As we mentioned last week, Stansberry Investor Hour is moving to Mondays!
This new air date gives host Dan Ferris a chance to reflect on the market news from the previous week and weekend that matters most to you and your investments. We’re excited for the extra value this change will bring and hope you are too.
Today, Dan talks with Peter Boockvar, the chief investment officer of $8 billion wealth-management firm Bleakley Financial Group.
As a top-down investor, Peter focuses on “bombed-out, value-type situations” that can be distilled into overarching investing themes.
One of the big themes Peter sees right now is a global, unstoppable force of people wanting to break out of their pandemic bubbles and travel. That doesn’t mean he’s long airlines. In fact, he cautions against such proven, cyclical money pits… instead preferring alternative plays on the travel industry, like hotels, casinos, or online travel agencies.
Another theme Peter follows these days is commodities. After the huge run-up commodity indexes have seen over the past year, he discusses the best ways for contrarian, long-term investors to contend with the daily struggle of commodity investing: How long do you ride that wave? And when is it time to get off?
Also on the podcast, Dan and Peter share how they see the big themes in inflation, cryptocurrencies, cannabis, and – the big one on everybody’s mind these days – inflation.
In short, Peter’s message is simple: “Investors need to be a lot more valuation sensitive. The playbook of the last couple years in making money in the markets will be different over the next couple of years.”
Announcer: Broadcasting from the Investor Hour studios, and all around the world. You’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here’s your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value, published by Stansberry Research. Today we’ll talk with Peter Boockvar, the chief investment officer of an $8 billion investment firm and a great macro analyst. In the mailbag today, questions about cycles, zombie companies, and cash holders. And remember, you can call our listener feedback line, 800-381-2357. Tell us what’s on your mind and hear your voice on the show. For my opening rant this week, let’s dig into the details. Let’s do that and more right now on the Stansberry Investor Hour.
All right. What do I mean by digging into the details? Well, I was inspired by a quote. I have all these books that have quotes with each date of the year on them. Quotes about philosophy and life, usually. And art and all kinds of things like that. But one of them is Robert Greene, The Daily Laws. Robert Greene is the guy who wrote The 48 Laws of Power and The Laws of Human Nature, was another of his books. I know he wrote a book called Seduction. He wrote a book called Mastery, which I read and I really liked and would recommend to anyone.
But this one is just his 366 meditations, one for each day of the year. And I recently, on Wednesday, February 16, I woke up and I really liked the quote. So I want to read you the quote, and then we’ll talk about how it relates to investing. And the title of the quote for February 16 is “Love the detailed work.” He talks about Aaron Rodgers, the quarterback for the Green Bay Packers, who spent his first three years as an understudy to one of the best in the business at the time, Brett Favre.
And he said that there were little or no opportunities to showcase himself during a real game. And for those years, all he did was practice and watch, and practice and watch. And then Rodgers later said that “those first three years were critical to my success.” And then he says it taught him patience and humility. He spent that time honing every possible skill a quarterback could need: hand-eye coordination, finger dexterity, footwork, throwing mechanics. Not exciting stuff.
He taught himself to watch from the sidelines with complete attention, absorbing as many lessons as possible. All of this not only elevated his skill level, but also caught the attention of his coaches, who were very impressed by his work ethic and his ability to learn. Through those years, he was able to master his impatience and elevate his game. In essence, Rodgers taught himself to love the detailed work itself. And once you develop that, there is no stopping you.
And he says the daily law is master the details, and the rest will fall in place. Well, that is certainly true of investing, is it not? You must master many details to be a good investor. And I thought we’d kind of do that, starting today. We talked a lot about macro themes on this show, because I know that’s what’s on people’s minds. They see headlines, they see television. They look on the Internet to whatever their favorite websites are. And these headlines jump out at them.
Like right now, you can’t go anywhere in the mainstream media or on the Internet and not see stories about what? Potential invasion of Ukraine by Russia, and Canadian truckers in their freedom convoy, and what the government is trying to do to them. You can’t avoid these stories. And by and large, I’ve tried to address topics that can’t be avoided.
Well, to be a good investor, folks, knowing the details inside out, upside down, and backwards is something you absolutely cannot avoid. In fact, I have to tell you. Learning stuff from the bottom up in this way, like Robert Greene described of Aaron Rodgers in this quote, it’s essential. That is investing. That’s what investing is. Or a big part of it. That’s where a lot of the skill and knowledge comes from.
You’re actually doing it at that point. You’re learning all the details, and making a decision, and putting your capital at risk. That’s investing. It’s not reacting to the headlines. In fact, nine times out of 10, 9.5... 9.9 times out of 10, that’s a big mistake, OK?
So, let’s start with my favorite details. I’ve already told you what they were in a recent episode, but I’ll deal with one of them at a time in the next several episodes. Because I want to get back to what investing really is. It’s a bottom-up process. It’s mastering the details. And we have guests who will talk a lot about macro. Our guest today, Peter Boockvar, will talk about macro. I’m going to get Cullen Roche back on the program soon. He’s a great macro analyst.
So I’ll let them handle that for a little while. And I’ll get back to the bottom-up details. So the first detail is free cash flow, right? You remember my five clues? Free cash flow, a business that generates lots of free cash flow. No. 2 is a business that generates consistent margins. No. 3 is they have a good balance sheet. No. 4 is they handle dividends and share repurchases well, or at least not too poorly. And No. 5 is they earn high returns on the money they keep in the business and reinvest in the business. Those are the five.
So the first one is free cash flow. Well, what is free cash flow? And why do we care about it? So here’s my little blurb that I use in each issue of Extreme Value, when I talk about free cash flow. I say a business’s intrinsic value comes from the cash it generates in excess of all taxes, expenses, and enough reinvestment to maintain and grow the business. That’s called free cash flow.
The best businesses tend to generate more cash than they know what to do with. So it’s really cash profit, and you derive it by two numbers. One is operating cash flow. You look on the cash flow statement, and the top third of that results in a number called operating cash flow. And then in the middle third, usually there’s another one that’s called, usually, capital expenditures, or investments in property, plant and equipment, something like that. Let’s just call it capital expenditures for today.
And you subtract capital expenditures from free cash flow. Now, why do you do that? Well, you have to know what operating cash flow is to know why you’re doing that. Operating cash flow starts with net income. Net income is at the bottom of the income statement. It’s your net profit after you’ve paid all your taxes and paid all your employees and bought all your raw materials and manufactured your product, or whatever you're doing in your business. It’s your revenues minus all of your operating expenses and taxes. That’s net income.
Then you take that, and you put it at the top of the cash flow statement. And then you add back a bunch of stuff. Now why do you go through this? Now look, we won’t get into the details of accounting. We’ll just get into the details of free cash flow. So let’s just for now say that accounting makes these numbers this way, OK? Accounting decides what net income is.
And the problem with accounting is that it doesn’t always tell you the exact cash outcome. It doesn’t tell you how much cash profit you have at the bottom of the income statement. We need to do some math and some manipulation to get at a number that’s closer to that. we never get the exact one. We always know that we’re trying to approximate as closely as possible.
So basically, the top part of a cash flow statement just fixes all the accounting stuff, so that you get a number that is after-tax cash profit, really. And that is – and after changes in working capital. So that’s your operating cash flow. But then you still have to account for one more thing. Remember I said it was all the taxes and expenses – free cash flow is. But it’s also minus the investment that you have to make to maintain and grow the business.
And for that we use capital expenditures, sometimes called investments in property, plant, and equipment. And you can find that around the middle of the cash flow statement, usually somewhere. So you subtract the one from the other. The resulting number is free cash flow.
So it’s cash profit after all the taxes and all the reinvestment in the business. And this is important because this is why you invest. This is why you run a business. It’s why you might want to own a business. Because after all the work is done and the bills are paid, you want to have plenty of cash profit left over, even after you’ve invested in the business. You want to have lots left over for the owner of the business.
That’s what free cash flow is. It’s an approximation of the amount that you have leftover that you can take out of the business if you would like, and you pay yourself dividends and buy yourself a house and do whatever business owners do with all their cash profit. Put it in the bank. Buy stocks, whatever – go on a vacation. It’s your money if you’re the business owner.
So that is free cash flow, and that is why we like free cash flow. The intrinsic value of a business is over time, all of the free cash flow that you can take out of it. And what you do is, the way they calculate intrinsic value essentially is you kind of estimate what that’s going to be over the next 10, 20, 30 years... however long you want to own the business.
And then you apply some math to account for the fact that you will receive some of it this year, and some next year, and the year after that, and the year after that. That’s a process called discounting. Let’s forget about that today too.
Let’s just know that free cash flow is an important detail, if you really want to be in the business of being a fundamental investor who knows what a good business is and can read the financial statements. You must – you may think free cash flow is not the right number for you. Warren Buffett doesn’t use it. He uses a number he calls owner earnings. Which – it’s similar. The basic idea is the same, but it’s a slightly different calculation.
And you could read that in his shareholder letters. He talks about owner earnings all the time. Pretty regularly. So, free cash flow’s the version of that kind of for the rest of us, or for some of us, anyway. But even if you don’t like the number, even if you do want to use owner earnings or some other number, you want to know what free cash flow is and how it’s calculated, and why some people think it’s important.
All right, that’s an important detail. That’s something that I don’t think you can be a really informed bottom-up stock analyst without knowing what that is. So, learn it. Look at the cash flow statement. Subtract capital expenditures from operating cash flow and take a look at that and see what you have left over. And then do it for – you can go into a service, if you have Bloomberg, great. They’ll just tell you what the free cash flow number is.
Or if you have – maybe you’re getting your financials off of where they should be gotten from... from the sec.gov, right? From the original source. And you can calculate this yourself, going back through years of financials. It’s a good exercise. It’s the detailed work that Aaron Rodgers did as a new quarterback. It’s that detailed, bottom-up work, kind of tedious. It’s not sexy. But it is where the rubber meets the road for an investor. It’s where the work is, that makes you an informed investor who can make a good decision.
Free cash flow. OK. That’s all I want to say about that for now. I’ll talk about margins next week. But for now, let’s talk with Peter Boockvar. Let’s do it right now. [Music]
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All right, it’s time for our interview today. Today’s guest is Peter Boockvar. Peter is the chief investment officer of Bleakley Advisory Group, an $8 billion wealth management firm. He’s also the editor of the Boock Report. He previously was the chief market analyst for The Lindsey Group, a macroeconomic and market research firm started by Larry Lindsey.
Prior to this, Peter spent a brief time at Omega Advisors, a New York-based hedge fund, as a microanalyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co. for 18 years, where he was recently the equity strategist and portfolio manager with Miller Tabak advisers. Peter graduated magna cum laude from George Washington University with a B.B.A. in finance. Peter, welcome to the show.
Peter Boockvar: Thanks for having me.
Dan Ferris: Really glad you could be here. So a lot of our guests, they didn’t find finance until after they graduated. You at least were headed in that direction in college. How early in life did you say, "Yep, I’m a finance guy?"
Peter Boockvar: Well, I wasn’t sure I was a finance guy, professionally, even though I studied it in college. I actually went to law school because I wanted to be a sports agent. But I was intrigued by the stock market, and that was probably why I studied finance. But after a year of law school, I got a job on Wall Street, and then I decided not to finish law school. And now I’m in finance, and not a sports agent.
Dan Ferris: Yeah, "I don’t want to be a lawyer anymore" is actually something I hear a lot on this show, from our guests.
Peter Boockvar: At least I stopped after one year. I didn’t finish it.
Dan Ferris: Yep, good for you. You’re new to our listeners, so I just want to give them a flavor for how you think and what kind of investor you are. So if we were sitting in a bar and I said what kind of investor are you, what would you tell me?
Peter Boockvar: I tend to be attracted to bombed-out situations, value-type situations. Mostly toward things that I can understand. And I don’t try to complicate the investment process.
Dan Ferris: All right. So that’s interesting to me, because if I hear somebody say that, I’m going to think, this is a bottom-up, value-oriented guy, who maybe doesn’t spend a lot of time thinking about macro. But I actually follow your Twitter feed. And you do spend a lot of time thinking about macro, don’t you?
Peter Boockvar: I spend a tremendous amount of time focusing on macro. I do a lot of micro work also, as I own individual stocks and listen to a lot of company conference calls and follow them closely. But I have found over time that I get a lot of my investment ideas by thinking macro and trying to think from that top-down, and then try to look at what’s the best way to invest once I sort of distill a particular theme.
Whether that’s a theme that there’s a global, unstoppable force of people wanting to travel that was only temporarily dislodged by COVID. And then, what’s the best way of doing that. Or trying to figure out what the Federal Reserve is going to do and where rates are going to go, and what’s going to be the right investments in that, and what’s not. Commodities of course usually are a top-down investment, so I think from that perspective, macro. And I like just finding good businesses that you can buy and hold something for a while. So I guess it’s a little combination of all of the above.
Dan Ferris: Did I hear long airlines in there? At the beginning of that description?
Peter Boockvar: No, I think there are other ways of playing travel, other than the airline industry which has proven to be a very difficult and cyclical place to make money.
Dan Ferris: Right.
Peter Boockvar: I’d rather own maybe a hotel or casino, or an online travel agency.
Dan Ferris: Right. Sounds good. I’m glad you mentioned commodities. This is something that I think we may be at a big inflection point here of a multi-year cycle. But that’s a guess about the future. Like the recent past is – the commodities indexes soared last year. They’re cyclical. They’re tough. They’re volatile. So this particular moment might not be real comfortable for a true contrarian. But where are you? Are you a long-term commodities bull, or somewhere in between?
Peter Boockvar: Well, I try to figure out what’s going to happen over the next six to 12 months. I fortunately have been long energy stocks since the latter part of 2020 into pre-Pfizer vaccine news, thinking that at some point, something was going to be invented to combat COVID. I didn’t realize that the efficacy rates would be so high, with the vaccines that literally kick-started the energy trade. But I’ve ridden it since.
And my daily struggle is obviously when you invest in commodities, is how long do you ride that wave? And when is it time to get off? And right now, with oil like $90, you have to start thinking about when am I going to get off. Because the early stage of this trade is in the rear-view mirror, and I’m trying to figure that out.
On the one hand, I think the supply/demand, big picture, and balances, will continue for years. But I don’t want to discount the impact of global monetary tightening that could slow growth. But then on the other hand, what if we wake up one day and China gets off their zero-COVID policy and that country fully opens up. And what that means for that entire region, you would see a voracious demand for energy products.
So, I’m going back and forth. And I do think that some of the oil stocks that I own are cheap. There is further upside, but in a way, I guess I have one foot out the door. Now, other parts of commodities, like agriculture, I still think there’s much more upside. I think that with the sharp spike in fertilizer prices, it’s not reflected in their stocks. I also think you’re going to see higher crop prices as farmers are getting squeezed on the cost side.
There’s obviously a lot of supply disruptions with Russia and Ukraine and Belarus in terms of the fertilizers they produce in Kazatomprom, and so on. Well, actually Kazatomprom’s uranium, I’m sorry. Because I was going to get to uranium next. But Ukraine, Belarus, and Russia, then you have, I think, the uranium trade is – still has a lot more legs to it. And I remain very bullish on gold and silver, which obviously is sort of a different analysis, that it's not really just strictly supply and demand.
Obviously silver, half the demand is industrial, so there is some industrial analysis that needs to take place. But also, you’re trying to figure out where inflation is going, and rates and monetary policy, and the currencies and so on. But I remain pretty bullish on that space as well.
Dan Ferris: Right. I saw something this morning that suggested holding gold headed into a tightening cycle could be a mistake. What do you think about that?
Peter Boockvar: Well, if you said that in the 1970s, that was a mistake. If you said that in the mid-2000s when Greenspan raised rates from 1% to 5.25%, gold doubled during that time frame. And if you said that in December 2015, the day that Janet Yellen raised interest rates for the first time after being at zero for seven years, that was a mistake as well.
So, if that’s the level of one’s analysis, it is very superficial. Because we also have to look at real rates. We have to look at the currency. We have to look at what happens during rate-hiking cycles. And we know how they typically end. So there has to be a lot more "underneath the hood" analysis if one is going to be successful in investing in gold and silver, than just "OK, we’re entering a rate-hiking cycle" or "We’re entering a rate-cutting cycle."
Dan Ferris: Gotcha. Yeah, I mean I’m not selling my gold. I saw something in the news and just wanted a reaction, I guess. Let’s talk about inflation for a second. I never bought transitory. I never believed that was the case. It sounds like you don’t believe that either.
Peter Boockvar: Well, my inflation antennae went up in the spring of 2020, when right at the depths of the shutdowns, you had bare shelves at the supermarket because we had this flood of demand, because people weren’t going out. And also, obviously you had all these logistical and delivery and supply problems that led to a spike.
And then it started to spread into different areas of the economy, in addition to the demand side getting boosted by all the money that was being thrown to people in addition to the Fed betting extraordinary aggressive with monetary policy. And then as the year progressed, my inflation antennae really went up in November of 2020 when Pfizer announced their vaccine news and said, "OK, now we have something here. And the economy is going to certainly improve a lot over the next 12 months."
And can the economy handle the supply side when you have this rush of demand? Again, that was fed by and stimulated by fiscal and monetary policy to an extent that we’ve never seen before. And then of course fast forward to 2021, and the federal government throws in another $2 trillion of spending in March 2021, along with the supply problems and so on and so on.
So I’ve been talking about inflation for a couple of years now. And while I do believe that we have probably reached peak inflation in terms of rate of change, come February and March, just because the comparisons get more difficult. And we will start to see some easing on the supply side. And I do think that the rush to buy goods over the past couple years will start to ebb. No. 1, because prices have just gotten so high.
People have gotten sticker shock, so that just is a natural depressant on future growth. But also, we have pulled forward a lot of spending. But then you have the services side, which is going to continue to see intense inflationary pressures, particularly on the housing side where the TPI and PC statistics have not fully captured the increase of rents, which in 2021 were up about 18% year over year for new rents and about eight to 10% for renewals.
While the Bureau of Labor Statistics told us that rents were up about three and a half percent. So there’s still I believe more persistent inflation, albeit at a slower pace. But one that does not quickly go back to the 1% to 2% range we were at pre-COVID, and more settles into maybe a 3% to 4% inflation rate.
You just listen to Chipotle last night on their earnings conference call. Prices are in 2021, were up about 10%. And they see possible price increases in 2022 of 6%. So yeah, it’s a slowing rate of change. But it’s still much higher inflation than what we’re accustomed to.
Dan Ferris: Yeah, it’s right, it was so low for so long, and so off the world’s radar screen that maybe all you need is sort of mid-to-high – or single digits for a few years to change things for a lot of businesses, I would guess.
Peter Boockvar: Even if we settle at three, that is a big change. And keep in mind, when you look at how the world economically and market-related was sort of set up on a foundation of one to 2% inflation. It allowed central banks to do everything they did, which then encouraged all the debt accumulation that we took that took place.
And all the inflated asset prices, whether in stocks, credit spreads, real estate, that again all predicated on very low, 1%-to-2%-type inflation. If we are now entering a world where it settles out at maybe three, well, negative interest rates is really not a setup for 3% inflation. A fed funds rate in the U.S. that is zero.
And even if it goes to one, or one and a quarter by the end of the year, that doesn’t really calibrate well with 3% inflation. A 10-year yield, which is yes, near two, is still obviously well below the rate of inflation. You have corporate credit spreads that are as tight as can be, and you have the high yield being about 5%, which is not that much above the rate of inflation.
So if, we’d be answering sort of a different world structure if we stop for three. Now, if we stop at three and then head back to one to two, well then maybe we can, there’s a disruption but only for a short period of time. And I think that remains to be seen. I’m not even going to try to guess where inflation’s going to be in 2023. I just think that in 2022, like I said, it’s going to slow on a rate of change basis. But it’s still going to remain elevated and be very uncomfortable to the world’s central banks that again have interest rates predicated on a much lower inflation rate than that.
Dan Ferris: Let’s talk about central banks a little bit. Has the Federal Reserve – and you can even throw the ECB in there too – are they behind the curve? Have they waited too long to take inflation more seriously, do you think?
Peter Boockvar: Well, considering that both are still expanding their balance sheet, and one has rates at zero and one has rates below zero, you can say that they’re not even in the same state as the stadium in which they would have to face a curve. So, it’s scary, how far behind that they are. But the problem is, it’s because they’ve medicated us all on this for so long, and have inflated debt levels and market valuations. It’s going to be very difficult for them to ever catch up. And I wonder whether I’ll ever see positive real interest rates again in the U.S. Who knows if we’ll see that in Europe, of course.
Dan Ferris: Right. I just think, thinking about what Ben Bernanke said. He said, “We didn’t go far enough in the Great Depression, and we’re never going to make that mistake again.” And I think that kind of, for me, that characterizes what I would call the era of the extremely accommodative Federal Reserve, and maybe even extremely accommodative global central banks. But certainly, the Fed of the last couple or few decades here, and I have – I do have trouble believing that after that, the Fed will pivot and become this hawkish inflation fighter, just in any short period of time.
Peter Boockvar: Well, Bernanke, that’s coming from someone who put the house on fire and then ran to the fire station, jumped into a truck, and then put the fire out and wrote a book saying, "I’m a hero." So, it’s dangerous that we’ve been led by people like him down this very dark alley, proving that they have no real understanding of capitalism and the regenerative power of economic growth. And the constant need to put us on opioids to recover has been a tragic mistake.
Dan Ferris: Yeah. The medicine is worse than the disease, isn’t it?
Peter Boockvar: Ask any young family that’s trying to buy a house today. And you almost wish you could sit them down with Ben Bernanke and have him explain to them why what he has done has been a good thing.
Dan Ferris: I wonder if that’s just – that’s partially a supply issue, though, right, too?
Peter Boockvar: Well, I don’t argue that if mortgage rates were in the 4% to 5% range instead of 2% to 3%, previous to the recent increase, that you wouldn’t have seen home prices up 20% year over year. And that yeah, there is a supply-side factor in terms of delivering new homes and COVID certainly threw upside down the mobility of people.
On one hand, there was a lot more mobility as people left cities and moved to suburbs. But on the other hand, you have people that were already in suburbs that stayed in their house. But it’s clear around the world that artificially low mortgage rates juices housing prices to such an extent that it offsets completely and then some the benefits of low mortgage rates. And then you have excessively high prices, and people then can’t afford. And then they go try to rent, and rental increases are double digits.
Dan Ferris: And in that environment, the Fed buys back mortgage-backed securities.
Peter Boockvar: Right. So further increasing the housing markets. So.
Dan Ferris: That’s a real head scratcher.
Peter Boockvar: For sure.
Dan Ferris: For me, Peter, I’ve been trying to understand the mechanics of the Federal Reserve. I see a lot of discussion all over the place about how they push asset prices up, but then when you look at the mechanics of it, they’re printing a dollar. They’re buying a dollar of securities... bonds... mortgage-backed securities like we said.
And mostly, doesn’t that dollar just sit there in a member reserve account at the Fed? I mean, what’s the connection? Is it simply – is the connection simply the level of interest rates? Is that what I’m missing? The importance of the level of interest rates and the ability of the Fed to influence that? Is that the real fulcrum there?
Peter Boockvar: Well, it’s not necessarily dollar for dollar back. The Fed took their balance sheet from $4 trillion to $9 trillion, and bank reserves didn’t go up $5 trillion. There is still leakage. But also, by suppressing interest rates, as QE is also part of the zero-rate policy, is you create a hot potato for risk free assets that then forces this search for yield. And that search for yield ends up in everything.
And while throwing out crypto, for example, is not necessarily a search for yield. It’s a search for any riskier asset that can provide a higher rate of return in hopes than zero. But the Fed is still through QE, obviously conjuring up money out of thin air. And while it is technically an asset swap, the asset that the Fed is swapping is still created out of thin air.
And like I said, there is probably some leakage. But then you get into where you were March 2020, where the Fed started buying corporate bonds. They didn’t buy many. But it was the signaling aspect that obviously saved that market and created a whole different world that we’re in, that the Fed can just go in and buy anything even though they’re technically not allowed to.
And they danced around the rules for that. But that’s another conversation. Now, when you look at the Bank of Japan for example, that not just bought a lot of bonds, but also owns north of 70% of the ATF market. Well, the Nikkei is still below where it was in 1989. So that’s only helped that market to an extent. And a lot of it is just psychological. It’s signaling. OK, the Fed is here, and they want to ease financial conditions.
So if they ease financial conditions, then that creates higher risk appetite, and therefore, higher asset prices. Bernanke specifically said, in a November 2020 editorial in the Washington Post – trying to explain why they were about to do QE2 – that QE was meant to ease financial conditions and lift sock prices. That was a stated purpose of the Federal Reserve.
Dan Ferris: Well, I guess they get an A-plus on their report card. They did it.
Peter Boockvar: Yeah.
Dan Ferris: Yeah, I don’t know if you could call that a triumph. Maybe more of a failure. But I’m glad you mentioned the example of Japan, though. Because I turn this one over in my head a lot. Just with a view toward thinking about the differences, not the similarities. And I think, well, what if the difference of our different – like entrepreneurial cultures – what if that’s enough difference so that in Japan, you get buying up all the ETFs, actually buying equities with the central bank buying equities. What if we do that in the U.S. and the cultures is different enough that we get a completely different outcome?
Peter Boockvar: Well, the culture is different. But the problem in Japan is that you’ve had years of zero rates. And you don’t have this – I learned it in school, that saving equals investment. And when you discourage savings through years of zero rates, you don’t have that pool of capital to grow an economy. When you have zero rates essentially forever, you reduce that sense of urgency in terms of taking advantage of zero rates and borrowing.
That was one of the fallacies of forward guidance in the U.S., is the Fed in their model said, "OK, if we tell you rates are going to be low for three, four years, they think that that’s stimulative." But it actually does the exactly opposite because it doesn’t create that sense of urgency. The whole point of fiscal monetary policy is to stimulate. It’s to encourage you to do something today that otherwise you would have waited till tomorrow.
Well, if you’re saying that we’re just going to keep rates low forever, well, you’re no longer stimulating anything. Also, having zero rates and no yield curve, you damage the profitability of your banking sector. Well, for small, medium size businesses, they can’t get access to the capital markets. They need to go to their local banks and get a loan. But the Bank of Japan has essentially destroyed the regional banking industry in Japan.
And then you have years and years of sclerotic growth, and then all of a sudden you have families that say, "You know what, I don’t want to have a kid. Because it’s too expensive and growth is slow." And all of a sudden you have an aging population that then creates its own factor. And then you now have a shrinking population. So there are a lot of unfortunate inevitabilities to being somewhat similar to that.
Not to the same extent for the reasons you gave, in that we have this entrepreneurial culture in the U.S. that while it exists in Japan, not to the same extent, we are repeating a lot of their same mistakes, as is Europe with their monetary policy. Where 80% of the lending takes place in the European banking system. But what does the ECB decide to do? They want to kill the profits of the banks by having negative interest rates. It’s – you can’t make this stuff up.
Dan Ferris: Right. They seem to be getting real tired of negative interest rates. And there’s a lot less of that, if you follow in Bloomberg, they had that index of it. It’s down in single digits now. It used to be, it was like 15, 16 billion at one point. But now it’s down in the single digits. So that’s just – I realize that’s a function of rates. It’s just a function of the movement and the market. But to what extent might they be getting absolutely tired of this? I know Christine Lagarde – the press was that she had changed as some great change in her thinking. But they’re not changing their actions any, right?
Peter Boockvar: Well, because fast forward that they went negative in 2014. So here we are, almost eight years later.
Dan Ferris: Yeah, whatever it takes, right? Yeah.
Peter Boockvar: 2014. In 2014, June 2014 when they went negative. So here we are almost eight years later, and they’re still negative. And to what purpose? Well, now unfortunately, it’s because the ECB has basically financed every single government throughout Europe. And now you have to wean them off. You have to wean this entire economy off negative interest rates. And cheap money. And that is not an easy thing, going cold turkey. So –
Dan Ferris: OK Peter, it’s just not an easy thing. It cuts against the human nature involved in this whole deal. Do we really believe that these bureaucrats have that kind of discipline? I just can’t see it.
Peter Boockvar: No, there is no discipline. All we have to do is look back the last 10-plus years, with what we’ve seen. But we have to keep in mind that central bankers are also political animals. And therefore, that makes them very sensitive to where the economy goes. And that there’s no Paul Volcker in the room anymore, that is willing to think more longer term. Any politician is thinking about just the next election cycle. Any central banker is thinking to their next press conference.
Dan Ferris: And even from a practical standpoint, you have no Paul Volcker, it’s not exactly 1979 anymore, is it? The amount of debt is a little bit different now than it was then.
Peter Boockvar: That is correct. Even though the inflation rate is not that far away from it.
Dan Ferris: Right. So it sounds like no matter what my next question is about the future, your answer is going to be, this doesn’t look very good.
Peter Boockvar: Well, I think they’re just – we have a period of adjustment ahead of us. And I think people just have to be prepared. It won’t be the end of the world. And hopefully, we can see the rate of inflation fall, which will give central banks more flexibility in terms of their tightening. And they can more take their time.
Unfortunately, when inflation is high, they have no choice but to try to catch up, and they can’t be patient and take their time because the reality of the situation has mugged them. But we’ll get through it. But again, there’s going to be a period of adjustment, because we partied too hard. And now there’ll be a hangover. But after a hangover, if you hydrate enough, you’ll be OK.
Dan Ferris: That’s right. You can’t keep a good planet down. So, let’s talk about some specific assets, then. You mentioned gold and silver already. Of course, the narrative right now is that, oh, bitcoin replaces gold. That’s why gold has basically sucked wind for most of the last year here. What do you think of that idea?
Peter Boockvar: Yes, so I’ve been hearing obviously the same thing for a while and I think it’s complete nonsense, that something that’s been around for 13 years is going to replace something that’s been around for 5,000 years. When you’ve been around for 5,000 years, you’ve been through a lot. You’ve been through depressions and droughts and hyperinflation and deflation and world wars, and so on and so on.
When you’ve been around for 13 years, particularly the last 13 years, all you really know is zero rates, negative rates, and QE. That’s pretty much all you know. Now, I do think that there’s potentially going to be a place for crypto, and that it can complement gold and silver in one’s portfolio. But it has to prove itself. It has to prove itself in an era of inflation that we are currently in. It has to prove itself when there is global synchronized monetary tightening that is now in place. It has to prove itself. And like I said, 5,000 years of existence, you sort of proved yourself in many different ways.
Dan Ferris: You sound like me there. So, gold, silver, or maybe I should frame it this way. What you talked about, liking bombed-out situations. Is there one right now that you really liked a lot?
Peter Boockvar: So the bombed-out situation I like, and I talked about travel early on, are the Macau casino stocks. People think that China will never get past COVID and while, unfortunately, they’ll probably get past it a lot later than the rest of us because of their approach, it’s not forever.
And Macau being the Las Vegas of Asia, with half the world’s population in Asia, to me is probably one of the most attractive tourist attractions in that entire region. And these stocks have been bombed out. They’ve recently rallied, because the Macau government laid out the relicensing framework and rules and how this is going to play out as all the licenses there are expiring in June or July of 2022.
But I think we’re past that, in terms of clarity, and that all we need now is a full reopening. And I’m hopeful that whether it’s after the Olympics, it will begin, or certainly after the party congress in the latter part of the year. That just as we saw Vegas roar back to revenue levels pre-COVID, Macau is going to do the same. And these stocks are truly bombed out.
Dan Ferris: Awesome. All right, great idea. How about cannabis? What do you think of cannabis?
Peter Boockvar: So, I do have a history in that industry, of previously being on a board of a small publicly traded company. So I do know the industry. I do think that there is no question about the demand side for product. Whether for recreational uses or medicinal. It’s just the supply side and making money from that. And from a regulatory standpoint, the U.S. government is still making it somewhat difficult from a federal level in banking and tax calculations, in terms of P&L and so on.
But the state legalization sort of trend will continue. And that will only expand further the industry, and at some point, hopefully the regulatory situation from the federal government is clear, and that states will treat it like alcohol, and you’ll have some federal requirements, and then we’ll have the big players that get in and we’ll see what that means. But overall, I think stating the obvious, a growing industry, no pun intended.
Dan Ferris: All right. And if you wait for this bogey of federal legalization, probably too late by then, right?
Peter Boockvar: Well, it’s interesting. It’s really, I’m comparing it really to the food industry. The restaurant industry. So you have the dispensaries, which are technically the restaurants. Some of the restaurants farm their own food. Others buy it from others. So when you think about where the industry will be on full-fledged legalization, you’re going to have your McDonald's types, and you’re going to have your local niche restaurant.
And you’re going to have your fancy foods and you’re going to have your Kellogg’s and General Mills cereal. But then you’re going to have a lot of niched brands. I think right now, the place to make money are two ways. One is owning the dispensaries because that’s basically owning a lot of restaurants. And however, wherever it goes federally, and the big boys want to get in, like Altria or Budweiser or whatever, you’ll still have that local restaurant.
And if Hershey wants to get into the edibles – I’m not saying that they will, but if they do – you’re going to have your niche products and you’ll have your more generic ones. And then also the picks and shovels industry. You take Scott’s Miracle Gro which, full disclosure, I own it for myself and clients. They have their lawn care business, but they’re building out their hydroponic supply business, that doesn’t matter who’s going to win or lose. They’re going to supply you with lighting and trays and nutrients and so on.
Dan Ferris: Well, I’m glad you mentioned Hershey, because I wonder, in 10 years, what the brand landscape of the actual products will look like. We, because, as soon as I started thinking about this whole thing, well, it’s an agricultural product. And I’m not sure how much you know, the fact that you can do all of these different things with it makes a difference in that regard.
Peter Boockvar: Well, look at Coca-Cola. Coca-Cola’s now in the liquor business. They’re selling spiked liquor, or alcohol products. So if Coca-Cola can get into the liquor business, well, maybe Hershey someday gets into the edibles business. Or Mars. We’ll see.
Dan Ferris: Right. Yeah, it’s not a bad example. Is there anything else that you really, really like right now? I’ll just leave it up to you.
Peter Boockvar: I think investors need to be a lot more valuation sensitive. I think I’m stating the obvious on that also, considering what we saw in the month of January. And currently, what we’ve been seeing since last year with a lot of high-fliers. So I think that the playbook of the last couple of years in making money markets will be different over het next couple of years.
And I started out this interview talking about looking at bombed-out situations. And you look at markets that are up here in [inaudible] it’s the Hang Seng. It’s the FTSE 100 as two examples of cheap markets, where there’s a dividend yield. And even Singapore’s is up this year, which I’m bullish on. So, low multiples. High dividend yields.
Looking at Asian markets that haven’t done very well the last 10 years, or even some in Europe. And cheaper value stuff in the U.S. that’s going to be less sensitive to a valuation rethink than some of the more expensive technology stocks or other parts of the market. And also, if it is going to be a choppy couple of years, it’s cash is an asset class. And just trying to lose less.
Dan Ferris: Right. So maybe I’ll go ahead and ask you my final question, which is the same for every guest, no matter what the topic. Even when we go off of finance occasionally. Same final question, every guest. And it is simply, if you could leave our listener with a single thought today, what would it be?
Peter Boockvar: So I have to answer this with the context of the investing world?
Dan Ferris: Go anywhere you like. It doesn’t have to be about investing.
Peter Boockvar: I think being humble is an important characteristic. That we can’t know it all. And humility, at least in the investing world, should be a key characteristic. Because any time you get overconfident about any one thing, the market has a way of coming around and slapping you in the face.
Dan Ferris: Perfect. Thank you. That’s a great one. And succinctly and well put. Well, thanks for being here. I’m really glad that we were able to talk to you.
Peter Boockvar: Sure. Fun conversation.
Dan Ferris: Yeah. And you’ll probably be getting a call or an e-mail from us in six or 12 months just to check back in with you.
Peter Boockvar: Great. Sounds good. I look forward to that.
Dan Ferris: All right, Peter, thanks. [Music]
Well, I’m really happy to have spoken with Peter. I’ve been following him on Twitter for a couple of years. And of course, I already knew that he was a value-oriented guy who also is really as you could tell, a deeply informed macro investor. And that combination to me is really potent because I’ve been a value guy forever.
But I really only have started paying close attention to macro issues within the past few years. And I still find them difficult to wrap my head around. So I like talking to guys like him who know what they’re doing. And I hope you do too. All right. Let’s shake out the mailbag. Let’s do it right now. [Music]
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows, and I respond to as many as possible. Or call our listener feedback line, 800-381-2357. Tell us what’s on your mind and hear your voice on the show.
First up this week is Troy R. Troy, it was a long e-mail. You had a lot of questions. I’ve kind of pared it down a little bit, OK? You have three of them. And the first one says, "I have been noticing a lot of talk about rotation of money cycles, history repeating or rhyming. And it certainly seems that the rotation is ongoing, and cycles do repeat.
"Seems to me that the market of old is vastly different from what we have today, specifically with gigantic institutional investing as well as the ease at which the individual investor can affect the market. Ease and no-cost trading along with electronic mass is influencing the market – Reddit and Robinhood. Will the cycles shorten or establish more randomness?"
I think I’ll answer these one at a time, Troy. So, yeah. Who knows – I won’t tell you exactly how long any cycle will last or how long it will take. Or even if it will happen. I just think the odds favor it, because I think it’s based on human nature, just typical human behavior. Things do change. The market of old seems vastly different from today.
But did you notice what you said in your question? You said on the one hand, you said specifically with gigantic institutional investing as well as the ease at which the individual investor can affect the market.
So, you can have one or the other being a lot different, but you can’t have both, you know what I’m saying? What you’re telling me is that institutions push the market around and so do individuals. And it’s not a stock market. It’s a market of stocks. Obviously, individuals sure pushed the hell out of GameStop and AMC, didn’t they? They pushed them through the roof and to the moon.
But yes, and I imagine in some other cases institutional buying and selling has a big effect. But I don’t know if you get to cite both of them and say that things are different because they’re both active. I hope you see what I mean by that. So, will the cycles shorten or establish more randomness? I don’t know. I just think human nature won’t change them, and the cycles will repeat.
Your second question is, No. 2, second question is the blunt question, you said. Be blunt, Troy. Don’t be afraid. Troy continues, "Your recommendation of cutting speculation and losers speaks to me. Obviously, I have made mistakes, and will continue to do so. But I recently tried to trim the losers and speculation much more so. Have you applied that same mentality to Extreme Value?" And he says he’s cringing as he types. You don’t have to cringe, Troy, just ask a question.
Well, sure. You mentioned a couple of stocks that I won’t mention because it’s just for readers, for paying subscribers. But yeah, we try not to engage in any speculation. The only real speculation in Extreme Value that I still have in there, that qualifies, is bitcoin. Because it’s kind of an unproven entity. I think it’s an unproven entity with some really good fundamentals underneath it, and a good future ahead of it.
But, technically speaking, it is what I would call a fundamentals-based speculation. And it’s still in there. So, technically speaking, the answer to your question is no, I have not trimmed the speculation from Extreme Value. But it’s all based on fundamentals. And all the stock picks are based on the same fundamental system. So if they’re still in there, that means we still like the fundamentals, even if the stock is down 30% or 40%. Which is just, I think there’s one or two of those. And the rest have done pretty nicely, thank you very much.
And Troy’s third question is "Hopefully I still have a long way to go before the big sleep." Ooh. A little dark there, Troy. And he continues, "So I am still interested in growth as well. Have you considered labeling some of your recommendations as value/growth? Troy R." Troy, they’re all value and growth. Value and growth can’t really be separated.
And I’ve made this point before, but it does need to be repeated. It’s slightly complicated. When I talk about value as being distinct from growth, I mean the contents of value indexes versus the contents of growth indexes. And even then, the contents of, for example, the Russell 3000 Value and Growth indexes – they overlap. They have some of the same stocks. So they’re not all completely different.
But they are – they are chosen differently – and that’s the point. One index is chosen based on valuation, basic valuation parameters like price to book, price to cash flow, price to earnings. And the other index is chosen based on revenue growth, earnings growth, maybe a few other things. But it’s all growth, growth, growth.
Now, when you talk about the individual recommendations I make in Extreme Value, growth is a part of value. You can’t assess a company without considering its growth prospects. I hope that’s clear enough for you, Troy. They’re good questions. Keep writing in. Thanks.
Next comes John A. And John A. says, "Hi Dan, I have heard so much about the zombie companies that only survive on low interest rates. Seems like interest rates will/are going up, and their input costs are going up. PPI, labor costs. Should we expect the undead to finally die now? Is there something close to a zombie company index that we could short, or buy some puts on as a hedge?
"On the flip side, from reading Doc Eifrig’s work, I’ve actually learned to reduce risk and add income selling options. Before I became an Alliance member, I pretty much was using options to swing for the fence as I think we all know how that works out. Keep up the good work. Ever forward, John A."
John, I couldn’t – I didn’t find a zombie index. But it’s a funny thing, because there’s a place on Bloomberg I found where they’re tracking the number of zombie companies in the Russell 3000 Index. And last July, I think it was, over 700. But just recently, the most recent entry I found is from December 23. And they said the number has fallen to 621. So, I think that’s interesting.
And I think it’s probably a function of oil prices. Because they put a note here that says among the 11 sectors of the Russell 3000, energy had the highest concentration of zombies. So, it makes sense, and I didn’t see any report anywhere else in this very short little piece about it, about how many zombies there were in energy in July versus now. But there are fewer zombies now than there were in July, and I’m going to guess that rising energy prices had something to do with that.
So, it’s funny how these things work out, isn’t it? You never know what’s going to happen. Predictions are hard, aren’t they. But yes, generally speaking, having a lot of zombies out there who depend for their life lood on being able to turn over low interest debt with equally low or even lower interest debt is a source of risk.
Next comes Steven R. And Steven R. says, "Hey Dan, I’m an Extreme Value subscriber and never miss a podcast. You have been talking about how we should prepare and not predict, and hold plenty of cash and maybe some long-dated puts as a hedge to our portfolio. When you say plenty of cash, do you mean 20% of your portfolio? 50% of your portfolio? Or something in between?
"I also think I found a better way to predict the downside than buying puts. I purchased the volatility fund, VXX, which moves up when the market moves down. The advantage is, I don’t have to worry about it expiring, and at some point, we will get a big volatility spike and the fund could easily double from where it is now. I would like your thoughts on that strategy. Steven R.
First question first. When I say hold plenty of cash, I have said, like between somewhere around 20% or 40% of your portfolio. More if you’re comfortable. It really is dependent on your comfort. But plenty. Enough so you could deploy in a downturn and make a good dent and buy lots of good bargain-priced equities.
The next part of your thing here – you want me to comment on holding VXX. So, these funds are based on VIX futures. Now, I’ve traded VIX futures, and I hate them. I think they’re garbage. And the reason I think they’re garbage, is because when the VIX goes up like 80% or 100%, the front month goes up like 40% or 50% or a whole lot less. You get none of that punch from the VIX.
And then, to boot, the rest of the time, when volatility is kind of low or falling, you get this degradation of value over time. Do a little exercise for me, Steven R. Go to wherever it is that you like to get stock quotes, OK? Pull up VXX, and if you’re on, say, Yahoo or someplace, there will be a button that says "Max," that will show you the max chart that goes years as long as the VXX has existed.
And so I’m hitting the max button on Bloomberg, where I get stock quotes, and it goes back to what, 2018. And it spiked up to what, February, early February, 2018. It spiked up. And then it’s just degradation, degradation. And then we got a spike back up but not quite as high in December 2018. And then it’s degradation and degradation, and it’s falling and falling and falling and falling and falling. And then of course, it spikes up in March of 2020, and then falling and falling and falling and falling and falling.
So just understand, you have not sidestepped the deterioration in value from expiration. Those futures contracts, they average 30 days. I think they pick the two front months. I haven’t looked at the prospectus. But most of them are run the same way. They take the two front months. So every 30 days, you’re kind of turning over. And then the second month becomes the front month, and the third month becomes the second month, and you get this moving average of those two months, and it’s constant degradation. You’re not escaping it.
Now, of course, when an option expires out of the money, it goes to zero and that’s it. So you’re right about that. But the effect is similar. And over the long term, if you – there are short VIX funds over the long term, and even those, they don’t look that great necessarily. But it depends over the timeframe.
So just know that that’s kind of the way that looks to me. But you will, if the VIX really spikes up hard, you will get a spike. But for me, I just haven’t found anything better than purchasing out of the money put options, way out of the money, when the VIX is low. When the VIX is low, that means that people don’t want to buy puts as much as when it’s high. That’s the difference. As an equity volatility index, that’s just the way it works.
So, yeah. Steven, I hear you. It’s an easier way to do it, isn’t it? Because you just buy it and hold it, and the market goes up over a period of time, well, the VXX is going to go down. But even if it kind of goes sideways, or doesn’t go down a whole lot, volatility could stay low and those futures contracts which perform like crap anyway are going to keep rolling over and not doing very well.
So be careful with that. With your expectations of it, anyway. But it’s a great question. I’m glad you asked about that VXX fund. I haven’t talked about it in a long time. I really, once upon a time I used to talk about it quite a bit.
All right. Well, that’s another mailbag, and that’s another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. And we do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want. Scroll all the way down. Click on the word "transcript" and enjoy. If you like this episode and know anybody who might enjoy listening to the show, tell them to check it out on their podcast or at investorhour.com. And do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you’re there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @investorhour. On Twitter our handle is @investor_hour. Have a guest you want me to interview? Drop me a note at [email protected] or call the listener feedback line: 800-381-2357. Tell us what’s on your mind and hear your voice on the show. Till next week, I’m Dan Ferris. Thanks for listening.
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