We Study Billionaires - The Investor’s Podcast Network - TIP227: Jesse Felder - Current Market Conditions 2019 (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back one of our favorite guests and good friend, Jesse Felder. Jesse is the former multi-billion dollar hedge fund manager, and he's been a contributor on the Wall Street Journal, Barron's, Yahoo Finance, and many others since 2005. Jesse hosts a podcast called Superinvestors and is an all-around market guru within the finance industry. So without further delay, here's our discussion with Jesse about the current market conditions. 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 welcome to the Investors podcast.

Starting point is 00:00:52 I'm your host, Preston. As always, I'm accompanied by my co-host, Stig Broderson. And today we bring back one of our favorite guests, Jesse Felder. Jesse, so awesome to have you back on the show. Thank you so much for always making time for the two of us. and just always being here to chat. It's my pleasure, you guys are my favorite hosts. Jesse, the first thing I want to talk to you about is just really kind of the current

Starting point is 00:01:13 market conditions. Last time we were on the show, you know, we hadn't seen the big December meltdown. Well, I don't know if I would call it a meltdown, but the December pull down of about 20% off the high that we saw there in the summertime frame, which is a pretty big drop in the equity market to come down 20%. I'm just kind of curious how you're seeing our positioning in the cycle. I think the last time you were on the show, I remember you saying the key phrase, topping process. Curious how you see it now after that 20% drop.

Starting point is 00:01:43 What we've seen since October and through the fourth quarter was the beginnings of a new bear market. And I look at it through the lens of fundamentals, sentiment, and technicals. You just start with fundamentals. And we're still very expensive based on any kind of valuable measures you want to look at, whether it's the Buffet yardstick or Cape ratio. Tobin's Q, something like that, we're all kind of still in the 90th percentile in terms of valuation. So still very expensive sentiment. And when I talk about sentiment, I'm talking about longer term sentiment.

Starting point is 00:02:14 So we see these short term swings where we did see some good fear in December, even though the VIX never really picked up like it should have. We did see some a little bit of panic in December, which created the buying opportunity, the rally we've seen recently. But longer term, you know, you look at longer term sentiment measures and stocks are still overloved. I mean, you look at the percentage of equities in, you know, household financial assets still very high. Things like margin debt, you know, is just completely off the charts. And so to me, that tells me that stocks are still overvalued, overloved. The difference now between now and the last time we talked to, stocks are clearly in a downtrend. And so this is the worst possible environment for investors, a very expensive, overloved market in a downtrend.

Starting point is 00:02:57 It is the worst possible environment. So like I said, I think this is the beginning of a new bare market. And really what I think people aren't talking enough about is what you hear people say, well, there's no recession on their eyes and no signs of economic weakness. And I think people are discounting too much what we call reflexivity, which is, you know, George Soros really was kind of the one to popularize this idea. He explained it as reflexivity is in effect a two-way feedback mechanism in which reality helps shape the participant's thinking. And the participant thinking helps shape reality in an undending process, which thinking and reality may come to approach each other, can never become identical. And so you hear somebody like, you know, Robert Schiller say there's a lot of talk in the air about recession being overdue. This is a quote or recession coming. To some extent, this talk itself can be a self-fulfilling prophecy. It wouldn't surprise me at all if we slipped in a recession real soon. And so a guy like Brad DeLong has written about recently that three out of the last four recessions were created by market pullbacks, by financial assets going down,

Starting point is 00:03:55 affecting people's confidence in the economy, changing their behaviors. That becomes this self-fulfilling prophecy. So I think what people don't appreciate enough is that the markets can create a recession on their own. It doesn't have to necessarily come from the fundamentals. If you look at the price analogs, Jesse, the recent drop you're seeing here with 20%. It looks very similar to what you saw in 2007, 2008. I'm curious to hear your thoughts on whether or not we will see a similar pattern and how we should react as investors. I've been watching very closely. I do a price overlay, a price analog of that time frame. And it was kind of eerie how closely those traded.

Starting point is 00:04:34 And it was essentially, yeah, that late 2007, early 2008 time period coincided almost perfectly from a price standpoint to what we've seen over the last three, four months in this topping process. So that's something that, yeah, I think it's really interesting to look at those price analogs. A lot of times they're made fun of. And, you know, but Paul Tudor Jones, one of the most famous trades of all times, was when he's short of the 87 stock market crash made, I think, a billion dollars in a day. He used the 1929 price overlay over the 87 crash to literally guide his trading through that time.

Starting point is 00:05:09 It was so close in terms of, so yeah, these patterns echo throughout history. And, you know, sometimes they work for a while and sometimes they stop working. But absolutely, I think it's really interesting. And you're right. If you look back at that period, for the first few months, it was about a two, three month kind of testing period, which would put us in that SPX, what is it, 2350 to 2,600, kind of a trading range for a couple of months before testing the lows again in, I think, like, a roughly April time frame. So, I mean, yeah, I think it's really fascinating to look at those things because they do tend to repeat themselves. I guess when I'm thinking about it, I look at it as mechanics, right?

Starting point is 00:05:47 So if the equity market pulls down at 20% abruptly, there's people that are trying to reposition themselves for what they think, that means. And they're repositioning themselves in the commodity market, reposition themselves in the bond market and obviously in the equity market. And so that takes time for all of that repositioning to kind of shake itself out. It's not something that's going to happen in a couple days, right? And so in that last example, we saw things go horizontal, out, you know, a few months. And then the equity market went up, kissed the 200-day moving average. And as soon as it did, that's when the selling reinitiated. So I'm curious, are you looking at the 200-day moving average is going kind of like one of those key benchmarks for if a person is agreeing with your narrative that

Starting point is 00:06:31 this is a bear market. There's two parts of that question. I said that, you know, the markets are clearly in a downtrend. And I think it's, you know, there's a few different ways to define that, you know, Paul Tudor Jones, I mentioned a minute ago, would basically just use the 200 day. Say price is below the 200 day. It's a, it's a downtrend. You know, a guy like Jerry Parker defines a little differently.

Starting point is 00:06:49 He uses, you know, the 50 and the 200 day or something very similar. And if the 50 is below the 200, that's a downtrend. The other one is you could just draw a simple trend line, you know, on a logarithmic scale from the 2009 low and, you know, connect those lows that we've seen, you know, back in 15, 16. And we've broken that up trend line. So that's why I said, you know, by those three different definitions, it looks to me like it's a new downtrend. But in terms of when to get aggressive on the short side, right now, technically, just from a textbook type of thing, you'd look at we're basically testing the underside of former support, which should now be resistance, which would be technically. kind of a textbook bearish setup. You know, you look at the great traders of all time and they're looking for some type of price confirmation before they get aggressive. So you'd want to see prices start to turn down again to confirm your thesis. And especially a break of those December lows would go a long way for that type of confirmation. Now, the thing that I'm thinking about is I'm long short. I own some things. I'm short some things. And I'm more heavily shorter have been for a while is, you know, we could go down and test that lower, even break it briefly and get kind of another round. rally, or if we break it convincingly with momentum, you know, then you could get a strong leg down.

Starting point is 00:08:01 So for me, that's going to be the next real interesting period as I think there's probably going to be a test of those December lows. If I was bullish, that's what I would hope for, is a test and then holding those and then another rally higher. Depending on how that plays out, really should guide your trading. It was interesting. So we had a conversation with Howard Marks. Howard made the comment. I don't expect this credit cycle to. kind of go down the way that the last one did. He said, I expected to grind on and for it to be a lot slower. And then I'm listening to this interview with Ray Dalio on Bloomberg, and Dahlio said the exact same thing. He says, I think this thing's going to grind on. I think it's

Starting point is 00:08:42 going to be kind of this long, drawn out kind of thing. I guess I'm just kind of curious if you have a similar opinion. And if you do, why do you have that opinion? If you look at the past two bear markets, we had the 2007-8. And that was. more of like a crash. Basically, all the losses were just condensed into one, that one 2008 year. If you look back to the one before that with the bursting of the dot com mania, it was more of a drawn out process. To me, I see a lot of parallels to both. A lot of the stuff in the credit markets, corporate credit markets right now is reminiscent of what we saw during the housing bubble and kind of what happened there. Stuff with leveraged loans right now and the amount of leverage and

Starting point is 00:09:23 the lack of due diligence and, you know, all these things in corporate credit are reminiscent of what led up to the financial crisis. Then again, you know, in terms of what we've seen in the equity markets, it feels more to me like dot com mania where you just had momentum and a classic misconception about the markets driving, you know, prices ever higher. That unwinds a little more slowly because there's not the type of financial distress that precipitates a real crash. And so I think it's impossible to predict how it plays out. Chris Cole's another. guy I admire and, you know, he's kind of proposed the idea of 10 years of just sideways volatile markets. And, you know, that's another possibility where we don't necessarily

Starting point is 00:10:01 get something that looked like the last two bears, but it's just kind of a go nowhere volatile market for a long period of time. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear

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Starting point is 00:13:59 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So, having said that, Jesse, I'm sure our audience are curious to hear. How do you position yourself? Is this a time to be long at all? I'm still very bullish on gold and some of the miners.

Starting point is 00:14:30 Actually, I think all three of the major miners that I follow, you know, actually today, Newmont announced they're going to buy my favorite gold play, which was Gold Corp. Gold Corp is just so extremely cheap and had such a good growth profile ahead of it that it looked like a slam dunk. And when they first announced this deal today, I thought, wow, they're stealing this company. But when you look at Newman, Newman is extremely cheap itself. I approach valuation of individual stocks from a couple different angles. One is I look at the historical valuation of that company. Newmont's typically traded about four times sales.

Starting point is 00:15:03 I'm talking about enterprise value to revenues. It trades 2.8 times today. It's also interesting to me that Agnico Eagle and Barrick both trade close to four-time sales today. If Newmont were to just trade in line with its peers and in line with its historical valuation, the stock would probably have to go up about 50%. And so it's really cheap too, even before you consider the fact that there's a bullcase for gold. I'm holding my Gold Corp shares going to convert them to Newmont Gold Corp shares when that deal goes through. I think that's a real exciting transaction.

Starting point is 00:15:34 I think Newmont gets the growth profile that they need going forward and Gold Corp gets the technical expertise and the financial wherewithal to really execute on their growth pipeline. I'm still bullish on gold. We can talk about the bull case for gold again. But it's funny, actually, we were on for, I think, a mastermind session. Maybe it was almost two years ago now. Stig's idea was Bed Bath and Beyond. And I direct message him on Twitter late last year and I said, guess what?

Starting point is 00:16:02 I'm buying some Bedbath and Beyond. Because I think this thing is finally cheap enough to buy it and it's finally hated enough to buy it. I was buying it in that December panic selling and stocks up 50% over the last three weeks or something when they came out and announced they're going to earn two bucks a share this year. And you realize it's a $15 stock. That's seven and a half times earnings where the stock trades right now. It's extremely cheap. They're starting to turn around the same store sales decline. And the other thing that I think people don't realize, which is just crazy to me, I don't think I've ever seen this before.

Starting point is 00:16:33 They have still over a billion dollar buyback authorization, if I'm not wrong. This is a $2 billion market cap company. They have a billion dollars in cash on the balance sheet. So right now today, they could buy back half of the company, if not more, from the public markets. And that is just a massive potential backstop for the share price also, I think. They only bought back $8 million of stock last quarter, which is crazy. This is what drives me nuts about public companies is they bought back a ton of stock at much higher prices. And then last quarter, when it's 10, 11 bucks a share, they bought back $8 million worth

Starting point is 00:17:05 of the stock. It's nothing. And this is when they should be buying it back. But I understand how they want to be conservative with the balance sheet. That's smart, especially if we're going to head into a period of credit distress. And so that's the stock I own some of it. And for me, I like to own some of these things that I think are extremely cheap and then, you know, hedge it against the broad market or some individual short ideas.

Starting point is 00:17:26 Yeah, Jesse, I remember that. And thank you for messaging me. I remember you a really, really. really bear on the stock of that point in time. And you couldn't see the price being justified. And unlucky me, my timing was definitely wrong at the time. And thanks to you, I didn't buy into it. When did you start buying Bethbeth Beyond stock? I started buying it just a few months ago. I think September-October timeframe, when it first got down into the mid-to-low teens, I bought a little bit. And then I did some buying in that around that Christmas time.

Starting point is 00:17:59 And Bed Bath and Beyond was one of the stocks that I bought a sloth. of, I think it's worth significantly more than 15 bucks a share, especially if they are smart and start buying back stock at these low prices. Yeah. No, I mean, it's come down a ton. I remember talking about that one on our forum. Oh, man, probably like 2011. And I remember the price was near 100 bucks.

Starting point is 00:18:21 So for it to be down in the teens is just crazy. But interesting. Let's talk a little bit more. And I think the gold conversation is going to come up a little bit more here when we talk about this Ray Dalio clip that we're going to play. a little later. Let's go to the next question here. So on Twitter, I got a message from a person that said they were interested in hearing your thoughts on the impact for baby boomers, more specifically what's happening with the long-term impact of this low interest rate environment.

Starting point is 00:18:45 The question, as I kind of read it, is what's the impact of the low rates we've had over the last 10 years or maybe implying that we're going to have low rates for a long time to come, which is a premise that I don't necessarily buy into. In fact, I think 2016 was probably the end of the bond bowl market that began in the early 80s in the 10 year bottomed out of 1.3, 1.4% or something like that, and it's doubled since then. We are in the process of transitioning from a secular disinflation to a secular inflationary environment. So I don't think low interest rates are going to last for another 10 years. We go through long-term inflationary, disinflationary cycles. And there's a lot of science that that ended. But to get back to the question, how does that affect? So let's just imagine if it's,

Starting point is 00:19:30 interest rates stayed low for the next 10 years. And you look at the underfunding of pensions and things already, and they're assuming an 8% rate of return. They're already massively underfunded. If they only get 2, 3% over the next 10 years, there's going to be big, big problems before then. It's only going to be another four or five years maybe before these things come to a head and big problems come out of that. The other thing, though, I mean, if you look about what's the effect of the low interest rates over the past 10 years. It's we've seen a massive misallocation to capital. We've seen corporate debt just get completely out of control and those things go hand in hand. So there's been a lot of sovereign debt taken on that's been enabled by artificially low interest rates and

Starting point is 00:20:11 artificial demand for bonds, which is kind of what I what I call quantitative easings, artificial demand. That's going to have to work itself out at some point, too, in terms of what are the ramifications? Well, this massive misallocation of capital that's been. debt fueled is going to have some type of be rectified sometime over the next several years probably. So there's a lot of different ways to go with this, but none of them are good unless we can find a way to really create some good fundamental growth and grow our way out of this stuff. But that is a long shot by most people's measures. Wow.

Starting point is 00:20:47 So that's very interesting. I just want to be completely sure you're saying that back in 2016, we saw the bottom and now yields expect to go higher for bonds? Absolutely. Yeah. And if you look at what were the disinflationary forces since the early 80s and what was the baby boomers coming into the job market, it was a huge supply of labor. The same time, the trends towards offshoring and globalization took off, which is also a huge

Starting point is 00:21:14 new supply of labor in the form of China and India and overseas. And that's really what that influx or supply shock to labor has allowed inflation. to stay very, very low and for corporate profit margins to go to the moon. I mean, they've basically labor's share of corporate profits is the lowest in history. And that's just a function of all this competition, not competition for labor, but so much supply of labor that's come in. Now we're starting to see, look at around the world, these nationalist forces are essentially de-globalization forces. Let's bring jobs home. Let's bring, let's, you know, Donald Trump talking about making iPhones in the United States. That is probably, you know, great example of how

Starting point is 00:21:55 of these trends are inflationary. You know, Apple has said, if we want to make iPhones in the States, we're going to have to double the price of a thousand dollar iPhones already extremely expensive. People talk about how demographics are potentially deflationary. Well, I think it was the Bank for National Settlements put out a report maybe six or nine months ago that showed in the United States demographics or poised to be very, very inflationary. And you think about you have this aging society and fewer and fewer people to take care of those people. So healthcare is a really good example of what healthcare margins are going down and down because we don't have enough nurses. And so they're going to have to pay them more. And that's why we're seeing, you know, wage

Starting point is 00:22:31 inflation right now. Part of it is cyclical forces, but I think also part of it is demographic forces and secular forces. So, I mean, there's a lot to this. The assumption that we're going to have low interest rates for a long period of time is probably, I hate to say optimistic because it will make all these pension funds go bust. It's not optimistic. But I think we're probably seeing a turn in the inflation cycle on a long term. So this isn't something that happens this year next year, even though we are seeing cyclical forces of inflation. These are trends that are, you know, I'm talking five, 10 years out. I know your listeners are fans of Warren Buffett, and there was an article recently, too, then I think Warren is on the same page here. Normally towards the end of a cycle, when he builds up a lot

Starting point is 00:23:12 of cash, like he has done now, he's got over $100 billion in cash, I think at Berkshire still. He will anticipate the end of the cycle and start buying zero coupon bonds with that cash. When interest rates go down, you know, zero coupon bonds go to the moon. I mean, much faster than than normal bonds. I haven't seen, I haven't read anything in the earnings reports or anything that he's been buying zero coupon bonds, but he did with Berkshire Hathaway finance recently take a bunch, billions and billions of dollars of floating rate debt and refinance that to fixed rate debt. And so Warren's not going to do that if he thinks interest rates are going to stay low or going to go lower. He's only going to do that if he thinks, you know, I might not be able to

Starting point is 00:23:47 refinance this stuff three, five years later at interest rates that are as good as they are today. There's a lot to this idea. If you are buying bonds today, I don't think you should buy anything that you can't hold to maturity. Really, there's not a lot of incentive to two. Two to five-year bonds that the longest are yielding almost as much as 10 and 30-year bonds. You know, you get very, very little. What about the scenario where you're a young couple and you're looking to buy your first

Starting point is 00:24:11 house? Does that mean that you have to put very little down and take on fixed debt? You know, house prices today. We're starting to see some weakness in the housing market when this is one of these feedback loops, the reflexivity in the markets. And I think that's just because affordability has gotten so poor, interest rates take up a little bit. And that makes for lower housing prices. So the one thing with housing that we saw during the bust is you saw a lot of people really stretching to a fio house they couldn't necessarily afford. And they were using the income from both partners in the deal.

Starting point is 00:24:42 You really want to be conservative. Imagine going through several cycles. You know, what if my wife loses her job or whatever? Are we still going to be able to pay the mortgage? I think affordability. is an issue right now. And I don't think it's smart to think of a house as an investment. I think it's smart to look at it like, okay, what's going to cost me more renting or buying over 10 years and can I be here that long and that sort of thing? But yeah, if you're buying something you can afford and you can lock in an interest rate today and around 4.5% or something, you're doing pretty good. But if you believe in the investment thesis for real assets today, then yes, it absolutely makes sense to borrow as much money as you can to buy as much real assets as you can because

Starting point is 00:25:17 the debt's going to stay priced at the same, but the real assets are going to, flate a lot higher potentially. A few episodes ago, we played a clip from Ray Dahlia where he suggested that the U.S. dollar was going to potentially devalue by 30% during the coming systematic event. So what I'm going to do is I'm going to play this audio clip and then after we're done listening to this, let's just have a little chat about it. Oh, I don't think that it's going to be as sharp and severe like that. I think it's more going to grind on all of these obligations will be a problem to be

Starting point is 00:25:51 funded. And I think it'll be more back there of a dollar crisis than it would be a debt crisis. And I think it'll be more of a political and social crisis than a big, big short there. We have to sell a lot of treasury bonds. And we, as Americans, will not be able to buy all of those treasury bonds. And if interest rates rise too much, the way it usually works, is that constricts credit. We borrow less. And that creates a weakness in the economy. So, in Instead, because we'll sell to foreigners, from a foreign perspective, when they look at it, they care not about inflation. They care about currency depreciation when they look at the interest rate. So if a currency goes down, the bonds become cheaper.

Starting point is 00:26:35 I think the Federal Reserve at that point will have to print more money for the deficit, have to monetize more, and that that'll cause a depreciation in the value of the dollar. We have the privileged position of being able to borrow in our own currency because we have the world's leading reserve currency. I think we are risking that by our finances. In other words, borrowing too much. And you can get to the point where, you know, others, when you own a bond in a U.S. bond or in any particular currency, you're getting a pile of that currency. By how much could the dollar go down? You easily can have a 30% depreciation. in the dollar through that period of time.

Starting point is 00:27:21 You know, that depends how long 30%, I would say. So, Jesse, I'm kind of curious to hear your thoughts on that clip. I've been bearish on the dollar for a couple of years. The dollar peaked in, what was that, late 16, 17 was a sharp down year for the dollar. We saw it rally last year. And I think the rally last year was really a bare market rally. It was caused by the divergence in monetary policy because our confidence, is more, you know, stronger than a lot of, you know, overseas economies. It was also the

Starting point is 00:27:51 repatriation of overseas cash corporations. That's, you know, a bunch of money coming from other currencies into the dollar. He explains it very well. We have to sell a lot of treasuries. Jeff Gunlack and Barron's over the weekend was talking about this too in that the debt is growing right now at about 6% of GDP per year over like 1.2, 1.3 trillion dollars a year. Now, the fiscal deficit's not quite that wide, but there's other spending and things that don't, you know, factor into the budget. People are up in arms about a 2.2% of GDP deficit in Italy. This is a crisis in Europe. Our debt is growing at 6% of GDP. So that means we're having to sell that many more treasury bonds every year. Where does the demand come from to buy all those bonds? This is one of the

Starting point is 00:28:40 reasons why quantitative tightening is bad for risk assets, because we have to sell all these bonds in order to attract investors, interest rates have to go up. And so you have risk-free securities, essentially, you know, treasuries that are now competing with risk assets. Traditionally, you know, a lot of the buying of these things has come from China and other countries with, you know, a trade surplus. But that's also been changing. We've seen Russia sell off all of its treasuries. There's also a big move towards a de-dollarization that we've already been seeing recently. So this is a really bad combination, I think. We're, we're, Europe is talking about ways to get out of the dollar system. They want to do business with

Starting point is 00:29:22 Iran and they want to get around the U.S. sanctions. Well, they can't do that as long as they're trading in dollars. So you have Europe talking about trading outside of the dollar system. You have Russia and China also looking looking at ways to essentially de-dollarize. And you have these massive fiscal deficits all at the same time. It's pointing to a potential sovereign in crisis. So you have even Fitch, you know, it was interesting when Fitch came out recently and said, you know, we'll potentially downgrade the U.S. due to the government shutdown. But when you actually read what they're saying, they're not talking about the government shutdown. They're talking about this fiscal situation and it's rapidly deteriorating. Let's take a quick break and hear

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Starting point is 00:33:27 return on risk-free assets, or you can also refer to as U.S. federal bonds? How do you see that in relationship to what you can get in the stock market right now and how those two play together? Warren Buffett wrote about this way back. I think this is 20, 30 years ago, one of his letters, and I'll just quote it here, I have it. Though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable. When bonds are calculated to be the more attractive investment, they should be bought. That's the 1992, Bertranda Hathaway chairman's letter. And so one indicator that

Starting point is 00:34:03 I created was let's take the Warren Buffett yardstick. And one of the things that's really interesting about his yardstick, essentially market cap to gross national product is it's very highly correlated with future 10 year returns in the stock market. It'll essentially tell you what you're going to make per year over the next 10 years. And so you can take that forecast that his measure essentially implies and compare that to the yield on risk-free 10-year, 10-year bond. You're comparing a 10-year return to a 10-year return. And so, you know, right now, the Warren Buffett Yardstick forecasts a return of just about 0% for stocks, that's including dividends over the next 10 years.

Starting point is 00:34:43 Back in October, it was a minus 2, close to minus 3% forecast. And so you compare that to 2.7% or something on the 10-year treasury, and you have 2.5% in favor of owning bonds. And so according to Warren Buffett's own methodology, bonds are, you know, should be bought over stocks. Now, you could also talk about if we do see an inflationary, if the dollar goes down 30%, we're going to see inflation and you're not going to want to own bonds. And so that's potentially problematic and stocks might do better at keeping up with inflation. This isn't a hard and fast rule, but if you just look at it from the metrics, bonds are technically more attractive than stocks today. And so now I think you understand why Buffett's in $100 billion a cash, right? Because if you

Starting point is 00:35:30 take that 10 year yield and you do account for inflation and you do look at the returns that you're expecting out of the equity market, you can understand why a guy might hold on to $100 billion of cash instead of doing other things with it, I guess. Not to mention the optionality of holding that cash. I mean, you know, he can put that all into two to five year treasuries and, you know, have zero risk, get two and a half percent risk free, and then have the ability to put it to work at, you know, when opportunities arise. You know what I think's going to be fascinating is when his 10K comes out and you kind of see what he has been doing with this downturn that we saw, this aggressive downturn that we saw

Starting point is 00:36:10 on December, where the market had pulled off 20 percent from its high. I sent out a tweet a couple weeks ago, and I said, you know, isn't it interesting that Warren Buffett is sitting here after a 20% downturn with $100 billion in cash. And I had a ton of people that commented saying, well, he's probably not sitting in cash anymore, implying that he was buying at those levels. And I think what's going to be really fascinating is looking at his ear end financial filings, because it's going to show you whether he is buying some of these dips or he's continuing to value that optionality in the cash. Curious what your thoughts are, Jess. Do you think that that's going to be the case or do you think he's on a buying spree right now? I think he probably did some buying

Starting point is 00:36:53 in December. To think that he put a huge dent in that cash, I think is probably optimistic if you're bullish. Probably, you know, he's looking at a lot of these things, you know, different stocks that he owns and other opportunities and seeing, you know, yes, maybe they came in, you know, 20% or 15% or so. When you look across sectors, it's interesting to me that to see there's a number of sectors that are still trading at their highest valuations in history. Things like utilities and consumer staples and things, these defensive sectors are still trading at their highest valuations in history. So to think that some of this stuff has gotten cheap is just wishful thinking. So Jesse, now that we talked about inflation, the economy, the U.S. dollar, I would like to bring

Starting point is 00:37:37 oil into the mix. We really see in the price of oil coming down. How do you see that as a position to go along in. And what is the relationship between oil and all those factors? It looks to me like you look back in that $42, $43 price level is a good support level. That's kind of right. Reversed. If you're bearish on the dollar, you probably have to be bullish on the oil price. They basically, you know, you look at when oil crashed in 2014. And a lot of that was the fact that the shale companies just started pumping a, you know, a massive amount of new oil supply. But a lot of that was just a huge surge in the dollar, too. So, you know, the oil price does kind of the inverse of the dollar. So if you think the dollar

Starting point is 00:38:20 is going lower, you got to think that the oil price is going higher. It's one of the ways why we've seen this, the oil price come down so much and it's affected CPI and, you know, made the Fed, you know, essentially enable the Fed to say we don't need to hike as quickly as we thought we were going to have to. The oil companies are a different story. I've been waiting for ever since the price in the old crash, you know, for a little over four years ago, but waiting for a real true kind of blood in the streets moment. And we just haven't had that in this sector. I think what a lot of people miss with the companies is they look at price earnings ratios. And a price earnings ratio does not factor in the amount of debt that these companies have taken on in recent years. And you look at a

Starting point is 00:39:02 company like when you look at enterprise value, which is the equity plus the net debt, the valuations of these companies are still extreme. I mean, right before this oil dump, But last year, a lot of these stocks were trading at their highest valuations in history, too. And people think, how's that possible with the OpeCrash? Well, you look at a company like ExxonMobil, and it recently traded its highest valuation history, still trades at very high valuation. And it's in every single dividend ETF on the planet. And so all the money that's flown into dividend ETFs has flown into ExxonMobil shares.

Starting point is 00:39:32 It's, you know, one of the big names in the essence. I think there's 130 ETFs that count ExxonMobil among its top 15 holdings. All that is passive flows going to ExxonMobil and it has nothing to do with its fundamental. So, you know, I think it's very hard to find cheap stocks in the sector just because they've taken on so much debt in recent years. And there's also the longer term implications about the shale stuff. Variant Perceptions done some interesting work on this, my friend Jonathan Tepper's firm, where they've shown that.

Starting point is 00:39:59 Yes, shale has enabled this huge surge in supply and made us energy independent and all this stuff. But there's a lot of research that shows these companies, the life of these wells may not be anywhere near what they're expecting. It looks like a lot of them are running out a lot quicker than they would have guessed, which would be bullish for the commodity, but not bullish for the companies. Another thing that I like to see in oil is that the speculators, and we haven't seen a commitment of futures report since the government shutdown, which is tough. But the last report showed that speculators were really bailing out of this thing. They were so heavily long.

Starting point is 00:40:32 And this is one of the reasons why oil, I think, got hit so hard as speculators were so heavily long and they had to unload those positions. We're seeing commercials now really build back up or rain in their shorts and kind of get more closer to a net long position. They're still way away from a net long position. But commercials are getting really bullish and speculators are getting really bearish, which is a very good contrarian sign. Very interesting. Jesse, please allow me to shift gear here here as a bit. We know we have a lot of listeners out there who is really not being investing that much before. Perhaps they're not even been invested at all. With your years and years of experience, what is the number one piece of advice you would like to pass on?

Starting point is 00:41:11 Don't try and be the next Warren Buffett. Don't try and be the next Stan Druck and Miller. You need to find what really revs you up and really gets you passionate about investing, trading, whatever it is. That's really what you're going to be good at. You have to have that real passion for it, not just wanting to be, you know, try and emulate somebody else's system. Now, that said, it really does help to study. a ton of different great investors, traders. That's why I always recommend reading the Market Wizard's books,

Starting point is 00:41:39 because every guy that Jack Schweger profiles in these books has a completely different way of making money in the markets. To expose yourself to all those different methods is very valuable because you'll find ones, you go, okay, well, this sounds awesome. One doesn't, you know, I don't know how that guy could ever pull that off because this does not make sense to me. I think everybody, just like in art, you know, a lot of artists and musicians, you kind of take from other people, guitar player.

Starting point is 00:42:06 I think, you know, I play music. You take licks from your favorite guitar players and you use them to, you know, create something that's uniquely your own. And I think in investing, that's really important too. So let me flip this question on its head. What one piece of advice do you have for an experienced investor who's been around for a few decades and seen a few cycles? What would you tell them?

Starting point is 00:42:26 Don't get overconfident. I think that's the most dangerous thing. It's really, really healthy to be paranoid and worried. that you're wrong. I mean, that's the right mindset where you're going to make money. As soon as you start feeling like I figured this out or getting too aggressive and doing things that are outside your circle of competence and you see it all the time. There's just stories all the time of professionals. I saw it with my partner at the hedge fund. People going outside of their own abilities getting extremely aggressive and it might work for a time. I think it's actually one of

Starting point is 00:42:57 the things that's driving the markets right now is this extreme overconfidence built by one of the greatest bull markets in history that also has had one of the lowest volatility readings in history. It's essentially made everybody feel like a genius until last year, whether it's, you know, selling naked put options or using vault targeting strategy. I mean, there's so many, we saw it with optionsellers.com last year in natural gas. We saw it with the selling, the short VIX ETFs earlier in the year. A lot of these trades work for a time, but they're guaranteed to blow up at some point. I see a lot of smart people with a lot of experience in the markets just feeling like it's their right to be gifted this great returns every year and these

Starting point is 00:43:40 extremely risky strategies. All right. So this is my last question for you. What's the worst narrative and the best narrative that you've heard lately? The worst narrative that I've heard recently, this is easy. So many people talking about the stock market valuation is now below average. You know, stocks are now fairly priced. And it's always, they're always using forward price earnings ratios, only looking at the last 20 years of history in that measure. And so think about that, we're only going to look back at 20 years of market history. That takes us back to January of 1999, right in the middle of the greatest speculative

Starting point is 00:44:18 mania and the equity market of all time. So we're going to use that as our benchmark for determining whether stocks are cheap or not. It's insane. So, I mean, forward price earnings ratios, first of all, are not. nothing but a marketing gimmick that Wall Street uses to get you to buy stocks. They have literally zero value in trying to figure out what stocks are going to do in the future over any reasonable time period. The best narrative that I've probably heard recently, my friend Ben Hunt is brilliant. He wrote a piece about the most dangerous thing to your portfolio are these massive regime

Starting point is 00:44:52 shifts. I talked about one about switching from disinflation to inflation. If you're not paying attention to that, you're going to get run over. The other things that kind of go along with that are, you know, this trend toward populism and nationalism. And, you know, these types of things. And it's, you know, Dahlio talking about a potential, you know, and Jeff Gunlack, a dead spiral. These guys are paying attention to this because these are risks that are now more apparent or more real than they've been in a long time. So I think, you know, that's a very important narrative, is pay attention to these things that or don't extrapolate from the region. recent past from the last five, 10 years because things change, they change in a hurry. You have to

Starting point is 00:45:32 pay attention to them and make sure that you're protected against them. I appreciate those types of narratives because they're not something you hear from traditional Wall Street and mainstream media. Thank you, Jesse. As you know, there's nothing better for Preston and me than whenever we have a sit-down with you and we can just talk about the financial markets. You have a great podcast, you have a great blog. Where can the audience learn more about you? Yeah, my website is thefelder I try and put up a blog post there once a week or something. And the podcast is called Super Investors and the Art of Worldly Wisdom. It's basically just my effort to scratch my own itch, things I'm curious about.

Starting point is 00:46:08 I just approach people who I think are brilliant people and really kind of dig into their investment philosophy or a specific thesis that they have. We'll have links to all of that in the show notes. If you guys want to check that out, we highly encourage that you guys subscribe to Jesse's show and then obviously check out his blog. So, Jess, thanks so much for coming on the show. Thanks for having me. It's my pleasure.

Starting point is 00:46:29 That was all that 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. 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.

Starting point is 00:46:58 This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP227: Jesse Felder - Current Market Conditions 2019 (Business Podcast)

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