We Study Billionaires - The Investor’s Podcast Network - TIP205: Jesse Felder on Tariffs, Gold, the Dollar & more (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back our good friend Jesse Felder. Jesse is a former multi-billion dollar hedge fund manager and is regularly featured on the Wall Street Journal, Barron's, and many other national level business outlets. For anyone that has ever listened to our show in the past, they will quickly attest to Jesse's incredible insights and depth of knowledge. Anytime we can get access to him and have a chat with Jesse, Stig and I are always just so excited. So on today's show, we're going to start off the discussion talking about gold and what

Starting point is 00:00:32 might lie ahead. As the show progresses, we talk a little bit more about the trade tariffs and what that might mean for the dollar. We talk Fang. We talk Elon Musk. There's a whole range of topics here. So just sit back, relax, and enjoy our latest discussion with the brilliant Jesse Felder. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, so we are so excited to have our good friend, Jesse Felder, back on the show. He runs a just incredible blog called The Felder Report.

Starting point is 00:01:22 We'll have links to that in our show notes. Jesse, welcome back to the show. Stig and I are just thrilled to have you here. I'm excited to be here again. Always a pleasure to be with you guys. So, Jesse, I want to start off with a conversation. that you and I had probably three or four months ago. And I was looking at gold at that point in time.

Starting point is 00:01:42 And I really kind of felt like we were getting ready to see it kind of break through a barrier that it had been experiencing for almost three years now. You kind of shared the sentiment with me that you kind of thought it was going to have this breakout move. And now we're only looking at the last four months. But since those four months, we have been just dead wrong. I'm kind of curious how you're seeing. in things, why we've seen gold take the direction that it's taken, because I'm sure people

Starting point is 00:02:10 listening to this are kind of curious themselves. Well, gold is, and you're absolutely right, it was, you know, not a great call to be bullish on gold. But I've been bullish on gold since, you know, late 2015 and, you know, mid-2015-ish when it went into those, you know, its ultimate low. And I have a really, you know, longer-term time. timeframe in looking at this thing. And it's been really interesting to me because the fundamental backdrop for gold is bullish and it's only gotten more bullish. And by that I mean, I look at,

Starting point is 00:02:47 you know, like the widening fiscal deficit is usually bearish for the dollar, bullish for gold over the long term. But more specifically, I think a shorter term indicator is inflation has been rising and yields have not. And so real yields have actually been falling, which is usually really bullish for gold. And so there's a couple of divergences right now that I'm paying close attention to in gold. And one of those is, yeah, those real yields are falling, which is usually bullish. Tips have been, you know, rallying for that reason. And usually golden tips are highly correlated. That, you know, correlation has broken down. Really what's going on is gold has stopped paying attention to these things that normally pays attention to. And it's been just following

Starting point is 00:03:30 the Chinese yuan. And, you know, the yuan has been in, you know, the yuan has been in, free fall lately, you know, versus the dollar. And that's, you know, the gold price has been going, you know, one for one with yuan lately. I, you know, we can speculate on why that is. I really don't have much of an idea and I don't like to jump to those kinds of conclusions. But, you know, we see gold because it doesn't have any kind of a traditional fundamental foundation that it goes back and forth between, you may be following the, you know, Japanese yen or yuan or, you know, what have you. It's really narrative driven. And right now the narrative is, the Yuan is falling and is taking gold with it. You know, whenever the price dropped around 5% from where we were talking about

Starting point is 00:04:14 it, I took a position in it and only to find that it went down like another 3 or 4% and I said, you know what, I'm just going to take this little bit of a loss and I'm just going to wait until I feel like we're starting to see a correction on it. Then I'm going to reinitiate the position. but yeah, I agree with you. It was pretty painful to experience. And I think what's even more painful is my pride, considering I talked about it on the last mastermind and it's just done terrible. I definitely plan on trying to reinitiate the position. I don't think that we're there right now and just for people, you know, hearing this, this is the 13th of August. But I kind of feel like we're getting close because you had mentioned it trades within a certain range. We've seen a very dramatic move on it.

Starting point is 00:04:59 And let me caveat this. I am no expert in gold trading whatsoever, but I'm trying to learn a little bit more about it because I definitely think that there's going to be some interesting things happening with currencies moving forward. And I'm assuming you share that opinion with respect to currencies moving forward. Is that true? Yeah, I do think that, you know, we're supposed to have more than a trillion dollar fiscal deficit next year. and that's, you know, you're going to yank the dollar down, you know, with it. That's just typically how that works over long periods of time. But back to specifically with the gold price, too, I mean, you know, you look at futures positioning, and, you know, there's two things I really kind of

Starting point is 00:05:39 been looking at lately, and that's futures positioning. We have a record, you know, net short position by large speculators. The managed money position is the lowest net longer. It's basically zeroed out that it's ever been. And so positioning is ripe for a massive short squeeze. in gold. And if gold were to play catch-up to where, you know, the real yield is on the long bond, you know, it's 20, 30 percent higher than the current price today. And so I think we are still looking forward to that explosive rally, that breakout above 1350-ish, you know, it's just, sometimes you have to wash out the week longs first. And I think that's what's going on. So, Jesse, what would be your catalyst? You know, the part in time where you're

Starting point is 00:06:25 you're thinking, yes, I'm not just only bull, but I'll also really act on it and act on it now. Well, to me, I look for the extremes and sentiment. You know, I'm a huge fan of Jim Rogers. When I read Market Wizards for the first time, it was really his chapter. And I go, oh, wow, I really, you know. And one of the things he said in that chapter was that he looks for these opportunities that are so compelling. You can't not take advantage of them.

Starting point is 00:06:52 You'll wait, do nothing until something becomes so compelling. And I think that's where we are right now with gold with the positioning. The positioning is extreme or more extreme than it was at the late 2015 low. And to me, that's the setup that you need to get an explosive reversal. And we're seeing the exact opposite in the dollar. I really think right now the consensus trade is bullish the dollar. And you're seeing traders get super confident in betting against the yen, the euro, etc. and I think that trade is pretty far stretched as well.

Starting point is 00:07:26 Yeah, it's funny. I was talking with Jim about gold and I said, so Jim, when is it that you want to own it? And he says, I want to own it when absolutely everybody. And I mean, everybody hates it. And I said to Jim, I said, I was expecting like a little bit more analysis to like how you're taking position. And he just laughed.

Starting point is 00:07:45 He says, no, there really isn't. There's not much more analysis other than I just wait until everybody really hates it, then that's whenever I want to buy it. So it's kind of going to what you're saying. You're seeing people with, you know, unprecedented amounts of shorts on gold at this point. So based on what you're saying, Jesse, I kind of get the feeling that you're saying maybe right now is kind of a decent time to start taking a small position and then building into it. Would that be a fair assessment? Yeah, I do think so. And I think it depends on your own trading strategy. But for me right now, this sell-off is a gift to people who are longer-term bullish on the gold price.

Starting point is 00:08:22 You know, if you have a three-five-year time frame, right, this sell-off is, like I said, it's a gift. But I think for people who want to be a little more conservative, you can, you know, pay attention to the technicals like you were saying, Preston, maybe wait for a clear, you know, trend change where the price gets back above its 200-day moving average or the 50 crosses back above the 200, something like that. That's kind of an all-clear, you know, technical signal to tell you, okay, it's safe to, you know, get back in the water again. Interesting. All right.

Starting point is 00:08:53 Well, we'll see here. Maybe what I'll do is just slowly start stepping back into the position after talking with you. We'll see what happens. I'm learning. Let's just put it that way. I'm definitely learning on this one. It's been a little bit painful.

Starting point is 00:09:07 So let's talk about current market conditions here, Jesse. We've had the Fed tightening. They're conducting QT. The ECB is slow and thin. things down, Japan's slowing things down. And I know you're not a bull in the market and you haven't been for quite a bit of time now, but the U.S. market just keeps on holding its highs. It keeps on trugging along. You know, it looked a little scary there where the price was coming down below the 200-day moving average, but it bounced right off of it and it's kind of come back.

Starting point is 00:09:39 What's happening? What's your read on this? I hate being the guy that is continually bearish on the market. But with that said, you don't want to be the guy who becomes a bull whenever the, everything's, the tide's changing, especially with the way that the central banks are acting in today's market. So let's hear what you got. Yeah, you know, I think we're very clearly in a topping process. You know, it's a famous adage on Wall Street, you know, bottoms are a point in time and tops are a process. You know, with a 2009 bottom, it was a day. The market reversed and went straight up almost from that March 2009 bottom. But you look back at how the market has topped in the past in 2000, 2007, and it's a process.

Starting point is 00:10:28 And I think we're in that process right now. And it's really similar to me when you look back at 2000, you look back at 2000, and the Dow peaked in late December 99, then the NASDAQ peaked in March of 2000. And then the NYSC hit its final high like in September of 2000. And so you had that clear dispersion between the indexes. And I think we're seeing that right now where mostly the indexes peaked in January, then the NASDAQ made a new high, you know, recently. But the Dow and the NYSC composite are still well off their highs. And so you get these kind of rolling highs between different indexes during a topping process.

Starting point is 00:11:08 And that basically is the best representation of the dispersion that's going on underneath the surface. And so there's other indicators we can look at. One of them is, you know, that I like to use, and I wrote about, I think late last year on the blog, was the number of Hindenberg omens that are triggered across both exchange, the NYSE and the NASDAQ. And a Hindenberg omen essentially triggered when the market is within, you know, one or two percent of a new high, but you have two percent of the components or some, you know, standard are hitting both new highs and two percent are also hitting new lows. You have a bunch of stocks hitting new lows as the market is hitting new highs.

Starting point is 00:11:48 And so it's just a sign of that kind of dispersion. The way that I explained this recently and something I erode is, you know, I was a fan of model rockets when I was a kid. And if you got into it, you end up wanting to get not just a one stage rocket, but you wanted to get like a three or four stage rocket, you know. So the thing would go off and then one stage would fall away. And then the next stage would take over and it would go higher. And then the stages would fall away over time until you're less with the final capsule,

Starting point is 00:12:13 which would fall back to earth. I think of the market that way, and then the beginning of a bull market or in the middle of the thrust, the most momentum, all the stocks, the majority of stocks participating, pushing the index higher, and as you move on later in the bull market, fewer and fewer stocks,

Starting point is 00:12:29 more stocks fall away and enter in their own bare market. And so just a number of Hindenburg omens, it can, to me, signal the number, the amount of dispersion going on in the market. So over the last six months, we saw cross both insurmings, indexes. We saw 20 Hindenburg omens over a period of six months, which is literally the only time that's ever happened in decades is right at the 2007 top. Back in the 2000 top, we had about

Starting point is 00:12:56 18, I think, Hindenburg omens that were triggered right around in that six months around March of 2000. So you basically have, you know, people make fun of this indicator because one Hindenbergoman doesn't mean much. And they go, oh my God, you know, sell because of one signal. No, I I agree that's not very valuable, but when you get a ton of them across both indexes, to me, that's a sign that this market is running out of gas. And, you know, we've been seeing that. And it's the type of action you only see at a, you know, before at least a 20% type of drawdown. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:17:33 dot com slash WSB. All right, back to the show. You know, I haven't seen this chart that you're talking about. Is this on your blog, this Hindenburg-O-O-Mann chart that you've made? Yeah, I think if you just search for flames on my website, because the way I made the chart was I basically turned the Hindenberg-O-Mens into like, they look like flames on the bottom of the chart. I will have a link to that in our show notes for people so they can check this out.

Starting point is 00:18:00 That's really fascinating. So, Jesse, whenever we look at really, you know, all key metrics, whether it's the dead limits, cyclical recovery, or any other fundamentals. It seems like you can draw a lot of parallels to the market top in 1937. This has been the narrative of Redalia for some time and also following your blog. I've seen that you've also been following up on that. And I know that you look into the price action for the last four years and the correlation for those years leading up to 1937, that is 94%. Now, what is the implication of this?

Starting point is 00:18:38 And can you talk to us more about the relationship between causality and correlation? Do we actually see causality here? Yeah, I mean, that's a good question. And you have to be really careful with analogs, which is price analogs, just comparing the current market pattern to patterns in the past. But most of the time, a lot of these things are overhyped and sensationalized. And for me, they're much, much more valuable when you have a fundamental correlation as well that mirrors.

Starting point is 00:19:08 And so this is what was so fascinating to me is Ray first put this out in 2015. I think it was like spring of 2015 when the Fed first started hinting about reversing its extreme policies. And he drew the parallel between today in 1937. It's basically you have a huge bubble that bursts and leads to a bust in the markets and a recession. That's, you know, 1929 and the stock market is a huge crash. He makes the parallel to 2007. In 2008, financial crisis interest rates hit zero amid depression, Fed lowers rates to zero.

Starting point is 00:19:46 They start money printing in 1933, just like they did in 1929, and stock market rallies. And they basically create a rally that creates a wealth effect and improves, you know, creates a cyclical recovery. Then the central bank starts tightening in our case, 2016-17, and in the case of 1937, results in a self-reinforcing downturn. And to me, this is interesting because the Fed has consciously created this wealth effect to try and raise the prices of risk assets to make people's feel wealthy so that they go spend more. And when you think about if Q, to whatever extent,

Starting point is 00:20:28 QE was responsible for creating this market wealth effect, the reversal of this can potentially create a reversal in that wealth effect. And that's what Dahlia was talking about with a self-reinforcing downturn where prices go down. People's mentality is, oh, wait, now I'm not making as much money in the markets. Maybe I should start saving more. And that creates, you know, even more economic pain. And so ever since 2015, I've kind of been had this in the back of my mind and referring back to it. And one thing that I do is I pull up price analogs using Nautilus Research's website, which is fantastic. One that came up recently was this 1937 price analog. And so you look at the market from 2015 to 2018. And it's very highly correlated to that, you know, 1930, you know,

Starting point is 00:21:17 four to 37 price top. And so to me, that's, you know, the price action kind of confirming potentially saying, yes, Ray, you're right, but now is finally the time that this could potentially make sense. And, you know, for those that say price analogs are not worthwhile, they're not worth anything. Another, you know, terrific investor that I admire greatly is Paul Tudor Jones. And he famously profited from the 1987 stock market crash. How did he do that? He used the 1929 price analog. Essentially back then, he didn't use computers to do it like I'm doing. He basically printed out a chart of the 1929 stock market, the 27 to 29,

Starting point is 00:22:04 and overlaid it over a chart of the 1987 market and found this has a hugely, you know, a very high correlation. And not only that, it's very, very similar. The speculation that was going on in 29, It's very similar to 87. So there's a fundamental component of that, too. And so I do think price analogs can be interesting, especially when there's a fundamental component like this behind it. You know, the thing that I took away from the 2015 period of time was we were seeing a lot of the same things we're seeing right now back in 2015 through Christmas. And what happened in the market started contracting in a fairly significant way.

Starting point is 00:22:43 and central bankers came out and I said, we will print and we will not stop. What's preventing them from coming out and using a similar language, a similar approach, and basically trying to revive this thing even further than where we're at right now? Do you think that they're posturing differently than they were back then? Or do you think that they wouldn't, I guess what's the difference between now and then from them preventing them

Starting point is 00:23:09 from doing what they did last time? Yeah, I'm glad you asked that. because I think a lot of people have that exact mindset, which is, you know, as soon as the markets roll over, central banks are going to come to the rescue and start printing money again. Since I started, you know, my podcast a year ago, I interviewed a couple different, two people that are, you know, the polar opposites in terms of career and finance. Bill Fleckenstein, successful short-seller, ran money for some of the most wealthy, successful, you know, people, you know, on the planet.

Starting point is 00:23:39 And I really think highly of him and his ability, but, you know, he's naturally skeptical on all these things. I interviewed also Bill White, who was the chief economist at the Bank for International Settlements. He's now chief economist for the OECD. Brilliant guy. He worked for the Bank of Canada. They both basically, when you ask him about this, they both say the same thing. At some point, the way Bill Flet phrases it is the bond market's going to take the printing press away. The way that Bill White phrases it is at some point, inflation is going to rise to to a point where the central bank can't afford to print money anymore. And so I think we're, I personally think we're at that point right now where inflation is already, interest rates are,

Starting point is 00:24:24 the Fed funds rate is still negative in real terms. Inflation is running hotter. And so people think the Fed is tightening. Policy is still accommodative because the Fed funds rate is still is negative. So if the Fed were to actually start fighting inflation and raise interest rates up enough to where they start trying to rain in inflation, they still have a long way to go. And so if the market rolls over now and inflation continues higher, and a lot of this is what's going on on the fiscal side too. We have tax cuts. We have trade war.

Starting point is 00:24:56 We have these things that are exacerbating already cyclical inflationary forces. There's also secular inflationary forces I've been paying attention to for a long time. And I really think that, you know, this might be the biggest mistake investors are making right now is the strike price of the Fed put might be a lot lower than people think it is or might actually be expired already. You hear a lot of people talking about this overheated economy. Do you see a lot of those factors right now, the numbers that you're looking at? Yeah, you know, I think we're already seeing a cyclical, natural cyclical forces of inflation, right? Unemployment's 4%.

Starting point is 00:25:32 And so the job market is extremely tight. And we're seeing, you know, prices go up in a lot of different areas. just from those natural cyclical forces. But then you add a tax cut during an expansion, a massive tax cut during the expansion, which is something we really haven't seen before, which throws some fiscal heat onto that inflationary fire. Now we have these tariffs and stuff that are going to kick in, which are another inflationary force. The central bank can do what it wants to do so long as the fiscal authorities, you know, the administration and Congress kind of, you know, play along and don't get in their way. But as soon as the fiscal authorities start

Starting point is 00:26:13 getting aggressive like they have with tax cuts and trade war stuff, that puts the Fed in the backseat. And so it's a battle between fiscal and monetary dominance. And for the first time in 30 plus years more, the monetary, you know, the fiscal authorities are taking over. And the monetary, you know, authorities are being forced to take a backseat and say, okay, we can't do these policies anymore because now we have to turn our attention to inflation. And I think that's a big risk with the next market sell-off. If it comes during this inflationary surge right now, it's going to be really tough for the Fed to back off their tightening policy right now.

Starting point is 00:26:54 Yeah, these are some amazing insights. That was really interesting stuff that you're talking about there. And I think it leads perfectly into this next question because you know, as when I got my start in investing, it was all about really kind of looking at the micro pieces and kind of implementing this Warren Buffett style approach where you're looking at an individual company, you're trying to estimate what those future cash flows look like and comparing it back to a 10-year treasury. And I think for somebody that's maybe just implementing that approach and completely disregarding the macro factors, could they get themselves in

Starting point is 00:27:31 trouble moving forward because at the end of the day, these are businesses that we're looking at. Talk to us how you think through that. Are you considering the macro factors? Are they preventing you from going into individual stock picks because of your concern of what could happen from a macro standpoint? Yeah, and that is a great question. And the way I look at it is I've been the same way. I started out as, you know, micro stuff and I don't even care about, you know, macro. But I think, you know what we've been forced to do as investors is to recognize that this is a macro driven market and when central banks have come in with unprecedented policies like this if you're not paying attention to macro risks then you are putting yourself in danger

Starting point is 00:28:17 and so the what I do in this situation is I never let macro concerns get in the way of taking advantage of a micro opportunity so if I find a really good micro opportunity I'm going to commit capital there What I've found is whenever I let macro get in the way of my micro, I always, you know, it's always an error of omission, you know, like Buffett says, you know. And so I don't let that get in the way, but then I, my macro concerns do inform my hedging, you know, an overall hedging strategy. So today I don't, you know, based on my macro concerns, you know, I have these micro ideas that I love. At the same time, I want to be fully hedged against macro risks. And, you know, I do think that one mistake that investors are making in this regard is just in terms of thinking.

Starting point is 00:29:10 And this is really, you know, what, you know, is going on right now with the markets. We've had all of these new strategies come up, passive investing, and all these kinds of things that are essentially non-thinking strategies. And so I think it's really even affected a lot of value investors who, you know, don't think about circle of competence anymore. They go, do I actually understand this business? And really, when it comes down to it, I think people, when they're analyzing businesses are not thinking about, is this business model sustainable? You know, I mean, really, that's, if Buffett teaches us anything, it's that, you know,

Starting point is 00:29:45 if you can't put money into something for 10 years, don't think about it for 10 minutes. And the only way you can be confident with that is being confident that the business model is sustainable. And I see a lot of value investors. investing in companies, you know, like for me, it was, you know, right before Facebook came out with their earnings, you know, I saw value investors pouring into Facebook shares. And I'm just thinking to myself, have they even considered, is this business model sustainable over the next five, ten years? Because I do think that is a hugely open question. And so for me, that's,

Starting point is 00:30:22 you know, that's one thing I'm thinking about on a micro level. When I look at these companies, is the business sustainable. And then on a macro level, people aren't thinking about our profit margins today sustainable because even if you think, okay, I'm okay paying 22, 24 times earnings for the broad stock market,

Starting point is 00:30:40 people don't realize what's embedded in that assumption, that earnings are only 24 times if profit margins can stay at record highs today. So think about our profit margin sustainable, and 99-2000 Buffett wrote an article saying that you have to be crazy to think profit margins can stay above 6% of GDP corporate profits for any length of time because that would require the working class literally giving up their slice of the pie so that shareholders and business people can take their slice. And so I think what we're seeing

Starting point is 00:31:17 is plain as day to me right now is that there's a huge pushback right now to wages have been real wages have been flat for 40 plus years. We're starting to see, you know, people in Silicon Valley become interested in forming unions again. And so I think you're starting to see this backlash against this big rise in corporate profit. And so even if you are an active investor buying the broad stock market and trying to think about these things, you've got to think about profit margins because if profit margins mean revert, it turns out the stock market is not 24 times today. It's 35 times. It's 40 times earnings today. And so that's something that I don't think many people are actually considering. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:35:12 This and other information can be found in the income fund's prospectus at Funds at fundrise.com slash income. This is a paid advertisement. All right, back to the show. I'm really happy you bringing this up, Jesse, because it's really a nice segue to the next question that we're going to ask. And this is really my favorite question here for this interview, because as an avid reader off your blog, I love how you coin new financial terms. You have this thing that you call the buy and whole cult. So could you please tell us what do you mean by that? And what is it that the buy and whole cult doesn't want retail investors like us to know? Right.

Starting point is 00:35:51 That was a choice of words that I mean. I really think that we are in a speculative mania currently and a bubble. And one of the ways that George Soros defines a bubble is there's some narrative that supports the bubble that is, patently false. And so in 1929 and 2000, it was very similar. We're entering a new era where growth is going to be above the historical trends and valuations don't matter. And, you know, all these brick and mortar companies are dead and eyeballs are all that matter. And, you know, this idea of a new era was going to save us and going to make anybody who committed any capital at any price a millionaire. That narrative was proven, you know,

Starting point is 00:36:43 drastically wrong years to follow. I think today the narrative that is clearly wrong is that people say I can invest passively because so long as I have a long enough time frame, I will always be made whole. I don't care about what the next bear market holds for me. I don't even care if it's a 50% drawdown. I'll make my money back. And that's what the markets have taught them over the last 20 years. But markets have a habit of teaching you something and then just in time to teach you the opposite lesson. And so I fear that today, you know, there's the narrative that is going to be proven false is that people believe so long as I can hold on for 20 years, I'll be made whole.

Starting point is 00:37:29 And, you know, if you were to say that to Japanese investors, they would laugh you out of the room. Today, you know, the Nikai, you know, peaked in 1990 and it's still below its peak price from 1990, I don't see why that's not possible here. And in fact, when you look at the valuation, look at the Buffett, the Buffett Yardstick, right? You look at market cap to GDP. Today, our market is more expensive on this Buffett Yardstick than the Japanese market was in 1990. So that's, to me, that's a real possibility. And, you know, I talk about this buy and hold cult because I think there is this mindset of people who think, you know, as long as I can hold on for 10 or 20 years, I don't need to worry.

Starting point is 00:38:15 Yeah. You know, when you were saying your narrative on this buy and hold cult, I was immediately thinking about, yeah, you know what? If people go back to Japan and look at the market in 1990 and look what has happened since 1990, you'll get a taste of what Jesse's suggesting might be in store with where we're at today if he proves to be correct. really enjoyed that, Jesse. That's some interesting comments. So in the previous mastermind, I can't remember when we recorded this, but we were talking about Fang and your concern for Fang stocks.

Starting point is 00:38:51 And more recently, you've come up with four companies and you call it MCBM that have outperformed, and these are boring blue chips that have even outperformed Fang. Tell us what these companies are and what you're thinking about this. Yeah, it was just amazing to me that everybody was focused on Fang last year, and rightfully so. I mean, the stocks have done amazingly well, especially Amazon and Netflix. But there were four stocks in the Dow that did better from over the two years, 2016 and 17, than the Fang stocks, and those were McDonald's, Caterpillar, Boeing, and 3M, right? just boring blue chips that just thawed even faster than the fang stocks.

Starting point is 00:39:38 And so I was like looking at these things. And one of the things I like to do when I look at a company is look at their valuation history. And where's the valuation today and compare it to the past? Because you can look at, you know, compared to their peers, compared to the market. But you can see a lot of stocks trade in a valuation range over the course of their life. And you can see when they're expensive and when they're cheap. And I looked at these four stocks and I found every single one of them was far more expensive than they'd ever been in their history, which is saying something because, you know, the fang stocks only have a short history when Facebook came public like, what, 2012 or something. These McBan stocks have been around for a lot. I call them McBam.

Starting point is 00:40:20 You got to call them. They have, you know, they've been around for a long, long time. And the fact to me that these companies are valued today at the most expensive they've ever been in the history, I mean, just to put that in perspective, from over the last 20 years, they basically traded in a range of one and a half to two and a half times sales. You know, I like to use a price to sales measure a lot of the times or enterprise value to revenues because it takes out this margin, you know, profit margin component, which is, you know, usually. pretty cyclical. So they traded one and a half to two and a half times. In January, they were trading four and a half times sales. So it's like if two and a half was expensive in the past today, they're four and a half. And so at the same time, you know, their average revenue growth was over this time period, you know, raised between five and ten percent based on cyclical

Starting point is 00:41:18 factors. Well, over the last five years, their average revenue growth is negative one percent today. So revenues, revenues are going negative and valuations, you know, price to revenues are soaring to new highs. To me, this is just representative of what happens in a speculative mania. People aren't paying a higher price of sales, you know, measure for faster sales growth. They're paying higher valuation for actually negative, the worst growth in these companies history. And I really think it's just people chasing dividends. You know, the Fed lowers rates to zero for 10 years, and people go, okay, well, I'm not going to get my interest, I'm not going to generate my income via bonds or savings account or CDs. I have to go

Starting point is 00:42:04 out the risk curve exactly as the Fed intended them to do and go buy these dividend-focused stocks. If you think inflation is heating up and interest rates are going higher, not only should you be bearish on bonds, you should be really bearish on these kind of dividend-focused stocks because, you know, they're probably more interest rate sensitive than even bonds are. Is this a question of the excess liquidity, Jesse? Is it because interest rate are hitting rock bottom? Is that really what has explained the soaring stock prices? What is really a narrative here?

Starting point is 00:42:39 Yeah, absolutely. And I think, you know, really what's happening is people are just pouring money into these dividend-focused ETFs. You know, that's what I looked at. ETF database is awesome. You can see McDonald's is in. Is the top 10 holding? in 32 ETFs, even though it's only the top, you know, it's not even the top holdings in the indexes. So people are pouring money in ETFs, and how many of these people putting the money in the

Starting point is 00:43:03 ETF actually realize that these stocks trade at their highest valuations in history? They're not doing the single stock research, you know, like we do. They're just looking at, oh, this ETF pays this dividend, so I'm going to, you know, buy this ETF. But when you actually look at what's underlying it, it's pretty frightening. I mean, 83 ETFs overweight Boeing currently. So you put money in almost any equity-focused ETF, and you're going to have a greater-than-market exposure to Boeing. So to me, it's pretty ironic, too, from the fact that a lot of these investors buying ETFs think they're investing passively.

Starting point is 00:43:41 But when you overweight Boeing in an ETF, you're an active investor, and you're actively choosing to overweight a stock that's the most overvalued in its history. So let me ask you this. If there was a trade that you were most excited about right now in August 2018, what would that be? Oh, man. I know we talked about gold earlier. I really do think right now is a terrific opportunity in gold just because, you know, like Jim Rogers said, I want to buy it when it's hated. And I'm seeing so much hate out there. It's not quite as much hate as I saw at the 2015 low.

Starting point is 00:44:18 but it's the closest thing to it that I've seen. To me, that's pretty exciting. But generally, on another note, for me, where I've found the most exciting opportunities lately are, is from basically adopting a philosophy that's the exact opposite of passive investing. So what I think a lot of people don't realize the passive is it's not just market cap weighted.

Starting point is 00:44:44 When you go by Spy, Spy is not market cap weighted. It's float-adjusted market cap-weighted. So you're systematically under-wading owner-operated businesses. Because when an owner owns a lot of the shares, let's say a CEO owns 30% of the shares outstanding, that reduces the float such that the index has to underweight it. The example that I really used to illustrate this point to people is when Andy Grove was owning Intel shares in operating the company from the mid-80s till 2000, the stock price went up like a hundredfold. And the index would have systematically been underweighting Intel during

Starting point is 00:45:27 that time because he owned so much. In 2000, Andy Grove sold every share he had to diversify into other things. And at that point, the index would say, okay, great, now we're going to market weight this stock. And whereas Intel today is still below its 2000 price. So I think there's a huge opportunity today in owner-operated companies that have low float that are systematically ignored by the indexes. Very interesting point. Okay, so if you had to pick a trade that you think people were about ready to lose their shirt on, what would that be?

Starting point is 00:46:01 Number one. Number one. What I've seen the last few days, maybe the last week or so, is the dollar bulls have been celebrating like no other. And to me, it's amazing because it's only been a 50% retracement of the dollar decline that we've seen over the last 18 months. It's not like the dollar's breaking out to new highs or anything, not even close. And so I really think there's this bullish dollar narrative that, you know, and however people choose to express it, that I think is really misinformed and is destined to, be, you know, very painful.

Starting point is 00:46:46 All right. Let's have a little fun before we wrap things up. I'm going to say a person's name, and I want to hear your response. Elon Musk. Oh, man. I feel so bad for this guy. I really do think he's brilliant. But in this day and age of social media, I think it's probably never been harder to be a genius.

Starting point is 00:47:11 And I honestly, I don't know if he's a genius, but, you know, he's just on Twitter and, you know, and he really needs to cut this stuff out and just focus on business. Short sellers thrive on, it's almost like kids, right? When you have kids, they all go through different phases of bullying, right? And the kids, you know, who just let it roll off, like water off a duck's back, don't get bullied anymore. But it's the kids, when you can get a rise out of them, the bullies just latch, onto that, right? And that's what's going on with Elon is the short sellers are getting a rise out of him and he's, you know, he's feeding into that and short sellers feed off that too. Because when

Starting point is 00:47:51 somebody, you know, it's, you know, the lady doth protest too much. When you have to start, you know, contradicting the short sellers and, you know, you're, oh, no, this is, you know, it's not a good sign. It's not a good sign. And that's what Elon's doing right now. To me, I have not shorted the stock because Tesla, that is, because it's probably the most crowded trade on the planet, the short Tesla. I really do think they're probably headed for bankruptcy. I don't think there's any way out of it. But a guy like Elon has been able to just pull things out of his sleeve, you know,

Starting point is 00:48:27 and so this idea of taking the company private, you know, who knows? Maybe he can. And I don't want to try and step in front of that, even though. And the other side of it, too, is, you know, I love Howard Mark. and the idea of second level thinking, you have to have a non-consensus for you to make money in the markets and you have to be right. So people ask me, Tesla's numbers were horrible. How did the stock rally? And I go, well, it's consensus that the company's going bankrupt. Everybody knows. Yeah. So every time a number comes out or something happens where it's not bankruptcy,

Starting point is 00:48:59 that's a positive surprise and the stock will rally. So to me, the consensus is the company's going to go bankrupt and maybe that's already being priced in as well as it can be into the markets. And so I don't see that as a non-consensus view. Jesse, thank you so much, not just on behalf of Preston Me, but really on behalf of the entire TAP community for coming on our show again to talk about the current mind conditions. We would love to bring you on again, but until then, when can the audience learn more about you? Yeah, speaking of Twitter, I do tweet a lot. I pretty much share a lot of the stuff that I'm reading that I find of interest. I don't express a lot of opinion and stuff on Twitter just for that reason.

Starting point is 00:49:41 Elon's a good example, not why you shouldn't probably do that. But I do express opinion on the blog, which is thefelderreport.com. I try and write one post a week, something like that there on the site. All right. Well, we'll have a link to that in our show notes. We'll also have a link to Jesse's handle on Twitter if you guys want to follow him. I highly recommend that you follow him. He posts some incredible charts, some incredible blog articles.

Starting point is 00:50:05 And Jesse Fowder, thanks so much for joining us on The Investors Podcast. Thanks for having me. I love what you guys do. It's always a pleasure. All right, guys. That was all the Preston and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP.

Starting point is 00:50:21 To access the show notes, courses, or forums, go to theInvestorspodcast.com. To get your questions played on the show, go to AsktheInvesters.com. and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

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