In This Episode
Dan Ferris launches into this week’s episode dissecting the warning from billionaire investor Ray Dalio, who’s saying there’s significant risk of a recession in 2020 – not just in the U.S., but a global slowdown.
While no one can tell the future, there is one grim statistic on Dan’s mind that doesn’t dispute this claim.
He then introduces this week’s podcast guest, Christopher Irons.
Christopher started writing about finance and “pulling the curtain” back on the B.S. of the industry under his moniker Quoth the Raven in 2013. Since then, he has been quoted in the Wall Street Journal, Financial Times and Barron’s, has made Seeking Alpha’s list of Top Bloggers, Forbes’ 100 Twitter Accounts in the Financial World to Follow, and has shared the stage as a speaker with acclaimed investors David Einhorn, Andrew Left, Ben Axler, Jon Najarian and many others.
He’s got a firm opinion on Tesla – and a prediction on exactly how the stock’s downfall will come about. And he’s not shy about calling another household name “fraudulent.”
In fact, Christopher is known for his blistering analysis behind shorting companies, starting with the first presentation Dan ever saw of his, titled “Short the Whole $%#@*&$ Thing.”
3:52: Dan goes over legendary billionaire investor Ray Dalio’s warning he sees significant risk of a recession in 2020 – not just in the U.S., but globally. While Dan doesn’t like to predict market movements, he notes that we hit all-time highs in valuations just months ago.
6:01: The general drag on economic growth as shutdowns stretch on is well-known – but Dan reveals one wrinkle in economic activity that gets far less attention: a restricted IPO market.
7:06: Dan introduces this week’s podcast guest, Christopher Irons. Christopher started writing about finance and “pulling the curtain” back on the B.S. of the industry under his moniker Quoth the Raven in 2013. Since then, he has been quoted in the Wall Street Journal, Financial Times and Barron’s, has made Seeking Alpha’s list of Top Bloggers, Forbes’ 100 Twitter Accounts in the Financial World to Follow, and has shared the stage as a speaker with acclaimed investors David Einhorn, Andrew Left, Ben Axler, Jon Najarian and many others.
10:56: Dan recalls the first time he saw Christopher speak in public, and how he stood out at a short-selling conference. Christopher explains how his stance on gold fits into his speech titled “Short the Whole $%#@*&$ Thing.”
15:30: Christopher lays into the Keynesian folly of dealing with bubbles by creating even bigger bubbles. If you do that over and over again, at some point you have either a sovereign debt crisis or your currency turns into $%#@&*! Swiss cheese.”
19:32: Christopher explains how, despite his reputation as Mr. Skeptic, he’s actually long on some companies that meet his specific criteria. “It just so happens that our market that exists today is chock full of nonsense companies that don’t turn a profit, that don’t generate cash, that have asinine valuations.”
22:50: Christopher explains how deep value can be found in, of all things, microcap stocks. “Because they’re very illiquid, often mispriced, underfollowed by analysts… we find some deep value situations in microcaps too.”
25:47: “With Tesla, I don’t think it’s going to be a slow bleed, I think we’ll wake up one morning and one of the major shareholders will have sold… there are a lot of people holding that stock who could give it a serious reality check, including institutional investors.”
31:10: Christopher goes into another stock famous for burning shorts: Herbalife, and how he hadn’t heard the company’s name in years before it fell into Bill Ackman’s and David Einhorn’s crosshairs. “To find out the company even still existed was baffling to me.”
40:45: Christopher puts his finger on why Herbalife is a fraud as a company. “My argument is, the business model is fraudulent. You can’t run a pyramid scheme. It is inherently a fraudulent model of business.”
52:38: Dan reaches into the mailbag for a question from Eric R., who wondered about ETF risks in December’s downturn. Isn’t it possible that ETFs that short the market can quickly go under – for more than investors’ initial investment, if the trade goes against them? Dan points out a bigger problem with these ETFs – leverage in shorts, which actually puts the level of risk on an entirely new dimension.
NOTES & LINKS
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host Dan Ferris.
Dan Ferris: Hello everyone. Welcome back to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m the editor of Extreme Value, a value investing service published by Stansberry Research. All right, let’s got to it. Let’s just talk a little bit about what’s been going on lately. USB, okay, so USB – or I’m sorry, UBS. I always do that with this company. It’s called UBS not USB. Union Bank of Switzerland is what it used to be called, but now they just call it UBS.
So their stock was down like five percent this morning as they reported that clients pulled about 13 billion out of their wealth management. What they call their global wealth management and asset management businesses. And this doesn’t surprise me at all because, of course, what just happened. In the fourth quarter we had this big, you know, almost 20 percent drop in the stock market, and of course investors always respond the same way. You know, they sell, right? That’s how those events get going. That’s how the market is down 20 percent in three months is people selling and pulling money out of things like that.
But this kind of highlights something about the asset management business in general, and it’s one reason I’m careful about it is that when things go bad like it’s all – when things go well it’s a wonderful business because you can scale up, right? It’s, you know, just in round terms – I’ll just use any old numbers, but if you have 100 million under management you don’t really have to hire a whole lot more people to have 500 million, or a billion under management let’s just say.
Okay, so, you know, your earnings can go way, way up with same amount of expense, right, so lots of scale there. Yet when things go poorly people – the money just heads for the exits, right, if you haven’t locked people up or anything and they’re just in regular mutual funds, or regular stocks, or whatever it is you’ve got them in the money runs out the door. So, you know, just it’s one of those things where I think the active asset managers, you know, the publicly traded asset managers I don’t know if they’re something I’d want to own near the end of a super long, super expensive bull market. Just saying. Just throwing that out there, okay?
And I don’t have like – I don’t know. I don’t predict economic stuff, right? I don’t predict macro stuff like recessions. But a guy named Ray Dalio who runs Bridgewater Associates – well he doesn’t run it anymore. He founded it many years ago and grew it up to be the biggest hedge fund in the world. I don’t even know how much they had. It was like well over 100 billion under management. It’s just some huge number. I don’t even keep track of it anymore, but biggest hedge fund basically in the world, has had a great track record, did great during the – he does great near the top of the cycle. Just put it that way.
And he’s now saying that there is a significant risk of a possible economic recession in the US by 2020, in 2020 he says, right? And he says it’s going to be globally – a global slow up was the term he used, so not just in the United States. So, you know, we see the global wealth division of the UBS with the money running out the door. We see like one of the smarter guys around saying it’s going to be a global slow down. You know, you put those two things together they kind of make a little bit of sense.
And again, you know, I’m not like Mr. Bear Market predictor or anything like that. I just think that cycles matter. I’m a value investor, so valuation matters, and we hit the all-time most expensive moment ever in the history of the US stock market back in September right before it dropped 20 percent over the next few months. And we’re within, like after today’s action, maybe 10 or 11 percent from making a new all-time high in the stock market.
And there are people – you know, there’s like famous people like Byron Wien from Blackstone. He puts out his 10 surprises every January. He’s been doing it for like 30 years or something. And one of his surprises is that the market will be up 15 percent this year, so there are lots of bearish people around, there are lots of bullish people around. And I’m not saying that – I’m not making a prediction. I’m just saying that at this point, at this point – at this level of valuation, and you’ll hear our guest today later on in the program talk about that, it’s just a – you’re just not finding a lot of value. So, you know, UBS doesn’t surprise me, Ray Dalio doesn’t surprise me that these things are happening.
Another kind of weird thing that’s happening overall, this doesn’t relate to the over valuation of the market, but apparently the government shutdown has really impacted the IPO market. So because of the government shutdown the SCC hasn’t been able to approve IPOs. What a weird moment for that to happen. I mean this is like the president who’s bragged about the stock market doing so great since he was in office, and I just – you know, I hope he owns it on the way down too. But, you know, you get what I’m saying, we’re late in the day, we’re late in the cycle, and there’s a rational viewpoint to me that we’re not to have. And these things that I just told you about, I mean they don’t really surprise me at all.
So I just want to leave it there. I think, you know, I just like to tell you where I think we stand. And I’m going to be doing a lot of that because we are at this kind of precarious place in the world. But right now I actually I want to get to our guest.
All right, our guest today is Christopher Irons. Christopher Irons started writing about finance, and pulling the curtain back on the BS of the industry under his moniker Quoth The Raven in 2013. Since then he has been quoted in the Wall Street Journal, Financial Times, and Barons, and has made seeking off his list of top bloggers, Forbes 100 Twitter accounts in the financial world to follow, and has shared the stage as a speaker with acclaimed investors David Einhorn, Andrew Left, Ben Axler, Jon Najarian, and many others.
Chris Irons, welcome to the show my man.
Chris Irons: It’s awesome to be here. Thank you guys so much for having me. I appreciate it.
Dan Ferris: You bet. First of all, Chris, I wonder if you could just tell us like a little bit about why you started this website, Quoth The Raven Research?
Chris Irons: Yeah, sure. The website actually I only just started I think maybe two years ago, so I started to write under the Quoth The Raven moniker back in 2012 I believe. I was working for a small startup company up in Niagara Falls, New York, and I had always been interested in finance. It was really my first position in the finance world. I was implementing in internal investor relations functions through the company, so it was a great way to learn a ton about securities law.
But really I was – I wanted to just basically earn a little bit of extra money on the side, which is why I started writing. I started writing because _____ had this great platform where you could express your opinions on companies, and they would kick you a couple of bucks for an article if it was something that their editors approved of. And certainly I had my fair share of terrible garbage that I wrote when I was back in 2012, and 2013 still kind of getting my feet wet on things.
And yes, I kind of just started doing it as a hobby really to be honest with you, for beer money basically. And then as I was working at this job and perusing seeking Alpha in the midst of when I started writing for them. And if you go back and read some of my early stuff I mean it’s truly terrible. It’s awful. But while I was on the site I came across Geo Investing’s article about Long Way Petroleum, which was one of the many brazen US listed China based frauds that they exposed over the years, and that’s how I actually wound up finding out about Geo Investing, which is located back here in Philadelphia.
So when I left Niagara Falls to come back home to Philly after things didn’t pan out at this company, I then kind of found my wat to this new job at Geo Investing where I’ve been for almost five years now, and then started to – you know, as a condition of my employment there I told them I wanted to continue to write as Quoth The Raven also, and they didn’t have any problem with that. I’ve always written under my own name as well. It’s done very well. And really I’ve stood the last five years to learn to be honest with you.
So my Twitter followers and people that e-mail me and read my stuff have probably watched the level of my analysis of all of slightly over the last five years. Because it was pretty much bilge I was putting out in 2012, and but I have a quick learning curve, so I’m a quick study. And feel like I still have a lot to learn, but I feel like quality has gotten better and some people have taken notice, so it’s worked out very well.
Dan Ferris: Yeah, I mean I think the quality is great. I follow your stuff. I love it. So yeah, you started this thing as a hobby for beer money, and it took on a life of its own. That sounds like a familiar story. The first time I saw you, Chris, I actually I saw you speak in public. That was really my first exposure, and it wasn’t too long ago. It was at Whitney Tilson’s short selling conference.
And yeah, I thought you were like the – by far the most entertaining speaker, but you also you shared some thoughts that I wonder if you would mind, you know, just kind of summing up. And your position was to buy gold for a specific reason. And, you know, we’re trying to get the listeners to be better investors and think more about things, and I think you can probably help them think about why one might want to own some gold right now.
Chris Irons: So I’m not an investment professional, and I don’t really tell anybody to buy this or buy that. And I certainly, you know, wasn’t there pitching to other people that, “Hey, you know, I think you guys should all buy gold.” You know, one of the things that I like to do, and I was thinking just a couple weeks ago, like what’s really my mission statement as a Twitter personality, as somebody that writes research. What’s kind of the underlying theme that is an umbrella over some of the company’s specific analysis that I do, and these speeches that I give?
And really it’s two things. One is maybe just have a little bit extra skepticism about the system the way that it exists today. Because I do think a lot of the system is bullshit. And the second thing is really to act somewhat as a counter balance to a long bias that I think is inherent in the media, and just in the world of finance. And I’m not saying that that’s absolutely 100 percent the best thing to do, and that you should go become a short seller and short the whole system, and put all of your money into gold. Because I wouldn’t make such a specific recommendation number one, and number two that’s really not what I’m saying.
The point of the – I had the idea for my speech which was called Short the Whole _____ Thing. That was the name of the speech because he wanted us to come and talk about something that we would short. And my answer to that is I would like to short everything because I don’t really – I’m not fond of the way that everything is setup in the way that we run monetary policy in this country, and really what our position is on fiscal policy in the country. Doesn’t really make sense to me.
Maybe it’s because I was just raised in a house where I was taught to save and not to take on debt, which seems like two very simple concepts. And when you finally wrap your head around it it’s a little bit of macro when you start to understand what spending and taking on debt is really the centerpiece of how we think about monetary policy, and how we think about economic theory. To me that gives me a little bit of pause. And everybody in the industry is indoctrinated to think that this is the best and most efficient way to do things.
And it certainly is for politicians, and for people that can benefit from unlimited money printing, when the government wants to spend more than it can afford, or when politicians want to get reelected. But I view the system as a lot of very standard basic economic rules that anybody can understand, like supply and demand and sound currency that has mutated and been morphed into this human centric system that is setup primarily to benefit politicians, to benefit the government, to benefit big banks and the big institutions.
And I don’t really like the way that the fed does business. To me it seems like there’s probably a happy medium. Even like Ron Paul says, you know, I don’t really want to end this site completely. I just want to maim it and get to a point where it’s doing far, far, far less. You know, I’m not 100 percent against central banking. I think there’s probably a happy medium there.
But I think with so many standard deviations in the wrong direction right now that I would be remiss from a intellectual honesty standpoint if I didn’t speak what was on my mind and say what I say and what I believe in, and that is we need to be more skeptical about the way that everything is setup. If we think 2008 can’t happen again we’re wrong. If we think that the next bubble burst of that scale won’t be orders of magnitude bigger than 2008 we’re wrong.
And it’s very simple when you think about it through a Keynesian lens, right? I mean all you’re doing is solving bubbles bursting by creating bigger bubbles. And you do that over, and over, and over again until at some point either your country has a sovereign debt crisis, or the currency turns into _____ Swiss cheese.
So to me that is an inevitability. Whether it happens in my lifetime or not I don’t know, but the one way I like to hedge against that whole kit and caboodle is by owning some gold, which has had value as an economic instrument for thousands of years, and has been a store of value for thousands of years. To me it just makes sense that at some point we’ll have a little reversion back to these historical _____ there.
And aligning with that is my skeptical and critical view of the financial media, which to me I think most people are probably don’t even think about the system as a whole because people have been so indoctrinated to accept that the government and the fed understand what they’re doing, when if you’ve ever walked into a DMV it couldn’t be more _____ obvious that you don’t want the government running things, right?
Dan Ferris: Yeah.
Chris Irons: But so I always just say, “Look, it’s nice to have a counterbalance, it’s nice to have somebody that critiques these people and kind of keeps them a little bit in check. And I’m not saying I’m 100 percent right, or I’m 50 percent right, or I’m 25 percent right, or that, you know, that I will ever be proven right to that degree, but I do think it’s healthy to have some discourse about it. And that’s really kind of my position on everything in, you know, five minutes or less.
Dan Ferris: Right, so gold for you then is a – it’s an insurance policy as it is for many people. Is that fair?
Chris Irons: Sure, yeah. I mean why do you think Central Banks hold it in reserve, right? They hold it in reserve for hedge against inflation, to hedge against systemic risk. And I think if there’s one thing that the fed is doing right, and that Central Banks do right, investors can kind of take a cue from them. You know, a nonsensical way to think about it because nobody gives a shit about a dividend when the market pulls back 50 percent. I mean big deal, you know? You collected a dividend for a couple of years before you _____ _____ _____ send it to you, so congratulations.
It’s not for that purpose. You know, the purpose is to kind of as an insurance policy. And as long as it’s nominated in US dollars, the more dollars we print, the more value that will eventually be assigned to an ounce of gold. And you’ll see some of that with other commodities as well that are finite in supply. And I’m just – you know, to me it’s just a safety net, and like to be safe with my capital, some of it.
Dan Ferris: Makes sense to me. So when you are not shorting the entire – you know, shorting the whole freaking thing as you put it, I notice a lot of the stuff on your website is you’re very skeptic and you like to talk about your short ideas it seems more than anything else. And just so the listener knows, for example a recent pod cast of Chris’ was called “Our BS Economy: Part Six of Five Hundred and Fifteen.” So he will be going on and on and on with this idea of shorting the whole thing. It’s great.
So but it seems like, you know, I can’t remember – I mean I’m not super familiar with all of your work, but most of it is like this hardline skeptic. I can’t find any longs I guess is what I’m saying. You don’t seem to write about longs.
Chris Irons: I have written about longs, yeah.
Dan Ferris: Okay.
Chris Irons: I’ve – and I do invest long in companies. I mean it’s a very simple equation. I’m not Mr. Super Skeptical about every individual company. I just wait until you see deep value to get in on the long side, or an obvious mispricing. It just so happens that our market as it exists today is chalk full of nonsense companies that are not turning a profit, that don’t generate cash, that have asinine valuations. And so when the average investor with a long bias goes out and throws the dart they’re likely to hit one of these companies and go, “Oh, it’s a growth story. Great, you know, I’d better get in long.”
But for me it’s not like that. I view each company individually on its merits, and chances are 99 times out of 100 the market is assigned either too high or too low of a price to your particular equity for whatever part of the capital structure you’re talking about. And, you know, my goal as an investor is just to say _____ on only long or only short. The goal is to find out how badly an equity or whatever other instrument you’re looking at is mispriced, and then make your decision accordingly.
So it’s not like I’m walking into – if you just hand me a company and saying like, “Hey, what are you _____, you know, whatever, American Express?” You know, knowing little about how the equity is valued I’m not going to go in and be like, you know, “Hey, shorted,” or, “Hey, go long without knowing anything about it.” I mean everything is kind of generally overpriced here, so maybe it’s more likely than not that I would look at it with a skeptical angle.
But, you know, in the midst of the 2008 financial crisis when the markets got absolutely destroyed, I’m sure perhaps I would have been more likely than not to look at things with maybe a long perspective a little bit more than a short perspective at the time. I mean it all depends. You know, I just think I generally don’t buy what I’m given without researching it and validating it for myself.
But, for instance, you know, I thought that I went long some of the banks recently. Geo Investing actually made a call to buy Goldman Sachs at 155 on this recent dip when my good friend and Twitter handle Kubiko pointed out to me that their price per book was under what it was under during the worst point in the financial crisis. I thought, “Okay, that’s probably a little overblown for where we’re at now.” Even thinking that we are probably heading into a recession. I don’t think we’re at the end of an enormous credit cycle like we were in 2008. I think we’re probably at the end of a shorter term credit cycle. A less kind of systemic one.
So I see something like that, a mispricing like that, and that makes a lot of sense to me. You know, are we systemically on better footing than we were in 2008, all things being equal and kind of putting aside the whole thesis of everything is _____. Yes, I think we are, and so a call like that makes sense to me. So, you know, we bought Goldman Sachs at 155 three weeks ago, or four weeks ago, and, you know, it’s got 195 today. So that’s an opportunity where I saw something on the long side that I liked.
And there’s been other instances of companies I’ve gone long, so I’m long goaled. So yes, it’s a short of the whole system, but it’s that _____ along. You know, I own some gold miners too, so I’m long those companies. And then I’m also long – you know, at Geo Investing we look at a lot of microcap stocks. There’s still a lot of deep value in some microcap stocks because their very liquid and often mispriced, under followed, under covered by analysts, and you can usually get good access to the management team to get color on operations.
And, you know, certainly you don’t want any material nonpublic information, but you – companies are a little bit more accessible to talk to. So we find some deep value situations in microcaps too. So a lot of times I’ll go long smaller cap or microcap names. But, you know, then you look at a company like Tesla and it’s like how are you expected not to be a skeptic.
You know, how are you expected to not understand that no matter what the macro environment is you can’t run a company the way that they’ve been running it, and expect this valuation based on a story of everything is going to be unicorns and rainbows someday to hold up. To me that’s just doesn’t make sense.
Dan Ferris: Yeah, it doesn’t make sense to me how the – I know it recently dropped, and I think it might have dropped even today below 300. But the persistence of valuation in access of 50 billion next to companies like BMW and GM and things with similar market caps that know how to make money making cars. I mean that’s got to be a prerequisite to a big market cap. I’m just crazy. Crazy suggestion I know, but I have marveled at the persistence of this story.
I mean he hasn’t exactly been like – that is to say Elan Musk hasn’t exactly been like the ideal public face of a public company, right? How is this thing still like – how is it still in access of 50 billion in market cap? Can you help me with that?
Chris Irons: Well, it says a lot about our market as a whole, right? So it says _____ in a way that keeping on, looking at equities in general. People are looking at equities. You know, Jim Kramer said a couple of days ago, and I put on Twitter. You know, he’s almost scared not to buy stocks, okay? And this is after the S&P has tripled over the last 10 years, all right? That is insanity. To make a statement like that I think he’s just insane.
I think it’s an insane way to look at a market that is significantly probably overpriced at the end of a credit cycle. We’re now, you know, we’re not even going to be able to continuing raising rates because we’re essentially I think at this point already triggered a recession, but nobody really cares. And as with any type of major correction, recession, pullback, whatever you want to call it, you know, these things they take the stairs up and then they take the elevator down.
So with Tesla I don’t think it’s going to be a slow bleed. I think we’re going to wake up one morning and one of the major shareholders may have sold, or something is going to happen with Musk. There are a lot of people that own that stock that need a serious reality check, including institutional investors. But their pricing that company not as a car company, as you know which would normally be assigned a price earnings ratio probably six to eight, but as a tech company, okay?
And if you want to be a tech company you want to look at the top line growth, which I guess more people are doing, and there’s this whole case for they’re going to have autonomous self-driving taxi vehicles down the road. I mean these guys they can’t even execute being a car company. They’re laying off employees already. And they’ve just made layoffs I think last year also prior to this. People are having trouble getting their vehicles serviced. People are having trouble getting their vehicles delivered.
You know, so look, it was a nice idea for him over the last couple of years to create this brand and come up with this buzz. And certainly I think he’s been a very poor CEO, and a very bad steward of his shareholder’s capital, but that’s just my opinion. And at some point reality is going to hit, and I don’t know what it’s going to take for that to happen, but at some point people are going to realize this is a car company.
This is not a technology company. And they’re in a race against interest rates right now, they’re in a race against their debt maturities. For some reason it certainly seems to appear to me that they aren’t able to raise capital because I think they would have done it already. They have outstanding, massive outstanding legal liabilities. You know, the Department of Justice is currently investigating them for misleading the public with their model 3 production timelines.
They have been unable to keep a multitude of promises that the CEO has made. The CEO comes off to me as an exceptionally unstable individual that doesn’t really care much for the wrong reason of regulation of the public markets. You know, he looks to some degree being a visionary and going against the grain as a very good thing. That’s how you affect change and how you come up with these novel innovations. But at some point you have to settle into a role as a CEO of a public company, and there are certain guidelines and rules you have to play by, and he just doesn’t seem to care about any of them.
So I think he’s a major liability. I worry about his mental health, which I don’t think – I don’t know. I just to me looking from the outside in it looks like he may not be doing well, which is worrisome. Of course obviously you don’t want anybody to have any kind of breakdown or something. But, you know, he’s got a lot of explaining to do, and he’s a – you know, say what you want and ask questions later type guy, and you can’t do that as a public company CEO. You can’t.
There’s a fine line between setting the _____ of targets and misleading the public. You know, I just don’t know. It just to me it feels like reality will hit at some point with the story.
Dan Ferris: Yeah, I agree. It’s the kind of thing where you wake up and it’s been cut in half. And I also agree that he does seem like an individual who – I mean I hate to say this about any human being. I wish the guy well. He’s got, you know, cojones. He’s done a lot of really interesting stuff here, but he does seem like he’s way over committed to all kinds of gigantic projects. And I find it hard to believe that anyone is that both brilliant and energetic, and all the things he’d need to be to not have a serious problem in that regard.
But let’s move on. Let’s talk about another company that you’ve written about if you don’t mind. You know, if you don’t mind talking a little bit about Herbal Life. Is that one you don’t mind talking about?
Chris Irons: Yeah, well Herbal Life is one of the reasons that I started getting into writing about financial companies to begin with. So back in 2012 or 20-13, whatever, Einhorn first started to stir up some public controversy about the company shortly preceding Bill Hoffman’s major fraud in the big battle royal between him and Icon.
Was really the first time I had heard the company’s name in years, 15 years or 20 years. And I remembered it as a kid, you know, always watching these infomercials at home. There were two types of infomercials when I was growing up as a kid. And I would get home from school and put on cartoons or whatever. There was always the real estate with no money down commercial, infomercial. And then there was always the work from home infomercial with John Carlo and Leslie Sanford.
And I remember Herbal Life from like the ‘90s kind of being like this cultish kind of weird, you know, with the buttons and the people all singing and dancing together. And like it’s like a little like religious movement. It was just kind of freaky to me. And then I didn’t hear about it for a long time, decades, right? And then I wake up one day and find out, “Okay, it’s a public company.”
And not only that but now it’s at the center of this controversy about whether or not it’s a pyramid scheme, which of course I knew even when I was 15 year old. I thought the company was bullshit. You know, you would watch these infomercials and just be like, “Look, you know, anybody that thinks that they can make money doing this is insane.” And as with any infomercial.
And to find out that not only was it still a company that exists was baffling to me, but that it had also been _____ and was not trading publicly I thought was also insane. And I kind of wondered, you know, over the last 15 years or however long it had been, and I lived in downtown Philadelphia for a decade, and I spent some time in Buffalo and in Canada, and then New Orleans, and kind of all over, and you just don’t ever see this stuff. You don’t see the distributors, you don’t see the products, you don’t – you know, it’s like you just don’t see it.
Maybe I’d pass by a nutrition club once or twice. They don’t even put the brand name on those things. They have to just cover the walls with green wall paper. So right off the bat I was like, “Well this is insane.” And then the controversy started with Ackman was going to come out and short the stock, and he put on this big presentation.
So I watched the presentation because I was really fascinated by it. I think I found it to be like – you know, when I was a senior in college I wrote this religious rhetoric paper on scientology. Like a long time ago before it was this big public controversy that it is now. And one of the reasons that I wrote about it is because I found the psychology of it fascinating.
And this Herbal Life thing was – it fell right into that same grove with me. I was like this is weird. It’s weird that this company still exists. It’s weird kind of how they do business. At one point, you know, I had a professional – this was afterwards when I came back to Philly. But I watched Ackman’s original presentation, which 200 slides and three hours long, and I watched it many times over. Probably 50 or 100, or 150 times, and I thought he was spot on.
I mean his argument was, “Look, you have a company making a commodity product that’s available at GNC under a different brand name, Lean Shake for a certain percentage less. You can buy it anywhere on EBay or online. There’s no need to become a distributor, and Herbal Life distributor if you actually wanted the product.” And his argument was that the only reason the product sell is because it’s stapled to a business opportunity that is giving people the impression that they can be entrepreneurs.
And his original thesis made a hell of a lot of sense to me. It still does to this day. And I think if Carl Icon hadn’t stepped in and backed the company and lent his name and his gravitas, and his capital to lock up a significant portion of the share structure, that this one may have turned out different, but everybody knows how it turns out. I mean I wrote a ton of articles on it. I never – you know, people were accusing me of working for Pershing Square and all this shit. Never worked for Pershing Square. Did all my work on my own. Was like, you know, very into it though. I kind of became like obsessive about it for a couple of years.
And because it’s just one of those things where it just it makes sense, and I found throughout the course of my life if it doesn’t make sense it’s probably not true. You know, you don’t need to – it helps to do a deep dive on a lot of things, but sometimes you just need to look at things at face value and say, “Hey, that doesn’t make sense. It’s probably not true.” And there was a lot about this company that didn’t make sense to me.
So it sent me off on a multiple year research kind of obsession into the company, and you can go look at my seeking Alpha, all these other things. And I went to Ackman’s second presentation, the Nutrition Club presentation when the stock rallied of course that day. And subsequent to that, you know, the stock traded much higher, and the FTC ultimately – the thesis at the FTC was going to shut down the company was one that I actually believed in because it was so clear to me that the company, in my opinion, was a pyramid scheme.
I wondered how they could miss it. But, you know, I learned a difficult lesson about putting your faith in the government, and about political connections, and lobbying, and all of the things that whatever it was that prevented Edith Remirez at the FTC from putting into the complaint that the company was a pyramid scheme, which those words were not used, whatever bargaining chip they had to put into play to do that is I think ultimately – plus a beautiful PR job by Herbal Life. I mean they did a fantastic PR jobs of trying to spin their side of the story, all of which I thought was bullshit of course, but they really should be commended for the PR job they did.
And to this day I – so obviously the stock has gone way up since the trade has had been a total failure. I lost a lot of money shorting the stock along the way admittedly. I haven’t had a position on the name in probably a year and a half because it’s a very difficult stock to trade. The share is outstanding. Has been reduced greatly. All of the things the reason the bulls own the name make it that much more difficult to short. A lot of the outstanding shares are locked up. The float is very small. It trades by appointment.
But to this day if you go back and read the federal trade commission’s complaint against the company, I mean ultimately they entered into a settlement agreement. But if you read their complaint against the company it validates everything that Bill Ackerman was arguing, and everything that skeptics of the company were saying about it. You know, they found that they were misrepresenting income claims to people. They found that a majority of the participants joined for the purposes of recruiting other people and not to – you know, not for retail purchases of the product, which is by definition a pyramid scheme, but for some reason they did not call it a pyramid scheme.
And famously when Edith Remirez was asked at the post announcement press conference whether they found the company to not be a pyramid scheme or not, she said it was not found that the company was not a pyramid scheme. So she kind of just like reversed worded back into maybe saying that it was. Obviously there was some terms of the settlement between the FCC and the company’s lawyers who, again, probably did a fantastic job. This is the best possible outcome that this company could have gotten from the campaign that was launched.
They did everything right along the way, but to this day I still I have a lot of difficulty. And look, some people will call me delusional, and some people will make fun of this and that’s fine. I’m perfectly okay with it. But to this day I still have a lot of difficulty figuring out and understanding how the company’s business, especially in places like North America and in Mexico where they had to make significant changes to the business model, has been able to continually produce the recurring base of revenue that it has.
I mean I understand in practice how it happens. I understand how the company’s business model works, but I’m having trouble reconciling how the business model works with where this money is coming from, and why these, quote/unquote, products are being purchased. You have people now qualifying for this president’s team, which is the top part of the echelons of the company, faster than they ever have before, and with more volume points than they ever have before, which is really their way of measuring how much of this crap you buy.
People are doing it faster and with more volume points ever at a time when the FTC has imposed sanctions on the company’s business model that should be suffocating it. And to me it still falls in the box of does not make sense. So maybe you can say I’ve just held onto this thesis for so long and I’m delusional, and I should just give it up and realize that I’ve lost, but I still think to this day that there may be something that we find out in the future that people may not have been made aware of. So I’m very skeptical of it.
And I think the entire multilevel marketing business model in general is bullshit. It’s total nonsense and bullshit. So it doesn’t matter whether you’re selling essential oils, or you’re selling sex toys, or you’re selling nutritional products, if you’re involved in a company where your business model is to recruit other people to sell the same crap, the same – usually overpriced commodity shit. Whether it’s Herbal Life or not, that business model doesn’t gel with me. It’s a breeding ground for pyramid schemes.
Dan Ferris: Wow. Yeah, I hear you. There’s – I’ve always wondered about Herbal Life, though, whether – you know, the questionable business model aside, if you can put that aside, like are they guilty of any like real fraud in other words? Like they’re selling – I think they – don’t they really do what they represent? I mean they -
Chris Irons: A pyramid scheme is a fraud. It is a massive fraud. It’s akin to a Ponzi scheme, right? So what you’re saying is, “Hey, aside from the business model is there any fraud?” And my argument is the business model is fraud. And, you know, the company did a very good job throughout the course of this criticism kind of washing over a lot of this shit and making it unclear. Even people that worked within the FTC were confusing the terms Ponzi scheme and pyramid scheme.
You can’t run a pyramid scheme. It is inherently a fraudulent model of business. So either – and that doesn’t mean that there’s not other little smaller instances of fraud occurring at the company, which I believe in my opinion there is, but just that aside, the overall bird’s eye view, 30,000 foot view of the business model is a fraudulent business model, in my opinion.
So you can’t – you just can’t have a pyramid scheme running as a pyramid scheme. You know, a pyramid scheme by definition is when more than 50 percent of participants are joining to recruit other people and not for purchasing of the retail product. So when that scale tips in the balance of 51/49, or 50.1 to 49.9 percent or whatever, and you can’t prove that more than 50 percent of your participants are signing up to purchase the retail product, you’re by definition, according to past FCC cases, you’re by definition running a pyramid scheme.
And not only that, but our new presidential candidate, Miss Kamala Harris who just declared that she was going to be running for president a couple days ago, had the chance to enforce permanent injunction in California that was signed in 1986 specifically to prevent this company from getting out of control and turning into this shit show that it has today.
In 1986 there was a consent decree entered into between the state of California and the company saying that they wouldn’t make false income claims. They wouldn’t make false health promises. They went through all this shit decades ago because the guy that started this company, Mark Hughes, was out there selling – saying whatever he needed to say to sell this stuff, and to move this stuff.
So Kamala Harris could have enforced a permanent injunction that was already in place since 1986. But not only did she not do that, she married a partner at a law firm that has represented Herbal Life in the past, so that’s what was going on in California. But this should have never grown and mutated into the company it is now, you know, went private, went public again, went private again.
You know, every time companies are looking to take it public, they’re looking to make a return on their investment after they took it private. They bring in Michael Johnson from Disney. And now you’ve got this mysterious behemoth of a company that’s got an enterprise value of like seven billion dollars, or six billion dollars or whatever it is selling a product that nobody owns, and nobody has ever heard of.
You know, the only time I saw a Herbal Life products over the last 10 years in like in my actual life was I had a very good friend of mine who played soccer for the LA Galaxies, and they were at one point sponsored by Herbal Life. I think they still are actually. And when I was helping him move, because he moved to Philly to play for the Philadelphia Union, when I helped him unpack his shit from LA to Philly he gave me a huge box of Herbal Life stuff.
This was like – I’m trying to think of what year this was. I think it was right around this time. Actually this was before I left, so this was maybe 2008, 2007. And he was like, “Here man, I don’t want this shit. You know, I don’t use this stuff,” whatever. It was all unopened stuff. So at one point I had actually tried the products. I tried the – they had like an energy drink called Lift Off, these little pills that you drop in water. And I had tried like the Formula One, and it was all crap. It was all garbage.
And that was the only time I ever saw the product was when this guy who was on a soccer team that was sponsored by the company was looking to throw out a big box of crap that he had because he didn’t want it anymore, and that’s it. So now you have a seven billion dollar company that you, me – do you see this shit on a daily basis? When you leave the house do you see Herbal Life products when you go out?
Dan Ferris: I’ve never seen them anywhere ever. Not once.
Chris Irons: Right, and where do you live?
Dan Ferris: I live in Washington near Portland, Oregon.
Chris Irons: Okay, so you’re in Portland, Oregon. I’ve traveled all over the United States. I’ve traveled to many places outside the country. You know, for 36 years old I’ve been around and I’ve seen some things. I’ve been to poor neighborhoods, I’ve been to rich neighborhoods. I’ve lived in poor neighborhoods, lower income neighborhoods, I’ve lived in middle class neighborhoods. I’ve lived in all over the place. For all intensive purposes, this stuff doesn’t exist.
I mean it just doesn’t even seem like it’s out there, yet here it is. It’s the seven billion dollar cash generating entity that’s somehow running on this model of hurting other people is just – you know, a Wall Street darling, and its stock has gone through the roof. To me something there doesn’t make sense. I don’t know what it is, but maybe we’ll find out at some point in the future.
Dan Ferris: Yeah, and until then I mean the thing is like – I’ve got a Max chart here. It goes back to 2005, and it’s within pennies less than a dollar of its all-time high close here it looks like, or somewhere there about.
Chris Irons: Sure, at a time where its gap net income is declining, right? At a time where its debt is skyrocketing, and its free cash flow I believe is in a downtrend still, and it’s something doesn’t make sense somewhere. You know, and then recently, too, you had this CEO just stepped down, Michael Johnson who to give him credit for anything which I don’t like to, but to give him credit for anything he stood tall in the CEO role while this whole mess was going down.
And then finally the FTC order gets entered into, and then he steps out to let Rich Goodis in who’s been at the company for a while, and also it’s a whole other conversation about why they continue to promote from within and not bring people from the outside, but that’s different conspiracy theory for a different day that I have.
And then all of a sudden this Rich Goodis mysteriously resigns a couple weeks ago for conducts – I’m sorry, for comments – something like the AK said something like comments that were unbecoming of the company’s business standards. And he just kind of mysteriously resigns after being at the company for a long time. And he gets a 3.5 million dollar windfall and signs a separation agreement where he’s got to keep his mouth shut. All these weird little things keep happening.
I have a theory about that that it has something to do with the company’s FCPA investigation that’s currently taking place I think with regard to their China operations. I think maybe somebody found something somewhere that he may have said that they didn’t like, but that’s all just speculation.
But anyway, so this guy just mysteriously resigns as CEO, and Michael Johnson is back in. And Carl Icon, you know, God bless him, made a killing on his investment, but it was very evident through what he said publicly about this company that he didn’t have a _____ clue how the business model worked, or how the – I mean he got the ticker symbol wrong. I’m like [crosstalk], okay?
So let’s just start there, all right? You’re going to tell me this guy did the rigorous due diligence that Bill Ackman did? And _____, a lot of people give Bill Ackman shit and that’s fine. There’s one thing you can’t say, even though he lost a shit load of money on this investment I still can’t say that his research he did on this company was incorrect because the way he laid out how the business model works.
And if you have the time and you’re bored, go onto You Tube and watch his original presentation on how Herbal Life’s business model works. It’s like two hours long, or three long. He does it with this guy _____ _____ who was one of the panelists at the time. And they explain in rigorous pain staking detail how the multilevel marketing business model works. And if you want to have your eyes opened as to why this industry operates the way it does, and why this model is so insanely complex that the lay person could never in a billion years figure it out without doing an insane amount of research, all of that is for a reason.
You know, I think the business model is cloaked in all of this complex kind of details, and word changes, and jargon for a reason very similar to the same way I believe that the financial industry uses jargon and financial terminology for things that most people would understand if they just called them by what they were. And I think that’s one of the – I think the financial world is like that so that the lay person doesn’t understand how the whole thing works because I think if they did they would _____ riot.
And I think probably similarly in the multilevel marketing world they use a lot of jargon in a very complex business model to perhaps cloak to the lay person how the business is really going down. And maybe even to disguise to potential recruits what it is that’s going on. That’s all just my opinion though. That is just my opinion. I’m not a financial advisor. You can take it or you can leave it, but I will go on record again and say I think it still doesn’t add up with that one for me.
But that’s that. I mean I could talk about Herbal Life for nine straight hours if you wanted to.
Dan Ferris: Okay, well I think that’s actually a good place to leave us, Chris, and you’ve been very generous with your time today. And I’m glad – I’m actually I’m glad you went off on Herbal Life. Yeah, that was like a great presentation, you know?
Chris Irons: Well I think if people that are listening to the podcast want to take a step into an angle on this company that I did not get into, that I think probably is worth looking into in detail, there is a website called Plain Site, P-L-A-I-N S-I-T-E. And they produced a document that lays out Herbal Life’s history with the drug trade going back decades. And that document is freely available. It’s a PDF. I think it’s about 80 pages long.
It was authored by Aaron Greenspan at Plain Site, and Christine Richard who led a lot of the investigation into Herbal Life for Pershing Square, for Bill Ackman at the time for O’Ryan Research. And I think there’s a link to it on my website too if you go to quoththeravenresearch.com and you scroll down to like things I read or whatever to hell I call it. I think there’s a link to it down there too.
If you want to have your eyes opened, and you want to have your _____ hair blown back a little bit, go and read that document, okay? Watch – maybe watch Bill Ackman’s presentation, then go read that document. And then just ask yourself the question of how has this company – where is the money coming from. That would be the question I would ask. And I’m not making any kind of conclusion here. All I’m saying is that something seems _____ to me. And that would be a great place to start and do some reading if this is something that interests you.
Dan Ferris: All right, and that’s unfortunately a place where we’re going to have to stop, but wow. Thank you so much, and I hope – who knows, maybe if we wake up one day and this thing is down 50 percent or so you can come back and talk about it.
Chris Irons: I’ll come back on any time man.
Dan Ferris: Okay, great. Thanks so much, Chris. I hope we’ll be talking to you soon.
Chris Irons: Thank you guys so much. I really appreciate your time. Thank you for having me on.
Dan Ferris: All right, now it’s time for the mailbag. Remember, your feedback is important to the success of our show, and you can e-mail us with a question or a comment, or whatever at [email protected] We read them all and we try to respond to every single one, even the hurtful ones, okay? So let us have it.
Just got a couple items here today in the mailbag. Number one says, “Dan, always look forward to Investor Hour. The topics have encouraged me to move from the Stansberry Investment Advisory to recently becoming a Stansberry Alliance member.” Good for you, and welcome to the fold is what I say. But the e-mail goes on and he says, “When the market took a downturn in December I wondered about ETF risks. If an ETF has severe problems I assume in theory it could go to zero and cease functioning. But are there additional concerns with ETFs that short the market? If we were shorting a stock and we were on the wrong side of the trade we would have to cover the short. What happens with an ETF that shorts the market? Are we on the hook for more than our initial investment if the trade goes against us?”
That is a really good question. I don’t know the mechanics of how they would work that out because as you say, you know, a stock can double or triple on your or something and you can – you know, you can lose more than you’ll ever win by shorting. But the bigger problem to me, and the reason why I think you’ll see some of these things blowup at some point, is that the shorts especially, you know, they tend to use leverage.
So it’ll be like the two X short fund, or the three X where they actually – I think they actually have the four X short fund for some index or another. And that’s really the – that’s the screwy thing. I mean these things are obviously made for day traders, right? And overall, you know, I just I’d much rather short individual names and be very careful about it than buy a short fund.
I’m not going to say much more than that because I haven’t done a lot of due diligence when short ETFs, but I hate the leverage, and I would rather short individual stocks. And that’s Eric R. Sorry. Thank you Eric R. for your question about that.
So one more e-mail here. Okay, this is from Gary P. Gary P. says, “Dan, I just recently started looking into investing in the market. I am not well educated on any of the processes, and would like to try with some small investments. I did consider trying to use a broker, but I am more interested in making my own investments from the comfort of my home. I just started listening to your podcast to get some insight on some potential investments, and I would like to get your thoughts on investing in the most recent events that is happening in my state. I live in Michigan, and we just voted to legalize the use of marijuana. There has to be some potential opportunities of investment as a result of this decision. I’d appreciate your spin on this topic. Than you, Gary P.”
And thank you Gary P. Let me tell you something, Gary, you don’t need to be in a hurry here. That’s the mistake that people make. They want to get in on a hot thing. They want to get in on the craze at the beginning and make a lot of money real fast. That’s a bad idea. Marijuana is farming and now it’s got kind of a retail angle on it, right? So they farm this stuff at marijuana farms, and they – you know, they make all kinds of different products frankly. Just everything your heart desires. You know, all kinds of edible things and drinks, and various ways to smoke it. There must be 10 different ways to smoke this stuff. I’m not kidding, it’s crazy.
I live in Washington, so I know a little something about this. And all I will tell you is that I don’t think that this is a great business. I don’t think growing – you know, farming is not a great business. It’s a highly cyclical, highly capital intensive thing. Highly competitive. You generally don’t get much control over the price of what you’re selling. This might be different because it’s – I mean people smoke marijuana to get high, you know? Like it might be more like alcohol, or tobacco, which tend to be good businesses.
But the good part is the frontend. All the value add is going to be after the farm, right? So the value add is going to be in companies that make all kinds of different products, drinks and whatnot, and companies that maybe run good retail operations possibly. But if I were you, the most important thing is don’t rush into it. You think you need to rush into it. You can actually wait until all the crappy businesses get washed out.
You can get a company that’s full of hype and the share price is way too high and it’s gone way up, and everybody thinks they need to buy it. Don’t buy it. Because if it’s a real business one day it’ll get dirt cheap and you’ll be able to buy it and make some money.
Case in point, Microsoft. It went absolutely bananas during the dot com years, and then it crashed horribly. I forget how much Microsoft was down. Probably 70 or 80 percent just like most of the big names were. And it finally broke even like a year or two ago, but it took a long time, and you had plenty of chance to get into it at a very good price and make plenty of money, all right? Don’t be in a hurry. That’s my advice. Thank you for that Gary P.
All right, well that concludes another episode of the Stansberry Investor Hour. Be sure to check out our newly revamped website where you can listen to all our episodes and see show transcripts, and where you can enter your e-mail to make sure you get all the latest updates. Just go to the same address, www.investorhour.com. That’s it for this week. I’m your host Dan Ferris. Hey folks, love us, hate us, just don’t ignore us. Thank you for listening and we’ll talk to you next week.
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