On this week's Stansberry Investor Hour, Dan and Corey are joined by two guests – Joel Litman and Rob Spivey. Joel and Rob head up our corporate affiliate Altimetry as chief investment strategist and director of research, respectively. And now, they're weighing in on some hotly debated topics... such as whether we'll see a dreaded triple top for the market, what the new year will bring, and the inevitability of a recession.
But first, Dan and Corey remember Charlie Munger by reviewing his career and legacy. Plus, they cover Elon Musk's recent remarks against Disney, the chances of X (formerly known as Twitter) going bankrupt, and Musk's efforts to bring free speech to the platform.
Next, Joel and Rob join the show to discuss the narrative around a soft landing, the rolling-recession "nonsense," and investors getting lulled into a false sense of confidence and believing everything is fine in the markets. Joel details the macroeconomic signals that are flashing globally – from China's failings dragging the world down to hyperinflation and recession in multiple Latin American countries. While explaining why he and Rob have recently made a major change in their forward market outlook, Joel says...
We've been bulls for, my goodness, since 2009. And in 2020 – at the bottom in March, April, May – we were bulls also then. But now that we have all these signals lining up, of course we have to sit back and go "this is different"... You have everything setting up for what's going to be another 2008.
Rob adds that another reason for their bearishness is the current credit environment. Credit is the lifeblood of the American economy. But now, it's disappearing. And according to Rob, that will further hurt economic growth...
We're seeing consumers and corporates now running out of that piggy bank that they had. And so the fact they can't get access to credit actually starts to matter. And that's why we've actually been really concerned.
And Joel explains that this same setup happened at the beginning of the great financial crisis...
This looks so much like October 2007 right now, particularly with the rally that we're seeing in the market, that this is that last hurrah before all the real fundamentals kick in and people say, "Oh, wait a second, I've got to get out."
The conversation then shifts to Fed Chair Jerome Powell's devotion to lowering inflation to 2%, the reality of "structurally higher" inflation, and how high interest rates are leading to massive investing opportunities in near-term cash-flow companies. Rob notes...
The biggest thing that happened last year was the crash that we saw for all those tech companies that had gotten so inflated... Because at zero interest rates, guess what, a dollar of earnings in 15 years that might happen is worth as much to you as a dollar of earnings today that we actually know is here. But all of a sudden, at a 5% interest rate, it matters if that dollar is here or [might arrive] in 15 years.
Finally, Joel and Rob discuss the bond market and why they find it so attractive today... give their opinions on "terrifying" business development companies... and analyze the Fed's next moves in regard to unemployment.
President and CEO of Valens Research
As Altimetry's chief investment strategist, Professor Joel Litman advises individual investors in equities, corporate credit, and macroeconomic strategy. He is also the president and CEO of Valens Research.
Director of Research of Altimetry
Rob Spivey is the director of research at Altimetry and Valens Research. He leverages his experience on both the buy and sell sides of finance - including with the Abernathy Group, Legacy Capital Management, and Credit Suisse. Having worked in credit and equity markets alike, Rob has gained a unique perspective of how markets work together and can offer contrary signals.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we interview Joel Litman and Rob Spivey of our corporate affiliate, Altimetry.
Dan Ferris: And today, Corey and I will talk about two, count them, two famous billionaires... Charlie Munger and Elon Musk.
Corey McLaughlin: And remember if you want to ask us a question or tell us what's on your mind, e-mail us at [email protected].
Dan Ferris: That and more right now on the Stansberry Investor Hour.
Two guys in the news. Charlie Munger – let's talk about him first. Of course Charlie died on November 28 at the age of 99. He would have turned 100 on January 1. Of course he was the vice chairman of Berkshire Hathaway... Warren Buffett's longtime partner for decades and decades and generally acknowledged as a very wise person. I know I'll miss him. Did you ever go to a Wesco meeting or a Berkshire Hathaway meeting?
Corey McLaughlin: No. I did not have the pleasure of going to either one of those, but you told me separately that you were once in the room with Munger.
Dan Ferris: Well, just Munger and I and a thousand other people at a Wesco meeting. The only time I've ever been in the room with Charlie Munger when Warren Buffett wasn't there and it wasn't 50,000 or whatever it is now, but it was a much smaller crowd. I remember this was years ago. This was at least 10, maybe 15 years ago. It was before they bought Wesco. And all I remember was something that I thought was really dumb. Munger was saying something like we should carpet the country with solar panels and the economy could sure use the stimulus or something like that. I thought, "Woah. Has this guy ever read an economics book? Is he this dumb?"
And so because I didn't really know a lot about him at that time. I knew a bit about Warren Buffett, nothing about Charlie Munger. I thought, "Oh, God. Am I going to sit here and listen to this?" I did and I was glad that I did because he was funny and pretty smart, too. You could tell he knew a lot about business. I don't think he probably ever talked for more than a minute when you couldn't immediately tell he was somebody pretty special. But my initial impression was really not great.
Corey McLaughlin: That's funny. Obviously, he's – probably will go down as one of the most well-known and successful investors of all time, if for nothing else his association with Warren Buffett. Obviously, he had his own story before he met Buffett too, although his story really goes back to almost entirely connected with Warren Buffett from his first – Charlie Munger's first job was working for Warren Buffett's grandfather during the Great Depression for 20 cents an hour. So they've been linked since then in one way or another. So it's really fascinating.
Probably like most people, I became aware of Munger from watching the Berkshire Hathaway shareholder meetings and him being on stage next to Buffett during the Q&A portion. Buffett goes on these long-winded answers and very detailed and will bring up all kinds of different things. Then Munger often will say, "I have nothing to add," or he'll come up with some other one-liner that is funny and short and blunt and would sometimes make Buffett uncomfortable. That was always fun to see just these two guys, how they must have bantered in their office in Nebraska together and come up with things to buy or not buy and those sorts of things.
Dan Ferris: Right. I think Munger actually remained based in Los Angeles the whole time, if I'm not mistaken.
Corey McLaughlin: Right. Oh, yes.
Dan Ferris: I don't think they ever shared an office, but yeah. They obviously spent a lot of time –
Corey McLaughlin: On the phone. Yeah.
Dan Ferris: – on the phone and stuff. I wouldn't – yeah. Who wouldn't mind being a fly on that wall, right? I am impressed by all the same stuff everybody else is. I had to reread the Harvard commencement speech. It's actually reprinted in a book called Seeking Wisdom: From Darwin to Munger by a guy named Peter Bevelin who Munger had a lot of good things to say about. It was June 13, 1986, and I never knew this before. I hadn't read this speech before. I had only seen excerpts, but he got the idea from Johnny Carson, who had given a Harvard commencement speech.
The whole speech was about prescriptions for guaranteed misery in life. Carson said, "I can't make you happy, but I can tell you how to be miserable because I have a lot of experience with it." He said, "Ingesting chemicals in an effort to alter mood or perception, envy, and resentment." Those three things were apparently Carson's focus.
Corey McLaughlin: Don't do drugs.
Dan Ferris: And then Munger added – yeah, drugs and alcohol trying to alter your mood. Munger added, "Be unreliable, learn everything you possibly can from your own personal experience minimizing what you learn from others, go down and stay down when you get your first, second, or third severe reverse in life." And what is the other one? Don't learn how to avoid bad stuff. Most people tell you how to do good stuff, but they won't tell you, "Hey, avoid all the bad stuff," basically.
Corey McLaughlin: Yeah. Those are – go ahead. Sorry.
Dan Ferris: Oh, I was just saying those are the – that's his prescription for guaranteed misery, Carson's three things plus his four. It's a great way to think about things, what not to do. I've often or certainly occasionally I would say several times in the past several years written about the "via negative," the negative way. That is the way Nassim Taleb stated. It was, he said, "The learning of life is about what to avoid." That is basically what Munger's speech was about. Really smart.
Corey McLaughlin: Yeah. It's interesting you bring that up because that's one of the things. Here's also this great biography that probably a lot of people are already familiar with, Poor Charlie's Almanack about Munger, which our friend and colleague Whitney Tilson actually is in and contributed to and his caricatures among the contributors in the front of there. That's one thing Whitney pointed out. Obviously, he knows Munger and Buffett better than most people. That's one of the things he talked about was that Munger would – one of his big points was how to avoid calamities. It's because he experienced them.
He was married twice, lost his first child died when he was nine from leukemia, which had no cure or treatment at the time. He went blind in one eye from a botched cataract surgery, Munger did. Just had some various heartbreaks in his life and persevered. I think he also – part of his early story and I'm actually planning on going and reading through Poor Charlie's Almanack again in the next couple of days because I'm getting more interested in how the super wealthy or successful got their starts. because it's easy to talk about wisdom once you're – God bless him, but he's 90 years old. He's got a lot of wisdom behind him. It's a little easier to talk about wisdom that way, but when he was 20 or 30.
He was a lawyer, Charlie Munger... went to Harvard law school. It was like a lawyer working for local businesses. At some point, he changed his fees from getting paid hourly to actually trying to get a stake in the companies that he was working for, an equities stake, which I think is really interesting. That launched him into investing eventually with a real estate firm and then I think ultimately partnering with Buffett. So just the value of equity, having an equity stake in a business. He was practically doing it. That's how he got his start in it. Basically he was doing that then till a week ago. It's those lessons from the start, but obviously he had problems along the way, too. So whenever somebody like this passes away, it's a valuable thing to actually look at their story and take what you can from it, especially a guy like him.
Dan Ferris: Yeah. I also saw a thing where he was talking about his three investments apparently, which is the overwhelming majority of his net worth and three investments, Berkshire Hathaway, Costco, and a fund manager named Li Lu, that he liked to talk about at Berkshire Hathaway meetings. Both he and Buffett are always talking about focusing and knowing what you're doing. If you don't know what you're doing, you can diversify. They're really down on diversification. I don't know. I'm impressed by that, actually. Three investments... Berkshire, Costco, and Li Lu.
I would imagine – I don't know, but I would imagine Berkshire is the biggest by far. You could argue that's one investment, but it's 200 companies. So is he not undiversified? Well, maybe he is a little more diversified than all that. But they did spend decades and decades and decades, the two of them, focused solely on that, which that doesn't surprise me. Look at all the billionaires that you can think of. The least focused one is the richest guy in the world, though, Musk. We should probably talk about Musk.
Corey McLaughlin: Yes. Also in the news for just about completely opposite reasons as we're talking glowingly about Charlie Munger.
Dan Ferris: I know. So it's interesting. Musk was alleged to have made some antisemitic remarks, but so far from what I can gather no less than Bill Ackman. I think Bill Ackman's current wife, his second wife is Israeli and he's Jewish himself. So he came out on Twitter today or Twitter today or yesterday. He was defending Musk. He said, "No. He wasn't really making antisemitic remarks. Him owning Twitter was a great thing. He's a great advocate for free speech. What Disney is doing is wrong," etc. Our own previous guest and, let's face it, our boss – yours and my boss – Porter Stansberry retweeted that and agreed with it and said, "Let's all boycott these companies that are refusing to advertise on X because they don't like Elon Musk and claim that he's an antisemitic when he's really not."
But that got plenty of attention and then what got the most attention of course is his interview with Andrew Ross Sorkin. Sorkin, not the quickest of cats at the best of times. I can criticize him all day long because I think he's just too fawning with all these rich people that he seems to worship rather than just interviewing him. In this interview Elon addressed the folks who won't advertise on Twitter by saying, "Go eff yourself," twice. He wanted to make sure that he got his point across. He said, "Is that clear? I hope so. Hi, Bob," meaning Bob Iger, CEO of Disney, which I thought was a great little quip.
Corey McLaughlin: And he called it blackmail, these advertisers pulling, which of anything, that's where I took the most on bridge with. It's not blackmail. They're making a business. They're making a decision and he's upset about it.
Dan Ferris: Right. It's definitely not blackmail. It's just – we call it a really woke, hasty, ill-considered kind of a decision. I don't know. Maybe I just like Musk's mojo too much. Anybody who tells Disney and others to go eff yourself, I just – I'm automatically on their side. I can't help myself. I can't help myself.
Corey McLaughlin: Right. It reminds me a few weeks ago we were talking about hot mic moments when Jerome Powell was like, "Close the effiing door," to the climate protesters walking on stage with them. This is like – you always – I think most people like to see somebody who is unvarnished and just do that, what Musk did on stage. Everybody would probably like to say that to somebody and he can because he's the richest guy in the world, I think, or first or second. I don't know at this point.
Dan Ferris: Yeah. He is still.
Corey McLaughlin: Twitter is obviously losing money hand over fist, but he can still afford to do these things. He doesn't – obviously, he's – well, I don't know what's going on in his head, but he's obviously not afraid of losing these advertisers. It doesn't seem to bother him with that comment.
Dan Ferris: No. He said – he was really incensed, as you said. He made that comment about being blackmailed. He said, "You're not going to blackmail me with money. Go eff yourself." He said it very plainly, "This will kill the company." I thought when you say, "Go eff yourself," are you really talking to the people who lent you $12 billion to buy this thing last year? Are you really talking to your lenders and your investors, by the way of which Bill Ackman was one when they took it private and his foundation apparently? I just thought, "Who are you really talking to here and what is your point?" because it was a very odd moment. And I encourage people to look it up online.
It was just a very odd moment when he said, "Oh, no. This is going to bankrupt the company. This will kill the company." There was an enthusiasm behind it. There was an energy behind it that I found very odd. I would have expected him to say, "Yeah. This could kill the company and I'm really bummed about it." No. He said, "Oh, no. This will kill the company. Yep. This will bankrupt it." Like do you want that to happen for some reason? I just found his demeanor very strange.
Corey McLaughlin: Yeah. I've seen – to that point I saw some speculation that maybe he wants to the company to fail at this point so he could get a tax write-off from it, which maybe there's something to that. This isn't – yes. Maybe if it does fail completely, this would be a great narrative reason to say why it failed because these companies don't support free speech or aren't in line with just having different opinions out there and that sort of thing, which might be true. This will be maybe a decent reason to attribute his failure at Twitter/X, too.
This is not – it might ultimately bankrupt the company, but it's been headed this direction for a year, since he took it over. They've kind of gutted the staff and lost all kind of – he's been losing advertisers for a while. The person who he hired as CEO who was brought on to bring on advertisers, she's got a pretty tough job right now. I don't know how much longer she's going to be around or she always – she's cleaning up the big guy's problems out there in public, but yeah. I don't know what's going to happen with Twitter. It was in trouble before he took over and it's – from a business perspective and it's probably worse now. So who knows? It's still a great community forum, I think.
Dan Ferris: It is. Yeah.
Corey McLaughlin: Given all its problems still it's still a great place to find ideas. We use it. I use it every day.
Dan Ferris: Yeah. I can't stay away from it.
Corey McLaughlin: Right. So hope it doesn't go away completely because it's a useful tool for me, but I think a lot of people. But there is just this fatigue over it I think too from a lot of people.
Dan Ferris: There is – we've gotten several guests from me contacting them on Twitter and saying, "Hey, you want to be a guest?" And they said, "Yeah. Sure." Next thing you know we're interviewing them. So it's been really valuable to us. It's valuable to me every day because there are – I'm just old now. So I rant and rave like an old person. I have to do that every day or else I just don't feel right. So yeah. I'm with you. I hope it doesn't go away. Him buying it, I thought he was very earnest about free speech when he was acquiring the thing.
Corey McLaughlin: Yeah. I think he is too. I think he is too.
Dan Ferris: There was speculation that he didn't really want to go through with the transaction, he tried to get out of it and all this stuff. He was just – it was bluster, but throwing billions of dollars around is a really weird way to exercise your bluster. I don't know how else to put it. I doubt that he spent $40 billion buying Twitter just because he was having a hissy fit. I think he really does believe in free speech. I have to say, this community notes function that fact checks things, it does a good job and it doesn't appear to be nearly, anywhere near as biased as it used to be.
Before they were just – anything that was anti-status-quo was just – it was taken down or whatever or fact check. I forget what they used to do, but now it's different and it's better. People say it's terrible, but I disagree. My experience of it has barely – it hasn't even really changed. So I don't know what anybody is talking about when they say Twitter is no good anymore. It doesn't make any sense to me.
Corey McLaughlin: Yeah. From a product perspective, it seems to have all the same qualities and problems that it had before. I'm with you. Once – I don't know why he ultimately decided to buy Twitter. I suspect he wanted to make it better ultimately. Then once he commits $44 billion, I'm sure he's not trying to run it into the ground. I don't think that would be the goal. I'm just curious now at this point, based on what you've seen, how much money they're losing, if he's just given up or to some degree. I don't know.
Dan Ferris: I find that hard to believe. I find it hard to believe that a guy who has spent his whole life working his tail off to build and build and build could behave differently with Twitter. I just don't think it works that way. I don't think human nature is that plastic and you can't go over here and try to build multiple huge businesses from PayPal, Tesla, all of it, the Boeing company, SpaceX, companies that are doing some pretty incredible things. You can't go from building that to, "Oh, well, I'm going to go play games with Twitter. I'm going to go invest $44 billion and play silly games with Twitter." I don't believe it. So having said that, I'm glad he owns it. I'm glad he's in charge. I hope he works it all out. I hope the platform stays around. I hope he tells more people to go f themselves.
Corey McLaughlin: For the record before anybody writes in and tells me I'm hating on Elon Musk, I don't necessarily think that he's deliberately crashing the company either. He's doing what he wants and what he feels is right, which is all you can really ask from a person.
Dan Ferris: Yep. And he's been able to – he's unusual because I think the way that a lot of billionaires they virtue signal. They get super rich and then they want their name on a building or a hospital or college campus. That's the typical thing or a foundation or something. But Musk, I don't know if he has a foundation or a building with his name on it. I don't care. I think he's done something different. He sees these problems, these great problems, and then he takes on a massive project to try to solve it. One of the things though, as much as I admire the guy, he's said, "I've probably done more to save the planet than anybody," because he's got Tesla. It's this electric-car company.
I just thought, well, I don't know if he really believes that or it's a marketing line because we know that folks like that are capable of weaving crazy marketing stories. I thought, "Well, it's interesting that I admire the guy so much because I think that is really dumb." I think all this environmental climate stuff related to electric cars and all this stuff is really insanely dumb and 50 years or 100 years from now, we'll all look back and say, "Oh my God. Those people were so stupid to believe that one of the essential elements for life on earth was poison, CO2." The whole thing, it's an insane narrative with no evidence whatsoever. Other than that, I think Tesla is pretty cool. Have you driven a Tesla? The thing pushes you back in the seat. It's an awesome drive, absolutely awesome. I drove a Tesla Model S. It was amazing.
Corey McLaughlin: So what I'm hearing is Elon Musk and Charlie Munger actually have something in common for you going back to the solar panels.
Dan Ferris: I know. They're both a little – yeah.
Corey McLaughlin: Going back to Charlie Munger's solar panel bullishness years ago.
Dan Ferris: They're both a little batty on the climate stuff.
Corey McLaughlin: And Musk doing great things for the world and saving us all.
Dan Ferris: Exactly. Thank you for bringing that around.
Corey McLaughlin: With the eccentric billionaires you take the good and you take the not so good. You hope that the good outweighs the not so good at some level.
Dan Ferris: Right, which I think it does in both of their cases by a long shot. Let's move on. Let's talk with our guests, two of them. We got a twofer today, the folks from Altimetry, Joel Litman and his good right hand Rob Spivey from Altimetry, an affiliate of us, of Stansberry Research under the MarketWise banner. I love talking with these guys and not just because they're in agreement with me about the market for the next couple of years. I love talking with them because they're really smart. They have a totally different approach to things. Rather than me saying another word about it, let's talk with Joel Litman and Rob Spivey. Let's do it right now.
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Rob Spivey: Dan, pleasure as always.
Joel Litman: Hi, Dan. Thanks for having us, man.
Dan Ferris: You bet. Hey, I should have you guys on once a day as long as you're bearish like me. I'm going to – I need all the backup I can get at this point because stocks keep going up and I keep looking wrong. Maybe just for our listener's benefit –
Joel Litman: Well, triple tops.
Dan Ferris: Yeah. You see a triple top, is that what's going on?
Joel Litman: It's a triple top. It always looks that way. Well, yeah. So 4,800 S&P December of 2021 and then July and then now.
Dan Ferris: Right. Everybody gets super excited every time and then, wham. So 2024 is going to be like wham. People aren't expecting it. Right now the market says, "Hey, we're happy," right? So 2024 is going to be probably pretty ugly, in your opinion?
Rob Spivey: It's funny. You look at the narrative out there and you look at all the data, but then you look at what people are focusing on. It is this classic setup. People always say the market inflicts the maximum amount of pain to the maximum amount of people. It certainly feels that way now because that "soft landing" narrative is definitely fully engaged right now. It's funny. We were talking to one of our institutional investor clients about a month ago.
It's funny. We were walking through everything that we look at from a macro perspective that has us concerned about the credit world and he kept on going, he goes, "Well, that makes sense, but so the market will look through that recession, right? And so I should just be buying early-stage companies now." We were like, "Well, actually what happens is the market falls and then you should buy those early-stage companies." So that was an amusing conversation. That's definitely the hope and prayer that people are working on right now, Dan.
Dan Ferris: Right. But Joel, hope and prayer is not a strategy, is it?
Joel Litman: Not at all. This rolling recession nonsense that, "Oh, another big, big bank on Wall Street just said autos have already had their recession, so things are good now." Like are you high? Have you not seen – they're like, "Well, consumer prices are down," because they said so it used to be cars were selling for above MSRP a year ago. Now they're selling for below MSRP. You have the highest delinquencies in subprime auto since 1994. That's 30 years. Literally, you have them saying, "Oh, yeah. That means it's over." We're like, no. It doesn't mean it's over. It means it hasn't even gotten started yet in terms of a true recession auto. Autos is now the third-biggest consumer debt area. So this idea that it's rolling recessions and so that's why it'll be a soft landing. You're like, "Or what you're seeing is early signals of things getting really, really bad," which they are.
Dan Ferris: Yeah. It's interesting to me how macro folks who I follow on X, formerly Twitter, and other places and who I just know personally and interact with, they're not there at all really, which it's a bit of a head-scratcher. For me, my bearishness relates to – mostly to cycles and security market valuations and the consequences of those cycles. None of that seems to be – none of this concern seems to be anywhere. So far those guys are all on the right side of the trade, but I don't know. It never – what we've been through never ends well. What we've been through in the past few years and really in the past, you could call it 15 years or so, basically from 2009 bottom to now, it just – it tends to have a certain set of consequences and they tend to be really bad. I don't know. No –
Rob Spivey: Yeah. I think if you look it's funny because I was talking to somebody else recently. We were actually saying – they, "What is the thing that has you, that has us at Altimetry most scared for the rest of 2023?" It's like, "What was a big surprise that could happen?" I was like the big surprise is all the looming issues that, Dan, you're talking about and we talk about all the time in terms of the credit environment and how it's setting up for economic growth and everything else to be struggling through. The issue is there doesn't actually have to be a catalyst for that to actually come into the forefront for people for possibly until early 2024.
So the scariest thing for me, for our readers and anybody I talk to is just that everybody just keeps on getting lulled in the sense of confidence of, "Oh, look. The Fed has been tightening interest rates for a year and a half and we haven't had a recession. Well, if we're not going to have a recession – if we haven't had one yet, we're probably not going to have a recession. So everything is fine." If you look at all that's what's happening underneath the surface to your point, Dan, it's like everything is building up, but until you actually see that catalyst, everybody gets lulled into this sense of confidence. That's why we're concerned the way that we are.
Dan Ferris: So you guys have indulged me because I've done something I always want to do on interviews and I don't – the guest usually doesn't let me get away with it, which is just to jump into the deep end. I just want to jump in the deep end and see where your head's at. For our listeners' sake, maybe we'll just back up a little, take it a little easy here and ask – just remind our listener. They've heard you talk about this, but it's OK. A little repetition is a good thing. How did you come to your bearish thesis at the present time?
Joel Litman: Well, it's a combination of quality of the earnings, valuation, the multiple on the earnings, and then the momentum in which we had set it. You can think of it is from the earnings, quality earnings revisions continually go down. The fact that every continent, whether you're talking about Germany pulling down the EU, China pulling down Asia and the world, Latin America where you got multiple countries in deep recession and hyperinflation, multi-inflation, multiple companies in Latin America. You put all that stuff together, there's no way you can say that we've got any kind of growth.
So the earnings growth is limited. You've got what will be eventually successful for the U.S., for U.S. corporations, which is a redesigning and a reengineering the entire global supply chain... non-China, non-Russia or very little China, very little Russia compared to the way it used to be. That's going to take time to work out. So you've got companies spending in capex like crazy, U.S. companies, which is going to bring down free cash flow. You're going to see earnings fall off for a while. This is not going to start revising back upward. Then you take valuations of something like a 24 times earnings multiple, which you can find historically when you have deflationary period.
So if you actually look at valuation multiples over time, I have no issue with a 24-times multiple two years ago, five years ago, eight years ago when you have deflationary environment. But when you have the kind of inflation that we've had and we think is going to stick around for a while, 24-times multiples in a no-earnings growth scenario being revised down with this level of inflation is just crazy that they'll stay at these levels. This is very different.
Dan, we've been bulls for, my goodness, since 2009 and in 2020 at the bottom in March, April, May, we were bulls also then because these were not the same signals. But now that we have all these signals lining up, of course we have to sit back and go, "This is different." The signals are telling us to be different and that's across quality, across valuation, across growth, and throw in some overly ambitious sentiment right now that's driving up this triple top that we're seeing in the S&P. You have everything setting up for what's going to be another 2008. Everything is set up there.
Rob Spivey: Yeah. And the one thing that to add to, Joel, is the other thing that has us – that's really caused us to flip the switch in really August 2020 at first was starting to see all the setup that we're seeing in the credit world. The bedrock of what we do and think about from long-term cycles right on top of that earnings-cycle stuff that Joel talked about in terms of how Uniform Accounting lets us see the true numbers is really understanding how credit expansion and credit contraction really is the lifeblood of economic cycles.
What we saw basically starting late last year and really got concerned about this year was how first availability credit started getting sucked out of the system. You really can't have economic growth without having availability of credit. The way that people actually spend money either buying stuff or to make stuff is by taking out credit to do that stuff.
At first, I was OK because of the fact that, quite frankly, we had such liquid balance sheets for U.S. consumers and U.S. corporates that even with tight credit they could shrug and say whatever. But in the last year, we finally started to see the actual fundamental credit picture start to wear out where we're seeing consumers and corporates now actually running out of that piggybank that they had. So the fact that they can't get access to credit actually starts to matter and that's why we've actually been really concerned if you layer that on top of everything Joel just said.
Dan Ferris: Yeah. I saw – I caught a Bloomberg article about consumers running out of cash this morning, which for a long time the narrative was, "Well, they've got so much more excess cash than even pre-pandemic," but according to Bloomberg, nope, no longer true. I think it's probably right. A lot of people who, in the macroworld anyway, look at the consumer as a very important leading signal.
Joel Litman: I remember people saying the same thing about the strength of the consumer is going to carry all the other problems in the market. I remember saying that October 2007. I can remember distinctly on October 2007 people were looking at consumers saying, "Oh, the consumer is strong and we're going to have a really strong retail season and we're going to have a good Christmas. You can already see the signs for it." To some extent, they were right meaning at that moment. Then what happened in 2008? So I would say this looks so much like October 2007 right now, particularly with the rally that we're seeing in the market that this is that last hurrah before all the real fundamentals kick in and people say, "Wait a second. I've got to get out."
Rob Spivey: Yeah. So many people forget that the whole entire thing was in 2007 we had a top in June, May or June, and then we had the quant crash. Then we rallied all the way back up into October, November. It's not similar to another period that we often talk about which is 1940s it looks like too. So this is a pattern that's repeating, 100% to Joel's point.
Corey McLaughlin: Yeah. Guys, this is Corey. You're talking about 2007, 2008. Me and Dan talked about this a couple weeks ago. The GDP numbers that people are talking about now literally are the same exact numbers before 2008 to your point, Joel. Talking about the strong consumer. Is it just that people just get lulled into this sense of complacency and Rob, you were talking about some people you were talking to just they think that everything will be OK because that recession hasn't come yet, but then that's exactly when it comes. We've seen throughout cycles in history.
Joel Litman: So we've been talking here – people talk about $2,000 gold forever and we're lucky if it'll hold $2,000 right now. We've been hearing about the bond markets, which is a blood bath anybody that was buying and what are you going to do, buy bonds now just because you think 4% is a good rate despite what may come. So bonds have been a bad place. Precious metals and specifically gold has been not a great place. You start looking around what, venture capital, private equity particularly with all the real estate that's buried in private equity.
So I think people are like, "Oh, but at least the stock market is going up. So let me just throw my money in there." I don't think it's a well-thought-out position. I think it's, "I got nowhere else to go because I don't want to just sit in cash with inflation where it is." I think we're going to find that cash may end up being one of the best places to be coming into the next year.
Dan Ferris: That's not sexy, man. So I want to go back to something that Joel said a moment ago. Joel, you mentioned inflation and the need for lots of new industrial plant. We've heard this theme before with other guests. Right now everyone is partying like inflation has been. It's a has been topic. It's passed. Don't worry about it. You disagree?
Joel Litman: Well, anyone going to a grocery store would disagree. Anyone going to the gas pump would disagree. When we're talking about, I'll say, main street Americans, I don't think they're looking at – OK. So if you're going to buy a $2,000 laptop, yes... $2,000 laptop gets you a lot of computing power, no question. It's a lot cheaper than it was two years ago. If you're talking about wireless phones, telecom usage, that's probably cheaper than it was. So it depends what your basket is. If you're talking about basic living needs or even just let's say semi-luxury. Have you been to a restaurant in New York City, any restaurant in New York City or Boston or Miami or D.C. or anywhere in the West Coast any time in the last year? You do not believe that inflation is subsiding right.
Even when you look at wage increases that still continue, which tend to peak, by the way, wage increases just ahead of a recession for the last, I don't know, 10 recessions or so. One of the things we do is we run cognitive analysis on Powell and we actually listen to what he's worried about. He is not worried about employment. He is emotionally wedded to hitting a 2% number. I don't think he thinks, whatever basket he's using, that he's anywhere near 2% which means he has to keep rates up for a while, which means he has to keep rates up for a while, which means that continues to help add to the recession, adds to tight money, higher interest rates for a longer period of time than people think.
Rob Spivey: And we think too, to add to that, is when you look at what's going on and everything that we're excited about the supply-chain supercycle and about the rebuilding of supply chains really being U.S. the center and not China, is the conversation that we think isn't really being had enough is there's going to need to be structurally higher inflation if that happens. We're not talking about 8 to 10 to 12 to 15, but 2% isn't a realistic goal if we're going to be rebuilding supply chains in places that don't have very, very low costs in terms of people and everything else. Just the fundamental structure of investing, stuff has a gravity.
So when you actually invest in stuff, you then need to get more stuff along with it. So all of that buying of stuff actually does create inflation. Where that services inflation doesn't necessarily really actually have a lasting impact, but stuff inflation, we actually buy stuff. That's what we're going to be doing when we build new factories, new fads, new infrastructure throughout the United States and Mexico and Canada and all of our friendlies. It's going to lead to higher structural inflation, which is probably the reason why I think Powell, to Joel's point, has that visual reaction that we can see in the earnings, in the earnings call analysis and the analysis of his Fed minutes and presentations we can see it. And we think that's probably the reason why.
Dan Ferris: Well, we know they're, I would say, irrational about targets. They establish these targets seemingly rather arbitrarily, in my opinion. They seem arbitrary to me, I'll just say. Then they slavishly stick to them. Of course what nobody realizes is that you can't hit them. There's no hitting it. You go past and you see it over here and then you see it over there, but it's never right in front – you're never hitting it. It's never a bullseye. So hitting 2%, the trip from just call it three down to two is a lot harder than people think and to get there, to hit that target, to maintain that slavish devotion to it, it's going to hurt. It's got to – they're going to have to hurt the economy to get there, I think anyway.
Joel Litman: And when you hear the supply-chain discussions across CEOs – we listen to earnings calls in ways that – technologically we'll listen to earnings calls. We actually listen to earnings calls, have so many calls. They're all talking about supply-chain resiliency, supply-chain protection, supply-chain whatever. Every time you hear that you have to think stuff is going to get more expensive. Every time you hear them talk about supply-chain resiliency it means things are going to get more expensive. That means you're going to have these rising prices and that is going to contribute to these inflation issues that Powell is trying to fight.
I don't know that he's got all the tools in the box to fight it, meaning he's doing what he thinks is right, which is going to lead to certain consequences in terms of recession and tight money policy, whatever else. But I don't think he's going to solve the issue. The only solution is going to take years. Over years we will have a better supply chain and we'll be dependent, as dependent on certain markets that I think people are worried about, like China. But it's going to take a while to get those efficiency back in that system and that means things are going to cost more. It's not going to be fixed next year by any means.
Dan Ferris: Right. It makes me get excited about the prospect of screening for cash-gushing, industrial, companies making highly engineered materials and parts and machinery and things like that. It makes me want to just start building that list right now.
Rob Spivey: It's a fun time, right? To your point, Dan, it is a fun time. It's been a long time since we've been able to really talk about something that's not, "Oh, let's talk about investing in this SAS company that's going to have cash flows that might come out in 10 years." Now we're finally at a point where we can say, "Hey, look, we can invest in actual real near-term cash flow companies." One of the things that when you talk about what happened in year 2022 and really what's happened almost in accordion factor in 2023 in terms of where people have put money in stocks and taken it out and put money because it's all about fund flows when you try to understand how the stock market moves.
The biggest thing that happened last year was the crash that we saw for all of those tech companies that had gotten so inflated, was all this idea that because at zero interest rates guess what? A dollar of earnings in 15 years that might happen is worth as much to you as a dollar of earnings today that we actually know is here. All of a sudden at a 5% interest rate, it matters if that dollar is here in 15 years because that dollar cash flow in 15 years is worth a little bit less.
So to your point, this is why we've been so excited looking at near-term cash flow companies, cash-rich companies in so many different areas, farm and everything else. But why we think that industrials are such a fun place to be able to look now because you finally have the opportunity to take advantage of it.
Dan Ferris: Oh, man. You're speaking my language with that cash-flow thing, the time value of money. I've written a little bit about that. I try to stay away from it because it tends to be a dry-ish topic, but yeah. Exactly that. I love every bit of it.
Joel Litman: Well, that's part of the point we're opening up with, Dan, which is that I have no problem with a 24-times multiple in earnings if we've got zero inflation or deflation because those cash flows are worth so much more today. But when you have an ongoing environment is going to remain more like today than it was five, six, seven years ago with that zero-percent number. How can you think that a 24-times multiple today isn't a lot more expensive than a 24-times multiple in a different inflation and interest-rate context? It's not the same number. The 24 times number today is a lot more expensive than that same multiple five, six years ago.
Dan Ferris: Right. So correct me if I'm wrong, rather than buy that very low-yielding, unattractive, overpriced equity, you're much more interested in buying the credits, the debts of those companies, those higher quality companies because now they're yielding what, 5%, 6%, 7%, 8% and that's a lot more fun than buying for 24 times, isn't it?
Rob Spivey: Exactly. This comes with the whole entire idea that ever since we started our business since July – founded it in 2009. We've always looked across the whole [inaudible] capital structure where we've always actually analyzed bonds and equities. But for literally 13 years, we never togged to clients about bonds because we said, "Hey, look. Literally this is not the environment to buy bonds in," but exactly to your point, when you're in an environment where all of a sudden inflation has pushed interest rates up to a level where now actually I can make money buying bonds and actually because of concerns that we're having pop up in terms of where interest rates are going, inflation is going, sometimes we can make equitylike returns and bonds.
That's why it's been – why we launched Credit Cashflow Investor, which we launched two months ago. We said, "Hey, look, this is finally the time to tell our clients you need to be in bonds because it actually makes economic sense to be," which hasn't been a thing that we've been able to say for 15 years because when you're making zero percent on bonds, why are you wasting your money tying it up in bonds. Put it in equities. Now it actually makes sense to have a rational balance of how you put money and equities in in bonds because there's the opportunity there.
Dan Ferris: I'm sold. Sign me up. I totally agree with you.
Joel Litman: Yeah. It shouldn't imply that we're suggesting a 50/50 bond equity portfolio. We're actually saying is that security selection is necessary more than ever. We wouldn't be buying the S&P. We'd be buying very specific stocks in very specific pockets that are going to do well from the supply-chain supercycle and from the reengineering of the world's manufacturing industrial and from a bond standpoint we wouldn't just be buying bonds by any stretch of the imagination. Just buy a bond fund because that could be a very, very bad decision.
However, security selection-specific corporate bonds where you can get realistically 10% to 25% yields, you're not going to get doubles or triples like you can get in the stock market. We can realistically get 10% to 25% yields, but you're not going to get that in a bond fund. You've got to get that in specific bonds. I think that's where strategically we've really moved to is that security selection is king right now because you can't just buy outright bond funds or equity funds without having this level of diligence.
Dan Ferris: So some of my compatriots here at Stansberry and I are interested in business development companies just for similar reasons. Where do you guys stand on those?
Joel Litman: Rob?
Rob Spivey: Yeah. Great question, Dan, because of the fact that we wrote a whole entire series of pieces earlier this year that was all around what – if you remember back in 2007, 2008 everybody was talking about the vampire squid that was taking over Wall Street with Goldman. The point that we were making recently is we're like, "Actually, the real vampire squid isn't Goldman. It's Blackstone," because Blackstone has its hand in everything. And those BDCs are a perfect example of it. You look at these BDC Reds and it's really terrifying what they have done because of the fact that they're making loans to high-risk, high-yield companies and yet the way that they mark – to mark these loans they basically don't acknowledge any of their losses. They don't have to do anything the bank does.
This is the whole entire issue with private credit in general is everybody – I swear, you can't walk through Wall Street right now without – if you swing a dead cat you're going to hit somebody who is working in the world of private credit right now. That should have you terrified, but the BDC works for the epicenter of it because what they are doing is effectively saying, "Hey, where banks won't lend, we'll lend, but we don't actually have to have any of the quality control rules that banks do. We don't have to report on outperforming loans. We don't have to basically break down our loans. We basically just hope and pray, and we extend, extend, extend."
So you're just building up this massive people who have credit from people who don't actually know how to underwrite. The BDC Reds, while they've got phenomenal yields now, that's why we're terrified of all of them. There's some of them that are better and worst like any structure. Some of them have actually learned how to do things really well. A lot of the ones, the highest-yielding ones, those are the ones that are some of the scariest parts of the credit world out there and why we've told people, "Yeah. The yield is there, but be a little careful because you might not be happy with how that yield looks in two years."
Dan Ferris: Fair enough. Absolutely. Personally, I've recommended one BDC and I think I might be done. I was a little surprised to find some of my colleagues, like one of them said, he said, "I am irresponsibly long BDCs in my private account." I thought, "Wow." I didn't expect that because we all know what can happen inside of a thing like that. Speaking of 2008, when people are marking stuff to fantasies. All right. So we like security selection. This is why I – having you guys on here is like a feel-good fest because you're bottom-up, fundamentally oriented, macro-aware investors. So it's just a mutual admiration society.
It's not the kind of show where I'd have somebody on that I didn't like anyway. So I guess that's not a big deal. You like bonds. You do like stocks also like me. You don't say, "Go sell all your stocks." And that is where you are right now. There is a pretty popular narrative right now. The Fed will definitely cut interest rates next year. So before we talk about anything else, do you care about that narrative? Do you care about whether it's right or wrong?
Rob Spivey: We think that the idea that the Fed is going to cut next year is right, but people are – this is the classic example that I think we were talking about earlier, the idea of people wanting to look past the bad news that's going to happen and the pain that it's going to inflict to them to think about the positivity. The Fed is going to cut interest rates next year and you know why? Because we're going to be in a recession. When Joel talked about the idea that Powell has this visceral emotional reaction to inflation, he doesn't care about unemployment, well, there's a reason why. It's because of the fact that unemployment has been incredibly strong for so long that he basically is looking, he goes, "I can keep on keeping interest rates as high as I want for as long as I want until that unemployment number rises. I'm not seeing it take off. So I'm going to go to war with inflation."
All that he's doing is effectively saying there's this idea in finance and actually, I think in physics. I won't pretend that I understand physics that well. This idea of area under the curve in terms of it's not about how high or how low things go. It's about how much area is under the curve in terms of if you have high interest rates for really, really long, you build up this pain and this pressure that builds up underneath the curve. All of a sudden it has to blow off. So all of a sudden what's going to happen is because of the fact that they are basically saying we are watching unemployment rates and say unemployment rates are the decision for when we're going to actually cut rates, that's under the hood what they're effectively saying by saying, "We're not worried about unemployment rates right now."
The only reason why unemployment rates rise is because of a recession. There's a reason why the Sam Rule is the only actual economic indicator that is predicted every single recession for the last umpteen recessions. Those of you that know, the Sam Rule is basically that when unemployment moves 50 basis points above its one-year-cycle, low, six-month average. When that moves up above that, that is consistently every single time a sign you're in a recession. Well, we're already two thirds of the way there.
In terms of where we are and if you look at the trends going up, but that's why the Fed is going to cut interest rates next year. We are actually – I wouldn't say we're concerned or not concerned. The Fed is reacting to the economy there. It's not going to be the one to save the economy. It's only going to cut rates because the bad news is out there and the recession is there.
Dan Ferris: Yeah. I believe that last point is really too horribly lost on too many people.
Joel Litman: Yeah. Powell really cares about two things and two things only. He doesn't care about the stock market. He's not looking at the bond market. He cares about do people have full employment, which he has, and then do I keep inflation at that 2% number, which he's emotionally tied to. As long as unemployment stays low he'll beat on that 2% inflation number with his only tools he has, which are basically interest-rate policy until – and economy and everything else, who cares? It's a little bit – who cares what the economy is? If people are employed and there's low inflation, then I've done my job. Let everyone else worry about the other things.
Dan Ferris: That's the mandate. So he's like, "Good. I did the mandate. I did my job. I can go home and have a beer now." Sure. So I just do want to mention that Joel and our other guest, our other colleague, Marc Chaikin, have recorded a presentation that is along these lines, but it focuses on what stocks you ought to buy with I believe one name in particular. You can go there. You can participate in this. You can see what they have to say if you go to StockWarning2024.com. StockWarning2024.com.
That will be a nice presentation of Joel Litman, Marc Chaikin talking about – I'm sure Joel will talk about the reasons why he's bearish, same as here, and Marc will weigh in as well and they both agree that you shouldn't run out and sell all your stocks and they'll have an idea or two for you. StockWarning2024.com. So it's time for our final question. You guys have answered this before, but I'll just repeat it for our listener's sake. We'll start with Joel, if we could. If you could leave our listener with a single thought today, what might that be, Joel?
Joel Litman: Yeah. On the – I have to mention what a terrible thing the passing of Charlie Munger is at 99 years old. What they've done, what Charlie Munger has done for the world, I think he's been – is the wit and wisdom of Charlie Munger. Thankfully, I was able to get a couple of signed books from Charlie before he passed away. I would say the wisdom in those books about investing are fantastic. Long term, the fundamentals still play out. Long term, the U.S. fundamentals will still be the best place to be and I'll say that all day long.
That doesn't mean that if you're going to need the money in the next two years you can just willy-nilly buy stocks and say, "I'll just close my eyes." So if you've got a Charlie Munger length of time, yes, you could let and ride things out of the storm if you're talking about a 10-year, money you won't need for 10 years. Ultimately the U.S. stock market would be a fantastic place. But if you need the money in the next five years you can't just be buying bond funds or stock funds across the market. It is a very, very, very bad strategy if you need that money inside of the next five years.
Dan Ferris: OK. How about you, Rob? One thought for our listener, if you could just one.
Rob Spivey: Absolutely. I think it's that the next 12 to 18 months are going to require you to be tactical. They are not an environment where you're going to be able to just buy the market and close your eyes, just like Joel said. That's why you need the tools to be able to figure out what are the stocks or the bonds you're going to want to own because it's not going to be the kind of environment where everything goes up. It's not going to be the 2010s. It's not going to be the second half of 2020 and in 2021. This is a different environment that we need to be more cognizant.
Dan Ferris: Amen. Listen, it's always a pleasure to talk with you guys. I love having you on the show and not just because we agree this time. I'm looking forward to doing so again real soon.
Rob Spivey: Dan, a pleasure it's always, man.
Joel Litman: Thank you, Dan. It's great. Thank you, sir.
Dan Ferris: The Fed wants you to believe they've got inflation under control, but I believe we've only seen the beginning of a devastating new crisis. If you don't prepare now you could see your savings evaporate as inflation and interest rates soar even higher over the next two years. It all traces back to a golden thread that ties together the biggest financial calamities in America's history. It seems the entire financial world is falling into the very same denial trap that led to massive devastation the last time this crisis played out. If you know your history you know there will be winners and losers and now is when you decide which one you'll be.
I've spelled it all out in an urgent new report. Go to BankRun2023.com to get your free copy. I'll also show you how to get my complete playbook for navigating this crisis including the three critical steps to take immediately. Again, that's BankRun2023.com for your free copy of my new report. Well, it's always good to talk with Joel Litman and Rob Spivey of Altimetry. I hope you embrace the basic message. I really do because I do think it's going to be a difficult – for me I think it's going to be a difficult couple of years. Rob was talking about 12 to 18 months. We'll see. I won't claim to know or to be able to predict that. Corey, do you have a takeaway or an impression that you wish to share?
Corey McLaughlin: Yes. I always like listening to Joel and Rob partially because they're dealing with clients as well. So they got a lot of anecdotal evidence and that sort of thing about what real investors are actually thinking in the market on Wall Street. My big takeaway though is everybody wants a black-and-white answer for what's going to come in anything really, but let's talk about recession in 2024 or what's going to happen in 2024. I think you hear from them. You got to be tactical, I think was the word Rob used, and selective and also consider your timeline.
If you have a long, huge Charlie Munger timeline you might not be as concerned with the next year or two years as somebody who has their retirement estate built up already and doesn't want to see it drop 30%. So I think those are always important things to keep in mind that always get overlooked in our business. People just want to hear what's going to happen next, what should I do. You got to think through it a little bit. It's not going to harm you to think through these things even if everything goes well.
Dan Ferris: Yeah. That's a great point. By all means, simplify things if you can. A lot of the times with investing you can't. Trying to creates more problems than it solves. It's best to say, "Well, I don't know and I'll base my decision on that, what I don't know and the risks that I see rather than the trend that I think is guaranteed to happen, which never is." That's a good point. I'm glad you said that. We need to make that point repeatedly in our business, don't we?
Corey McLaughlin: Yeah. The truth is people don't want to hear that, I don't think. It's –
Dan Ferris: No. They don't.
Corey McLaughlin: That's what will make you money in the long run, I think.
Dan Ferris: Yep. They want us to know everything and if we say, "I don't know," some people don't see the value in telling the truth that way. I think Rob and Joel are two people who really they know right where to focus. They know exactly what to tell investors. Some of it involves, I don't know. But they're always about where to position yourself now and that's about as well as you can do. You can't predict what's going to happen in 12 or 18 months, but you can sure look at all the signs and signals today, as they are, and say, "There's a risk in this." And they're not running out and saying, "Everybody sell everything. It's going to be horrible." They're just saying, "Hey, cash would be a good place to be. Be very picky about stocks. Be very picky about bonds. Bonds are more attractive than they were. We weren't telling our clients about them and now we are." That message right there, just that much, that's hugely valuable, I think.
Corey McLaughlin: Yes. And they have tools for doing that too. I assume Joel is going to talk about this at his event with Marc Chaikin. They are – Altimetry has these Uniform Accounting methods that cut out a lot of the noise and things that Wall Street and incorporations can hide in their financials and really pick the true, strong companies. So I assume they're going to be talking about that as well.
Dan Ferris: Yeah. I'd bet on it. They don't just have an interesting view. The view comes from having these incredible tools and years of experience. Marc Chaikin has got decades of experience and so do Joel and Rob. So that StockWarning2024.com is where you can go if you want to hear that information as well. I would go there. You learn so much. Even if all you do is listen to the presentation, they'll give you – for listen to the presentation they'll give you some kind of a deal on their services. If all you do is listen to that and take notes, you'll learn a lot and you'll come away potentially a better investor. So, StockWarning2024.com.
All right. Well, that's another interview, and that's another episode of Stansberry Investor Hour. I hope you enjoyed it as much as we did. We do provide a transcript for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or on InvestorHour.com, please.
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