This week, we're thrilled to welcome a brand-new guest to the Stansberry Investor Hour... who happens to be the lead analyst for Stansberry Research's longest-running flagship publication: Alan Gula.
But first, Dan and his co-host Corey discuss the latest hot-button topics: Big Tech's sweeping wave of layoffs, why media coverage of the "debt-ceiling crisis" is just "pure noise," the "cat-and-mouse game" of the lag effects of Federal Reserve policy, and whether there could be an encore to last year's bond-market beatdown.
Speaking of distressed investments... today's guest had a front-row seat to the financial crisis, as he was working Barclays Investment Bank's distressed-debt desk when Lehman Brothers filed for bankruptcy. Alan worked at some of Wall Street's biggest firms before joining Stansberry Research. He also holds a Chartered Financial Analyst ("CFA") designation and earned his MBA with a specialization in quantitative finance from the Stern School of Business at New York University.
From as early as age 14 – when he bought his first stock – Alan knew that he wanted a career in finance. (The same can't be said for writing, however.) But after a storied career on Wall Street, he switched gears in 2014 and honed his writing before joining Stansberry Research in 2016. Alan's goal for Stansberry's Investment Advisory is to make sophisticated research accessible – and enjoyable to read – for the average investor.
"I think that any good recommendation has a good macro tailwind. And cycles are crucial from a macro standpoint," says Alan. That's how he and his team were able to catch the bottom of oil's boom-and-bust cycle... which recently resulted in a 400%-winner in less than two years for his subscribers – the largest gain booked in the newsletter's history.
But finding a winner requires more than just the right macroeconomic setup... As Alan states, it's one that "marries both the macro and the bottom-up fundamentals research." He dives deep into his bottom-up research process. And he also shares his No. 1 tip for successful investing.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we talk with our colleague Alan Gula, senior analyst at Stansberry Research.
Dan Ferris: And for today's rant, we'll talk about tech layoffs, the debt-ceiling crisis, and more.
Corey McLaughlin: And remember, you can e-mail us at [email protected] and tell us what's on your mind.
Dan Ferris: That and more right now on the Stansberry Investor Hour.
So I'm looking at some stats here at layoffs.fyi and they list the biggest tech layoffs since COVID-19 and the top ones are the top six – Google, Meta, Microsoft, Amazon, Amazon again, and then Salesforce – all since November, and it totals 57,000, as I read here... 57,000 people in these companies.
These are the companies that you've seen these like TikTok videos where they go to work and they show you basically, "I work at a resort called Google" or something, right? "I work at a resort called Meta and they have all these incredible foods and services and anything you want." And their job looks like a piece of cake the way they represent it in the TikTok videos.
So, my point here is that these companies... their employees are a huge investment and they're looking for the best of the best. Now, I'm not saying that all the people who got laid off, you know, if you're going to lay people off, you don't lay off the best of the best, right? But overall, they spend a lot of money to get these folks and now they're laying off 57,000 of them. I think this is a harbinger. And Microsoft, when they did their big layoff a few days ago, they said it's the slowdown in the global economy. There's no if, ands, or buts.
Corey McLaughlin: Yeah, like you said, Microsoft was the most recent one. They laid off 10,000 employees this week, cost-cutting measures basically and Microsoft's CEO made this announcement from Davos, by the way, which was probably nice for those employees back in Seattle or wherever they are.
Dan Ferris: A little tone deaf there, buddy, but OK yeah.
Corey McLaughlin: But the point being, yeah, these tech layoffs are still happening, you know, because obviously, these companies are going to try to keep their margins up and beat Wall Street expectations and whatnot. So, yeah. And I heard a comment today that the tech industry isn't even at – you know, they're still above full employment, generally speaking, the tech industry. So, there could be some more room to go here, I would think if that number is true and a harbinger of things possibly to come in other industries like we've been talking about the last couple of weeks.
Dan Ferris: And even to come in tech, like if you look at the other stats at layoffs.fyi, you will see just layoff after layoff after layoff. They list the companies, but they're really small. I've never heard of any of them and they're laying off 100 or 50 or 200 or 20 or the number, they don't even list the number, it's just some little company you never heard of. I think the ripples are already feeling this. The most recent one, by the way, was actually Google – 12,000. So, just recently, that's like 22,000 in the past few days.
Corey McLaughlin: Right.
Dan Ferris: Boom. No job, and they get, you know, a few months of severance and they get, again, treated really well and maybe somebody out there is going to tell me, "Yeah, but this is good for margins." Generally speaking, yeah, but Microsoft would rather keep these people and see their business grow and not be hampered by what they – apparently they're looking at maybe some type of global recession or something. So, not good. And I think worse maybe than the average market participant is thinking?
Corey McLaughlin: I think so.
Dan Ferris: Yeah. Not a lot of bearishness out there that I'm seeing.
Corey McLaughlin: I know. I was thinking about this today. I'm getting increasingly more concerned than I was two months ago just because of the amount of optimism that is out there. I would love to be more optimistic about the markets and the economy, but now you're starting to see these layoffs continue and maybe pile up even more. You're starting to see some other numbers pointing to serious economic slowdown and then at the same time, you're hearing the Fed officials get nervous and saying, "Oh, we're going to go to 25 basis points instead of 50."
They're already pulling back faster than they thought they would or talking about doing it than they thought they would. So yeah, so anyway, I'm getting a little more concerned now that, to your point about maybe the average market participant isn't. I can't speak for every market participant, but I think I'm getting a little more not-scared, but concerned maybe than some other people.
Dan Ferris: Sure. Yeah, I think you're seeing the same thing as I am. It's like, wait a minute. Where's the bearishness again because you still, that's still –
Corey McLaughlin: Where did the bear market go?
Dan Ferris: Yeah, that's still sort of a narrative is that, you know, people are so bearish, but they're really not that I can see. I mean, like Bed Bath and Beyond, they got warned the past couple of days, they were warned by the Nasdaq. They have, I think, 60 days, to get in compliance by filing their 10-Q. They're late on their 10-Q and what do you do when you're busy filing bankruptcy? Right? Let's just not worry about the 10-Q right now because it's about to become totally irrelevant. And the stock is still like, I think the market cap is hundreds of millions anyway. It's still three or four bucks and it should be pennies by now. It should not exist.
Corey McLaughlin: Yeah, they're closing hundreds of stores and it's yeah.
Dan Ferris: Yeah, the last wave is like 130 stores. I mean, just like not really – it doesn't look bearish to me. And Tesla was another one. Like, finally after all these bears talking about fraud at Tesla for years now, their director of whatever, self-driving, I forget what his title is, but he comes out in a Reuters story last week and says, "Hey you know that video we had of the self-driving Model X in October 2016? We faked it. The car doesn't really have those features. It doesn't really stop at red lights and go at green lights," etc., etc. And I mean, I don't know if this is going to blow up into something bigger, but the stock is up like 3% or 4% on the week. I mean, it's just like, that's not bearish.
Corey McLaughlin: Right, right, when the bad news is still good news, it's still not bearish yet. We saw a little bit maybe last week about when those retail sales numbers came out, that was a little bad news becoming bad news as far as – I think it was 1.1% decrease in December in the U.S. after another month of decreases in November. The market reacted badly to those numbers, but I think on balance, there's still these pockets of froth – I mean, when you're talking about Bed Bath & Beyond, like has anybody been to a Bed Bath and Beyond lately? It's not – you don't get that warm and cozy feeling there.
Dan Ferris: It's downright awkward.
Corey McLaughlin: Yeah. So for the stock to be performing the way it is, I mean, that's just kind of residual I feel like from the peak meme era are still hanging on there.
Dan Ferris: Yeah, I mean I saw a really, really sad tweet of some poor guy who's apparently longed Bed Bath and Beyond. He's like, "Come on guys, let's pump this thing up to the moon," just the same way everybody was doing during the meme stock era in 2021. It's just sad at this point. The thing is headed for bankruptcy. We all know it. Oh.
Corey McLaughlin: Yeah. That's like being too late at the party.
Dan Ferris: Yeah.
Corey McLaughlin: Unfortunately.
Dan Ferris: Really sad. So, you know, I think the tech layoff headlines are sort of the opposite of noise. It's not loud enough. Like, people don't quite get enough. At the other end of the spectrum is like almost pure noise, which I would categorize the debt ceiling, the debt ceiling crisis. I'm making air quotes, folks.
Corey McLaughlin: Yes, I would too.
Dan Ferris: Debt ceiling crisis in quotes. What do you – I mean, do you agree, disagree?
Corey McLaughlin: Yeah as far as it being pure noise, an immense amount of noise. Yeah, I mean, all you need to do is look at – we're talking about this because it's been in the news again lately the politicians bringing up the debt ceiling raise or suspension or whatever you want to call it. The debt ceiling's been raised almost 80 times since 1960, so if you think it's not going to happen again, that's not a good bet, first of all.
And people are going to make – this is probably going to go on for another three months or so, some debate about it, mainly from politicians using it as some sort of leverage or talking points. I was literally looking up what I wrote two years ago about when this happened the last time in 20 – it wasn't even two years ago, it was 2021 when they were arguing over the debt ceiling. In the end, the debt ceiling is going to be suspended or raised and there'll be more debt in the system. The U.S. cannot survive without. I mean, you're talking about Treasurys defaulting. Nobody's going to get that point. I think Janet Yellen has a form letter at this point that she sends out about what's going on I think from two years ago. It was almost the same exact thing with some names changed, Democrats, Republicans. It's all the same nonsense.
Dan Ferris: It is. I completely agree and it's just so absurd. You've got the world's reserve currency. You know, there's more demand for dollars. I think there's a lot of demand, actually, out there for dollars and more on the way. And it's hard to sell anything in this world without getting dollars.
And that being the case, like there is absolutely no political reason – it's politically totally not feasible at all that the United States would default on its debt, which, if they run this thing out, they technically go into default. I think they might lose another notch on the credit rating. You know, they went from AAA to AA+ the last big go-around in 2011, so maybe they take them down to AAA. But, who cares? It's still the U.S. dollar and they'll raise it because they have to because the people, you know, they'll see the political reality.
You can't be the guy who held up the process of raising the debt ceiling, pushed the country into a crisis no matter how much you think it's the right thing to do. It would really very so quickly look like the insane thing to do, politically at least.
Corey McLaughlin: Right. Part of me always thinks when this came up the last time was, you know, maybe somebody is dumb enough in Congress to just let this happen. And if it does, I think those same people in DC will quickly realize what a mistake that would be just for the system in general and them. You know, maybe at that point it'll sink in for them. But I would never rule out anything as 0% risk.
Dan Ferris: Right. It's – yeah, there is a non-zero probability.
Corey McLaughlin: There is a non-zero probability, however, it's – history suggests more of the same with the debt ceiling. So no matter what you hear about the debt ceiling, they already pushed it back to the next deadline about negotiations till April, so that'll probably happen again. And by the end of the year, they'll be – I think what happened last time is they got to the end of the year and some of the budget bills and whatnot and then it became a fixed, which basically raising the limit.
Dan Ferris: I forget what – they have a special term for the day when we sort of go into default and everything ends, but it's sometimes in the June, September timeframe is my understanding when it just gets so insane that there's no way they'll go through to like September with this, I don't think. And the whole thing, it's pure political noise, but – but it does create some noise in the bond market, which might give you a nice opportunity to enter.
The question becomes, do I really want to try to time this? OK, we're pushed out to the April deadline now. Do I want to wait until halfway between here and there because one would think that in eh second half of that period, we might start getting the idea that no, we're not insane enough to do this, to let this happen. You know? But we'll see. I think at some point along here, there's going to be a dynamite moment to buy bonds.
Timing it is probably insanely difficult, but I don't think you have to pinpoint the bottom. And you can't do that anyway, but you don't have to. I think bonds were beaten absolutely to death literally the U.S. Treasurys have had their worst year since 1788, according to the Deutsche Bank data. I saw some Bank of America data that puts it at 1796. So I'm going to let those people argue about eight years, whatever. But let's just call it 18th century. You know what I'm saying?
I don't think we're going to get another, a second year in a row of worst performances since the 18th century. And that might be all it takes.
Corey McLaughlin: Yeah, you don't need much more.
Dan Ferris: So there could be an opportunity here. Also, I think there could be a – I just get this feeling and it's partly based on looking at charts, which you know, I'm practically a voodoo witch doctor when it comes to looking at charts, but I think it's useful. When I look at stuff like copper and gold and gold stocks and copper stocks and things, I think, man they look like – they don't make me feel like a contrarian at all because they're really pushing up against the recent highs, but I feel like they're getting ready to launch, which is a weird way to feel when you're talking tech layoffs and global recession and all this stuff. So, there's danger and opportunity here.
Corey McLaughlin: I agree. I'm with you on gold right now too. I think things are aligning for gold in terms of a monetary policy and risk and the dollar, what's going on with the dollar weakening a bit and the more I think about it, the more gold is perfect right now because the dollar's weakening. We talked about this a couple weeks ago. Gold had already been making highs in other currencies or versus other currencies. Then I think inflation is going to stay higher longer.
So, if you have a weakening dollar and inflation's staying higher than usual for longer, I mean gold and those kind of hard asset type things I think, like you said, this is like a different – we're in a – Howard Marks called it the sea change. This is it. This is like, this is what's happening. Tech companies are laying thousands of people off and gold's going up. So what else do you need to see? It's a different time. It's very interesting to me. I mean, this could be a fun kind of year if you're plugged in and –
Dan Ferris: I agree and it's interesting to me, like I feel slightly insane, but I know how these things go. Like, I want to be long dollars and I want to be long gold at the same time, oddly enough, like just think of the dollars price as being reflective of euro, yen, and pound, and I think of gold's price being reflective of dollars. So the dollar can actually weaken versus gold and be strong versus the others. So like DXY, you know, the dollar index is simply the dollar in those other currencies proportionally. It's like 57% or 58% euro, etc. It's really mostly almost entirely those three.
So, you get this weird sort of thing where maybe the dollar and gold rise together. And I don't think you're insane for wanting to own both. Certainly in The Ferris Report, I'm like, yeah, we just bought dollars in a good way and we've bought gold I think in a pretty – in a couple of pretty good ways. So we're ready, man. We'll see.
Corey McLaughlin: All right.
Dan Ferris: If things happen the way –
Corey McLaughlin: We'll check back in a month.
Dan Ferris: Yeah. Well, give me more than a month, but yeah, we will check back. Interesting year.
Corey McLaughlin: Yeah, it will be, one way or another.
Dan Ferris: It ain't 2019 anymore, buttercup. It's different now. It's certainly not 2021 or 2020, the latter half of 2020.
Corey McLaughlin: Yeah, let's hope not, 2022. It is fascinating, you know, you wonder what the – I still feel like everything that happened in 2022 was kind of just advance kind of fretting and warning about the Fed and inflation fighting. And now still, I don't know – I don't think that a lot of whatever is going to happen in the middle of this year or the end of this year is still – like if you look at the bond yields and whatnot, people believe the Fed is going to come in later this year and cut rates, still. And to this point, they still have done nothing but the opposite of what those same people have expected.
So I don't know. To me, I'm still on the relatively conservative side, but still seeing opportunities out there I guess is my point at the beginning of this year.
Dan Ferris: Yeah, I think that's a decent posture, but I'm starting to look at the situation and think, you know, these 25 bps raises that we think are coming, are there going to be two of them or are there going to be four of them. And after there are let's say two or three of them, would there be no action for one or two meetings and then a cut? Because like the lag here, and I've said this in other places recently, but I'll keep repeating it, the lag component is like twice over because when the Fed announces policy action, it's looking at the data backward. The data's lagging and it's looking backward at that data. Then, it's executing monetary policy at that moment, which itself has a lagging effect months and months into the future. So that moment months and months in the future is months and months before the monetary – it's like way off.
Corey McLaughlin: Yeah. It's like this cat-and-mouse game. They're playing catch up to themselves.
Dan Ferris: Yeah. So are we really – is this really at this moment in January 2023, are we saying that this moment discounts is what we – what the 75 bps, the simultaneous 75 bps cuts, it was about this moment? Or are we still not there yet/ You see what I'm saying?
Corey McLaughlin: That's what I keep thinking too. Are we not there at that – we're waiting for these lag – they say all the time, these blunt tools, the lag effects. You know, what are we – and at the first sign of slowdown, they're saying, "We're pulling back." So maybe there's something to be said that for the end of the year, we might have some sort of cut. But again, if inflation is what it is and like we've said before, those numbers with the housing market, you know, that rent number. That's still going to be higher than usual. So, I don't know. It's going to be interesting toward the end of this year or obviously the next couple months, probably all of this year, really. If there's no real – sometimes I feel like you kind of can see what – generally speaking where the Fed might go but –
I don't right now. I don't –
Dan Ferris: No. as a matter of fact, this is important. Up to this point, you've been able to say OK, they said they're going to be more restrictive. They said there's going to be pain and they keep making these interest rate hikes. And it was like 75 bps and they kept coming with the 75 bps. I was like, "Whoa, they're serious. Their words and their actions are lining up." But now we get to the point where you're going to have to go back into a much heavier parsing of Fed-speak, right? Maybe.
I'm guessing that in the next couple of meetings, the next couple of monetary policy actions, you're going to start hearing some different talk and then you're going to have to scratch your head and say, "OK, that wonderful reverse negative goldilocks period where you knew they were going to hammer, hammer, hammer with hikes and hikes and hikes, well maybe that's over and now what? It's an interesting moment."
Corey McLaughlin: Agreed.
Dan Ferris: All right. So let's talk to an interesting guy, Mr. Alan Gula, our colleague, senior editor here at Stansberry Research. I cannot wait to talk with him because we've never done so and I consider Alan a really fantastic analyst and just a great guy. So let's talk with him. Let's do it right now.
Many mainstream analysts are predicting that stocks will recover soon, but I say we'll instead witness a cash frenzy unlike what we've experienced in 21 years before stocks recover. And I'm urging Americans not to buy a single stock until they see it. I predicted the Lehman Brothers crash in 2008 and I called the top of the Nasdaq in 2021, but this is the No. 1 most important thing to pay attention to for 2023. And I'm not talking about another market crash or politics or inflation or any of these other things. As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening.
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Alan, welcome to the show.
Alan Gula: Thanks for having me, Dan. Good to finally be on the show.
Dan Ferris: Yeah, yeah, we finally got you in here. I've been wanting to do so for quite some time.
Alan Gula: Yeah, I was just waiting till inflation had peaked so I could come to the show, and so it would be bullish.
Dan Ferris: All right. Hey, bring it on man. If that's how you feel, you know, we definitely want to hear more about it.
Alan Gula: No, no, I was just joking.
Dan Ferris: OK. Well, I don't know, maybe we should start there because I tend to think of you as this serious bottom-up guy who does really kind of deep analysis into the companies that he writes about. So, it always makes me wonder, how much does anyone who think about macro issues. And you bring up inflation, so maybe we should start there.
Alan Gula: Well, I think that any good recommendation has a big macro tailwind. And so I think cycles are crucial from a macro standpoint, so is the business cycle, credit cycle, risk cycle. Inflation is important. And so, I can give you an example, when we got the cycle right and I say we, so I work on Stansberry's Investment Advisory, which is our flagship newsletter. We call it that because it's our longest-running publication with a track record back to 1999.
And in that newsletter's model portfolio, we have these investment categories that our recommendations usually fall into. And one of them is America's Energy Renaissance, which we've been writing about for over a decade, far longer than I've been at the company. And so the best time to invest in the energy sector is during an oil bust. So do you remember what happened in April 2020 in the oil market?
Dan Ferris: Oh April 2020, sure, WTI went negative.
Alan Gula: Yeah, so the front month, like front-month crude-oil futures contracts went negative and that was – for me, that was sort of the signal that we'd see max pain in the – for that oil bust and that we were on our way to a boom. If you remember at the time, most people thought the majority of exploration and production companies, the oil and gas drillers were going to go bankrupt.
So I looked through the industry to find well-run businesses, doing the bottom-up analysis, the fundamentals bottom-up research and you know, to find well-run businesses that could survive a prolonged bust – in case I was wrong – they really weren't highly leveraged. And so we recommended Parsley Energy, a relatively small oil driller in the Permian Basin in Texas. And so the boom actually arrived fairly quickly, sooner than I had thought, and Parsley was acquired by Pioneer Natural Resources, which validated our work, and we later recommended some other oil royalty companies and one of them was Texas Pacific Land and we actually just took profits on TPL last November for something like a 440% gain in two years.
And so that's a good example of us getting macro right, catching the bottom of the oil bust and then we got inflation – it's not like we foresaw such a massive inflation, but we were just following the cycle, being opportunistic and it really worked out in the end. And so we could talk about views on inflation, but I think that it's sort of – any good recommendation marries both the macro and bottom-up fundamental research.
Dan Ferris: Sounds like a good recipe to me. So let's just talk about your bottom-up process. Do you do screens or where do you start?
Alan Gula: Well, so we do screens. So we're big on capital efficiency, and capital-efficient companies don't require a lot of capex to grow. So they scale really well and produce a lot of free cash flow and turn a lot of capital over to shareholders. And so every quarter, we publish a capital efficiency monitor which is a list of our top 25 technology and non-tech capital-efficient companies and so we source a lot of the capital-efficient stocks that we recommend from that list.
So that's an example of sort of screen that provides us with some ideas. And then we'll go in and do more research and we'll have a bunch of ideas that we've been working on and then sort of get to the other end, and this is really a team effort.
So there's me and a bunch of other analysts that work on the flagship newsletter that will get together and decide which ideas are most compelling, which is most timely and then we'll go into more in-depth research and then start the write-up and look for a lead story, which instructs something that I think that we're –
What we do is very much different than sell-side equity research where we have our research is much more accessible to retail investors and we tell these cool stories at the beginning of the write-up and it sort of relates to the thesis and it tells some history ideally and it's like a – it's something that's meant to be memorable. So we're not just giving people a bunch of tables and data.
Dan Ferris: Right. you know, Alan if I met you at a conference, I would say, "Oh, he's a buy-side guy." He's working for a hedge fund. To me, that's just like you exude that kind of mojo. And it's intended as a compliment. I hope you don't have a bad view of hedge –
Alan Gula: Not at all, not at all. I worked on Wall Street. That's where I began my career and then sort of had this – started writing. So after the financial crisis, I started writing a little bit and put out like a couple reports just to people in the industry I knew. And then somehow I joined a financial publishing firm in 2014 and yeah, moved down to Baltimore and then joined Stansberry Research in 2016. So been here ever since.
Corey McLaughlin: Yeah, Alan, what did you see during the financial crisis and what got you into starting to write about the markets a bit? I mean, where were you, maybe for people who aren't aware or just because that's kind of a transformative time for a lot of different people. So how did it hit you?
Alan Gula: Yeah. Well, I was actually on the distressed-debt desk at Barclays Capital when Lehman filed bankruptcy. So it was a really crazy time going through that. It was after I'd gone back to business school. I was on a trading rotation and I had some time at various trading desks, at Barclays and it was just a tremendous experience. I don't know when I started writing. In high school, I think English was probably my least favorite subject and I never thought, you know, I just hated writing. And just never thought I would now be – I think half my job now is writing and half is researching and so like it's just crazy to think how I got here.
Corey McLaughlin: Me too, believe it or not. English was –
Alan Gula: What?
Corey McLaughlin: Me too, believe it or not. English was not my favorite subject either.
Alan Gula: Yeah, but yeah, it's worked out well and I really – I really enjoy what I do and I think it's much more rewarding than where I was at in the sense that I started off in corporate advisory and it was exciting and I learned a lot, but it wasn't that rewarding. So now I get to help every-day investors manage their portfolios and help them navigate these challenging markets.
Dan Ferris: Yeah, they've become a lot more challenging. It seemed almost easy up to the top in 2020 and it was really hard for a couple of months and then it seemed really super easy for a while after that, but it doesn't seem easy anymore. It wasn't easy all along though, was it?
Alan Gula: Well, I think, like I think we've gone through these massive cycles and I think that you can have a view, you can have a macro view, but you just always have to be looking for opportunities, no matter what's going on in the world, no matter what's going on in the markets. I think that that's one of the things that I've really been good at, just obviously I have – you have your macro view, but you can't let that get in the way of looking for opportunities.
Dan Ferris: Right. So that's – what you just said, it sounds like sort of the classic value investor, right? The classic value investor says I don't care about the macro and I will buy any security that is priced right at any time.
Alan Gula: I would say I'm more of a "growth at a reasonable price" investor. So I'm somewhere between the growth and value camps because I tend to stay away from deep value because as we've seen, up until recently, value didn't stay out of favor for a very long period of time and there's also the risk of value traps. And then the major downside of growth investing is, as we've seen in the past year, growth stocks just get demolished during a bear market.
So I look for companies with solid growth prospects that have great underlying businesses, yet their stocks are trading for a big discount to their, say, five-year-average valuation. And then if the macro fits into that, great, but I do the fundamental bottom-up research... lots of research looking for those types of attractive setups, looking for long-term setups and mostly in large caps and mid-caps.
Dan Ferris: You know, I get a powerful whiff of Howard Marks from you, a former distressed-debt guy who is very aware of cycles. Marks wrote a whole book on cycles.
Alan Gula: Yes, it's true. Yep. That's right. Yeah, I've read that book. I've read some of his work. I think he's great.
Dan Ferris: Yeah.
Corey McLaughlin: What's your outlook now? I mean, you mentioned, off the top, kind of the macro, the oil bust in April 2020, and how that presented a great opportunity eventually as we saw. What kind of areas do you see as kind of good areas for opportunities, maybe some hated areas or that have good long-term stories?
Alan Gula: Well, let me give an example of our most recent recommendation and I'm not going to give it away because I don't think it would be shared to our new subscribers, but I can illustrate why we like it. So our newest category in the flagship newsletter is – it's called Gatekeepers of the Financial Markets.
And these are securities and derivatives exchanges and they just have fantastic business models. They're often near oligopolies. There's high barriers to entry, so there's limited threat from new entrants. They benefit from network effects, not unlike social media networks. The more traders on an exchange, more each of those traders benefit in the form of tighter bid-ask spread, increased liquidity and they have really wide free cash flow margins. And they're also recession groups, so risk and uncertainty cause substantial market volatility which drives up trading volumes, which boosts the exchange's fee revenue.
So these businesses are recession-proof, but the stocks tend to get hit like any other when there's risk aversion, right? So the one that we recently recommended was – it was actually down – it fell 38% during the COVID crash and at a time when volatility was spiking and in hindsight, it was probably the best quarter the company has ever had.
Dan Ferris: Incredible.
Alan Gula: You know, objectively the best quarter they'd ever had. So the market really gets these – I think it doesn't really understand these or else there's just forced liquidation.
But anyway, our latest recommendation, it's a leading futures exchange, but it's coming off a great 2022 with the volatility last year in terms of operating results, but the stock is now down again, it's down 30% from its peak and it's about the cheapest it's been in the past five years based on the work we did, which was like a normalized free cash flow trend. And that, you know, it's a solid business. It's a relatively slow grower, but it's a fantastic opportunity to pick up this stock.
And that's – I think that's a good example of some of the types of opportunities we look for. But I think Corey, you're probably trying to get at where I think – am I bullish or bearish, where is the overall market going. And I'd say I think –
Corey McLaughlin: If you have an opinion, yes.
Alan Gula: Yeah, my opinion is not very strong right now and I'll give the context, but I think that people – you really have to have some type of guide, and a few years ago, I developed a work evaluation model because I was sort of tired of all the other models that were out there that, the CAPE ratio and the market cap, the GDP and price of sales and forward P/E ratios, all these market valuation models, they have these severe deficiencies.
So I created a free cash flow yield model for the S&P 500 excluding financials. And this has sort of served as my guide for where the market is sitting from a valuation standpoint and it's one of the reasons why I was bullish in March 2020 because the market on this measure, free cash flow yield, on this measure, you know, the S&P 500 had gotten dirt cheap in March 2020. And so, then of course we had that massive reality and the market got expensive.
I don't think it was a bubble. Dan, you would disagree with me. Last year, I think you called it just a mega-bubble or whatever it was, and I think the market was expensive. I don't think it compares to the tech bubble in '99 to 2000. But anyway, I think now the model is showing that we're back to basically the average valuation over the past 25 years. And so prospective returns are not great. It's not like a time where I would pound the table and be bullish.
But still, like I said before, you always have to be looking for opportunities and we can see – the scary part is, if the market were to get cheap, we would be down, say 17% from where we are now. If it gets dirt cheap, we would be down another 30%. And so that's – that's the risk. But I do think inflation has peaked and the market's going to breathe a sigh of relief as inflation continues to come down, the Fed sort of backs off its rate-hiking campaign. So that's sort of where I'm at.
Corey McLaughlin: Yeah, that's great. Dan that really – I'll let you guys – you guys can debate mega-bubbles or not, but that fits with a lot of what we've been talking about the last couple weeks, past couple months really on just – nobody really knows for sure where this is going next, but to weigh the possibilities of if things get worse, yeah, it could be another 15%, 20%, 30% down. But there's still places to make smart investments in the meantime that are beaten down already and have longer-term stories behind them. So I think that's refreshing for maybe our listeners to hear as well.
Dan Ferris: You know it's funny because people are always trying to get me to debate like Matt McCall. And he and I sit down and our view on things overlaps like 80% and it's not a debate. There's no debating. And this idea of the mega-bubble, it's such a rare thing.
Like, I'll never tell you that it's supported by rigorous statistical analysis. It's pure anecdote because there simply isn't – it's subjective and – even subjectively, there's not enough data points. It's hard to say. It's my opinion of things. It's not like I'm saying, "Oh no, Alan's wrong and it's a mega-bubble." You know? And yes, I do get tired of hearing myself say this. I've been saying it for a year or whatever. But anyway –
Alan Gula: Dan, to your credit, you called out – I remember early 2021 and that was really when you started talking about the expenses, you know, and Cathie Wood and ARK, so I'd say that – and you've been dead right about that. And y, that's – if there was a bubble, it was in some of those stocks, not – and so I think that we're not on completely different pages. I think that there were some crazy excesses and – but largely, those were outside the S&P 500.
Dan Ferris: While we're exploring all this, do you have views on crypto and bitcoin and Ethereum and things?
Alan Gula: I do. Well, so bitcoin has become just this "risk on," "risk off" asset. It's just highly correlated with the broader stock market. So it's like, if you're really bullish on the stock market, then you're sort of bullish on bitcoin. But I've been – I think I first looked at bitcoin in 2013 and didn't buy it and then I'm just kicking myself. And then I did do a lot of work on it in 2017. And I bought some then and so I'm a long-term bitcoin bull, but it's like, you have the 80% drawdowns, which is a feature, not a bug. I think we're in a 75%, 80% drawdown or we were and so you've had three or four of those over the course of bitcoin's life and then its's like, I think it's probably time to start looking at when another big bull market's going to begin.
Dan Ferris: Yeah, it's like Amazon on steroids, right? Multiple huge drawdowns. Everybody says, "Oh, it's finally over." Nope.
Alan Gula: Right. Right.
Dan Ferris: But of course, it's different though, isn't it? It's – I don't want to go too far down a rabbit hole because we could, but I've never even been really sure that I understand truly what it is or why it has value. I mean, I know the characteristics. I can cite the characteristics, right? I can do what other people can do, but when I look at a really great business, like when I look at Costco, I think, "Oh man, this is beautiful."
It's like, I remember I researched this years ago and I was looking at Walmart and Costco and a bunch of other things and I thought, God, just one extra inventory turn at Costco and they'll have – they have like two kinds of mustard instead of 50. There's so many beautiful details about it. I could talk about it all day. But bitcoin is like, well, I think I know the important details, but I don't have that visceral love of it like I do for a great business.
Alan Gula: Yeah. I think the problem with bitcoin is – or crypto in general, you had – well, besides the fact that there's this – all this fraud that's being uncovered and – but anyway. I think a lot of crypto people last year sort of latched onto the inflation.
They became these macro tourists and it was like, "OK, we're going to have massive inflation, so that's bullish for bitcoin," which, obviously, it wasn't true, but yeah. It's totally different. It's a speculation. There's no cash flows and it's a speculation. It should be a very small percentage of everyone's portfolio, no leverage, and it's very different than analyzing a company.
Dan Ferris: I said a moment ago that you reminded me of Howard Marks and I'm going to go back to that and even a little bit of – well, let's just stick with Marks and it's this idea that you are really – you seek a good return, a well-priced security with the characteristics and traits that you like, but there is – we haven't even used the word very much. We always get here, so I'll bring it up. There's always this tight focus on risk, tight focus on minimizing downside and I hear you doing that through the bottom-up analysis, looking for good businesses that have growth potential, you know, good financial condition, good competitive advantages like you were telling me with the exchange, and macro tailwinds. That all, looked at one way, that all sounds like lots of risk mitigation in your mind.
Alan Gula: Yeah, I think that's right and when you talk about that, it brought to mind so the – sort of the minimum volatility anomaly, right, so it's like in the – in finance, you have these models that sort of are supposed to predict how risky a stock is based on its beta and you know, the evidence is that some of the least risky securities actually have the best risk-adjusted returns and even higher returns than some of the riskiest securities. And it's sort of this anomaly that just doesn't go away.
So when you have these minimum-volatility ETFs and funds, like USMV and ACWV that outperform over the long term, and so that's like a systematic way of this – of carrying out the strategy. And so it's like sort of what we try to do on an individual basis like looking for individual stocks that have these attractive risk-return relationships, but it's not the – I'm not looking for growth stocks. So yeah.
Dan Ferris: Without giving us a name if you don't want to, can you just give us another example of something where you saw kind of the stars align the way you described your current pick.
Alan Gula: "The stars align." Well, so like in early 2021, and the market – so the market was expensive. I don't know if it was a bubble, but the market was expensive and we were looking for picks. And we had to make a pick, obviously, we had to make a pick. And so we went with Northrop Grumman, which is a defense contractor. They make inbound and outbound missile defense systems and also rockets and spaceships, right? And so that was sort of – and I made this analogy with the tech bubble.
So in the tech bubble, you had – honestly tech stocks were egregiously overvalued, but most stocks were expensive. And then you had aerospace and defense industry was in like a 40% drawdown during the tech bubble. So if you were always looking for opportunities, those stocks, if you bought those during the tech bubble in '99, 2000, you outperformed the market for a very long time. And so we sort of – and it's not that – it's not the exact same situation, but we were looking for opportunities and Northrop Grumman was trading at near a five-year-low valuation. That's sort of one of the things I look for. And so that turned out to be a big winner.
So I think it was one of the top-performing non-energy companies in 2022. We didn't predict the Russia-Ukraine war. In fact, we had a thesis – the primary thesis was about the space race and how Northrop Grumman was the key to helping us with this next space race. But that's an example of like you said, the stars sort of aligned and it was a low-risk recommendation at a time when the market was expensive and it worked out well.
Dan Ferris: Yeah, that's a cool one. I would encourage anybody listening, just take a look at a chart of NOC from, what was it, early 2021 or so till recently? It's nice. It's like, I mean, let's see here, just round numbers on a sloppy old Yahoo chart like maybe high 200s, low 300s, 320 or so and then they've got a peak of 549 in October '22. And again, you weren't – you're making this huge return, but you weren't basically buying bitcoin or some money losing tech thing in arc. It's cool.
Alan Gula: Right.
Corey McLaughlin: Right. To me, that's another example of when you pick a good company and then the macro, like you said, the war, the macro, eventually those things are going to happen. And so the good companies within that will benefit the most. One thing I did want to ask you about is inflation. We talk so much here about CPI and all this data. Everybody's an expert, but where are you – I know you and the team have done a lot of work on inflation data and just where do you see that going?
Specifically, I know you've written about the housing data and maybe why that would be sticking around for a while, those higher numbers. Maybe just explain to people how – what your thinking is there and what maybe we should expect from the inflation numbers.
Alan Gula: Well, inflation, let's go back –again, it's always important to have the historical perspective in the market, looking at the data. So I went back to 1960, looked at M2, which is a measure of the mind supply. And so in the '70s and early '80s, that was the stagflationary environment, had high inflation. And sure enough, M2 increased by over 150% in the '70s. That was a 9% annualized increase. Then in the '80s, M2 was up 100%, over 100%. And then you had a moderation in both M2 and inflation, obviously.
And what's interesting is in the 2010s, you know, M2 was up 73%, which is only a 6% annualized increase. So you had – that was falling – everyone thought that QE was going to be really inflationary and you just didn't see the increase, a big increase to M2. And now you've had the fiscal stimulus response to the pandemic and so now M2 is up 30% since 2020 and you had that big – year over year it was up 3%. That's when we had this inflation shock. And now what's happened is M2 is about to go negative, year over year.
And so that's sort of the context that I'm looking at. If M2, if we don't have a decade of M2 increasing by 150%, I just don't think we're going to have anything close to the 1970s. I don't think we're going to have a stagflationary environment. And I think policymakers, the politicians are pretty clueless. I don't think we're going to make these mistakes. I don't think we're going to see M2 increase by 150%. And so that's sort of where I'm at with inflation.
And then I don't want to get into all the details with shelter, inflation, and goods and what's sticky and what's not, but yeah, I think that inflation is going to slowly decline to at least below 5% this year. I think the Fed is eventually going to hold their hikes and yeah, I think looking back in a couple years, I think that it's not out of the question that we'll look back and we'll say, "Oh, there was some – the transitory nature of inflation actually – there was some truth to that."
And the supply shock and the war, how oil spiked after Russia invaded Ukraine and that sort of threw a wrench in the works, but yeah, I think that – and that's part of the reason why I'm bullish on bonds, I'm bullish on treasuries and MBS. I don't think that corporate bonds are the place to be yet. We haven't seen credit spreads blow out yet and we might, so based on my inflation outlook, I'm bullish on bonds, on non-treasuries.
Dan Ferris: Yeah, good play. I mean, it's really interesting too to be bullish right now because let's face it, treasuries scared the daylights out of the entire world in 2022. Deutsche Bank had that data that said it was the worst performance going back to 1788. I love the Deutsche Bank data. It's like centuries and they have it for other bonds too. It's funny.
Corey McLaughlin: Pen and quill I always like to say I think about. Yeah.
Dan Ferris: Yeah. So that's actually, I mean, if we're heading into a period such as you suggest, of course bonds would be a classic move right now, right, but after the year we just had, it may seem slightly bold if not more than slightly bold of you.
Alan Gula: Well, after the worst year, everyone says it's been the worst year for the Bloomberg aggregate, which used to be the Barclays and the Lehman aggregate, it's the worst year that the overall bond-market index going back to '76 and so some people are shell shocked, but I think bonds can now – since the – if the inflation shock is over, then now bonds can resume their diversification properties and they can be a ballast during rough times in the stock market.
Dan Ferris: So as a cyclically aware guy, you know, part of the argument here among bond bears is bonds move in enormous, long cycles, right? 1946 to 1981, huge bear. 1981 to the present, huge bull market. Now transition to another long, decadeslong bear. You don't see it though.
Alan Gula: That's the risk. There's always risk. But I just think that there's – yes, the bond market tends to have these long-term trends, but there's also these long-term macro trends in its favor where we have – such as demographics and technological advancement which is – I think it's sort of constant, but I think it's accelerated in the sense that you know, there's less demand for manual labor and now even knowledge workers and things of that sort.
So I think there's a lot of inflationary pressures... that there's a lot of disinflationary pressures and plus, now the U.S. is – we've had our energy renaissance and it's another big difference between now and the seventies where it's – we have these vast oil and gas resources that we're finally exploiting. So I think that does keep a lid, a long-term lid on an energy crisis.
Dan Ferris: Yeah and to be fair, if you take – I don't care how you do it, do like constant maturity and just pick your duration or whatever, there are multiple – in the long beer cycle, there's like multiple bull runs. It's not – these aren't straight lines up or down and to the right So, you can be – even though if you look at – I'll just pick on the 10-year, 3.5% might not seem like the greatest deal in the world, it could still be a wonderful ride to like 2.5% or something.
Alan Gula: Right. Exactly.
Dan Ferris: So, we've actually been talking for quite a while, Alan, and I've enjoyed it quite a bit. So it's time for my final 'question. Same final question for absolutely every guest no matter what the topic, even if it's a nonfinancial guest. So the question is simple. If you could leave our listeners with a single thought today, what would it be?
Alan Gula: Well, I think I'd – I think I touched on it. But there's a quote from Shelby Davis, who's a highly successful but not that well-known investor and Davis said something like you make most of your money in a bear market. You just don't know it at the time. And now that's true, but only if you're actively looking for opportunities and not stuck in a defensive posture. And where in a bear market, maybe the S&P 500 makes new lows, maybe there's a hard landing, but we can't let these risks veer us away from looking for opportunities. And that's my message. I said throughout... Always be looking for opportunities because I think a couple years from now, I think most investors are going to look back through the market and see a whole bunch of stocks that they wish they'd bought in 2022 and 2023.
Dan Ferris: Great point. Thanks for that. We interviewed Chris Davis on the show a while back. That was a good one.
Alan Gula: Oh yeah, that's great.
Dan Ferris: Yeah. Great guy. Great talker. Really gregarious and brilliant, of course. But Alan, thanks a lot for being here. I'm glad we finally got you on the show.
Alan Gula: Dan, it's been a pleasure. Thanks for having me.
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Dan Ferris: All right. That was really good. I've been wanting to get Alan on the show for a long time. I have a lot of respect for him. I think he's about the greatest analyst and as you heard, his timing can be quite exquisite and I wanted him to talk about the process and how he does that [inaudible] just a great talker. Corey, what are your impressions?
Corey McLaughlin: Agreed. I enjoyed listening to him kind of run through all things macro and micro and yeah. I mean, I think his point's a good one just as far as where his outlook is. Looking forward, he's got a neutral-ish on the market, but within it, there's areas of opportunity while also being aware of the downside risks ahead.
So I think that's all you can really do in this and you know, you're not going to exactly predict what's going to happen, but I think you can get a good sense of how Alan approaches things and what he brings to – like he said our flagship publication, which is Stansberry's Investment Advisory.
I'll do a quick plug. It's kind of our introductory sort of service where if you're looking to see more detail and recommendations of what we're talking about, it's a good place to start. It's probably the most affordable thing you could start with.
Dan Ferris: Yeah. That's a great point and that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did. We 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 like it, tell them to check it out on their podcast app or at InvestorHour.com. Do me a favor, too... 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 us to interview? Drop us a note at [email protected] or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host Corey McLaughlin, till next week, I'm Dan Ferris, thanks for listening.
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