On this week’s episode, Dan gives the latest updates on what is on everyone’s mind, the Coronavirus. At the moment, unfortunately, we have more questions than answers.
“What happens if the poorest in our country can’t work for 6-8 weeks?”
“What happens if Americans go back to work before the virus ends?”
“Is the cure worse than the disease?”
Then on this week’s interview, Dan invites Principal of Bearing Asset Management, Kevin Duffy, onto the show.
Bearing Asset Management was one of the few firms on Wall Street warning their clients of the housing and credit bubble before 2008.
Dan asks Kevin about his new newsletter “The Coffee Can Portfolio.” It’s based on an older contrarian investment strategy that you may be unaware of.
Kevin tells Dan stories of what it was like on Wall Street during the Financial Crisis and why the situation today seems so different.
Porter has a big announcement for these questionable times. Click here to listen in.
Co-Founder of Bearing Asset Management
NOTES & LINKS
1:14 – Dan opens this episode with a personal story about the coronavirus… “My wife has asthma, I absolutely cannot afford to make her sick.”
7:30 – “I do believe this is the watershed event of our lives. I don’t think things will ever be the same again… I think this is the biggest thing since WWII.”
9:58 – Dan talks gold. Why did it drop recently and what’s going on with the price now? Is there a gold shortage? Is now the time to get back in?
17: 30 – Dan has a conversation with today’s guest, Kevin Duffy, Principal of Bearing Asset Management. Bearing is famous for warning their clients about the housing and credit bubble before the crash of 2008.
26:05 – Kevin shares some of his biggest wins, biggest losers, and lessons learned over a long career investing for over 40 years.
28-50 – Dan and Kevin discuss Kevin’s new newsletter “The Coffee Can Portfolio.” It’s based on an older contrarian investing strategy you may have never heard before.
37:15 – How is the bubble today different than previous bubbles? Kevin gives a fascinating take on why today’s panic is different than ones in the past. “In my mind, there’s always a silver lining… there’s a profit opportunity.”
44:36 –Dan and Kevin discuss a lot of the irresponsible ideas being floated around to fix the economy. “As investors, we need to [use those ideas] to our advantage.”
48:10 –Kevin downplays the threat of the coronavirus on college campuses in the Midwest… but Dan pushes back.
59:05 – Kevin discusses two different types of businesses, their mindsets, and which ones you should be looking to invest in. “Who’s going to be able to withstand this? I think you’re better off with…”
1:04:35 – Dan asks Kevin “if you could leave our listeners with one idea, what would that be?” Kevin touches on two things and even gives a stock he’s bullish on.
1:07:05 – It’s a mailbag for the ages… Dan, are you nuts? Last week was one of the most pessimistic episodes I’ve heard, do you really think there is such a large black cloud? Why is Altius getting hammered? Is it time for the government to do “a little something?” Dan answers questions from listeners in the mailbag.
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 and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with Kevin Duffy, who is a money manager and all-around smart guy, and also a great Twitter follow @kevinduffy1929 on Twitter if you're out there, and he's got some really interesting like long-term-investor-type ideas for you, we'll talk with him today. But first, I have a few thoughts to share.
Man, what a roller coaster our lives have become. It's a roller coaster of emotions and news and ideas and questions with very hard answers. I'm probably guilty of having more anxiety than I otherwise might because I absolutely cannot afford to get sick. My wife has asthma and I absolutely cannot afford to make her sick. And I've heard stories of like pro athletes on TV sort of reporting in through Skype and things saying that they got sick with this and it was the worst illness they ever had.
Like people with, you know, ostensibly the strongest lungs on the planet saying it's the worst illness they ever had. And as you know, I've found it somewhat difficult to get a real good handle on anything but the economic impact and the financial implications of the coronavirus pandemic. Two weeks ago, I suggested government-mandated shutdowns were a no-brainer. Then last week I kind of whacked myself back to consciousness after receiving a wakeup e-mail from today's interview guests, Kevin Duffy.
Now I'm sitting here asking myself questions like the following. OK. When you leave your house, pandemic or not, don't you do so in full knowledge of the risks you're taking, whether you're walking down the street, you're out for a drive? Anytime you leave your house, you accept the risks that go along with doing so, and it makes me wonder how is the pandemic any different? If I want to risk getting sick, isn't that my decision? I suppose the question eventually becomes, how does my decision to accept the risk of getting sick affect others?
But I can't get away from that basic decision that we all make when we choose to leave our homes. You do so, fully aware of the risks every time. Is this really any different? And of course, yes, most of the time your decision to leave your home doesn't involve potentially killing somebody else by infecting them with a virus. So, it's different that way, or at least we think it doesn't usually, but we don't know really do we? And that's a fair point, right? When death is on the line, the conversation changes and it's like in finance when ruined, financial or otherwise is on the line, the conversation changes, right?
Another question I have is, is it really better to plunge millions of people instantly into poverty than some other alternative? Is the cure worse than the disease? You know, at first when the streets are deserted and it can feel like shutting everything down was the right thing to do, but what does it look like after, I don't know, you tell me, four, six, eight weeks of zero income for the poorest people in our economy?
It's true that lots of people tend to pull together in a crisis. I get that, and we've seen all kinds of stuff in the news about that. You know, plenty of that will continue to happen at every level of society. But it's also true that when you push millions of people over the edge into a zero-income poverty nightmare, you will get a reaction out of them.
Many of them will turn to violence and crime to make ends meet. They'll steal, perhaps even kill to get food and other supplies. And I'm just afraid that if we keep this up, I'm afraid we'll see, you know, looting and crime in the big cities especially where people are packed together. Anywhere there's a bunch of people who are on the edge of poverty, well, now it contains a bunch of people who've been pushed over that edge and are in serious crisis.
So, shutting everything down comes with a very, very high price. We had better make sure we stop this virus and kill it off for good, but with all the shutdowns, because if we shut down, push people over the edge, OK, then we're going to let them get back to work. Then what if we re-ignite another pandemic because you know, that happens? These things can go down for a while and then they can come back. If we let this happen, it'll be 10 times worse. If we shut down for like, I don't know, however many weeks, six, eight weeks, you know, it'll take a lot longer before things are back to anything approaching normal.
So, you know, then we can afford much less to have a resurgence of the virus. You see? And I saw an article that just broke my heart on Twitter the other day. It said suicide hotlines are overwhelmed with people calling in because they're lost their jobs and they have no money. That is an unintended consequence I'm willing to bet nobody considered when advocating a shutdown. Maybe they did. I don't know. I wasn't in the room.
And you know, there are possible solutions to this. There was an e-mail in our reader feedback this week said maybe we should focus just primarily on isolating those 60 years old and above, as well as those with serious underlying health conditions. They're most at risk of serious illness and death from coronavirus. It's a good suggestion.
I suppose it requires a lot less shutting down in the economy. The economy isn't just, you know, it's not just a source of money for hedge funds and bankers is it now? We all depend on it for our livelihoods. We all depend on each other. And when neither of us is allowed to show up, it's a problem for both of us.
So, there's a couple of things with that suggestion. Obviously like we've heard reports of younger people, people under 40, people under 20, young people getting this thing and it making them really, really sick. And I think we got the first report of a very young person dying recently in California, but in Sweden, they're taking this very laissez-faire approach apparently, according to a Bloomberg article that I saw this morning.
Kids are still in school. People can still gather in big groups up to 500 and they consider it a balanced approach and they're just starting to do a few things differently. Like, it just recently started in Sweden where you couldn't go up to the bar and get waited on. You had to be at a table and I don't know, I hope it works out for them.
I'm asking real questions here. That's the best I can do is to be a person who asks real questions at this point, because I don't have any answers. I'm not saying any of this is easy. I think I came off thinking this was easy in the beginning. Oh, just shut everything down. Easy-peasy. We’ll all be good. So, you know, there are no easy answers.
I do believe though that this is the watershed event of our lives. I don't think things will ever be the same again, and I know people said that after like 9/11, the financial crisis, but I think this is bigger than those events. I think it's the biggest thing since World War II, and I believe it will impact all aspects of our lives the way World War II did. I mean, don't ask me what that looks like because this is not World War II.
This is a virus. So, you know how it looks afterward, I don't know. I hope life does get back to something approaching normal. And you know, like I said, if I sound like I have more questions than answers, you are definitely picking up what I'm putting down this week. I certainly hope this situation improves. The economic damage is already horrendous.
My friend and colleague at Stansberry, the editor of Stansberry NewsWire, Scott Garlas, said in a recent Stansberry daily Digest, he thinks hotels, restaurants, and casinos will see revenues fall anywhere from 65 to 95%. He said he thought casino revenues could fall 95%. What does that look like? I don't even want to know. I hope it doesn't happen, but obviously a lot of people's revenues, you know, since the shutdown of things across the country have gone to zero.
So, I hope this ends quickly. I still think there's more downside in the stock market, but I also know from experience with bear markets that it's virtually guaranteed we will see an absolutely rip snorting, smoking hot rally, maybe even more than one.
Listen to this, of the top 20 largest daily increases in the Nasdaq composite index, all of them... all 20 took place during bear markets, including a couple during the present bear market like this week. So, 12 of them took place in 2000 and 2001 during the dot-com bust. So that's the nature of bear markets. So, when you see these huge one-day moves, and President Trump and Larry Kudlow cheer... Don't cheer. It's standard bear market stuff.
And we saw even like a blistering rally in gold in the last few days. It caved in and in less than 24 hours though, from early Monday morning to early Tuesday morning this week after caving in from like 1700 to below 1500, the April gold futures contract soared earlier this week, $200 an ounce from around $1498 an ounce up to as high as $1698 in a period of less than 24 hours.
And of course, you know, stocks rallied on Tuesday. Dow Jones was up 11%, huge one-day move. But I'm talking about something in the way of like a blistering rally that takes the big stock indexes up like another 30 or 40%. I'm not just talking about a one-day event. I think we could see that. That would be standard fare for a bear market. And given that this one was like the fastest one in history to arrive, you know, who knows what this is going to look like?
Couple of things about the rallies, right? They tend to be smoking-hot. You get lots of short covering. One stock that I'm looking at to possibly recommend as a short sale in the Extreme Value newsletter, it tripled since last week. It was up almost 60% in a single day this week. I think their business is totally screwed, but it struck me as weird that a lot of the worst companies were the best performers over the past few days, it positively reeks of short covering, right?
Another weird thing about gold. There's a shortage of physical gold versus demand. So, if you go into like a coin shop or whatever and you try to buy physical gold, they're like, “Well, we don't have this and we don't have this and we don't have this, and we don't have that, but you can order.” What did I order? I ordered maple leaf coins, a few of those, and he said, “OK, great. Just pay me today, and it's like $95 over the normal price and you won't get them until May 21.”
That's what he told me last week. I'm like, "OK, so it's March." It was March 19, I think it was, and May 21... April... May... two months out. Wow. Eight weeks. And the gold market – like for example, the bars they sell in London, in order to make the 100-ounce bars that you can deliver into the futures contracts, like the London gold bars have to be melted down. So, that's not an easy process. Refineries are shut down.
So, the link between the physical and the futures is kind of broken. And earlier this week, at one point there was like a $52 difference between the spot market, you know, the cash market for gold, and the April futures contract. And I tend to think that you're going to see some more of this liquidation of the gold futures. I noticed that the April contract bounced up against like $1698 per ounce, then $1699 per ounce, and retreated quickly. And the previous high I think was $1704 per ounce.
So, when you see it retreating shy of the previous high, maybe that's not great, but you know, who knows? It's a crazy market. Predicting anything is insane. It's just untradeably volatile. And man, the futures market, you know, it's mostly cash-settled, right? A lot of brokers don't even allow you – if you trade futures – they don't allow you anything but cash settlement. So, there's this disconnect because people really want physical gold and they're liquidating what they can liquidate.
So, you get this weird phenomenon where the physical supply is really tight and we've got this huge drawdown from $1700 to below $1500 in the futures. Weird stuff, huh? So you know, I recommend buying physical gold and silver if you can get your hands on it. If you can't, there are some publicly traded vehicles that work well, and I'll share a recommendation of my favorite one with Extreme Value readers in the upcoming April issue. I mean, it's probably not hard to figure out, but I've got to tell them first before I give it away for free.
And also, in Extreme Value we put our stocks on hold not too long ago. I know some investors are really buying the dip here and they're very excited about the bargains and they’re long-term investors. I'm not quite there yet. I think I'm getting there, though, but I'm not quite there yet. It's just, it's difficult to get there when you see a market divorced from fundamentals, like the sentiment and the fundamentals and the support and all that, it just means nothing because people are liquidating to raise cash.
But that's really what I want to leave you with because I think that's one of the most hopeful things I can say from my position. That's my main job is to do research in individual stocks and communicate with Extreme Value readers, and I'm getting there. We've got a really great list of names. I think if we catch a really blistering rally, like 30 or 40% up, we'll probably do some short sales if we can. I don't like to try to be too cute about this stuff, but I don't think this is over yet.
But if we keep going down, down, down, down, down, like this, I will have no choice but to start buying because I mean, look, I was born in 1961 and the buy opportunities were like 1974, 1982 is considered a big one, but the market was actually lower somewhat before that, you know, 2002 and of course 2009, and we're obviously getting another one of those shaping up right now and people are scared to death.
It's all about the virus. They're not focusing on the sort of the babies being thrown out with the bathwater, and at some point here, as bearish as I was for three years, I'm going to just, you know, I’ll pull a 180 and I'll get ready to pound the table the other way and start buying.
So, that's all I have for you today. I do want to tell you about a new thing that Porter Stansberry is going to be doing. I know a lot of you have been asking about where is this guy? We want to see him on the podcast, and we haven't heard from him in a long time. We'd like to hear from him. But he's going to do a little event. He's going to get in front of the microphone. So tune in today at stansberrymessage.com and he's going to introduce a brand-new product.
He's identified the 20 best companies in the world that he thinks maybe you should start kind of stockpiling them these days, and they're companies that you never sell, never use trailing stops, just probably make you 20% a year if you buy them really dirt-cheap, which a lot of things are right now. And he's going to share a lot of things. He's going to share why gold has not performed the way most expect during a crisis. We already know that.
His prediction for the exact date, the stock market will bottom. I can't wait to hear that one. Two reasons why the crisis has unfolded so quickly and how the government's drastic restrictions will impact the market this year, and exactly which stocks he thinks are likely to recover the fastest. And then he'll also tell you what he's going to do with $1 million of his own money, and I know you want to hear that one. So, stansberrymessage.com. Sign up, tune in, and Porter will tell you what's on his mind. I'll be there. I'll be curious, as curious as you.
So, let's go now and talk with Kevin Duffy. It's time for our interview. Today's guest is Kevin Duffy. Kevin Duffy is a principal of Bearing Asset Management, which he founded in 2002. The firm manages two long/short hedge funds with a flexible mandate. Bearing warned about the housing and credit bubble of 2005 through 2007, shorting stocks such as New Century, Bear Stearns, Lehman, MBIA, Countrywide, Wachovia, and Citigroup.
Man, that's awesome. Duffy wrote extensively on the subject, including articles, “Alan, We Have a Problem.” I think I remember that one. “Mr. Mozilla Goes to Washington” and “Honey, I Shrunk the Net Worth.” In May 2007, he gave a speech in New York City titled “It’s a Mad, Mad, Mad, Mad World” identifying root causes of the bubble.
A month later, he issued a warning in an op-ed for Barron’s titled “For Whom the Bells Toll.” Man, what a run you had there. The Barron's credit-bubble index was cited by Marc Faber and speeches in the gloom, boom, and doom report. Despite their success in shorting the credit bubble, Duffy, well, regrettably overlooked by Michael Lewis when writing The Big Short. Man, that stinks. Duffy bought his first stock at the age of 13. Kevin Duffy, welcome to the program, sir.
Kevin Duffy: Dan, thanks for having me on. Good to be here. What a time.
Dan Ferris: Yeah, man. You should have been in The Big Short.
Kevin Duffy: I know.
Dan Ferris: How about that? I mean, all those articles and all those shorts and everything. You were all over this thing. How about that? Well, you know, nobody's perfect. Can't hold it against them too much, I guess. But that just makes me look like I'm getting the scoop when Kevin Duffy, see, so it makes me look better.
So Kevin, let's go back a little bit to this bought his first stock at the age of 13. I actually read about that in the first issue of your newsletter, "The Coffee Can Report" or "Coffee Can Portfolio." Sorry, I thought it was a great story. It's like Buffett-esque. Can you tell me what led you up to that though? What led you up to buying it?
Kevin Duffy: Yeah. you know, it's interesting. My dad was in involved in medical technology and he was always one of these forward thinkers. So, I remember as a kid, and this was in the early '70s, he bought the first Texas Instruments calculator, and this thing was about the size of a brick, and it probably weighed a little bit less than a brick. And at the time, I think it cost $75, which was a lot of money in the early '70s.
But then I remember, I was delivering newspapers, 13 years old, and my dad came home with this idea called incoterm. And so, I thought, OK, well, that's interesting. And so, he bought some at $5.50, and little did I know this was the bear market of 1973 to '74 which is the worst bear market since the early 1930s and the stock just kept going down and down and down.
And so finally, and I deliberated over this quite a bit, and finally I pulled the trigger and I bought it at $1.75. And, of course, that ends up being the very bottom of the worst bear market since the Depression, and the stock goes up to $10.50 in 11 months. And I remember my dad, and I used to get up and I was delivering newspapers. I checked the stock price every day, and then my dad came home and he said, “Well. I guess I'm going to sell.” I said, “OK, sell.”
So, you'd think that after that experience that you'd be hooked. But at the time there was all these concerns about inflation and stagflation in the economy and all these war stories about the stock market. So even as a 13-year-old, I guess I took that all in and I said, “You know what? I'm not going to do this anymore. I'm going to quit while I'm ahead.” So, that was my first experience with investing.
Dan Ferris: Well, I'll tell you, as first experiences go, it's a pretty darn good one. And then, so that was your first experience and you quit, right? And you were afraid to get back. When did you pick it up after that?
Kevin Duffy: Yeah. So again, my dad is very interested in technology. And so, this would have been in I think 1978, and I remember him coming home and he's describing this company that is in the business of fault tolerance systems. And they were called tandem computers. So, of course the name fits with having a redundant system. And he described this in great detail and he was very excited.
And you know, by this time, I'm 17 years old. I’m a little bit older, starting to – we were building... my brother and I were building decks and we're starting to make a little bit of money. And so, I said, OK, I'm all in. Well, I didn't know it at the time, but the stock I think was selling, it was a high-flyer and it was selling at, I don’t know, like 75- or 100-times earnings.
Well, I didn't know anything about valuation, OK? Well, that was the good news because the stock ended up going up six times in a few years, and they just grew and grew and grew, and so they grew into the valuation. And you know, by this time, we're building decks, we're making good money. I'm just shoveling money into it. Now I'm going into college. And so that was my next experience.
And then my third experience, so now I'm becoming a genius, of course. So, my third experience, I'm in college and, now I turned I guess 21. I'm old enough to get a margin account and so we discover, now this is the early bull, the bull market of the early eighties, 1980 to 1993 which culminated in the first PC bubble. Remember the home computer Commodore PET and Coleco Adam and IBM... the "Peanut," the IBM PCjr?
And so, we were, I remember in college, I had a roommate who was basically speculating with student loan money. You know what I mean? It was completely insane. And I'm buying on margin and buying this company called Digital Switch, and the stock is just doing somersaults. So now, we're making all kinds of money and I'm on the phone. I'm spending more time on the phone with my broker at Paine Webber in St. Louis than I am focusing on my studies. It was completely out of control.
Well, of course the bubble burst. And so, that was going from, "OK, I'm going to quit while I'm ahead" to, "oh, now I'm a genius" to, "hmm, I just learned a really painful lesson." And so, that was sort of my indoctrination in investing.
Dan Ferris: You got some good stories, man. You got some real good stories.
Kevin Duffy: I got a lot of them.
Dan Ferris: Yeah, and they continue like right up to the present through the financial crisis and everything. We need to see a Kevin Duffy book for sure.
Kevin Duffy: We're working on it.
Dan Ferris: All right, good. So, let's just talk about where you are today, because I read this first issue of "The Coffee Can Portfolio" and it's got a lot of really interesting rules in it. And that example about not knowing P/E ratio and the thing grew into itself, that's a really neat one to me because I think it's kind of a classic error that certainly the value-oriented folks make of thinking P/E is really, really important.
But one of your rules explicitly says when you're at – rule No. 4, when analyzing growing companies ignore earnings and focus on investment. And as soon as I read that, I was like, you know, sort of face palm. I thought, "Oh, that's what I've been doing wrong all this time." I mean, not really, but sometimes. I've been a deep-value investor and I wasn't looking for these situations and I feel like I should have been.
You have the example of Starbucks. We did recommend Starbucks in the newsletter. It's done pretty well. You got any other ones that you want to share or you want to expound on that? Because it's a fantastic idea. Fantastic idea.
Kevin Duffy: I think the thing about investing is you have to have a lot of sort of arrows in the quiver. We can talk about being a generalist and you have to be able to adapt and I think be a contrarian. So, it just depends on the times and what's available. The problem is that in the period that we've gone through, I think people tend to suffer a little bit from recency bias, and they look at recent success stories and then they extrapolate those.
So amazon.com, you know, what did they do? They invested heavily, and this was another mistake. We can talk about successes. I think it's really important as you’re writing a newsletter and going through 45 years of experiences to talk about the mistakes. And you know, one of the mistakes I made with Amazon, I never invested in it. I'm looking out at Amazon, because I remember going through the tech bubble, and the stock was a tulip and then it crashed 95%.
And then I started watching this after that, and I could see that, wow. I mean, all this money that these guys spent, and they spent a ton of money investing. Those investments were starting to pay off. And yet, how many people made the mistake of looking at that and they're saying, you know, this thing is trading at 75 times earnings or 100 times earnings. So, they missed that.
The problem though is that, that invited copycats, so people missed Amazon, but then they started thinking that, well, everything's in Amazon. And so, money flowed and money of course, because interest rates being so low, they're flowing into every next Amazon. And so, I think it's a really tough environment. People are saying, "Well, Uber is the next Amazon."
Well, it’s one thing to look at those investments. It's another thing to say, you know what, I think these investments are going to pay off. So, I think it's been a very dangerous environment to just assume that just because a company is investing heavily, that you're going to get a return on that investment. So, at this point in the cycle, those types of ideas are not sort of just jumping out at me.
Dan Ferris: Yeah, I'll say. As we speak, you know, the markets are pretty much melting down and everybody's panicking and it's an interesting time. Maybe we should even talk about Robert Kirby a little bit before we even go any further, because that's where "The Coffee Can Portfolio" idea comes from. And it's an interesting time to talk about this because I feel like we're approaching one of these 1973, 1974 moments maybe in the next several months or next year, let's say, if we get a big recession, and it could be the time to put the put stuff in the coffee can and leave it there for forever, for a decade or more.
Kevin Duffy: Yeah. I think we've got to be careful. When you come up with a title for a newsletter, you know, there's only so much that you can say, and I kind of chose that for a reason, but it doesn't tell you everything about what I'm looking at. So, it's sort of a hook, I guess.
But to me the coffee can – and it was Kirby and it was the idea of the Old West, where you'd be very selective in what you put in your coffee can and you put it under your bed. And if you had to pick up and run, you could grab it and these were the things that really meant the most to you. So, I think the discipline in the coffee can is being very selective about what you put into it and be very patient.
And for me, the discipline is "can I look out 10 years?" Can I look at this business and say, "All right, through thick and thin, and right now we're going through a tremendous amount of turmoil – is this company going to be able to survive?" And so that's a part of what I'm doing. But the reality is that right now, the companies that I feel like I can put in the coffee can are pretty limited. And so, there's another section of the portfolio, which is opportunistic. And then there's a section for reserves and a section for speculation.
But you know, buying right and sitting tight does not mean going to sleep. You know, you still have to really pay attention to what's going on. But I think that's really what we're trying to do is look at it at companies that can basically withstand the things that we're doing right now, so that you're not panicking. You’re seeing a tremendous amount of panic right now. And I think if you feel comfortable that a company can withstand this, then you're not just going to panic out and sell. In fact, if anything, you'll probably look, you'll take opportunities like this to look to buy more of a good business.
Dan Ferris: Right. I kind of expected you to say that last part, difficult as it is, and it's getting really difficult. Now, let me ask you this, because I noticed over the past, like, I mean, you seem like a really business-focused bottom-up guy here. You're really focused on being very careful about what businesses you want to put in that coffee can.
But I've noticed over the past, I don't know, year or two or so, a lot of value investors or people who are bottom-up focused the way you are, I noticed the macro sort of creeping in and they look at the level of the stock market and they buy puts and they buy bonds. And even, I know one guy bought a levered bond fund, and so, the macro kind of creeps in on people. Where are you on this?
Kevin Duffy: I am definitely a generalist and definitely both. I think you have to, again, look at this, it, you know, it's a very complex, the global economy is infinitely complex and as many ways as you can look at the problem, the challenge, as you can, the better off you're going to be. You don't want to just dismiss. I think this is something that's happened a lot is that people tend to be value investors and they say, “Well, I can just completely dismiss the macro picture.” I think even people like Warren Buffett, they make certain assumptions. They say, "Well, you know, the U.S. economy will always grow."
Well, OK, that's been a great assumption for the last 50 years, and it served him well. But can we make that assumption going forward? And so, I always try to look at this from, again, many different angles and also try to take a contrarian view. So, if people are really dismissing the macro, and I think that's what's happened certainly over the last five years and probably over the last 10 years, is that a lot of people that are managing money, they assume that we can be fully invested.
There's no reason to hold reserves. We don't have to worry about the macro picture. We can always count on the Fed to come in and rescue the economy. We don't need to know anything about economics. You know, that sort of mentality. So, I'm like a chameleon, you know, I'm changing my spots. I'm trying to adapt based on where the crowd is going and things that the crowd is ignoring.
So, I'm absolutely, I think the macro is important. And I remember Fleckenstein, Bill Fleckenstein. I don't remember which bubble this was, whether it was the tech bubble or the credit bubble. And he said, you know, right now, and it was at the top of the bubble. He said, “Right now, economics doesn't matter. But I can tell you when, at some point economics will matter, and when it does matter, it will be all that matters.”
So I kind of think that that's where we are in the cycle is that the macro is more important than the micro, but at the same time, you have to look at things from the bottom up because I think it gives you a lot of information where you have a lot of macro economists and macro type of strategists, and they look at aggregates. I think aggregates are a big mistake looking at economic indicators. You really have to look at the macro at the micro level. Does that make any sense?
Dan Ferris: Oh, absolutely. Yeah. Look at the macro from the micro level. Yup. Sure. So, in other words, you think about a particular business in relation to, oh, how might this be during a recession? Like we covered Dollar General in our newsletter, and we thought, well, you know, maybe if we get something like 2008, 2009 again, back then Walmart was a really good performer.
I think it was up about 20% in 2008. But this time around, you know, it looks like the ascendant model is these dollar stores and Dollar General is one of the better operators, so maybe that'll happen, that type of thing. Does that sound like the sort of thing that you're talking about?
Kevin Duffy: Yeah, absolutely. And you know, every environment is different. I think what makes this environment, like if we look at the last two bubbles, the last two bubbles were sector specific. You had the tech bubble and you had the credit bubble. And so, the problems were somewhat limited. and I think this is a completely different animal. So, there were places to hide out back in 2000.
In fact, the bubble was in the new economy and the place to hide out was in the old economy and you could have bought Procter and Gamble and Church and Dwight and real defensive names. Defensive names were really cheap. And so, if you're going into a recession, not only is it nice to own defensive names, but you have a margin of safety because these stocks had been abandoned so that everybody could buy the dot-coms, and so you had this a bubble next to an anti-bubble.
You had a similar situation in the credit bubble, not quite to that extent, but there were some places to hide. And I think what makes this one so different and so much more dangerous is that first of all, at the epicenter of this bubble, this so-called everything bubble, is a bond bubble. That's what makes it different. And the other thing is it's really an economic bubble.
And you look out there and you can see that defensive names, I mean, I would love to own defensive names in this environment, but they're extremely expensive. Very hard to find good defensive names on sale. So, it's limiting you in terms of where you can go. I think it's been kind of fascinating to watch how people have reacted over the past month. You know, the market peaked almost exactly a month ago.
It was on February 14. I wrote down this morning before we got on the call, I wrote down, well, most important one is I should have written down the S&P 500, but I could do the math here real quick. The S&P 500 is down 24%, and over that time, let's look at the safe havens. Gold is about flat. It’s down 0.4%. Bitcoin, you know, that was supposed to be a safe haven. That's down 42%, and bonds as measured by the TLT actually up 10%.
So, I think this is kind of fascinating that people are jumping into, they're sort of jumping out of one bubble and they're jumping into really the epicenter of this bubble, which is this massive bond bubble. So, is that crazy? This is the thing that's so interesting about this is that it's not, there's no textbook on what we're experiencing right now. It's something really, really different.
Dan Ferris: Yeah. I've heard more than one person call it the everything bubble. No place to hide.
Kevin Duffy: If you go on Twitter, on #everythingbubble, you can see I've got a ton of tweets on the subject.
Dan Ferris: It's not a hopeful message, is it? I mean, you know, people are listening to us. They're like, OK, what's happening and what do I do about it? And we're going, ‘The worst thing ever is happening and there's nothing you can do.” I mean, I feel like that's almost like what we're saying.
Kevin Duffy: Yeah. And you know what? And that's a great point, because I think this whole exercise is about, first of all, there's a dedication to reality. Scott Peck in The Road Less Traveled said mental health is a dedication to the pursuit of reality at all costs. So, the most important thing is we got to stay focused on reality, whether that's good or bad. And I think also we have to try to stay as balanced as possible, and then all we do is objectively look at the future and we have to do two things, look at the future, and also look at how others are looking at the future.
Those are the keys. And then we exploit the difference. If people are doing crazy things, hysterical things, which is what's going on today in many respects, then that presents opportunity. So, it's one thing to focus on the negatives. It's another thing to, you know, in my mind, there's always a silver lining, which is there's a profit opportunity. And the hysteria that's going on is creating all kinds of opportunities.
I think another thing for, and this is one of the motivations of me writing this newsletter is that people have placed their trust in authorities. People think a certain way, and the people that are essentially running money in this business, they're wired a certain way. They're wired to believe that whenever there's a problem, the authorities will just come in and fix it. And so, I saw that you had a tweet. I think it was really great, see if I can find it here, that talks about this, but I've noticed the same thing.
Here it is. You just said this recently. I hope you don't mind if I repeat it, Dan. “Every finance TV network is running the same headline, blah, blah, blah, as investors await stimulus. It's like a kid sitting in jail waiting for his dad to come and bail his dumb ass out.” And I mean, isn't that? But that tells you the way people think, and the way they think and the way they're acting I think is really important. And because we live in this highly complex world and we have to navigate this somehow.
The global economy is infinitely complex. How do we navigate it? And I think that people have sort of two ways of looking at the world. One is that there's a natural order that knowledge is decentralized, that the price system is a part of this, that profit and loss system is a part of it. There's an elegance to it, there's a beauty to it, and it works without central direction. That's one way of viewing the world.
Another way is the world is chaos. The world is dangerous. And we need leaders and we need authorities and we need experts, and we need all these people to basically take that chaos and create order out of it. I think it's two entirely different ways of looking at the world, and we need these frameworks. They're lenses that we view the world through. They’re ideologies. And they're always oversimplified. That's the danger of them, but we have no choice but to use to use shortcuts.
And so, that's what we all do naturally. Well, the problem as I see it is that the predominant ideology is the second one that I've described, that there is no order, that we have to rely on the authorities. We can't rely on the price system. We have to rely on, if we don't like interest rates, what do we do? You know, it's like the kid waiting in jail, or the kid who's spoiled, who throws a tantrum and says, “I want the Fed to lower interest rates. That's going to solve the problem.”
Or you know, now we have this coronavirus and you have Steve Liesman on CNBC saying, “We need to just throw $1 trillion dollars at it. That's what we need to do.” So, you have a lot of very irresponsible talk out there, but I think it's all a result of people thinking a certain way. And what I'm suggesting is if you have an investment advisor, you might want to ask him how he thinks, and these people that think the world operate this way, they're going to be blindsided.
And so, I think it's a good time to sort of change your lens, and that's what I'm trying to do is attract people that have sort of that similar lens that don't see the world as just relying on the authorities to run things and the central bankers, they're going to basically create this nice cushy environment for all of us where we can just have 10 or 15% returns year in, year out.
We don't have to worry about anything because if the big bad wolf comes along, you know, they're just going to scare them away. And I think what you're seeing right now is people are starting, people who put all their eggs in that basket, they're starting to realize, wait a minute, the wolf is at the door and now they panic. So we, I think as investors, we have to use that to our advantage.
Dan Ferris: Well said, sir. Yeah, we do. It's almost like emotionally you have to wait until you feel your absolute worst and then you'll do your best work. Then you'll make your best investments, and that's an unnatural act. It's like jumping out of a fully functioning aircraft. Parachute or not, it feels insane and wrong. That's why there's only one Warren Buffett, right?
Kevin Duffy: But it's at that time of, you know, sort of peak uncertainty if you think about it. And we're going through this right now with the coronavirus and I find it really fascinating to watch. We're kind of at peak uncertainty, and when you, as an investor, especially after you've seen this over and over and over, over a long period of time, it is uncomfortable.
What you do though is you start to recognize it and you start to kind of develop a comfort level that, OK, let's just take a deep breath here and let's relax and let's not panic along with everybody else. You know, what does this mean? I'll give you an example of this. I went to University of Missouri at Rollins, now Missouri Science and Technology.
When I was there, the ratio was 7-1 guys to girls, and so there wasn't a whole lot to do but play foosball and drink beer. St. Patrick's Day was the big party, so we would get two days off, Thursday, Friday, Saturday, Sunday, big long weekend, big drink fest. Everybody outside playing games, having fun. And this was the main event in that college. Well, they just canceled it as a result of coronavirus.
And so, I got out the map and I looked at, "OK, well, gee, I wonder how many cases of coronavirus there are?" I mean, this is coming up this weekend, I think, or next weekend. And there was one in Missouri, one in Kansas, one in Arkansas, three in Oklahoma. These are young people. They don't have to worry about getting coronavirus or anything. They're out in the middle of nowhere. Rollins is 100 miles southwest of St. Louis. It's out nowhere, and oh, they're going to be outside. So, it's a lot better than being inside. It's a total overreaction to the threat.
Dan Ferris: Well, yeah, I mean, I'm on the fence about this because in this particular case, you know, it's not like you're going to lose your job and you bought a house you couldn't afford like in the financial crisis. It's like, I really don't want to get sick and I don't want to make someone I lovesick and someone who might be older and frailer than me sick.
And maybe I'm an example you might say of why every crisis is different and I'm sort of, I don’t know, maybe you'd say I'm the example of why people are so afraid and they create opportunities for people like you, but this does have a feel to me, like, I don’t know. Like I said, I'm on the fence. If I thought this, you know, like in 2008 I was telling people in November, December, January, March, we were buying stocks and I was saying this is your opportunity.
Buy really great companies. Buy Microsoft, Berkshire Hathaway. We bought Automated Data Processing and a bunch of other good stuff, really good stuff that was cheap and really attractive and great businesses, but right now I'm like, I'm sitting here, and that economic piece I guess is still overwhelming me. Let me put it that way. It's like the economic piece is such a giant question mark I feel at this point.
And this morning, I don't know if you know Paul Graham on Twitter. He says a doctor friend of his says we're two weeks behind Italy. I mean, two weeks behind shutting everything down. Now that would be the peak to me. That would be the peak. Then I'd probably start buying.
Kevin Duffy: Well, yeah, and I'm not necessarily talking about buying, I'm just talking to the reaction to this itself. So, I think we have to kind of separate those things out. The thing is that some of these others, I think Ebola and SARS, they happen, they tend to happen closer to bottoms. I mean, this thing happened right at the absolute top of the greatest bubble that we certainly have ever seen in our lifetimes. So, I think you do have to take that into consideration. I think these ideas, they apply not just to investing, but they apply to your life, the actions that you take, choosing a career. Do you make travel plans? I mean, right now, I think if I were a profit-seeking person, I would consider looking at maybe booking flights somewhere. And my guess is that the airlines are so eager to have business that they would probably, if things were to get worse, they'd probably allow you to cancel the flight anyway. So, these are the kinds of mispricings that happen during a hysteria. You know, as far as the market, I think we have to kind of distinguish between, there's a lot of things that are going on right now that are interesting.
So, look at gold. Now, I happen to believe that it's a good idea to own some gold, and I also happen to believe that gold mining stocks, while I'm not thrilled about that industry in general, it's very capital intensive, it's a very difficult business, lot of moving parts, geopolitical risk, regulatory risk, etc., but since the peak, one of their inputs, one of their big costs is crude oil and it's down 40%. So, your output is gold. It's flat, and one of your main costs is down 40%.
And these stocks are, the GDX is down from the peak. It's down 19%. So, you have things like that that are going on. I happen to believe that the Fed is basically saying we are going to print money. We're going to keep printing until we get out of this, which I think is just going to dig the hole deeper, but it could lead to price inflation. So, hey, maybe owning some gold isn't such a bad idea. The other I think really hysterical thing that people are doing is buying bonds.
Why would you buy bonds that are yielding, the 10-year yield is 1.3%? I'm sorry, the 10-year is 0.7%. The 30 year is 1.3%. And Jim Grant, he likes to call it "return-free risk." I don't think people really understand how much risk is involved with buying bonds at these levels and what can go wrong. You know, the other thing that's happening is that these people are talking about a response to this, the coronavirus, which is spend more money, print more money, all these things that are going to create a worst fiscal situation for the federal government.
And I think a lot of people believe in "Santa Claus" economics. They just believe that, you know what? We have monetary, MMT, and we can just, the government's got infinitely deep pockets and they can just throw money at the coronavirus and there won't be any consequences. And so, they're jumping into bonds, and I don't think people have any idea how much risk they're taking on in the bond market.
So, you know, I think that's another example where we can look at the hysteria and first of all, try to avoid danger and then maybe finally another place is this idea that people have piled into index funds and they have avoided a lot of stocks across the index divide, and that there might be opportunities there. That's sort of what I'm looking at, you know?
So, you see a lot of, like Tesla. Tesla is up 50% on the year and Tesla is down from the peak. It's down like 28. Tesla has been a great place to hide out during all this until maybe today, you know? But so, a lot of this makes no sense at all, regardless of what happens.
Dan Ferris: Makes no sense. Boy, I agree. I totally agree. I think bonds were, they were a good trade coming into, you know, coronavirus and coming into the belief that the Fed was going to cut pretty hard. And I don't think they're anywhere near done with that yet, and who knows? We'll probably see some 0% and maybe negative in the U.S. treasuries. I never thought I'd say that. You know, it seemed like it won't happen here, but I think it probably will.
I think you and I see the world a very similar way. Another fellow who sees the world our way is Chris Mayer. We've interviewed him on the program and, I know you mentioned him in your newsletter. It's funny because you also, if you don't mind me just pivoting around here a little bit, you have so many good ideas in this newsletter of yours that I read. I just wanted to get to some other ones.
You used a phrase in your newsletter that really just, you call these stocks that you're buying "equity participations," and the only other person I've heard use that phrase is a guy named Tony Deden who is kind of Chris Mayer-like as well. I want you to tell me why you used that phrase. What does that mean to you? Why not just say these are the stocks we buy or the businesses that we want to own?
Kevin Duffy: You're exactly right. That phrase came from Tony. I've known Tony a long time. He's a good friend, and I was actually in Zurich a couple of years ago and was sitting down over a bottle of wine with Tony, and he was showing me what he was doing and he talked about that phrase and he focused on it. He sees himself as a business owner or alongside business owners. So, he's really looking for people with skin in the game. That’s where that idea comes from.
So, you're right. It totally comes from Tony. You know, I think we have a lot of influences and I think about Kobe Bryant and how he was a student of the game. He obviously had a lot of talent, but he would study Hakeem Olajuwon and he studied their moves and Michael Jordan, Charles Barkley, and he would try to incorporate the best moves into his own game.
And I think we're all like that, right? I mean, we all admire other people and we all try to incorporate some of what they do into our own game. And so, I look at a Chris Mayer or Tony. Tony's been a big influence on me and yet we're very different. We're very different in terms of what we do.
Dan Ferris: Yeah. But there does seem to be a similarity though, that it's that business owner mindset and you also, and Chris Mayer also, you also focus on this aspect of getting involved with owner operators, which I find very, very interesting. Tell me a little bit about that.
Kevin Duffy: Yeah, and I think it's, you know, it's just sort of one more layer of protection, that a lot of people, they just look at stocks and they're just stocks, right? Well, these are businesses and these are people running the businesses. And the problem is that you have I guess what's referred to as agent operators and owner operators, and it's a very different mindset. The owner operator, his mindset is survival.
With the agent operator, they're really not an owner. They're more of a renter. They're there for a short period of time and they have all kinds of different pressures on them. Shareholders, stakeholders, portfolio managers, investors, meet this quarter's earnings, that sort of thing. So, it's a different mindset. It's a different focus. I think what I'm trying to do is look at, assume that we're going into a really difficult environment, you know, a storm.
I've been thinking for a long time that a massive economic storm is coming. OK. Who's going to be able to withstand this? And I think that you're better off with the owner operators. As a short seller I've also focused on the other side of this, and I can give you an example: Boeing. Boeing is I think it really kind of a classic example of what happens with agent operators, what happens with companies that have all these different forces pulling at them.
Last year, of course, they had their problems with the new plane, the 737 Max and the crashes and all that, and their gross profits declined over 70% last year. They had an operating loss of $2.6 billion, and what did they do financially? Well, they raised the dividend, they kept paying the dividend, they raised it. They bought back a bunch of stock and they took on $26 billion in debt. For those actions, the shareholders rewarded them with a gain in 2019 of 1%. Stock actually went up.
Everybody's ignoring what's going on. And so, what happened yesterday? The stock is just getting, getting pummeled now. They took out their entire credit line in one day yesterday. There's no margin of safety there. The people that were running this business, they just assumed that there would never be anything like more than a little bump in the road. So, there was no planning for contingencies like this. Oh, what happens if there's some kind of a virus and people all of a sudden panic and they don't travel?
They already had the crashes. They're already having to dig themselves out of that hole, and yet what do they do? They just keep on making the company more fragile. You know, with owner operators, I think you have a much better chance, and it's really, this is a game of probabilities. We don't know. We’re all acting on imperfect information. I just think that in terms of finding robust companies that are able to withstand these kinds of shocks, you're much better fishing around in the owner operators. They have a different mindset.
And I think the beauty of what we've experienced is that the crowd and the crowd has really funneled into index funds and they own Apple and they own Boeing, and they own a lot of these companies that are run, they're big bureaucracies, but they're also run by agent operators and they're run with maybe not as much of a margin of safety as people realize. And in doing so, and these indexes, by the way, are float-weighted.
So, if there's a lot of liquidity, i.e. a lot of shares that are in the hands of the public, they tend to show up in these indexes, but if you have high insider ownership, then the float is low. And so, these owner operators like Gamco Investors, there's an example, Mario Gabelli owns about 80% of the stock. How many investors in ETFs own Gamco? I mean, it's got to be next to nothing because there's no float available. So, these companies tend to be kind of overlooked. And you know, that was interesting.
I remember actually on Monday we were getting this panic and we owned some Gamco in our fund, and I thought, "OK, well, what can I buy right now that is really cheap and should not be selling off? Let me try to buy this." And so, I put a limit order out there and I missed it. The stock actually started bounced back, and my guess is that the people that own that company, they probably saw this and said this is insane. Let's just buy our stock.
And so, the stock actually has done quite well. Now that doesn't apply everywhere, of course. But anyway, that's kind of my long-winded skin in the game rationale.
Dan Ferris: It's a good idea. I wanted people to hear it. I thank you for that. We are at the end of our time now, but I like to ask all my guests, if there's just one idea that you could leave our listeners with, you have a lot of good ideas in "The Coffee Can Portfolio," but if there's just one idea that you could leave our listeners with, what would that be?
Kevin Duffy: Well, how about if I give you two? One is to avoid bonds. I think that's a good, you know, kind of an asset allocation move. If you have an advisor, if you're not doing it yourself, and this is what I'm trying to give to people, for the do it yourselfer I'm trying to offer advice, but for the person who is not doing it themselves and has an advisor, my advice to them would be lighten up on bonds. Take advantage of this insanity in the bond market to lighten up or sell, whatever you have to do.
And then I'll give you for the do it yourselfer, for the bottom-up stock picker. a company that I like is Skechers. It fits a lot of the rules that I laid out in the first issue of "The Coffee Can." It’s tainted with the brush of retail and people think of it that way. They think of Skechers here, but really Sketchers has a huge presence in Asia. It seems like the coronavirus problems, obviously they were there early. They're starting to plateau and dissipate.
So, we're getting some clarity there, and the insiders own I think 28% of the stock. It’s been absolutely pummeled. But I mean, this is a company that's been growing their international business at a nice pace and they have a strong balance sheet. So, that’s one idea I think I leave your listeners with.
Dan Ferris: Well, that's excellent. Thank you for that, Kevin. Look, I could do this all day with you. This is really awesome and I hope you'll come back and continue some time.
Kevin Duffy: I’d love to. This is this a lot of fun. I knew it would be, and I really appreciate you having me on.
Dan Ferris: You bet. All right. Well, talk to you soon. See you on Twitter, and I guess it's bye-bye for now. Thanks.
Kevin Duffy: OK. Ciao.
Dan Ferris: All right. Wow. That was really cool. I could do this all day. Lots of good ideas. Usually when we ask for that one last idea, it’s something about life, it's general advice, but today we got a pick. Awesome. Absolutely awesome. All right, let's check out the mailbag.
The mailbag is where you and I get to have an honest conversation about investing and whatever else might be on your mind. Just send us an e-mail at [email protected] I read every single e-mail and respond to as many as possible. We're getting lots of them these days, and so I edited some of them because some of them are kind of long and I want to get to as many as possible, especially considering the high anxiety that we're all living with these days.
Here we go. Doctor no less, Dr. Ed S. says, “My God, it's just the flu. Are you nuts?” That was his whole e-mail. I don't think I'm nuts. I'm trying to avoid ruin, right? Ruin in finance is when you lose all your money. Ruin in life is when you lose your life. And I don't want that to happen to myself or my wife. So yeah, I'm concerned. Agree to disagree, Doc, Dr. Ed S.
Next is John M. and John says what some other listeners have said. He says, “Dan, I'm a big admirer of yours and have enjoyed the heck out of your podcasts. However, your interview with Doug Casey left me scratching my head. First of all, with the possible exception of Harry Dent, he has to be the most pessimistic investor analyst on the planet. His story never changes. The world is coming to an end and Chicken Little better run and hide.
He says the only progress we've made the last 100 years has been in science and technology. How about medicine or communications or automotive safety or transportation or oil exploration or a host of other areas? He claims every country in Africa is a hellhole. How ridiculous. I could go on, but I hope to get my point. The most disappointing thing of all is that it appears you agree with him. Do you really see that much of a black cloud? Long armor, John M.”
I'm not sure what a long armor is. Maybe the long arm of the law. So John, about that science and technology, then you named a bunch of science and technology advances: medicine, communications, automotive safety, transportation, oil exploration. That's all science-and-technology-based. I probably disagree that every country in Africa is a hellhole, which John did not say hell hole. I'm kind of making this G-rated.
I don't see as much of a black cloud as Doug does. I think this is the best time to be alive that's ever been. More people have a higher standard of living than ever, and I think that's going to continue, and Doug does too if you noticed. He says, ultimately long-term, yeah. But I think he's more willing to entertain various dire scenarios than I am. I feel like I don't have the luxury of that. Good question though.
James B. writes in and says, “Love the podcast. It's the reason I became a Stansberry subscriber.” Wow. Thank you, James B. He continues, “The current narrative is that the long bond yield is rising in dramatic fashion due to everyone moving to cash. Could there be other reasons? Maybe bond investors are predicting a massive inflationary stagflationary pulse from the millions of current near future monetary fiscal stimulus unleashed after the world is released from the shutdown. Maybe we will get Sjuggerud’s melt up after all, but in all the wrong ways. James B.”
James, this stuff happened so fast that I feel like the bonds were up and then they were getting sold off and now they're kind of back up, and as I speak to you this week, we saw the one-year treasury rates go below zero. They went negative briefly, and I don't know where they are now. They could be negative as I speak, or as my words reach your ears. Put it that way.
Yes. So, I think that continues. It's a no-brainer that the Fed wants to keep rates low, low, low, maybe even negative. And I think, you know, that makes bonds kind of a kind of a no-brainer, but definitely not a great value. It's a speculation on interest rates, but I think it's a decent one. Rich B. writes in and says, “Why has Altius Minerals performed so poorly during this challenging time? I thought it would have performed as a safe haven.”
I recommended Altius since 2009. It's been clobbered along with everything else. I never represented it as a safe haven, per se. I said that you can just buy it and don't need a trailing stop and forget you own it for the rest of your life because the assets are so long lived, the balance sheet is so good, and the management is so unbelievably good at managing cycles that they will do well over the long term. I still have that viewpoint, but it's not like buying treasury bonds, is it?
No, it's not. They get money from royalties from copper mines and iron ore mines and other things, and if you think deflation is coming, there's less demand for that stuff. They won't make as much.
OK, John, look at Deutsche Bank and look at what Mario Draghi did in Europe. Banks make money on spreads and spreads are interest rates spread. So, when interest rates collapse and the curve collapses and flattens, they don't make money. Put it this way, they make money. It's a lot harder for them to get a spread, you know, to borrow at a lower rate and lend at a higher one. That's why that's what happens. That's why banks get hammered. Banks get hammered when interest rates get hammered.
Peter W. says, “Kudos to you, Dan. You are the only one I know who speculated that COVID-19 could shut down the economy and could lead to an earnings recession well before it arrived in North America. This is exactly what seems to be happening. Keep up the good work. On this subject, may wish to read Ian Golden's work, which is referred to in the interview below.”
He gave me a link. He said, “Maybe a great guest for your show.” I'll check out Ian Golden. Thank you, Peter W. We had Raoul Pal on the show. He predicted the same thing. But yeah, thanks.
John M says, “Love your podcast. Listen every week. I agree that the government shouldn't ‘do something’ but maybe a little something wouldn't hurt. Rather than isolate ourselves, we should isolate those 60 years and older. Everyone else should go back to work. If young people get sick in general, they will not be as seriously ill, and in any event, the ICUs won't be clogged with seniors on ventilators. Take care, John M.”
John, I'm not quite there with you. I get it, but I think this thing is really serious. It can kill young people and it has. You know, people under 40, under 30, they get it. It's like a horrible illness. I pray to God I don't get this thing, and I've had the flu, and I hear that this is just the worst.
George O. writes in and says, “Wow, Dan, wow. I'm an avid listener of yours. Your discussion with Doug Casey was the best show I've listened to bar none. Doug's breadth of knowledge coupled with yours opened some doors for me and I assume many listeners. Maybe you should do a series of meetings with him, especially if you take him up on his offer to visit him at his ranch. Fond regards, George O.”
Thanks, George. People were mixed on Doug. A lot of people really liked it. A few people thought he was a little over the top, too negative.
Derek is a 14-year Alliance member. He writes in and says, “Hi Dan, great talk with Doug Casey. Bring him back regularly, please.” And then he says, “I've been following my stops, but if this is the start of the 'Greater Depression,' why would it not be more prudent to sell all long positions and conserve cash value? 14-year Alliance member, Derek.”
Derek, the thing is, you don't know that it's the "Greater Depression." You use trailing stops as a way of letting the market take you out rather than depending on your ability to accurately predict the future. OK? I hope that makes sense. And we've got a couple more of these.
Keith M., and he said some nice things and made a bunch of comments, but then he got to these questions. And he says, question one, “Why did you not believe in yourself enough to do something similar with you and your wife's 401(k)?” He said he pulled his money out thanks to all my worrying. He said, “Why did you not believe in yourself enough to do something similar with you and your wife's 401(k)s?”
Actually, we did mix things with our 401(k)s. I was in a value fund. I was convinced that, well, maybe I can't predict a bear market, but I'm pretty darn sure that the tide is turning in favor of value and against like the huge, highly valued stocks that are growing faster than other, and which are great business, but which everybody is in love with, so they're really more expensive. I think the value versus growth differential got farther out of whack than any time in history there. So that's where my problem came in.
And you know, my wife was in a money market going into the crisis. She didn't lose money until yours truly stupid put her in gold stocks, some in gold stocks, but some in bonds. So, her bonds are doing well, the treasuries.
Question two, “Could you toss us podcasters a crumb of value research with this market drop? Maybe what's interesting and maybe cheap and attractive right now? Question three, with the government going full bail out and losing some population due to COVID-19 do you think we get a lot of inflation soon? Thanks for all you do and occasional investment ideas, Keith M.”
Keith, I'm going to hold back on giving any more specific advice right now, but question three, I think inflation is, regardless of population or whatever, yeah, it's a distinct possibility when you're pumping money and you know, you have people like Neel Kashkari saying the Fed has an infinite amount of cash. Infinite is a big number. That's a lot of cash. That could push the price of things up a little bit.
Bernie B. says, “I just finished listening to March 19. So much here I would be prohibitively long if I let myself respond to it all, but I can't let this go. Early in the hour mentioning all the misguided things our government has given us in the name of having our back, you included the FDIC deposit insurance. Are you really suggesting that we as a nation would be better off if things were as they were in 1900 with bank failures? Bernie B.”
What I'm suggesting, Bernie, is that banks take more risk than they would take without FDIC deposit insurance. When you give that, when you insure deposits, you make banks riskier, period. It's not even a big deal. And you say better than things were in 1900 with bank failures. Yeah, there were these bank failure events, but it was like a few dozen banks at a time. Then the Federal Reserve was created and 25% of all the banks went out, or half the banks went out of existence.
So, the bank failure thing is worse under Federal Reserve, and I think the FDIC is a similar type of idea where the government's basically Federal Reserve ostensibly backstops the banking industry, FDIC does that with your deposits up to $250,000 and it's not the wonderful thing it purports to be. It's not a one-way street. You can't just say, OK, everything's safer now. There's going to be an adjustment somewhere else. Banks are riskier investments because of that. Period. It's not even controversial, actually.
Michael E. writes in and says, “Enjoy the podcast as well as your contributions to the Stansberry e-mails. You mentioned you have incorporated trade stops into your investment process. In previous podcasts, you disclosed two of your investment recommendations, Starbucks and Altius. Will you be willing to advise listeners when you've been stopped out of either of those positions?” Sure, why not? But Altius has no stop on it and Starbucks has no stop on it. So, it might be a long time before we get rid of those.
Travis writes in and says, “I've been listening to your podcast and I keep hearing you talk about holding some gold. What's the best way to do this?” Best way to do it at this point is to hold physical gold to buy gold coins, you know, like Krugerrands or Maple Leafs or American Eagles if you can get them or gold bars, if you can get them, whatever kind of physical form you can get.
But it's really hard, really, really hard, super hard. And so now you have to satisfy yourself with one of these publicly traded gold investment trust type vehicles, and I'm going to write about one in my Extreme Value newsletter. Sorry, I can't be more specific. I have to be specific with them first before I tell you.
OK, so last one here from Ari Z., and Ari Z. writes in and says, “I have some positions in BXMT, TWO, MIC, and NRZ, and loved the steady dividend stream. They all got vaporized. I don't understand why. What has changed that they dropped 75%? Can you shed some light and also give a hint what you think about this special situation in the stock segment?” I'm not sure what you mean by that, Ari. “I'm enjoying your show and always look forward to next Thursday to see what wisdom you will share. Best, Ari Z.”
Thank you, Ari. Those are mortgage REITS, and two of them are extraordinarily highly leveraged with like $30 plus billion of debt and a little tiny sliver of equity. So, it's no mystery why they're getting hammered. People are liquidating them because they're liquidating everything in this virus crisis in the market, right? They're just raising cash. They're selling gold, they’re selling every stock that's not nailed down, which is all of them. The only things that have gone up are like these little biotech things that might have some virus treating technology, some kind of treatment for a virus and, and maybe Zoom, everybody's on Zoom now.
But other than that, it's been a bloodbath in everything. And these companies are highly leveraged. No matter how safe you think the assets might be because they're mortgage backed securities paying you these big fat dividend streams, they can only pay you big fat dividends because they lever up to the hilt. You're chasing yield with these things, and I realize, I think some people represent these as safe.
You never heard that out of my mouth because they're leveraged nightmares that look, the Fed isn't stepping in and buying mortgage backed securities for nothing. They did that because the market basically shut down. They're buying mortgage backed securities, they're buying corporate debt, they're buying bond ETFs. That means they're afraid the markets are like shutting down before your very eyes. That's why you got vaporized with these.
And you know, they will, they can and will cut dividends if need be. So, that's what I have to say about those, and that's why you never have seen them in Extreme Value and never, ever will ever.
Lately, I think the latest episode has been taking up to a week to get a transcript, but they are all there. Just scroll all the way down. What you really ought to do is go to iTunes and subscribe to the Stansberry Investor Hour there and click on “like.” That will attract more like-minded folks like yourself, and we'll have an even better conversation about what's going on in the world. And one more time, I just want to remind you today to go to www.stansberrymessage.com and listen to what Porter Stansberry has to say.
He knows a lot about investing. He’s studied the market for decades now, and they compiled reports of 20 of the best stocks that they've ever found, and I think they're going to create a whole new product to share those with the world, and he's going to tell you about that today, as well as telling you things like, you know, why the market has gotten obliterated so quickly and when he thinks the, the market will bottom, like to the day, it sounds like. He's going to try to peg the date maybe.
I'm sure are going to tune in to find out what that is all about and I hope you do too... stansberrymessage.com. I'll be there listening with you. So, until next time, stay safe, wash your hands, and bye-bye for now.
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