Episodes

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 portfolio manager, Jeff Muhlenkamp, a man after my own heart. In the mailbag today, kind of a light one... just a couple of quick questions and one of my least favorite topics, the Federal Reserve. Remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show.

For my opening rant this week, it's all about "sticking it to the man," but boy, do I wish I was the man. That and more right now on the Stansberry Investor Hour. Sticking it to the man feels good, I think, but sometimes it doesn't go the way you think it'll go. What I'm talking about are all these people who are still buying and holding and promoting meme stocks, especially AMC Entertainment. They act like they are some part of a social movement because these stocks became meme stocks because they were heavily shorted, they're terrible businesses. They're going out of business.

AMC, GameStop, Bed Bath and Beyond, they're going out of business. So they're heavily shorted. But given the times, especially in early 2021 when this stuff started, well, people were still home from work. They were locked down or many of them still were. They had checks from the government and they were trading stocks and they got a little out of hand. They inadvertently caused an enormous short squeeze in the meme stocks. That's how the meme stocks became meme stocks. They were heavily shorted and they were squeezed by all these retail traders at home.

So they think they're going to keep doing this. They think they've learned how to create short squeezes and they have this hashtag on Twitter, #MOASS, the mother of all short squeezes is what they're always trying to do. They're really just looking in their rearview mirror. They're not going to do it anymore or if they do it it'll be very – it'll have a short life the way the Bed Bath and Beyond squeeze went recently. Up 500% and then boom, back down almost to where it was before they started. So the reason why I'm just really skeptical of all this. They think they're sticking it to the man.

The man was a hedge fund called Melvin Capital, which is out of business. They were shorting – I think they were shorting GameStop and AMC maybe. They were shorting one or two of the big meme stocks and they lost a whole ton of money and they wound up going out of business. Citadel, this big hedge-fund firm, which is also a market maker. They have this company called Citadel Securities. They make markets and stocks. In fact, they handle more retail order flow than any other market-making firm. So sure, maybe the Citadel hedge fund lost a little bit of money shorting these meme stocks, but Citadel Securities loves this because they're handling all the order flow.

So there's a big billionaire named Ken Griffin behind all this. I think he's worth $20 billion, $25 billion, something like that. He's loving this. So if you think that you're sticking it to the man by being long AMC or GameStop, you're not. Ken Griffin is saying, "Man, I love being the man. I love having it stuck to me to the tune of billions of dollars." Of course, last year, Citadel Securities did record revenue, more than $7 billion. As long as they trade these things you better believe Citadel is going to be handling the order flow. They pay for it.

These market-making firms pay for retail order flow because they make so much more money on it than they do handling institutional order flow. Because the institutions – they're doing research. They sort of know – a lot of them know what they're doing sometimes. So do you really want to handle some gigantic order from some institution where they're shorting the stock maybe and then it goes down and as a market maker you're sitting there holding a big loss all of a sudden? No. You want to handle retail order flow, right?

They're twitchy and they don't pay attention and they do things that they shouldn't do at exactly the wrong time and they're constantly going back and forth. They're just a great way for a market maker to make money. I don't know how else to put it. So this idea that they're sticking it to the man, it's not just wrong, it's exactly backward. Once again, I promise you if there were a real bottom in sight, if this is the big bear market that I think – I think we're at the beginning of a pretty big bear market. Of course, I don't know. You don't get to know that until after the fact. You should prepare yourself for that and if I'm right about that, I promise you nobody will be talking about sticking it to the man by buying AMC and GameStop if this thing were really truly bottoming.

So maybe people say, well, it's a new bull market now, Dan. OK. Sure. Whatever you say, but I don't think so or rather my real view is I suspect not and you should prepare for that. I suspect this is not a new bull market and that it's still a bear market and that the market is doing what it does especially in bear markets which is acting to lure in the maximum number of folks and treat them very badly. That's what the market does and it's especially what it does during bear markets. I just – I covered this idea in my most recent Stansberry Digest. As you can tell, it annoys the hell out of me. I don't know why.

Actually, maybe I do know why. I was driving down the street. I live in a rural area. We're five hours drive from any major city. I'm driving down this country road and I see this dirty white van of some kind in front of me and on the back of it, scrolled in the dirt is, it says, "Buy hashtag AMC, hashtag AMC." I thought, man, you can't escape this. They're scribbling stuff on the side of trucks and buildings and things like they're some kind of banana republic revolutionaries. They're taking over. It's for the people. No. The people are making Ken Griffin rich. That's what they're doing.

I suspect most of the world's revolutionaries throughout history have thought they were doing something righteous, but they were probably serving someone just like Ken Griffin. Unfortunately, I think that's mostly true. I think the American Revolution was highly unusual. At any rate, I just wanted to talk about that. The other thing that I talked about that I think you also won't see in a market bottom was all this crazy artwork that I've written about and talked about over the past couple of years. The craziest one of all was the banana taped to the wall at the Art Basel show. I think it was in 2019 actually. It's already been three years maybe.

This artist, Maurizio Cattelan, he tapes a banana to the wall and he called the work Comedian, because bananas, comedian slipping on a banana peel. You get it, right? He sold I think three copies of this where he basically gave the person – they paid a total of $390,000 for three copies of this. The people who bought it, they get a certificate of authenticity and instructions on how to install the banana at the right angle and the right height from the floor. It's insane. Rich people and art. God, it's crazy. I took it all as a sign of continuing speculative frost. I think it's money is just sloshing around the markets. It overflows into the art market and it gets crazy.

Well, the crazy thing now is that a guy is suing this artist Cattelan for the money that he made for the $390,000 and the guy who's suing them is a California artist named Joe Morford. Morford says Cattelan plagiarized his work because 20 years earlier he taped a banana and an orange to the wall, and I forget what he called his artwork. A judge in Florida, because the Cattelan piece was on the wall in an art exhibit in Florida. So that's where the case is going to be. A judge in Florida has let this thing go forward. Cattelan tried to have it dismissed. The judge said, "Nope. We're going to go forward with this." You can read. You can type "Morford versus Cattelan: C-A-T-T-E-L-A-N." You'll go right to the document that this judge wrote up. He's talking about bananas and art and all this stuff.

He quickly gets to – he quotes a guy named Marshall McLuhan. If you know who he is, great. If not, you can Google him, Marshall McLuhan. McLuhan said art is anything you can get away with. As soon as I read that phrase I was like, "Ugh. That's it." We have been in an "anything you can get away with" market and the meme stocks are that. The people who are really getting away with something – the market makers, they're just doing business and the retail people are throwing their money at them. The one who is getting away with it is AMC Entertainment management because they took their share count from roughly $100 million to $500 million and sold into all this insanity.

Basically, they heavily diluted their highly enthusiastic ignoramus shareholders, the worst investors on earth. So management is taking advantage of them and exploiting them and sold roughly $400 million shares. Then they did something else. They created a whole new class of security. You can't just endlessly issue shares. Corporations have limits to the number of shares. If you want to get the limit raised, you have to – the shareholders have to approve it. Well, the shareholders wouldn't approve it and they're running out of shares to sell. They can only sell another $7 million. So they created this whole other class of securities, AMC did, called APEs, which is hilarious because that's what their shareholders call themselves, APEs.

So they created this APE. It trades under the ticker symbol, APE and it's effectively – it's supposed to be 1/100th of a preferred share, but it's effectively just the common stock. It's nearly identical to AMC common stock. So they issued one share for every share outstanding. So they've effectively split their stock. What I think is going to happen is that the shareholders are going to not like the fact that they can't convert the thing into common stock. So they're probably going to pressure the management to do that. So then instead of having 520 million odd shares out, they're going to have a billion shares outstanding. They will have effectively diluted – well, that won't be the moment of delusion.

That's effectively a split, but the moment of delusion will come because if you read all the documents that AMC put out, they can issue as many as five billion of these APEs and they've only issued 500 million. So they got another four and a half billion. If they can sell those, talk about exploiting your ignoramus shareholders. I don't know if they'll be able to do it. I think this creation of these APE securities that are – they're as worthless as the common stock. The bonds all trade at less than 90 and some of them trade less than 80. They can't borrow the money. So they have to issue this other garbage. I think they're actually done. They created a big liquid market by issuing these APEs. So presumably they could sell even more of them for cash. I don't think they're going to be able to do it. It's a money-losing business.

The only way they can stay in business is to issue new securities. I don't think they're going to be able to do it. I think this is the beginning of the end of AMC. I can be wrong. I'm not making a prediction because I just think predictions are futile, but that's what I'm on about this week. It's the anything you can get away with market. The poor shareholders think it's the – they think there are the ones who are in charge and they're not. You don't have any of this stuff near the bottom of a bear market. People are going to forget all – the meme stocks are going to be a distant memory. People are going to hate the stock market. People are going to leave the stock market and not come back for a generation at a real bear market bottom. I think I suspect this is a real bear market. That's what I'm on about this week. I'll leave it right there.

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Time for our interview once again. Today's guest is Jeff Muhlenkamp. Jeff Muhlenkamp is the lead portfolio manager of Muhlenkamp & Company Inc. Muhlenkamp fund's objective is to maximize the total return to its shareholders through capital appreciation and income from dividends and interest. Before joining Muhlenkamp & Company as an investment analyst, Jeff served in the United States Army for 20 years, retiring in 2008 at the rank of lieutenant colonel. Jeff is also a graduate of the Air Assault Airborne Ranger schools and the Command and General Staff College. Cool. Jeff, welcome to the show.

Jeff Muhlenkamp: Thanks for having me, Dan. Looking forward to the conversation.

Dan Ferris: So Jeff, I am actually familiar with the Muhlenkamp name. I remember years and years ago and it's been so long that I can't remember if we actually spoke, if I actually spoke with Ron or if we exchanged some e-mails or something. But I was reading his stuff and I really like the ideas. So when your name was presented to me I thought, "Yeah. I remember that guy," but that's your father, is it not?

Jeff Muhlenkamp: That's correct. Ron is the founder of the firm. He brought it out in boy, 1977 and brought the mutual fund out in 1984 – I'm sorry – 1988. I remember that year. I was one of the first investors in the fund and I borrowed money to do it. So the way it worked at the time, I could get a cheap car loan because I was going to the military academy and they knew what my employment prospects looked like. So I took out a loan, bought a super cheap used car, and invested in the fund with the remaining money. So that's how I got started in investing.

Dan Ferris: That's a neat story. I didn't know you could do that with a car loan.

Jeff Muhlenkamp: It was unsecured. So the car was not collateral.

Dan Ferris: I see. There you go. All on the up and up.

Jeff Muhlenkamp: Oh, yeah. It was completely legal.

Dan Ferris: Yes. So I think a good place for us to start would be – where I often start with folks in your business, if you and I met in a bar and I said, "What kind of investor are you, Jeff? You're in this business. What kind of an investor are you?" How might you answer me?

Jeff Muhlenkamp: I would say I'm looking for value that other people don't recognize. So one of the things I do in my spare time is I ride motorcycles and I typically buy used motorcycles. What you can do is by paying attention to the market you can get a feel for what a particular model and a particular brand is worth and is generally really selling for. So when one comes up on Craigslist or in the classified someplace, you can go and look at it and you have an idea what the market is.

If you can get it cheaper than that, that's what I do not only buying and selling motorcycles, but buying and selling stocks. So I'm looking for is something that is not highly regarded or at least I think there's more to the company than is baked into the price. So I'm looking for that mismatch between what I think the reality is and the perception that the market has as reflected in its share price. That's really what I do.

Dan Ferris: That sounds like a very one security at a time, bottom-up process.

Jeff Muhlenkamp: Correct. So Ron developed a model when he first started the business early in the '70s he started working for an insurance company called [inaudible]. His model looks at return on shareholder equity... the multiple that the market will place on that depending on what the rate of inflation is at the time. So those are the two key inputs for his model and we use that as a screening tool to this day. So we go through a universe of about 2,500 stocks on a quarterly basis and we're looking for things that pop on his model where you've got a better ROE than his model gives for a value of that company and that starts us down the path of investigating the company and figuring out the ins and outs of it and is it a good investment.

Dan Ferris: Oh, so ROE is a central metric in the model?

Jeff Muhlenkamp: Correct. The reason he settled on ROE is because it was more stable at the time than earnings or some of the other metrics that you might use.

Dan Ferris: Oh, I see. Yeah. I'm just curious about it because we use a particular model in the newsletter that I write each month with another fellow named Mike Barrett and Mike runs a model that's more or less just cash-flow type. It's not exactly that, but then the thing that I contributed years ago before Mike ever showed up was a screen and my favorite return metric was return on equity simply because I wanted companies with decent balance sheets that still earn good return on equity because you can crank up the return on equity by borrowing a lot of money. I'm always – when I find a kindred spirit I'm always happy about it.

Jeff Muhlenkamp: Well, the challenge we've run into lately is that companies aren't necessarily borrowing a lot of money, but if they've bought back a lot of shares their equity per share has gone down. So we end up having to adjust for that because it really doesn't say that the company is more profitable. It really means that they've reduced the shareholder equity through buybacks. So that's something that's developed in the last 10, 15 years as it becomes much more popular to buy back your shares.

Dan Ferris: Right. And a lot of them have borrowed in some cases quite heavily to do that, right?

Jeff Muhlenkamp: Some have. Some of them look at their capital stack and say, "Well, we can get cheap debt. Why wouldn't we replace expensive equity with cheap debt?" If your cash flows are stable through a business cycle that may be a rational decision. The risk you run of course is that your cash flows are less stable than you expected. So you've made your company very fragile to a downturn by going for debt as a source of capital instead of equity. We want to be mindful of that. We want to be very careful of those sorts of companies and be mindful of where you're at in the credit cycle. If you're going to invest in a company like that you have to understand that's the risk you're running.

Dan Ferris: Jeff, as you talk about debt as a source of risk I'm thinking, "Boy, this is just normal thinking to a lot of us, but over the past call it 10 or 20 years, it's become weird. What are you talking about?" We're in the minority now, aren't we, thinking that way?

Jeff Muhlenkamp: I couldn't really say if we're in the minority or not, but it's the only way that makes sense to me. My thinking on that was reinforced, if you will, by reading Nassim Taleb's books about "antifragility" and "skin in the game" and those sorts of things. When he talks about being fragile to me as a company, the easiest way to be fragile is to be heavily indebted. So that's just how that translated to me.

A whole lot of people were very fond of debt and that's scary, and not just in the investment community. When I talk to my neighbors and I see what they do in their personal lives, they can have just a very lucrative career. They can be generating a lot of income, but they've levered themselves up so much they really are not in a stable situation for something to happen. So it's people do it in their economic lives in many, many ways.

Dan Ferris: Indeed. In every case, whether it's corporation or your neighbor or anybody, you're just straining to pull forward your future income and use all the benefits of the future income in the present. I don't know. It turns out – actually, we should be honest here. It turns out just fine until one day it becomes a disaster, right?

Jeff Muhlenkamp: That is correct. In your personal life if you financed a big house, if you financed a fancy car, if you're financing your vacations and you're covering all that with your very robust income stream, that all works great until the day you lose that income stream. So you can be cruising right along, feeling good, living the life you want to live, but if something unexpected happens, maybe it's your health, maybe some accident occurred, maybe something happened to the business that you were a part of that you couldn't anticipate or didn't anticipate, but that's when you've got no cushion. Your debtors are still coming for you and you've got no income. So it's the same with the companies. It all works great right up until the moment when it doesn't and they've got no flexibility. They've got no resources to tap because the markets aren't there for them anymore.

Dan Ferris: Again, I just feel like to a very modern sensibility we sound like a couple old fuddy-duddies. "Don't you kids get yourselves in debt. You're going to regret it."

Jeff Muhlenkamp: Well, they just haven't learned that lesson through life yet.

Dan Ferris: Right. It's funny that we're talking about debt because we didn't plan – we're winging this conversation and we didn't get together beforehand. Right now the president is talking about forgiving student loans and here we are talking about, "You kids got yourselves in debt."

Jeff Muhlenkamp: Frankly, we did our children a disservice. Full disclosure, both of my daughters are recent graduates of college. One has been out for three years and one's been out for a couple of months. To encourage everybody to go to college is one thing, but to not walk them through the nuts and bolts of what it's costing them if they're borrowing to do it, that's a disservice. In order to make those loans attractive to the lender, you can't discharge student loans and bankruptcy. So that's a painful debt that I think the kids get themselves into too easily. They buy the sales pitch a lick on us for collectively of our generation for making that sales pitch to them and a lick on them. They're all bright kids. They're all going to college. They're not stupid, but they bought the sales pitch and then have buyer's remorse afterward.

Dan Ferris: And there's also another thing that we've generated there in education are the bubble dynamics. The cost went way up. You can get a degree in just about anything you can name.

Jeff Muhlenkamp: We encourage them to get a degree and to pursue their dream. So they go get something that doesn't translate directly into a lucrative job. A lick on us for selling them that fairytale and a lick on them for believing it. So there's two partners in that dance.

Dan Ferris: Just like all bubbles it all looks so rational in the beginning. Well, of course you want a college education and of course, we should encourage everyone to do that and of course, it's a good idea to help everyone pay for it as much as we possibly can... and then here we are.

Jeff Muhlenkamp: And now it's time to count the cost.

Dan Ferris: I feel like we're in philosophical territory here. Let's get a little more specific. As you go through their bottom-up process and refer to your model to suggest securities, are you agnostic about sectors and various industries? Some people I know avoid commodity businesses. Some old fuddy-duddies like us might avoid technology businesses still. Do you have anything, any constraints like that that you follow?

Jeff Muhlenkamp: Well, we don't have constraints, but you've got to understand the business. So commodity businesses are a good example or businesses that are very sensitive to the economic cycle. They end up being different. So when you look at the returns on equity, the returns are going to be very good at the peak of the cycle. So from our model's perspective, the stock is going to look very good. It's going to look like it's worth a lot more than the market price because the market is looking at a cyclically adjusted ROE, which we have to understand that, and we have to do the same.

Frankly, for cyclical companies, the better way to really buy them is probably to look at a price to book. So there are any number of companies that – homebuilders, for instance. Typically, in a homebuilding trough, which we're entering right now, they're going to sell for less than one times book. That's when you want to buy them. You want to buy them in the trough of the cycle. Then later on at the peak of the cycle they're going to be selling it two or two and a half times book and that's when you want to sell them.

But from a strictly ROE perspective, they're going to look much more attractive at the peak than they do at the trough. So you got to understand. You can't just take the model and apply it without thinking further. You have to understand what's going on in the industry. You have to understand how that operates over time. Then you have to apply that knowledge to what you started with, if that makes sense.

Dan Ferris: Sure. Cycle dynamics. Cycles happen. You better be mindful of them.

Jeff Muhlenkamp: And in some industries more than others. In health care, that's not so true. Depending on the aspect of technology that may not be true, whether your company is consumer oriented or is business oriented or software and it's agnostic to what happens in the cycle. Banking is a little bit different in and of itself also. There you got to worry about the credit cycle and what's going on with how solid their book is and what the charge-offs look like. So you have to understand what's happening in the industry, what's happening to the company. Yeah. Where we start still is ROE.

Dan Ferris: So this is – as we've established, this is a bottom-up, "one security at a time" kind of a process. As I look through your July 2022 quarterly letter, there's a lot – this is a lot of macro discussion.

Jeff Muhlenkamp: There's a couple reasons for that. The first is it's really – I have a hard time talking individual stocks and the reason is because I'm constrained on how I talk about it. So if I tell you that I like a stock because of the constraints around my position what I'm really telling you is I bought it sometime ago and I own it today. If I sell it tomorrow I'm not going to tell you. So you might suspect that I am simply talking it up so that I can sell it to you, in which case there's no point in my telling you about the stock because you mistrust what I'm saying and you're right to do so.

If I tell you I like a stock, but I don't own it, then you're going to say, "He's telling me he likes it, but he doesn't own it. Why the disconnect?" So whatever I say about a stock, whether I own it or not, you as a skeptical listener should be saying, "Well, I don't quite trust what he's saying." So there's no point in my talking about it because I have to talk my book and you know I'm talking my book. So you don't believe that I'm being honest and to a certain extent, I can't be. So I don't really like talking stocks. So what does that leave you with?

That leaves you with talking about more general conclusions about sectors. That leaves you talking about with the economy and what's going on with the economy and broader issues than that. Sometimes those broader issues are important. There are long periods of time where they don't matter and then there are some periods of time and the last one really was '08, '09 when nothing but those broader issues matter.

Dan Ferris: Jeff, I'm going to – can I just interrupt for one –

Jeff Muhlenkamp: Go ahead. I'm sorry, Dan.

Dan Ferris: I'm just going to interrupt just for one second.

Jeff Muhlenkamp: Absolutely.

Dan Ferris: Our listeners know me and they're just meeting you. What you just said, I've said probably 20 times. I know they're sitting there nodding their head saying, "That's what Dan says." About macro – it's like macro doesn't matter until it's all that matter, I think is what I say. So go on. Thank you.

Jeff Muhlenkamp: My bit of experience in the industry was in '08, '09. I started working in the company October of 2008. The first six months was extremely painful and the next three years or four years or five years or 10 years I've reflected on what did I learn during that time period and how did I respond to it then and all that. So you think about what was going on at the time, what I did at the time, what I thought about at the time and those sorts of things. This is what I've come to believe currently.

You're always looking for: What don't I understand very well? What do I need to understand better? What can I learn from what's going on and from what just happened? You've got to continue to learn, and that's what I try to do." The reason I wrote in that last quarterly letter about so many macro issues is because there are a couple that I think really are important and the most important one in my opinion for our U.S. investors is to understand that if we are in a long-term inflationary environment then the relationship between stocks and bonds has now changed. What you've believed for the last 30 years that bonds are safe place to put your money and to protect it from the volatility of the stock market is no longer true because in a rising interest rate environment, bonds are going to hurt you, not help you.

So all these portfolios, the 60/40 portfolio construction that works so well over the last 40 years which has been a bond bull market, it's not going to be true going forward and you need to know that. The sooner you recognize that, the better you're going to be. Now that's predicated on the idea that we in fact have a period of higher inflation going forward, which I suspect is likely, but I'm not saying is certain. There's a very – the underlying assumption – when I look out at the U.S. investor and I say, "What assumption does he hold that might get him burned over the next decade," that assumption is bonds are safe. I won't lose money in bonds.

I would simply say, be careful with that. To a certain extent, I agree. If what you're looking to do is to protect the nominal value of your investment over a short period of time and by short, I mean two or three years, and you put it into a two- or three-year Treasury, you are going to get a 100% back exactly true. So they're safe from that perspective. If you expect to invest in bonds for the next 10 or 20 years with the idea of growing your capital, I think you're going to be disappointed.

Dan Ferris: Yeah. I couldn't agree more. It's the end of the world as we've known it. We had a bond bull market. It looks like it's probably over and you had better be careful from here. So you said something about ongoing inflation and again, you sounded like me again. I almost thought you were going to say you should prepare for these things, not try to predict them. I've said prepare, don't predict a million times. So if you agree with that, how do we – what – how do we use all this insight? If we're aware of these things what do we do then? Do you build your portfolio differently than from this point forward?

Jeff Muhlenkamp: Well, what has worked really for the last 10 years, what has been most highly sought after or rewarded by the market players has been revenue growth. I think that's done. I think that really ended last summer when you started to see biotech collapse and then the no-profit tech collapsed. I think we're probably halfway through that collapse. So the first thing I would say is if you're thinking about bottom fishing in that space, I would suggest patience. My guess is from top to bottom it's going to take something like two years and you say, "Jeff, why do you say that?" Oh, gee, because I look at 2000, 2002 and it took about two years.

So I see a similar bubble. I see a similar collapse. You don't need to be in any hurry. The values you see today I suspect will be there or maybe even better a year or two. So that would be the first practical advice I would suggest to you. I suspect as the cost of capital goes up that companies that don't need to tap capital markets to do what they want to do are going to be more highly regarded than they have been for the last decade. So companies that are generating sufficient cash flow to maintain their existing operations and to expand as they choose to do I think are going to be more respected by the market than they have the last 10 years. That's the space we've always operated in any way. That's been more attractive to us than the folks that don't generate that kind of cash flow.

You've seen that for about – it's been on and off, but for about six or nine months you've seen that those companies are doing a little better. When you start to think about what if we have a decade of inflation, what if we have something that sort of looks like the '70s where you have high inflation and the Fed does some things and then it pulls back a little bit and then the Fed eases up and then reflation reoccurs. So you've got this on going back and forth between trying to slow down inflation and inflation breaking back out. You have that sort of thing happening over a period of years. Where do you want to be?

What we saw worked best in the '70s were commodities. So energy did reasonably well in the '70s. Ron and I have had some long discussions. He invested through that. So I said, "Ron, what worked for you then?" He said, "Man, I wish I'd owned more energy." So we've looked at that. You'll see that reflected in the portfolio is we own more energy now than we have for quite a while. But the struggle is when I read guys like Ray Dalio and he makes a ton of sense, he thinks basically because of our debt we're going to have to devalue the dollar. I think I summarized that pretty well.

You say, OK, well, where do I go? What do I buy when I sell my dollar that's going to protect me from this devaluation of the dollar? Do I buy Yen? Do I buy euro? Do I buy Renminbi? Do I buy gold? Where do I go? As I started looking around at all these places, frankly, the yen scares me more. The euro scares me a whole lot more especially now. I don't trust the Renminbi because I don't trust their government at all. We made a statement – I made a statement about I guess 18 months ago that in my opinion, Chinese equities are uninvestable and I can explain that if you want.

But I think everybody is in the same boat. We're all looking for what's going to provide stability in an environment where most of the Western governments have to devalue their currencies. So far I don't think we've settled on anything. When we do then everybody will know. So gold isn't big enough.

Dan Ferris: Right. It's very small. Sure.

Jeff Muhlenkamp: It's very small.

Dan Ferris: But Dalio, you mentioned Dalio and he's been on for I want to say a year or two now, he's been on a "you must be diversified" kick. That's been his mantra through all of this.

Jeff Muhlenkamp: And I'm not saying he's wrong. I'm not quite sure either what diversified translates to as a practical matter. What does that really mean? Does that mean you need to own debt? Does that mean you need to own foreign? If so, where? Again, because I started looking. I said, "OK. What do Japanese companies look like? Are they interesting? Am I willing to take the risk of the currency translation that is inherent in investing in Japanese companies, for instance, or in European companies, for instance, or in Chinese companies, for instance?"

And you go back to Buffett and his thoughts about diversification, the less you know the more you want to be diversified. So really add those two together and what Ray Dalio is saying is, "I don't know. Own a little bit of everything and what works will beat what doesn't work." That is not necessarily bad advice.

Dan Ferris: Exactly. It actually makes me think about another thing that I saw in your quarterly letter, which I tend to think the way asset classes correlate nowadays, just up and down together so often, I tend to feel oftentimes like the only true diversifier is cash. You did say in your quarterly letter that you're holding a fair bit of cash and that certainly helps diversify one, does it not?

Jeff Muhlenkamp: Yes, it does. Ideally, through diversification, you would want to find something that goes up when everything else goes down. If you can't do that, then owning something that goes nowhere when everything else goes down is a good second best. To me, cash does a couple of things. One, what I learned going back to '08, '09 is just how I personally react to a really crappy bear market. So I get very – it's hard for me to look at stocks and I feel bad. Everything is going down. Everything I own is going down. The last thing I want to do is go buy a stock and yet that is exactly the time when I should be looking for the bargains and looking to put money to work. So having cash on hand allows me to focus on where is the opportunity for this cash instead of obsessing over, "Oh my God. My stock is down 3% or 4% or 5% today."

So it's as much – it's very much a mental thing. It helps me focus how I'm thinking because you're trying to make good decisions in a very chaotic environment. So what I learn coming out of there is my emotional and physical reaction to a down market is a key indicator of how I should be thinking. How I should be thinking is where's the opportunity today. Cash allows me to take advantage of that opportunity because I don't have to think about "What do I sell today in order to buy today?" It becomes one decision. Where do I invest my money today? And I don't have to think about selling into a really crappy environment for selling.

Dan Ferris: Right. You're also – you're at least alluding to this idea that Seth Klarman discusses of the future opportunity set. When you're in cash if you trust yourself to find a great opportunity you've effectively found it even before you know what it is because you've got the cash ready to exploit it.

Jeff Muhlenkamp: Right. So yeah. We are heavy cash right now. Frankly, I expect an opportunity to put that cash to work is ahead of us. I think we're going to see better prices ahead of us than we see today. Why do I think that? Really it simply comes down to the Fed is still raising rates. I struggle to see how the market really goes up in that environment. So the Fed has yet to start shrinking its balance sheet very much. So credit remains widely available both through the banks and then the nonbank lenders, but the cost of that debt is going up.

So as long as that continues and I – my honest expectation is the Fed will continue to squeeze until something breaks. So right now there's been very little downside to their raising rates other than a market correction of 15% or 20% and the bonds of course have sold off. There's not a lot of pain yet and at some point, there will be pain. Whether it's domestically or internationally, I don't know, but there will be pain. At that point, the Fed will have to make a hard decision. If they decide to continue to reduce the money supply and to raise rates and those sorts of things in order to fight inflation, then the markets are really going to have a hard time with that.

If the Fed eases off so that whatever pain that they're experiencing is alleviated and inflation comes roaring back, well, that's going to be a little bit different too. That's how inflation doesn't go away. We don't muster the will to slay the dragon. When confronted with a problem we back off and inflation doesn't quite get stamped out. It flairs back up again. I think that decision is in front of the Fed. I just don't know when it's going to happen or what specifically is going to create that circumstance.

Dan Ferris: Lots of uncertainty holding lots of cash. It all makes sense, doesn't it?

Jeff Muhlenkamp: God, I hope so.

Dan Ferris: Makes sense to you and me anyway, right?

Jeff Muhlenkamp: Yep, but that's why we are where we are in terms of putting my clients' money to work. That's the environment we see and as we go and we look at individual companies we have to be mindful of this context. You can't just say, "Oh, this is a great company and I really like this price." Well, what's the current look like here in the water we're swimming in? That's a weird metaphor, but I guess we'll go with it. What's the context look like? Right now it's tough.

Dan Ferris: We're so used to – I think people are still getting it beat out of them. It's been Goldilocks for 10 years or 12 years or something. Little blip during March 2020 and then away we went again. You can buy anything and hang on to it for a month and make 20%.

Jeff Muhlenkamp: Do very well. Yes.

Dan Ferris: It will take a lot to beat that out of people, won't it?

Jeff Muhlenkamp: One of the markers I look at is Cathie Wood's ARKK fund. I don't think I'm the only person doing this. I'm not even sure I came up with it on my own. I probably read somebody that does it, but you can look and see how many shares are outstanding. So even though the fund price is way down, the shares outstanding have continued to climb. So that tells me that her investors are buying the dip. In my opinion, the bust of the sort of thing that she invests in, the transformational technology stuff, won't be complete until her clients have given up on her. So the fact that there's still buy-in, the dip tells me this isn't over yet. That's one of the markers I look at.

Dan Ferris: Yeah. We have written quite a bit about ARKK and also meme stocks. People are still crazy for meme stocks, which are just total –

Jeff Muhlenkamp: Crazy.

Dan Ferris: Yeah.

Jeff Muhlenkamp: Yep. The funny thing is we actually own GameStop and sold it prior to it launching into the stratosphere. I reflected on that. I'm like – because at first I thought it was of value and then their business never quite stabilized. So we were seeing a lot of cash flow. We said, OK. We think that's stable. That makes sense to us. We'll invest in it. Well, the cash flow never quite stabilized and you've got a whole lot of product cycle stuff in there in terms of games and game machines and that sort of thing. I reflected on that.

I said even if I had held on to it into its skyrocket launch as a meme stock, how long could I have honestly held that? I concluded I would not have sold anywhere near the top. I'd have bailed far earlier than that because I'd said, "Holy cow. This is really overpriced now," and we'd have gotten rid of it then and not gotten some of the returns that somebody did as it went into the stratosphere. So that was really interesting for me to speculate about, but yeah. We owned GameStop for a while.

Dan Ferris: Those things seem like – it's almost like people are looking for the absolute worst deteriorating businesses and secular declining industries and treating them – the meme stockers say, "We'll never sell. We're never going to sell." Of course, I believe that they will and they will learn a huge lesson. Then when they're completely gone from the market and when ARKK can't attract another dollar then maybe it'll be over.

Jeff Muhlenkamp: Then, in my opinion, that's the time to go fishing in the space that Cathie Wood fishes in. Until then, I think that's still a hazardous area to look for good investments.

Dan Ferris: The analog for me is 2002 with lots of little tech companies trading at discount to net cash and net current assets.

Jeff Muhlenkamp: I think you're going to have that opportunity. I look forward to that opportunity. That's the opportunity I want to be set up for and I just don't think it's here yet. I think you're halfway down. You're not down at the bottom of the mountain yet.

Dan Ferris: All right, Jeff. This has been a lot of fun. It's time for my final question. The final question is the same for every guest no matter what the topic is. Even if the topic is not finance, it's the exact same question. So the question is, if you could leave our listeners with a single thought today, what would it be?

Jeff Muhlenkamp: Oh, that's a good question. Don't risk money you can't afford to lose.

Dan Ferris: I like that. Very good. Straight to the point. All right.

Jeff Muhlenkamp: I'll expand on that little bit. People, we get all wrapped up in my industry talking about stocks or talking about stock versus bond or active versus passive management and all the trivia of finance that Wall Street has built multiple industries on, but really at an individual level where your decision making starts is how much do you make, how much do you spend, are you saving money, for what purpose, and that sort of thing. Those sorts of strategic decisions in your life are going to be much more important than the kind of decisions you'll hear analysts and financial planners talk about in terms of active versus passive, bonds versus stocks, that sort of thing. So don't put any money at risk that you can't afford to lose. Put your financial house in order and you will be fine no matter what decisions you made over here. That's what I think about it.

Dan Ferris: Very good. That's excellent. Thank you for being here, Jeff. Actually, it was a lot of fun to talk with you.

Jeff Muhlenkamp: Well, thanks, Dan. I enjoyed it too. Hopefully we did your listeners some good.

Dan Ferris: Oh, yeah. The simple fact that we are so simpatico, which I promise everyone listening, I did not know this about Jeff. I did not know that he and I were so much on the same page. That alone was really a fun aspect of this. All right... definitely I enjoyed this a lot. I hope we can call you back in, I don't know, six or 12 months or something and see what you're thinking.

Jeff Muhlenkamp: Yeah. Sounds good. Love to do it again.

Dan Ferris: All right. Well, it's bye-bye for now then. Thanks.

Jeff Muhlenkamp: All right. Thanks, Dan.

Dan Ferris: Once again, I just want to say this, it really is true. Jeff and I did not get together. We don't know each other. We only just spoke for the first time on this podcast in this interview. Actually, I haven't read Muhlenkamp's stuff for years. I didn't read anything until just, just before we started the interview I pulled up their latest quarterly letter just to look through it. Just two pages, pretty short. Even then I couldn't have anticipated that we'd be so much on the same page and thinking so much alike about things, which is refreshing. You develop your view and you stand your ground until you have reason to do otherwise... until you have reason to change your mind. It's really nice to have somebody else agreeing with it, isn't it? It's nice to be at the table with someone else and not alone.

So that was fun. Also, like I said, I made fun of the two of us. I said we're like fuddy-duddies or something, but being conservative with money, there's no substitute for that. There's no substitute for having plenty of cash on hand just in case. None. You can't say, "Well, I'll just put that cash in my 401(k)." No. It's not the same. Not anything like it. So yeah. I really enjoyed that and I look forward to talking with Jeff again in several months from now, maybe a year from now, whenever we can have him back on. I hope you do too. That was great.

Let's look at the mailbag. Let's do it right now. One of the most successful entrepreneurs in America over the past 50 years is going public with his fourth and final prediction about a scenario he calls "America's Nightmare Winter." You've probably never heard of Bill Bonner, but in addition to owning an interest in businesses all over the globe, he also owns more than a 100,000 acres with massive properties in South America, Central America, and the U.S., plus three large properties in Europe. I've been to one of them. It's gorgeous, gorgeous château. I've known Bill for many, many years. He hired me into this business.

He says we're about to enter a very strange period in America which could result in the most difficult times we've seen in many, many years. He's made three similar predictions in his 50th-plus-year career and each time it proved to be exactly right, although he was mocked each and every time. And I remember all of them. This is why I strongly encourage you to read about Bonner's fourth and final prediction totally free today. It's all spelled out in a free report that we've put together called "America's Nightmare Winter." Get the facts yourself. Go to www.nightmarewinterscenario.com to get your free copy of this report. Even if he's only partially right it'll dramatically affect you and your money. So again, go to www.nightmarewinterscenario.com for this free report.

In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and I respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. I'm getting these light mailbags. I guess you guys must be on vacation. I bet the mailbag will pick up after Labor Day. But just two of them this week.

The first one of course is from our faithful listener and longtime correspondent, Lodewijk H. He had a couple questions. Lodewijk, you're still asking me about these Russian bonds. I just – good luck to you if you want to do that. I could never do it. I just don't have that many guts when it comes to putting money to work. Lodewijk H. Has another question. He says, "Real estate is an interesting method to make money, but it's not covered by your company Stansberry and MarketWise as far as I know." Then he suggested some real estate folks to have on the show.

So Lodewijk, we actually do cover real estate. You're right. We don't cover it as much as we cover stocks, but there is a publication that we talked about very briefly. I think we just mentioned it in passing maybe, if at all, last week with Brett Eversole. It's called True Wealth Real Estate. They cover actual real estate deals that readers can get involved in. They're not buying real estate stocks. They're actually getting into real estate deals. So if you go to StansberryResearch.com and you look around you'll find something called True Wealth Real Estate. I realize you're in Europe, so I'm not sure what kind of rules apply to you, but we do. We do cover it a little bit.

I agree. It's one of those things that most people could probably do at least as well, if not better, at than the stock market. It's worth knowing something about. Next and last this week is Anthony H. Anthony, you actually asked a question about the Fed and the government and there were two other questions. I didn't answer the two other ones because your question speaks to my scant knowledge of how all this works.

You said, "Dan, could you expand on the relationship between the Federal Reserve and the government spending leading to inflation? If the money doesn't get lent and spent, I agree, it won't show up as inflation. But if I remember right during COVID, Powell spoke publicly that Congress needs to act aggressively and assured the Federal Reserve would accommodate the spending. Doesn't the government need the Federal Reserve to accommodate spending or can the government just print, spend, and add it to the deficit? Is the Fed balance sheet a part of the deficit? I never totally understand how it works. Appreciate any insight."

Fed balance sheet is totally separate, totally separate entity. It's not even really a government entity technically speaking. It's run by a government appointed group of people. So that's that answer. We know that one. Can the government just print, spend, and add it to the deficit? Well, when the government prints money they do it by selling debt securities. It just makes it a lot easier to do that if there's this enormous buyer in the market, the Federal Reserve, which can itself print money and just buy securities with it. That's what they do. That's the Fed's primary tool. It's really a set of tools, but really their main tool is to print money and buy securities, mostly Treasury bonds.

The Bank of Japan lay book had the Bank of Japan buying ETFs and they had mopped up quite a huge segment of the ETF market as we covered when we talked with Brett Eversole last week. So your question is, "Could you expand on the relationship?" I don't even know if I need to expand on it. The Federal Reserve is a huge buyer of Treasurys. The government prints money by issuing Treasury securities and yeah. If it's not covered by taxes it is definitely added to the deficit and they've just completely forgotten about that. Nobody is concerned about deficit spending at this point. So that's just my understanding of how all this works. Government borrows. Fed buys the securities. I don't even know if it's accurate.

Another listener wrote in and referred to this as monetizing the debt. I'm not even sure it's accurate to refer to it that way, but I don't understand how it's not a de facto monetizing. So what if the Federal Reserve isn't buying direct from the Treasury? So what if the Federal Reserve is only buying from, at this point I think it's a couple of dozen of these authorized participant type people. I forget what they're called. It's some name like that, authorized participant. Goldman Sachs and Morgan Stanley and all these big banks, those are the authorized folks who get to sell Treasury securities to the Federal Reserve.

Mostly the money I think just sits in the reserve account at the Fed. The Fed gets the Treasury security and the bank gets the cash, but I think mostly the cash just sits in the reserve account at the Fed. Therefore, that's why I say mostly doesn't get lent and spent. So that's just my understanding of the mechanics of it. Having said that, as I've said before, if all you have is the Federal Reserve printing money and buying securities, maybe you don't get higher prices, but I think technically that should be called inflation because they are printing money.

So when you get the government printing money, that is lending it into existence and immediately or pretty soon after spending it and even just making the plan to spend it at some point in the coming year or years, then you get inflation or the effect of inflation that we all recognize as inflation. This is a better topic, Anthony H. than – I don't do it justice. It's a better topic than this. I've been trying to get certain people on the show to talk about it who I think know a lot about it, but no luck so far. Maybe I'll get one of them on here. Until then, keep asking questions and I'll keep trying to learn and maybe you and I together will figure something out.

All right. Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want. Scroll all the way down. Click on the word "transcript" and enjoy. If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.

Do me a favor. Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts and while you're there help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @InvestorHour. On Twitter our handle is @Investor_Hour. You can also just type "Stansberry Investor Hour" on Twitter. It comes right up. Have a guest you want me to interview? Drop us a note at [email protected] or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris. Thanks for listening.'

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