We Study Billionaires - The Investor’s Podcast Network - TIP 090 : Jesse Felder's Macro & Micro Views on the Market (Stock Investing)

Starting point is 00:00:00 We study billionaires, and this is episode 90 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your first. host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson out in Denmark. Today, we have a really big name in finance on the show. And his name is Jesse Felder. Jesse's the founder and publisher at thefelderreport.com. And he comes with two decades of experience in the finance sector. He's the founder of a multi-billion dollar hedge fund out of Santa Monica, California,

Starting point is 00:00:53 and runs a family office out of Bend, Oregon. I came across your content and I thought to myself, Now, this is a guy who knows what he's talking about, and I took note. And so then I was doing another search. I was looking for something, and I was looking for some different facts and data because I like to actively pursue the things that I'm looking for. And I come across multiple other articles all written by this Jesse Felder guy. So with all that said, we knew you were the person we were looking forward to have on the show.

Starting point is 00:01:20 And we are really thrilled that you were able to take some time out of your busy day to chat with us and present all this information to our audience because it's very beneficial. So thank you so much for coming on the show. Thanks for the kind words. I appreciate that. I've been writing for a little while to try and just kind of get this information out there because I think it's really powerful. And most of the major outlets don't cover it.

Starting point is 00:01:42 So, yeah, I appreciate the kind of words. So, Jesse, without further delay, let's jump into the questions because I have a lot of things that I want to ask you. And I know Stig does too. You like to study some of the billionaires on the smartest, most successful billionaires on the planet. And so do we. That's what our show is all about. So with that said, we are really big fans of billionaire Stanley Drunken Miller. And recently you wrote a blog post, which we will provide a link to your blog post in our show notes of this episode so people can see what we're referencing here.

Starting point is 00:02:12 About one of the things he attributes to his success in the markets. So can you tell our audience a little bit about this article? More importantly, tell us about what this special sauce or this secret ingredient is that billionaire Stanley Drunken Miller says is why he was able to beat the market by so much. Also, tell the audience about his return so they kind of have an idea. Sure, yeah. Stan Druck and Miller ran George Soros's hedge fund for a number of years. And so, you know, I think people are really just starting to hear about Druck because I think George Soros got to take the credit for a lot of his big trades. But, you know, George is a wonderful investor and trader in his own right.

Starting point is 00:02:48 But Druck was really the guy behind those returns. And, you know, he did, it was 25 years of 30% per year after fees. So the guy generated, you know, he's probably the greatest money manager alive today, if not of all time. Track record speaks for itself. But, you know, he gave a speech a little over a year ago to a very small group at a, I think it was a country club in Texas, where, you know, he had, he started talking about these issues in the markets. One of the things he said was that the biggest money that they made at the Soros funds was taking advantage of central bank. mistakes. When the central banks were trying to go against the markets, they went the other way. And it was interesting, too, because, you know, Jim Rogers also worked with Soros. And he says the same thing in the

Starting point is 00:03:40 book Market Wizard. He says, whenever the central banks do something, take the other side of the trade. So this is a common theme among Soros, Druck and Miller and Jim Rogers, that, you know, the big money that they made, biggest trades. And, you know, most famously, I think for Soros and Druck was when they broke the Bank of England and shorted the British pound and made a billion dollars. We got access to that speech that you're referring to about a year ago. We saw it. And that's whenever he really kind of came on my radar as well. I was like, this guy really knows what he's talking about. And so we read that. Now, recently, and I mean, just this past week, he came out with another presentation. And this one's even more bearish, if you will, where he's

Starting point is 00:04:20 just basically saying that this thing is going to come unraveled at this point. Can you talk to our audience just a little bit about that speech that I know you have seen and you've seen the slides to it. What's he saying now? He started talking a little bit about it and that's that first speech a year ago, but basically what he's saying is that these boom bus cycles that we've had over the last 20 years, including the dot-com bubble and even way prior to that, you know, exacerbated. And, you know, he's specifically looking at the corporate credit market. Companies have been able to borrow amount of money, leverage ratios at even non-energy companies are off the charts. And that's where he sees, you know, very specific misallocation of capital. So, Jesse, giving that you might agree.

Starting point is 00:05:08 First of all, do you agree with his perception of the special corporate bond market? Absolutely. You know, even Richard Fisher, the former head of the Dallas Fed, has come out in recent years and said, you know, he was the only one at the Fed who had any real world experience with risk management, managing money. Everybody else is an academic at the Fed. And he's been saying for two, three years, look at this growth in Covenant Light lending. This is going to be a problem.

Starting point is 00:05:32 In the past, when we've seen this, to any degree, it's ended in tears. That's his quote. We've seen it now 10x times. How would you play specifically? I'm just going to defer to Druck and Miller here. He ended his presentation at the Sown Conference House by saying, get out of the stock market.

Starting point is 00:05:49 And I think that's the easiest way to play it, is reduce your risk, you reduce your allocation to risk assets. I mean, trying to go short junk bonds and these types of things is, you know, pretty complex trade. And I doubt that even Druck is doing that. I know there's some smart money that's going to be looking for opportunities in distress debt over the next year or two, you know, from the long side. Once this stuff starts to blow up.

Starting point is 00:06:13 And I also thought it was very interesting last week that the chief investment officer at Oak Tree, you know, Howard Marks's firm, they think we're just now seeing defaults. the default cycle start to take off and that they're going to be looking for opportunities in the next year or two. So I really think it's tough to take advantage of the problems that are going to rise in credit. But I think problems in distressed credit are opportunities there from the long side will start to pop up over the next year or two. And just reducing your allocation to risk assets right now is probably the best way to take advantage of. So Stig has this big smirk on his face because he's looking at me and he knows what I'm thinking as you were saying that because back in December, I disclosed

Starting point is 00:06:52 to the audience that I was going to invest in a short on high yield debt. So I don't really do shorts. That's not really my thing. But it was something that I wanted to talk about on the show and just kind of document. I was not recommending it to the audience at all. But that's why Stig was laughing, and that's why we were kind of smiling each other as you were talking about how it might be a good thing to turn on these high yield plays. You know, this is how this is my vantage. I try to think of things in really like a simplistic standpoint. If there was a bunch of kids living in a neighborhood and me as a parent wanted to give some kids some money in order to start a lemonade stand. And I just give them, you know, a hundred bucks or whatever.

Starting point is 00:07:32 And they ask me, okay, what interest rate do we got to pay you the money back? And I say nothing. It's it's zero percent. Just pay me back whenever you get a chance. And then I have the other neighbor kids and they come over and are like, hey, we saw Johnny and Sarah started their lemonade stand. you give us $100, too. And I say, yeah, sure, here's $100. And they ask me what the interest rate is.

Starting point is 00:07:52 And I say, there's no interest rate. Just pay me back whenever you can. And pretty soon you got the entire neighborhood of kids all selling lemonade. And what happens? The price gets just crushed. You can walk down the street and you can buy lemonade for like a penny because you got every kid in the whole neighborhood competing. And when I look at like the oil sector, that's how I see this.

Starting point is 00:08:14 And so whenever people are saying that the price is going to go. up in the short term here, like in the next couple months, I just kind of like raising my eyebrows. Like, really, is that what you think? Because you're starting to see these defaults in the oil sector really start to pick up and it's almost looking like it's going exponential. It'll be interesting to see what happens next quarter. But you're starting to see these things finally start to default. And I don't see that the price is really going to come back to a 50 or through $70 price range long term and reach some type of stability until you see that the leveraging, if you will or like, you know, meltdown in this sector.

Starting point is 00:08:49 Would you agree with that, Jesse? Do you think I'm in crazy land or do you like my logic? I definitely agree with you. I think it's a really interesting situation right now. You know, a lot of the energy companies were able to borrow some, you know, with the kind of rebound that we've seen in high-hield credit. But that's the problem right now with the economy as we, you know, with the low interest rates, we've prevented a normal cycle of clearing out the dead wood, so to speak, and allowing companies

Starting point is 00:09:21 to go bankrupt and, you know, with the low interest rate, it prevents that from happening. So we have a lot of zombie companies, you know, in the economy right now that are just kind of, you know, on life support, but they're still ticking. And so, yeah, you know, I tend to agree with you. I think, you know, where the opportunity in credit might be, honestly, is in investment grade, you know, companies that are investment grade today, but will be downgraded because, you know, their profit margins are inflated right now. And, you know, that's another part of this problem in the markets is profit margins are extremely high. And a lot of these leverage ratios are built on record, record high profit margins. Yeah. So if profit margins just start to revert to historical standards,

Starting point is 00:10:03 all of a sudden, these companies become incredibly over leveraged. They start losing investment grade ratings, et cetera. I totally agree with what you're saying. And it's something that you go back to right around the start of 2015, right after they turned off the quantitative ease and they said, hey, we're done with this. Right about that point in time is when you saw those profit margins really kind of peek out. And if I'm, I might be wrong with this number, but I think it was around like 10, 11 percent or something is where they peaked out. And now they're pulling back to what, eight, seven percent already within the last year. You're really seeing those start to contract. And for me, that's a lot. And for me, That's a major, major issue because you're exactly right. They're issuing their credit rating

Starting point is 00:10:42 off of these multiples of their earnings. Is those margins decrease? It's just going to continue to get worse for these companies from a big picture standpoint. That's a great highlight. I know that your investment philosophy is firmly grounded in fundamental value investing. However, I also know that you combine that with technical analysis and macroeconomic analysis to improve your performance results. Could you please explain your process, Jesse? Yeah, you know, I think I consider myself a jack of all trades. I try and utilize a variety of different methodologies. I definitely started out idolizing Buffett and reading everything about him that I could get my hands on and go through all the Berkshire Hathaway letters. And that's actually,

Starting point is 00:11:22 I think, a wonderful education in itself. And so I started trying to incorporate, you know, learn some technical analysis. And really, for me, it's all about momentum. I want to see, you know, are we, we have really strong momentum. Are we in the middle of the trend or, or is momentum waning suggesting a trend reversal? What I really try to do is find something that's fundamentally very attractive. Sentiment-wise is particularly hated usually, is how it gets to be cheap. And for me, sentiment is about supply and demand. So when something's hated, there's not a lot of supply left to come on market because pretty much everybody who's wanted to sell it is sold. Yeah, but there's a lot of potential demand if that situation, the story about the stock or what have he changes.

Starting point is 00:12:04 So find something that's cheap that's hated, has a lot of potential demand, and then signs of a shift in momentum. So I'm curious, do you have any things that you've written or something that we could link to in the show notes for those last two points that you said about the wave analysis and things like that? Because that's something I'd like to kind of dig into and just read a little bit more on. Is it something that you've written for that? Yeah, I can give you a link, actually, the best example of it. was in March of 2009, I showed some demarc exhaustion on the S&P 500 on multiple time frames. So we had daily selling exhaustion, weekly and monthly selling exhaustion, suggesting that the bare market was just running out of steam.

Starting point is 00:12:45 And we had also hit an important Elliott Wave support level. That's something I wrote seven years ago. It's just a real simple example of how those things work. So not to put you on the spot, but now here we are at 8 May. Are you seeing any of those indicators in today's market or anything that people need to be aware of similarities or anything? Yeah, I think we're seeing, that's a great question. I think we're seeing just the opposite of what we saw March of 2009. We're saying buying exhaustion on multiple levels. You know, I think back in, you know, in May of last year, we came within like a quarter of a percent of hitting a very important Fibonacci extension target. Basically the, 61.8% extension above those 2007 highs. And at the same time, we got some longer term demark exhaustion indicators. And then with this most recent rally out of the February lows, the Russell 2000 made a 9-13-9-de-marked sequential cell signal. The S&P 500 hit a 13. I think the NASDAQ is the only one we

Starting point is 00:13:48 didn't see a cell signal on. But, you know, seeing it also on, you know, some of the oil patch. And so those are the things I look at when you see a bunch of those signals on multiple timeframes. That confirms what Stan Druckenmiller saying, get out of the stock market. You know, he's saying it from a macro fundamental perspective, but the technicals are saying the same thing. I'll tell you what, Stig, have we ever had a person on the show that could talk so much value on one side and so much technical analysis on the other? Like, I'm kind of impressed to be quite honest with you. I don't think I've ever, I've ever really talked to an investor that knew both sides so well. I love it.

Starting point is 00:14:22 Yeah. Preston, I think it's because most people see those two as opposites, right? Either you are value investor or you're a technical analyst. And it's really interesting just to hear from you how you merge those two strategies. You know, yeah, I mean, like I said, I'm Jack of all trades. The other half of that is Master of None, right? So, you know, I'm definitely not as well versed in any of these things as, you know, a demarc guy. But that said, I think the value and it's, you know, Charlie Munger, worldly wisdom is kind of where I come. from is the more you can understand about a variety of different things, the better holistic understanding or appreciation you have of what's going on. Totally agree with you. And I love that you brought Charlie's point of view up there because I totally agree. I try to get inspired from physics and all sorts of different things when you're really kind of thinking about how markets work. And I totally agree with you guys.

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Starting point is 00:19:20 All right. Back to the show. And just to take your downplay and your modesty out of your comment, I want to remind our audience that Jesse, multi-billion dollar fund, he does know what he's talking about. So even though he downplays this and he'll continue to downplay it, don't believe it for a second. He knows what he's talking about.

Starting point is 00:19:41 All right, so Jesse, I'm going to go to the next question before you can comment. So, Jesse, there's a lot of people saying, that the next crash is going to be one of central banks and governments not being able to control the magnitude of the credit contraction. So what are your thoughts on this idea that as we look at countries like China and Japan, my understanding is that the shadow banking in China is like completely unprecedented. And then you have people like George Soros out at the Davos convention saying that he's watching it crash right now over in China. So these guys are saying these things like, but what do you what do you say about this? Do you really think that it's going to be a

Starting point is 00:20:17 crash of governments at this point? Because we had Jim Rickards on the show just a couple weeks ago. And that's what he was saying. Yeah, yeah, I think it's very, very difficult to understand how this is all going to play out. Obviously, there is a problem with the central banks. And it seems like it's gotten completely out of control at this point. I don't know how it ends. But I really do think, you know, my friend Peter Atwater has done some fascinating writing and research about this, that, you know, we've had the housing bubble. We had the dot-com bubble before that what is what really is the center of this bubble. And I think, you know, he proposed, this is the central bank bubble. And he backs it up with some interesting data, you know, just

Starting point is 00:20:57 from the New York Times. They have a part on their site where they will show you how many times, you know, a phrase or a word comes up in their articles. And he was looking at just the term central bank. And it just exploded during QE3, the rate of that popping up in articles and during the taper. And prior to that, really was like no discussion or that term never came up in the New York Times. And so, you know, we look at stock market as, you know, stock market valuations are extreme. Now, real estate has come back. Bonds are extreme in terms of their interest rates and the level of bond prices. But it's not even just that. It's the startup market. Peter Thiel was talking about this. It's not just the unicorns. And the startup market that's incredibly expensive. It's everything. And so what do we call this? We call it the everything bubble or, you know, I actually saw another, I think it was either an op-ed in the Wall Street Journal or New York Times within the last year. And they said when you put together a composite of stocks, bonds, real estate, and collectibles never before have valuations across multiple asset class has been this high. So it really is the everything bubble. But I really think, you know, where does it come

Starting point is 00:22:05 from? It's the central bank bubble, as you know, Peter Atwater says. So it's interesting because when you think about capitalism in general, part of the process of capitalism is you have to let companies fail. If you never let them fail, you don't get this reset and this survival of the fittest, if you will. So when we look at what's happened since the central bank was formed, I think 1913 until now, really you had that going on during the Great Depression in the 30s, okay? But as time progressed, the central bank, it kind of became this mechanism, if you will, for letting some de-leveraging occur, but really just making sure that a little bit happened and then we were back on our way. And I think whenever you let this compound for decades,

Starting point is 00:22:49 you kind of get in a position where you allow growth to occur in specific industries where businesses start to get so big that now they're in a position that they've grown so much that if one of them fails, it actually has this cataclysmic effect that ripples through the entire system, now you get to a point where you can't allow one of the fundamental ingredients of capitalism to occur, which is you have to let companies fail or else the reset button doesn't occur and it creates this growth. It's almost like a forest fire that has to burn in order for the growth to occur again. If you don't let that happen, then like how in the world are we ever going to get out of this? You're in a position where everything's just too big to fail.

Starting point is 00:23:30 Right. I love that metaphor that you used about, you know, forest fire. The central bank, the Fed, especially, I think, is, you know, it's a, it's a, appears as if they believe they can do away with the normal business cycle, which is, I don't think that's debatable. I think that's ridiculous. But, you know, the Fed is basically trying to prevent every little forest fire from happening. And they tried this in Yellowstone. And, you know, before they learned that you have to allow, you have to have controlled burns, you know, at the very least or allow, you know, certain areas to burn. Trying to prevent every single little forest fire allows, you know, all of the undergrowth and things, you know, it's a perfect The misallocation of capital to just explode until you get to the point where it's just a massive tinderbox and Yellowstone subsequently suffered the massively devastating fire, the worst fire, one of the worst fires in the history of our country. And so, you know, I think that, you know, who knows what's going to happen with the central bank issue.

Starting point is 00:24:30 But eventually, you know, there's going to need to be a forest fire that comes in and clears all that overgrowth. Jesse, amazing answer. I'm really fascinated about your saying about the forest fire. I would assume that we can only guess what will happen. I would really like to circle back to President's original question about China and Japan because I pulled up some numbers where I'm comparing the gross government debt to GDP. And so, for instance, China has a debt of $5.4 trillion, that's compared to GDP of $8.

Starting point is 00:24:59 Japan, that's $9 trillion. And that economy is even just half the size of China. So we'll be looking at ratios like Japan's more than two. The U.S. is just above one. To me, that's very disturbing, Jesse. But I would also assume that you would agree that there's more to this discussion of debt that only be looking at the gross government debt ratio to GDP. So which ratio would you be looking at to evaluate the debt situation? Yeah, I think what's the interesting way to look at that. And I don't know. I think maybe it was George Soros that brought this up as you look at the explosive credit growth in China. now. I mean, the economy is slowing and credit growth is still exploding. And I think that is the sign. I mean, because, you know, debt can keep growing and who knows really what the limit is,

Starting point is 00:25:43 you need a catalyst for a problem to arise. And I think it was Soros who showed that the new credit growth that's happening in China is not being accompanied by economic growth. So essentially, all this new debt is not boosting the economy. And that's where the, you know, the end game starts to come into the picture is that if the economy is not responding to more debt, then the economy is saying, okay, we've had enough. It's time for this cleansing process to happen. And I think we're seeing the same thing in Japan. The Bank of Japan is buying up an incredible amount of the equity market, their government debt, and they're still in recession. So at some point, the governments, you know, the central banks realize, are going to have to realize

Starting point is 00:26:26 that no matter what they do, they're not going, they're not boosting the economy. I mean, they're not creating consumption, and they're going to just have to let it play out. I think we're really close to that point right now. The thing that I'm calling it over in Japan, Jesse, and feel free to use this if you like it. I say that the Bank of Japan is nationalizing all assets. Right. I mean, effectively, that's what they're doing. They're buying everything back.

Starting point is 00:26:50 Well, what happens when you own 100% of the stocks and bonds in the market? And that's a natural limit right there. And I can't even imagine what that would look like. I don't even know or have an idea to begin to wrap my head around what that looks like. But I do, if I had the guess and I only had one guess, I think it involves the yields on debt just shooting to the moon overnight is how I see that playing out. And I could be completely wrong, but that's how I see it playing out. I wanted to quickly bring up John Hussman because I love John Hussman. And I didn't know you were friends with him.

Starting point is 00:27:27 I read, like, I love reading anything that John Hussman writes. I think he's extremely talented. I think he's one of the smartest thinkers out there. And anytime this is where I struggle with John is anytime I hand off one of his articles to a friend or family or somebody in the industry saying, hey, look at this, look what this guy wrote. They immediately want to throw back in my face that his performance over the last eight to 10 years really hasn't been so hot.

Starting point is 00:27:54 And so my comeback, and I'm curious and the reason I'm bringing, this up because I want to hear your thoughts because I know you're a little bit closer with him now. My thoughts is that this whole quantitative easing thing just really kind of scared to live and pulp out of him. And he just really hasn't been able to actively start getting back into anything equity related because he didn't trust what was going on. Is that a true statement? Because that's what I, that's what I'm assuming is the case. Yeah, I've actually talked with John about that process that he went through recently. First of all, when people dismiss something.

Starting point is 00:28:27 because of the person it came from. Usually, you know, there's two ways I respond to it. One is, you know, that's just clear genetic bias. You cannot dismiss an argument because of the person making it. You can dismiss an argument based on its own merits. But most people are doing that because they don't want to take the argument on its merits. They want an easy way to dismiss it because of their confirmation bias or what have you. So, you know, accuse them of, you know, being subject to genetic bias and say, hey, don't judge this because

Starting point is 00:28:57 it came from John Hussman, take the argument on its own merits. And if you have something to argue legitimately, then, you know, I'm all ears. And I have not heard anybody legitimately argue against his valuation case that he's making right now. But the challenge that John went through was, I think, during the financial crisis, he went back through history and found times where things got much, much more painful economically than they did, you know, this time around. And I think he felt like there's a good possibility that, yes, we fall in 50%, that we fall another 50% easily, kind of like we did after 1929 and again in the late 30s, those declines were extremely painful. And a lot of them had to do with a major shift in the economy.

Starting point is 00:29:45 And I think he was looking at the risk of, yeah, okay, what if I get constructive here in 2009? Like my models are suggesting maybe I should, but the economic situation. is changing. So when investors are risk seeking, he's not quite as positioned as bearishly. And he doesn't really position bearishly. You know, he's either hedged or not hedged. And, you know, and I think that's in degrees based on the environment. Yeah, Jesse, I completely agree with you. And I completely agree with John Husband. I'm a huge fan of his work. And at least in my opinion, I think that he had the fundamental on his side for a long time. And it to me just basically proves that what Warren Buffett is saying about how long the market can stay rational. Because to

Starting point is 00:30:31 me, if you look at the next 10 year for John, I would assume that he would be being in the market. I definitely trust his research. Jesse speaking of John Husband's work, Preston and I, we've been following the New York Stock Exchange's margin debt for quite some time, actually based on his work. And we have noticed the beginning contraction from a very high level. So in a historical perspective, it would indicate that the stock market could expect to enter a barrisome. territory in the time to come. Would you just agree with that statement? And could you explain why you think that the New York Stock Exchange's margin debt is of relevance to stock investors? Yeah, you know, for me, margin debt is a sentiment indicator. And, you know, as I mentioned

Starting point is 00:31:12 before in terms of sentiment, what sentiment tells me is potential supply and demand in the market. When margin debt borrowing is very, very low, people haven't borrowed very much at all, that's a sign to me that investors are fearful of the market. They're fearful of borrowing. And so, you know, that's a sign that forward returns, you know, can be good. And that's actually borne out by the data. But conversely, when margin debt is is very, very high, there's been a lot of borrowing to buy stocks that tells me investors are euphoric. That's probably time to be more fearful because that margin debt, that massive, that has to be paid back. Usually the way it gets paid back is by liquidation and usually by forced liquidation. So there's a lot of potential, that tells me

Starting point is 00:31:56 there's not a lot of potential demand because there's not much borrowing that can be done. But there's a lot of potential supply if those, you know, investors are forced to liquidate to pay back their brokers. But so I like to look at margin debt relative to GDP, tell me how much borrowing is there financial speculation relative to the overall size of the economy because that way it kind of, over time is relative. And that number, some people look at two and a half year returns. I look at three year returns. And you can just see that when margin debt's very low, returns are very good over the next three years. When margin debt is very high relative to GDP as it is now, we'd actually, I think last year hit an all-time high in margin debt to GDP. Four to, you know, three-year returns

Starting point is 00:32:43 have been very, very poor. So Stig, let's throw up a chart of this, what we're talking about on our show notes. So people can literally see the graph that we're talking about how people were basically borrowing a bunch of money on the New York Stock Exchange in order to buy equities and stocks. And then when you see that contract, you really kind of see how the market kind of flows within. So, Jesse, moving on to the next question. So we are big, huge, enormous Warren Buffett fans, really kind of got our start, just like you by studying Warren Buffett, went through all of his shareholder letters. And we were at the meeting, at the Berkshire meeting just last weekend. I'm curious, were you at the meeting this weekend? Maybe we cross paths.

Starting point is 00:33:22 No, I haven't yet been into a meeting. I've been trying to get to them, but I haven't yet made it out there. So you are going with us next year. Okay. That is happening. You have to come out with this. We will give you the details. We will make sure that you can go if you still want to go next to choose later. Sounds like fun. Perfect. And just so you know, we do a pub crawl as a community. We had about 100 people from our podcast that came out this last year. and we all went on a pub crawl through the old market in Omaha, and we had a blast. Let me tell you, we had a blast. Sounds like a great way to do it. Everyone else is attending, like, all these, like, high, sophisticated meetings. We're out there with, like, T-shirts on doing a pub crawl. So that's how we roll.

Starting point is 00:34:01 I love it. Love it. So anyway, back to the question here. So Warren Buffett was asked this question during the meeting where everyone was bringing up negative interest rates. The question had to have come up. How many times stay? four or five times, something like that. Yeah, it was a lot. And the question is, is where are they going with this? And I know this question is insanely hard. And I know that, you know, if somebody asked me, I'd say, I have no idea. I don't really know what to say. But I'm going to ask you anyway, because it's such an interesting question of where

Starting point is 00:34:34 is this going to go in the next five to ten years? Yeah, it is a great question. It's a question on that's on everyone's minds right now because it's something we've never seen before. so it's really hard to model or even guess about what's going on. I think that it's pretty obvious right now that negative interest rates are actually deflationary in the short term. So when banks are trying to charge negative interest rates, all that encourages people to do is take the cash out and stick it under the mattress.

Starting point is 00:35:07 That's not inflationary. That is a deflationary phenomenon. And I can't imagine a better, honestly, a more bullish fundamental backdrop for gold. And I think that's why I've seen gold really sore this year. But yeah, so I think in the short term, you know, here's where it gets interesting. I think, you know, they're starting to see that. And unless they outright ban cash, they're going to have this problem of people just taking their money out and sticking it under the mattress and that's slowing the economy.

Starting point is 00:35:39 We haven't seen an outright ban on cash. but I think if the central banks realize, okay, negative interest rates aren't working and they have to backtrack, that's where we could start to see a dislocation in the markets, where the markets start going, okay, they really have lost their ability to do what they've done for the last 20, 30, 40, 50 years, and they've run out of ammo. And that could be a frightening thing for the markets. That's pretty much as far forward as I can think about it. Well, and so this is where, and I completely agree with everything you just said. And Stig and I really see it the exact same way. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 00:40:05 And so we had this massive interest rate movement where we went from five or six percent down to nothing. You know, for years and years and years, central banks could lower interest rates, narrow corporate spreads, encourage borrowing. We've gotten to the point we're at a government level, at a corporate level, at a consumer level. We've basically borrowed as much as we can borrow. And so that game is over. You know, and the central banks have lost their power to stimulate. more dead growth. That's a huge deal. And I'm basically just repeating what Ray Dalio said a little over a year ago. So, Jesse, I'm really curious about your response to this question because Preston, I went out to Omaha,

Starting point is 00:40:44 and I know at least I got a lot of questions from college students about how they should look at a career in finance and as a management. And I don't know if I'm the right person to ask. I spent a few years as a commodity trade. I really didn't like it. I went into academia, which no one in college would ever dream of, at least not at that point in time. But your career, Jesse, is probably more interesting to hear about the mind because you are at Bair Stearns for a few years upon graduation as an assistant portfolio manager. And you later started three hedge funds, which had capital in the billions, by the way, and you finally transitioned into managing a small base of exclusive clients. So could you please explain to us about the pros and the

Starting point is 00:41:25 cons of each of the three positions you have held? That's a great question. I actually get asked it a fair amount as well. And for me, my experience at Bear Stearns was great, you know, getting in with, at the time, you know, Bear was doing more business on the New York Stock Exchange than any other firm, you know, but there were, you know, in terms of the pros and cons, yes, I found a guy there who was a really brilliant investor. But we were really constrained in what we could do. You know, we basically had a hedge fund within Bear. And I had to go find this guy at the firm because the first couple guys I worked for were basically just salespeople and didn't really, you know, I want to learn how to make money in the markets. And they knew how to make money for themselves, but not how to make money in the markets.

Starting point is 00:42:11 And so I found another guy to go work for. But we were constrained by the firm. And also, you know, I was turned off by the difference between, you know, holding the firm holding itself out to the public. You know, hey, give us your money. We'll help you make money. And really, in fact, what the whole MO was, you know, we're trying to make money for the firm. And so ethically, I felt that wasn't right. And so, you know, when we moved to the hedge funds, part of it was be able to do things our way.

Starting point is 00:42:41 So we started on firm. We actually only started with about $100 million and grew it to, you know, $10, $11, $12 billion. And I left, you know, in the middle of that process. I wasn't there for the whole growth of that firm. But, you know, with the hedge funds, it was, you know, the challenge there is, you know, Yes, you're managing money and you're reporting quarterly performance, but your job is to really generate good long-term returns. And so balancing the quarterly reporting with doing the right thing for the long term is a big challenge there, is that, you know, Wall Street is a what have you done for me lately business. What have you done this quarter or last quarter? It doesn't matter what you did last year, the year before.

Starting point is 00:43:21 And so doing the right thing over the long term. And then, you know, working with individuals is different again in that, you know, as an advisor, your main job is to really just hold their hand. And so you're, you know, you're more a therapist than anything and the research and stuff. To do a good job as an advisor, you really have to make that your number one thing. So, you know, I know Warren Buffett's advice to young people a lot of times is just, you know, mine would be a little bit different. I think he says work with people that you like to work with. I mean, it doesn't make sense to, you know, I worked with people for a long time who I didn't enjoy working with, although I did learn a lot. It was mostly miserable. So, you know, so I would say, I tell people, if there's somebody in this business who you really, really admire, this is, this was kind of my tactic when I was young, was, you know, just go find that person and tell them you will do anything in your power to make them more successful, to just have the opportunity to work with that person. Yeah. And Jesse, I have a follow-up question to the response, and you might already have answered some of it, but I feel like the message I need to communicate with a young person

Starting point is 00:44:33 whenever that person asked me, so what should I do is that you should always, always, always make sure that your integrity is intact. Because I remember from my own personal experience, I was almost consumed by the financial industry. And I felt like I couldn't recognize myself at some point in time. And reading your blog post and listening to your response, it would seem like you might have a similar experience. So my follow-up question would be, how do you make sure that your integrity is intact whenever you pursue a career in the financial industry? I love that, Stig. It's a wonderful question because I don't, you know, have a lot of familiarity with a lot of other industries, but I know that your integrity can be readily, you know, and

Starting point is 00:45:13 regularly questioned in our finance industry. It's part of the reason why I write so much and try and help individual investors. I feel like I almost have to pay penance for an industry that does so much harm. But, you know, I think that's just, you know, you go with your gut. When somebody asks, that that's actually why I quit, you know, why we left Bear Stearns. It's also why I quit the hedge fund firm in quit in March of 2000. And I felt like we had an obligation to our investors. We had a very fundamental value approach. And my partner at the fund wanted to start putting money into the high flyers, the dot com stuff. And I said, hey, look, this is not our, this is totally against our mandate. And it's against everything, you know, we used to raise this money. And these people

Starting point is 00:45:59 are trusting us to do it a certain way. And you have to follow your own inner compass at the end of the day. You have to be able to sleep at night. And I think it's crucial, you know, for me to, I've been in this business long enough that I've seen the guys that do push the envelope, end up getting into trouble. And the only way to last in this business long, long term is to do the right thing. Man, you couldn't have said that any better. If there's a note to take of any of our episodes, that's the note. So, Jesse, I love how you brought up the timing of which you were just talking about,

Starting point is 00:46:31 because in 2000, everyone knows that was the peak of the internet bubble. So you obviously knew something back then as far as, you know, this is not a place we want to be because of the valuations, because of the extreme amount of risk. Before we started recording, you were talking about how you had been blogging. about real estate and how there was a real estate bubble back in 2005, 2006. So then again, you were front running this. You saw it coming. You knew it was happening. People have heard your comments today. And so that leads me to my last question that I have, which is when you look at the global landscape and even here just domestically in the United States, I think that,

Starting point is 00:47:11 you know, for the global economy and for, you know, the credit markets and the banks, you know, so much so much of it will revolve around what happens in China. Will they devalue the currency to a large degree? I think they probably will be forced to eventually. And then I think, you know, the bank of Japan might be number two. I think they're kind of the canary and the coal mine for central banks. They are, you know, leading the way in terms of getting creative in, you know, buying up stocks, buying up bonds, negative interest rates. I think we're seeing with the currency market kind of rebelling against the Bank of Japan recently, I think they're kind of leading the way and showing us what's happening with the central bank bubble. And then number three, I think I mentioned it earlier, you know,

Starting point is 00:47:59 Stan Drucken Miller talking about what's happened in our corporate credit market here in the U.S. It's a global credit phenomenon. But I think with the oil patch, potentially, you know, just in the early innings of a credit bust right now. And it's showing signs of expanding, you know, far outside of just the energy sector. Jesse, this might just be a bad joke, but if Preston ever calls him sick, I hope I can call you in because it seems like I'm speaking to Preston right now. You're just as gloomy about the macroeconomics. I love it. I love it. Well, you know, I love, you know, like I said, John Hussman is a friend of mine and he recently wrote that in order to think this way, you actually have to be the ultimate optimist

Starting point is 00:48:42 that things are not, we're not going to be offered zero percent returns in every asset class forever. There will be opportunities. I'm very, I actually think it's optimistic to say we're going to get a great opportunity in the stock market, you have good valuation sometime over maybe the next two,

Starting point is 00:48:57 three years. We'll have better out. I mean, think if you're a home buyer in the United States and prices are crazy, you know, crazy a lot of markets. I can't afford it as a first time homebuyer. You have to be optimistic to believe I'm going to get an opportunity to buy it, you know, to have a better chance to buy than I do today. So I don't look at it as gloomy.

Starting point is 00:49:15 I look at it as, hey, I'm an optimist. I'm going to have better opportunities to be facing me. Oh my God. Stig, you nailed it, man, because that would have been the same response I would have said. In fact, I've used that same line just in the last couple of weeks. People, I've talked to people and they're like, man, you're really, I'm going to go back and have a shot of whiskey after talking to you. You're so gloomy.

Starting point is 00:49:36 I'm just curious, Jesse, do you think it was a compliment when I said it? just like speaking to you personally. From what I've heard him, you know, say in this podcast, absolutely. I take this. I love it. So my final question, yes, he is, as a person that is very accomplished and well read in micro and macroeconomics, what would be the top two books that you would recommend to our audience that covers these two fields of study?

Starting point is 00:50:02 Gosh, I don't know if I can limit it to two, but I'll try. First, one of the books I recommend most to people who are trying to figure out investing in the markets is market wizards. I love the whole series, but the first market wizards gives you such a great perspective of a variety of different methods, you know, from just quantitative computer-driven stuff, you know, that was people were doing back 20 years ago, to, you know, macro traders, to fundamental to just technical trend, you know, traders. So I love market wizards. And then just how to think about the markets, I love Howard Marks, the most important thing. I think he has a wonderful way of thinking about markets. And it's more from a fundamental, but it's perspective, but it's incorporating sentiment and these things. And it's just a compilation of his memos.

Starting point is 00:50:51 And, you know, Warren Buffett is a huge fan of Marx's work. And so, you know, that's hard to find a better endorsement than that. The thing I like about Howard Marks that I think a lot of value investors, miss is Howard's like one of the first value investors that started talking about the where you're at in the credit cycle and that there is better times to really kind of be in stocks and equities versus bonds and kind of I think he does a really good job of talking about that where a lot of value investors really miss the market and are saying hey just ignore all macro just ignore it completely and just look at the value where Marks doesn't really necessarily say that

Starting point is 00:51:29 and I think that that's a breadth of fresh air and I think a lot of value investors need to take a closer look at his work as well. We have an executive summary on his on his book if people want to kind of, we'll put it in the show notes so people can kind of quickly skim through it if they want to see if they want to read the whole thing or not. But yeah, we agree with you. We really like that book as well. Can I make two more quick? Absolutely. Yes. Yes, sir. So for fundamental, for fundamental people who are really interested in value investing, I love Toby Carlisle's deep value. Deep Value was a wonderful read. He sent me a copy before it was published and I thought this is fantastic. It goes against what a lot of people believe in terms of what works in value investing.

Starting point is 00:52:09 And he just has some wonderful research in there. And then for traders, people who are just pure traders and don't care too much about fundamentals, what is it, the Jesse Livermore book that Paul Tudor Jones hands to every employee that comes to work for him. The fictionalized biography of Jesse Livermore is just wonderful. And there's so many little nuggets of trading wisdom in there. So, Jesse, if you do come to the Berkshire meeting with us next year, Toby has already told me, Toby Carlow has already told me that he is coming. He is going to be there. And he's going to be on the pub crawl with us. So there's another reason to maybe come out. Cool. That sounds like a great time. And I'll definitely have to see if I can make it work,

Starting point is 00:52:52 because that sounds like the best way to do it. Yes. Yes, sir, it is. It is. It's us not taking anything too seriously and just going out there and having a good time with the people from the audience and other value investors and really it's a great networking event because by the second or third bar, I mean, you're like best friends with everybody. Sounds like my kind of trip. All right. So, Jesse, we like to give you this opportunity to give people a handoff to your site where they can read this amazing content that you have out there.

Starting point is 00:53:26 Feel free to tell the audience where they can learn more about you. you anything that you've written or anything that you just want to highlight to our audience. Go ahead. Yeah, you know, at the filter report.com, I update a lot, you know, write about these things that I've been talking about and I keep them updated on a regular basis. Every time margin debt comes out, I write a post about the updated margin debt numbers every quarter, you know, when the Fed releases their data on Q ratio and market cap to GDP and these things, I update all that kind of stuff. So that's really where, you know, people ask me, hey, Jesse, where can I find these updated numbers and this updated research, I blog about it every time it's news. So feldreport.com.

Starting point is 00:54:02 Fantastic. So, Jesse, thank you so much for coming on the show. I know our audience is going really get a kick out of this, especially Stig's comment. Anyway, it was a compliment. I just want to say that. It was a compliment. Yeah, I don't know about that. But seriously, thank you so much, Jesse. I really hope a lot of the people from the audience start really coming into your site and looking through it because there's so much value for them to be happy. reading some of the posts that you have there. So thank you for taking time. Yeah, thanks for having me.

Starting point is 00:54:31 This really was my pleasure. I had a great time. And thanks for inviting me on. All right. I will see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.

Starting point is 00:54:46 www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only.

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We Study Billionaires - The Investor’s Podcast Network - TIP 090 : Jesse Felder's Macro & Micro Views on the Market (Stock Investing)

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