the sheer massive quantities of supply. Very similar to what went on with fracking and oil in the middle part of the last decade, 2015, 2016. So I don't know that I really buy into the supply argument, but I understand the demand argument. Well, it's silver. There's a lot more silver than there is gold.

Gold supply only rises like 1% or 2% a year. Because even with a lot of the money spent on a lot of these projects, the grades of gold that are being found are much lower. So it's taking more and more discoveries to create the same level of supply. Now, I don't own gold because supply is very low. And I'm worried that they're running out of gold, like the peak oil arguments, both on supply and demand. To me, it's a monetary metal right now. Central banks have obviously have gone to all ends of the earth to try to inflate things. And they're doing that on purpose. It's not like it's a coincidence. They're doing this on purpose. No, they're telling us they're doing this.

Yeah, they want you to inflate asset prices. And obviously now all asset prices are going up. It's not just gold. It's fixed income. It's areas of the stock market. It's antique cars. It's comic books. It's baseball cards.

But that's what they want. And they want to buy this time until we get that vaccine. And then we'll see what happens, what they do when we do get the vaccine. But you can be sure that central banks will overstay their welcome with a lot of these easing. I mean, Charlie Evans, the Chicago fed president yesterday said that he wouldn't look to raise rates until inflation got above two and a half percent. So even with a vaccine, he should see my healthcare premiums. He should see my company's health insurance premiums. If he's worried about two and a half percent, cause they're going up about 15% a year. Right. So to my inflation argument, and I've been talking about this for a couple of years, is that services inflation, X energy, so X like

the gasoline station or whatever, has been very sticky. Not high, but it's been 3%. And a lot of it's been rents. It's been insurance, healthcare insurance up 20%. So medical care and rents have been driving. So you've had very sticky inflation of around 3% year over year. But you've had these goods deflation where goods prices are flat to down for what we talked about earlier. Naturally, goods prices should go down. As we become more efficient, goods price, we should always deflate. That's why parts of deflation are actually good. The computer you have in front of you is cheaper than it was 20 years ago, and that's good deflation. So the goods deflation is offset sticky services inflation. So if you run into a situation where, because of all these supply disruptions around the world, demand comes back quicker than supply, you could get what I think a jump in goods prices.

And you combine that with sticky services inflation. That's where you get CPI that all of a sudden quickly gets to two and a half to three and a half to maybe four. Peter, wouldn't people argue though that that's what they would rather have happen? Well, it's one of those, be careful what you wish for, because the world's bond markets are not set up right now for a bout of higher inflation, considering where rates are. So while theoretically a central banker may say, yeah, this is great. We get to inflate our way out of all this debt. But that assumes bond markets accommodate that.

I argue that the 10-year yield will probably not be 55 basis points if all of a sudden we have two and a half, three and a half type CPI prints. The bond market will sort of revolt against central banks and the central banks will have a choice. Do they fight that and speed up their QE, which then potentially could be further inflationary? Or do they then start to raise interest rates, which could get inflation back in control, but then can threaten economic growth. How does the stock market react to not actually overnight, but like an overnight kind of reaction where 10-year treasury has to readjust and be 1% or higher? I would imagine the initial reaction from the stock market will ignore the reason, which is that the economy's improving

and it'll get spooked. It has to, right? Because the stock market doesn't like surprises. If the rise in the tenure to 1% or more is because we're beginning to see some inflation and pressure show up in the statistics, it could be good for some stocks and not good for others. It could be good if all of a sudden commodity prices are part of that story. Well, then maybe energy stocks, which are a minuscule part of the S&P, maybe that starts to outperform. Maybe copper prices or industrials or companies that have pricing power will start to outperform those companies that do not. I would imagine banks could be part of that. If you start to see a steepening yield curve, banks can be a beneficiary. Those that will get hurt are PE multiples that are inflated. I was talking to somebody in my office,

taking Apple, for example. Apple's obviously great. They're delivering amazing numbers, but a big part of the stock price, our performance has been the PE multiple. If Apple's PE multiple, assuming their earnings continue to go up, if their multiple just goes from 30 back to 20, well, that's a 33% decline in the stock with no change in the company, no change in the amount of iPhones they sell. And so the growth trajectory- You won't get, right. You won't get the offsetting growth and earnings to balance that out. Right. You'll get a decline in the PE multiple. So you take the secular bear market in stocks from 1964 to 1981. GDP growth was actually 3% plus. Earnings were still good, but you just had a valuation reset. So you can get a valuation reset in the expensive growth areas in the market, and money can go to those companies and those businesses that have pricing power that will be able to pass on any cost pressures. So that is this, this elusive, like, um, growth versus value. Maybe

that's, maybe that's what ends it. A catalyst for that. Yeah. Because I mean, when you think about value stocks and you know, I know people like to throw on a value stock is this homogeneous thing, but you have value traps. Like I heard the story with Macy's at $30. Oh, it's value because the value of the real estate or whatever, but the business itself was a melting ice cube. Then on the other hand, there could be value stocks where they're just temporarily out of favor. Their long-term business models aren't hindered, but they're just out of favor. Those are the stocks can rebound. The melting ice cubes, well, they may never rebound. So you have to really be careful with

what you consider a value. It's so funny you're saying that. I was looking this morning, Lululemon and Ralph Lauren are both going to do the same amount of revenue next year. They're going to do between like $4.5 and $5.5 billion, both of them. But Lulu's market cap is now $42 billion, and Ralph Lauren is trading one-time sales. It's like a $6 billion market cap. Well, why? Why would you have two apparel companies with that huge of a disparity? Well, because one figured out how to grow, and one isn't.

One is making money. Ralph Lauren just reported a massive loss this morning. and now rates are higher and people start to reprice growth lower, I think that could lead to a lot of upheaval in the market, even if ultimately it's healthy to see that revert. Because you look at every bull market in the history of the world, yes, earnings growth is a big contribution to that. But PE multiple expansion is also a big contribution to bull markets, just as they are to bear markets where that PE multiple deflates. So you could get a rethink of not necessarily the fundamentals of Lululemon, but you can get a rethink of what multiple you want to pay for that same set of earnings. That's exactly your point. All right. Last thing I want to get to, this set of earnings. That's exactly your point.

All right. Last thing I want to get to, this is from my friend, Ryan Dietrich, who does really great research at LPL. He was talking about gold versus the S&P 500. I want to hear what your thoughts are on this, because I think that a lot of the people that are watching this video might be under the assumption that if gold starts to really work, it'll be because something's wrong in the stock market. But Ryan says, so far, 2020 is the first year since 1979 when both gold and the S&P 500 have made new highs during the same calendar year. I didn't know that. What happened last time? In 1980, gold added another 17%. The S&P was up 26%. So he's making the point like it's widely believed that gold prices are indicative of everyone getting defensive and something being wrong.

But it's not always that simple. And there are periods of time where the two trend higher together. What do you tell people that ask you, well, if you're bullish on gold, how could you also want to own stocks? I agree. And even mid-2000s, stocks traded well. Gold went up. Gold is a form of money. Do not look at gold as, oh, the world is falling apart.

I need to own gold. Or the world is a scary place. I need to own gold. Gold is just another form of currency. And if fiat currencies are being disrespected by central banks, well, gold looks more attractive. If interest rates are low relative to inflation, gold looks attractive. Gold should not be looked at as a safety thing, unless you're going to another world war and you only can exchange things for gold, but that's not happening. Is there an element to the gold rally though that has to do with the coming election,

or do you think that's not really what's going on? No, I don't think so. I think geopolitics will influence the price of gold one day here, one day there. When Iran bombed Saudi Arabian oil fields, oh, the world's scared. I need to own gold. That rally lasts a day or two. Yeah. Just look at gold as just another currency relative to other fiat currencies.

They're going to be times to own gold. They're going to be times not to own gold. Now it just happens to be one of those times to own gold. Obviously, people have different ways of valuing gold. Now, gold doesn't produce any cash flow, so you can't base it on that. But people value gold relative to central bank balance sheets. They value gold relative to trends in inflation. There are different ways of valuing it. I only look at it technically. Well, you can look at it technically. So I think 3,000 is a fair price. Gold can go to five. There are people out there, they say five to 10. I'll probably be out at three and let everybody else ride it from there. All right. You heard it here first, guys. Peter Bookvar, gold to 3,000. There's a lot of ways to

look at it. There's a lot of ways to value it. I appreciate your point of view. Guys, go to bookreport.com, B-O-O-C-K, report.com. Check out Peter's stuff. Let us know what you think in the comments below. Go ahead and like the video if you liked what we had to say today. Subscribe to the channel if you haven't already. We will be back with you very soon.