For today's episode of Stansberry Investor Hour, we've managed to reel in one of Dan's favorite Twitter personalities: Michael Gayed.
Michael is the brains behind The Lead-Lag Report, a long-term investment strategy newsletter. He's also a portfolio manager at Tidal Financial Group, a Chartered Financial Analyst ("CFA"), and a prolific writer – having penned award-winning research papers and more than 1,000 articles published on websites like MarketWatch and Seeking Alpha.
On Twitter, he has racked up nearly a million followers with his shrewd – and hilarious – market insights. You can count Dan as a fan, too... He introduces Michael on the show as "one of the folks in my [Twitter] feed that I have got to check in with every day."
Michael critiques the social media platform, saying "finTwit" (short for the "financial Twitter" community of users who discuss investing and money) is riddled with prognosticators who make calls based on gut feeling rather than historical data and metrics.
According to Michael, "Path matters more than prediction"... especially in the credit event and the market rally he sees possible in 2023. He relies on multiple indicators that "get ahead of highly volatile regime shifts in equities," and "when they [the indicators] all give you the same message, that's your tell."
Also, while determining your investment strategy for this year and beyond, Michael advises listeners to do one important thing...
Read... People are too busy drawing lines on a chart. Anybody can do it – including a toddler. If you want to be good at something, you've got to put the time into it. You've got to put the concentration in. You've got to read the books.
Only with experience and knowledge and study do you know that cycles are a thing. That's what keeps you energetic – even if in the short term nothing seemingly is going to win.
Michael also breaks down the lumber-to-gold indicator for market moves... the fallacies in market timing and adapting to the market... the meaning behind his Twitter profile picture... and more. Plus, you'll also hear Dan and Corey discuss how stock bulls pinning their hopes on a Fed pivot could be in for a disappointment and the latest in shenanigans from the duo's favorite dethroned crypto king.
Publisher of The Lead-Lag Report
Michael Gayed, CFA is the publisher of The Lead-Lag Report. He is respected as an award-winning, results-oriented investment manager, showcasing 15 years of success in executing initiatives that result in significant revenue growth. And he is also known for identifying and implementing various investment strategies to capture market anomalies while maintaining a business mindset beyond portfolio management.
Michael offers a proven track record of evaluating investment opportunities and quickly understanding market dynamics and relationships that few tend to focus on. An out-of-the-box thinker with a passion for investing, he is committed to strengthening organizations' financial performance through hard work. And he is way more popular on Twitter - with nearly a million followers - than in real life.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan talks with Michael Gayed, publisher of The Lead-Lag Report.
Dan Ferris: For today's rant, we just can't resist talking about SBF, the CPI, and Greg Diamond's weird cycle chart.
Corey McLaughlin: And remember, you can e-mail us at [email protected] and tell us what's on your mind.
Dan Ferris: That and more right now on the Stansberry Investor Hour. Well, he's back. I mean, I don't want to talk about Sam Bankman-Fried all the time, but he keeps coming back. He must be the worst client for an attorney in the world because he will not shut his mouth, and now he's taken the Substack. He's been arrested, he's been charged, and he's taken the Substack to keep babbling about his excuses and what went on.
I can't believe this guy.
Corey McLaughlin: Yeah. He keeps surprising us. Maybe he shouldn't at this point, but when I saw those couple headlines this week – he did an interview from under house arrest, which is always nice, and then he started his own Substack newsletter. [Laughs] I had the same thought. He's back. At this point, he seems like a fallen celebrity who is just trying to hang on to some shred of popularity at this point to me more than anything.
Dan Ferris: Yes. Absolutely. And the tone of the thing, it comes off that way too. It's like there's this underlying implication all along when he says, for example, like, you know, the same thing that crashed our assets 80% or 90%, or whatever it was, crashed everybody else's too, as if to say that wasn't particular to us, so not my fault. [Laughs] It's just like –
Corey McLaughlin: Yeah, but it was particular. It was very particular to them, you know?
Dan Ferris: [Laughs] Yeah.
Corey McLaughlin: There's a lot of things that have been down 80%, 90% this year and haven't bankrupted an entire business and screwed over other customers, so it is very particular.
Dan Ferris: And charged with fraud. [Laughs]
Corey McLaughlin: Yeah. Then charged in the Bahamas, you know, where you think he'd be freer to get away with such matters.
Dan Ferris: Right.
Corey McLaughlin: It's hard to do, to get arrested in the Bahamas, yeah.
Dan Ferris: That's right. The Bahamas are like "Even we're not this laid back. You're under arrest."
Corey McLaughlin: We don't want you. We don't even want you here.
Dan Ferris: Yeah. And they found money. They found, from what I was reading in the Wall Street Journal, a total of $9.6 billion, like $5 billion in really decent liquid assets and then another $4.5 billion of book value of God knows what, you know, probably stakes in crypto companies or something. I don't know.
Corey McLaughlin: Yeah. I saw a couple things like that too, which reminded me at the very beginning of all of this, you know, we were maybe trying to give – or I was trying to give him a little benefit of the doubt like, hey, we don't know everything that's going on here. But now I saw something, like how much money they spent on food and all these other things. It just stinks. The whole thing smells and I'm glad he's behind bars or on house arrest at least. Yeah. Honestly, like Jerome Powell, I kind of forgot about him, [laughs] to be honest, until I saw it this week, just that's the way my mind was working. But I'm glad he's getting prosecuted at the very least.
Dan Ferris: I agree. The Fed and Sam Bankman-Fried, it's like I'm so sorry I have to talk about this but I can't resist it. That's the kind of topic it is. It just won't go away. It's in your face all the time. Ugh.
Corey McLaughlin: Yeah. And we shouldn't forget about it because these are the things that people will forget about them, and then these sorts of things will happen again.
Dan Ferris: Right, right.
Corey McLaughlin: So it's just kind of human nature.
Dan Ferris: That's my story too and I'm sticking to it. [Laughs]
Corey McLaughlin: Yeah. There we go.
Dan Ferris: It's just so much fun. The truth is it's so much fun to talk about Bankman-Fried and Cathie Wood and even poor Michael Saylor and all these other folks who just rode the bubble so hard and look so ridiculous now that it has begun to burst, now that the really crazy speculative parts of it have just completely deflated and fallen apart.
Corey McLaughlin: Yeah. It is a big entertaining as well, yes.
Dan Ferris: I should say mostly fallen apart. You know, I mean, Bed Bath & Beyond was up 200% or 300% last week, so mostly fallen apart.
Corey McLaughlin: Yeah. There's still some bubbling going on, I would say.
Dan Ferris: Yeah, yeah. Those people still have money left and they're doing what they've done for the last several years. Of course, the other thing that we can't – it's something that actually is in our face all the time that we should talk about maybe is inflation. Of course, the latest CPI came and it's 6.5%. What was it? – I can't keep track of it anymore – sixth consecutive drop in year-over-year increases?
Corey McLaughlin: Yeah, it was since June, so whatever the math is there.
Dan Ferris: OK, whatever that is. Yeah.
Corey McLaughlin: Yeah. It was over 9% in June, down to – this is the annual number – and then down to 6.5% for December. But again, I think the more useful thing to look at with the CPI number is that month-over-month comparison, and that was down a tenth of 1% from the previous month, which might not sound like a lot to most regular people, but relatively speaking it's important, just showing that the pace of inflation is slowing. And if you go deeper into the data, some areas are showing deflation already, certain parts of the data, so that's significant too but we'll see where that goes.
The market really didn't do much in reaction to it. I think this sort of thing has kind of been expected, largely. But I have a couple thoughts on it to watch going forward, but for now it's just kind of more of the same. You know, like you said, it's six or seven straight months of slowing inflation, but inflation is still there, is the main point, is my main idea.
Dan Ferris: Yeah. We're fairly obsessed as a society and as a market I guess you could say with year-over-year increases, but if you just look at the CPI index itself, it's up and to the right forever. It almost never goes down. And another way of saying that the increases are slowing is to say it went up again, and it just goes up and up and up forever.
Corey McLaughlin: Right. Yeah.
Dan Ferris: Yeah. [Laughs]
Corey McLaughlin: It's rising slower, yes. Rising, yes.
Dan Ferris: Yeah. The idea that this is bullish for stocks is comical, because in the last mega-bubble, at least for valuations, the 2000 peak, CPI, I think it started out – let me take a look here – yeah, it started out around 3.8% at the peak in March of 2000 and wound up around 1% near the bottom in 2002. So falling CPI after enormous mega-bubble, not particularly bullish necessarily. Maybe it's good for consumers, right? You're not paying as much more for stuff. But the idea that the market ought to rally on this kind of stuff is a little serious. [Laughs]
Corey McLaughlin: Yeah, especially if we're maybe getting into the deflation part of things too in certain parts. That's not good for businesses either. When you look into the data a little bit more, it's mostly gas price driven, this, and how much lower are gas prices going to go from here? I can't imagine very much. What, are they going to go down another dollar per gallon? I don't think so.
The housing and rental cost part of it, is that going to go down? No. I don't think significantly. You know, there's still, like we said, that fundamental shortage of housing. I don't think businesses are going to start lowering prices, but they're still going to try to be making money, which for the regular consumer doesn't turn out well because a lot of – you know, the wage part of this is sticky, is still – and I wrote about this a little bit this week. Basically, even if inflation comes down throughout the rest of the year, and the feds with their policy is weighing this, stable prices and maximum employment, and there's like 10 million job vacancies at this point, so assuming job losses don't pile up but some of those vacancies come down, we're still at record unemployment right now.
So the job market is still going to be tight, as they say, and skewed in workers' favor, and that means the wage and salary inflation is still going to go on. Now that's not bad for regular people who will make more in their paycheck, but for businesses that's more costs for them and then they're going to raise their prices on the backend to those same people and on and on it goes. So this is why inflation just stinks, is what I said, and it's insidious, you know?
Dan Ferris: Yeah, and it's up and to the right forever pretty much.
Corey McLaughlin: Yeah.
Dan Ferris: And not only that, but if your obsession is the stock market in all of this and you're maybe thinking, well, you know, lower CPI, more chance of a Fed pivot and all that stuff, well, not only are they not talking about talking about doing something like that but that wouldn't be bullish. Past pivots have not been bullish. So the whole idea that, ah, blessed relief, the CPI is coming down, no, no, I don't think so. I don't think we get out of the biggest financial mega-bubble in all recorded history without substantial economic pain. It's always been that way.
It was that way after the '29 bubble, it was that way after the Japanese escapade, that bubble. It's just the way it goes. The excesses have to wash out.
Corey McLaughlin: But is it the last seven bear markets or something like that haven't ended until that pivot happens, and so there's a lot of things that can happen –
Dan Ferris: Right after, yeah –
Corey McLaughlin: – between now and that point. That means things have gotten to a point where the central banks have finally said, hey, we need to reverse course here and help and loosen things up again. So we're not at that point yet.
Dan Ferris: What's more inflationary, hikes or cuts? You know, we kind of got here with loose monetary policy, and I understand the dynamics. QE is not necessarily inflationary. I understand the market dynamics of it. But QE and then $10 trillion of stimulus or whatever the total was in the end, yeah, that obviously does cause a little bit of inflation for a while. So I don't know. I think it's like – you know, Jim Grant said some time ago, you know, years ago, it's like we're at a major league sporting event, like a baseball game or something, and we're obsessed with the umpires, right?
We're just talking about – we know the names of all the umpires. The umpires are on the cover of all the sports magazines and that's all they talk about on ESPN is umpire, umpire, umpire. That's what all this obsession with the Fed is, but I think they have a lot less control over things than anybody believes.
Corey McLaughlin: Agreed. Yeah. And if I was at a baseball game, you don't want to see the umpires or the referees or the officials. They shouldn't be drawing any attention to themselves. It should be the players, which is the stocks, the businesses and whatnot, and the people. Like you say, right, fish in water. Yeah, so I love that analogy actually. It's just – yeah. Maybe I'll stop writing about the Fed now.
Dan Ferris: [Laughs] Yeah, that's right. Forever.
Corey McLaughlin: No umpires. Yeah.
Dan Ferris: No umpires, yeah. All right. Well, we should talk also about Greg Diamond, who was on the show recently, and viewers apparently loved it. They tuned into his webinar and had some good things to say about that. The most fascinating thing though, and I'm always fascinated with such things, is this seven-year cycle that goes back to like – when is it? Like the Civil War or something? I don't know. I don't know the exact date that it starts.
Corey McLaughlin: Yeah, post-Civil War, 150-plus years ago. Yeah, during the event, Greg, who we talked to last week, he talked about a lot of things, but the one thing that made me chuckle is what you said, brought up this chart from this old pig farmer from Ohio who was a wealthy farmer... lost everything in a market panic and also a hog epidemic back in the 1800's, and he tried to make sense of what happened.
And eventually, and I don't know the full details, but he settled – Greg shared this chart of basically panic and boom cycles that this guy settled upon – his name is Samuel Benner – through the year 2053. When you look at it – I wish I could show it, but it's got these different boom and bust cycles, one of the last ones topping out in 2019 and going down to kind of a bust in 2023. [Laughs] So, hello, that's pretty good. The last one, there was a panic before that in 1999, and Greg called this a cash panic basically, that everybody wanted to kind of – were paying anything for dot com stocks.
So anyway, the point was if nothing else, I would check out, if you haven't, check out Greg's presentation just for this chart alone. I would say it's worth it. Just kind of peruse that for a bit. It speaks to the idea that we were talking about, about cycles and how they're maybe undervalued by a lot of people who have money in the markets.
Dan Ferris: Yeah. People misunderstand them and they get too caught up wherever we are currently. They're too short-term oriented I guess is one way to say it. But I like the chart because, you know, it's got a major bottom in 2023 and then it's got sort of an intermediate top in 2026 and another major bottom in 2032. I consider that like a sideways action and that's kind of what I've been talking about for at least several months now.
I talk about it mostly in the Ferris Report and the videos that we make about that. But it's fascinating because this guy did this thing in like 1920-something or whatever it was, and he took it out to 2053. I mean, that's the kind of confidence that you just don't see anymore. [Laughs] You know? You just don't see this anymore, where people are – you know, it's like the Japanese corporations and their 100-year and their 500-year plans.
Corey McLaughlin: [Laughs] Right.
Dan Ferris: I haven't heard a lot about that lately.
Corey McLaughlin: Yeah. Who did the – what was it? – 100-year bond a couple of years ago? [Laughs] I forgot which country did that. Yeah.
Dan Ferris: Argentina maybe? Yeah.
Corey McLaughlin: Was it? Yeah. So yeah, similar thought there. And what's also interesting to me with the 2026 kind of intermediate little rally here, that also aligns with the cycle that I put a lot of value in, kind of like the 80-year saeculum cycle. That's the year where Neil Howe would say that's supposed to be the year when like the great end of this crisis era ends, which would make sense, and it ends with kind of a war, total war, which the war we have going on now is the Russia-Ukraine war, and you would hope that it doesn't go for three more years, but that's certainly possible the way it's going, especially if it's gets worse and other countries get involved and it just kind of spirals into some sort of mess and like another direct war between two or three other parties. You know, I can't foresee Russia and Ukraine fighting for four more years, but who knows?
Dan Ferris: Who knows, yeah.
Corey McLaughlin: But anyway, the point was these cycles kind of – especially with these different cycle theories line up with each other, yeah, I think it's worth looking at.
Dan Ferris: Right. It gets interesting when it happens. I always have a voice in the back of my head saying don't be fooled by randomness, but it's fun to think about it.
Corey McLaughlin: Yeah, yeah, yeah.
Dan Ferris: And certainly the generational theory, you know, Neil Howe's generational theory that you mentioned with the saeculum and all that, it's interesting and he cites a fair amount of – by its nature, it's backward-looking, so he looks backward through all the American generations back to the founding of the country and it's kind of fun and you see, oh wow, yeah, he's got these four archetypes and I'll be darned if they don't reappear, you know, according to the evidence that he presents. If nothing else, it's a really good story and it might be a really good insight about how human societies evolve over these 80-year periods and in these 20-year generations within them. At the very least, it is irresistible. It's like mind candy at the very least.
Corey McLaughlin: Yes. Yeah. I wouldn't necessarily be market timing to the year and the date based off of it, but I think it does inform what is possible based on long-term cycles that most people living frankly now are not aware of nor really should they be, but for people like us who look at these sorts of things, it's helpful to see patterns over time, and that's really what we're talking about.
Dan Ferris: Right. And for investors, I mean, the point about it being cyclically aware, I would hope – I would hope – is once again obvious, right? Because it's easy for a guy like me to rant and rave all through 2021 like I did, but then when the chickens actually come home to roost in 2022, you know, then people are patting me on the back at conferences. But up until that point, they're saying, "Really? Really? Really?"
You know, when the cycles turn, people go, "Oh, of course," but right up until that moment, they can't bring themselves to fully embrace it. It's just an insidious part of human nature. Anyway –
Corey McLaughlin: Well said.
Dan Ferris: Be aware of cycles I think is the point we're trying to make, and there are many ways to do that.
Corey McLaughlin: And check out Greg's presentation if we're still using Dan 2023.com?
Dan Ferris: Yeah. So be aware of cycles and check out Greg's presentation at Dan2023.com. Make up your own mind. But I think Corey and I are both sort of trying to promise you that once you get to this chart in the presentation, you'll really be tickled by it at the very least, if not fascinated. And Greg, of course, he actually has nailed lots and lots of trades over the past year in part by using this cyclical insight that he gained from this chart.
So, you know, real money is made off of this. We're not just sort of talking casually about something. This is like real money, and Greg is the guy who sort of figured it out. So you can go to Dan2023.com and check that out. Why don't we go ahead and talk with Michael Gayed now?
I love Michael. I love his Twitter feed. It's definitely worth following. We'll talk about it during the interview here. A great guy and lots of insights about what he expects to happen this year, and a particular view on how he thinks about whether or not things are going to happen.
I find his view very measured, very smart. Let's go ahead and talk with Michael Gayed. Let's do it right now.
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And with that, Michael, welcome back to the show. Good to see you again.
Michael Gayed: I appreciate the invite, as always.
Dan Ferris: Yeah. So I have to tell you, and this is for our listeners too, following you on Twitter, @leadlagreport, has become more exciting than ever. You're one of the folks in my feed that I have got to sort of check in with every day. And I have to commend you too, Michael, you've developed a real brand, you know? I could know it was your feed even if it didn't have your name on it, you know?
And so let's talk about some of that. When you say, for example – the one word that I associate with you is few, and you say the word few a lot. And I know what it means, but why don't you give our listeners an explanation of why you use the word few so often?
Michael Gayed: You can say I use it many is I think the way to think through this.
Dan Ferris: Yeah. [Laughs]
Michael Gayed: I'll tell you, the social media world is fascinating in so many ways, the way that people get triggered. Around the top of the bitcoin and cryptocurrency peak, if you remember on Twitter, everyone had laser eyes, right? It was everywhere – celebrities, individuals – I mean, it was just every single place you could imagine. I'm a pseudo market history – I mean, I'm one of those guys that when I was a kid I was reading all kinds of books on markets, and history would suggest that when you have that kind of conviction, that kind of popular narrative, that tends to be a top, at least for now.
But it's more than just the idea of everybody having laser eyes back then. It was also that there was a certain degree of vitriolic response, where it was the people who had the laser eyes and everybody else, and everybody else didn't understand why these people had laser eyes. Now the bitcoin community use that line – if you understand this – since I think 2017 or so, but in early 2021, I was basically just trying to have an out-loud conversation on Twitter. I got attacked by a lot of these so-called bitcoin maxis for narratives that I was picking apart back then which now ended up being right in the way I picked them out.
But as a way of sort of countering the vitriol and the idea that only a few understand this, I started using it as my own mean, sarcastically to kind of mock the idea that people think they know something that others don't. So I started saying if you understand this few, and then I threw in exquisite, atrocious, and it became a bit of a brand. Instead of having laser eyes, I put lumber and gold eyes. It's funny because I was basically turning my Twitter account into a little bit of a parody of all the things that I thought were wrong about the cryptocurrency.
Dan Ferris: Exactly. That's why I love this, because their smugness was real and yours is mock smugness when you say few. That's why it's brilliant.
Michael Gayed: Right. But then people think I'm being smug by saying few, because they don't –
Dan Ferris: Exactly.
Michael Gayed: I can't win. So if you don't get the joke, you are the joke, right? That's kind of the thing.
Dan Ferris: That's right.
Michael Gayed: So I keep on doing it. And it's weird because sometimes I have to explain the jokes. Somebody's like, "Oh, will you stop with the few? It's so arrogant?" It's like, you guys are not understanding it. First of all, you know, when you've been in the business and, yeah, I'm somebody who's in the game... I run funds – we'll talk about that I'm sure – but the market humbles everybody but at different times. You know, I've been humbled a lot in this business because the cycle didn't really favor the approach.
I think maybe that's finally turning. We'll see. And last year was a real anomaly in that sense. But, you know, part of humility means knowing what pain is, and believe me, I know a lot of pain in the industry launching strategies a long time. So arrogance is what gets you in trouble. I often rant against overconfidence, and yet when people see few, they get so triggered by it, it's somewhat comical.
And I debate it every day. It's like, should I keep going with this? And then I say to myself the fact that a few really do understand this means I should keep saying few.
Dan Ferris: Yes. No, you should keep saying it. I just want you to know, some of us continue to get it, you know? All right. So I want to talk about specific tweets because that's my window into you. And so a couple of them recently, and by recently I mean, you know, around January 11th or so.
You're talking about seeing the potential for a rally, a little "Melt Up" here? Little or big. I don't know. Melt Up. But you're simultaneously talking about the potential for what you call a credit event in 2023. So most folks, you know, they're just like one-sided views, so it's up or it's down or it's bullish or it's bearish. This is clearly sort of both at once. And you use another word, that you just throw out that one word – path – when you talk about these things. So tell me about this. Tell me about potential for a Melt Up, simultaneously potential for a credit event, and this word path.
Michael Gayed: So first of all, you and I both know that you can be both bullish and bearish at the same time.
Dan Ferris: Oh, yeah.
Michael Gayed: Right? It's just a function of time frame, which is amazing how people don't really understand that concept to begin with, right? It's like you can be bearish on the entire world, but how you get to the lower lows is ultimately what matters, the sequence of returns, the path. I always go back to that point, path matters more than prediction. So it's interesting, right?
On finTwit, everybody likes to talk macro. Everybody likes to talk about all these things which are really ultimately all about end point. But the only thing that matters for traders, and I'd even argue investors because they react off of path, is the path, the way that you get to the end point, the dance in between the raindrops, so to speak. So let's take a step back.
October 3, I put out a piece – a put a Tweet out, thread, saying that – back then everyone was bearish – I said, you know, I believe conditions now favor a Melt Up. It wasn't a call. It was me basically looking at quantitative metrics that all got so extreme, sentiment that was so extreme that it's like that's the setup for a big move. We can quibble about whether it was a Melt Up in definition, which nobody seems to properly have a definition for, to begin with, but it was a 17% move in the S&P in a matter of two months and fairly sizeable.
Then December 3, I then put out another Tweet thread saying now I believe the conditions favor an imminent stock market crash. You didn't have a crash, but you had the fifth worst December in history, and it wasn't based on some gut feel. No, it was based on metrics, historical data. Now entering this year, somebody said to me what about that crash? I said, well, it's not as clear to me the way that this year is shaping up.
And I say that because if you look at what's happened out of the gate, emerging markets have been outperforming significantly. Small caps are showing some strength. Lumber looks like it may have bottomed. Utilities have been so strong for so long as a defensive sector that it's probably due for some kind of weakness, right? So you're at a point here where there's so much negativity from intermarket perspective, and length of time of the negativity has lasted so long, that you probably are going to have some kind of relief rally.
That's why I put a poll out saying, you know, would you consider it exquisite or atrocious if I thought a Melt Up now was coming following the imminent crash argument, which obviously didn't play out. But again, fifth worst December. Now it wouldn't surprise me at all if we have some kind of run higher, and I say that also keeping in the back of my mind seasonality. So you're still in the best six months, November to April, you're in the third year of the presidential cycle, which is historically the best year of the four-year presidential cycle.
So that's one part of it. I think at some point though you're going to have a credit event. So you could have a move higher and then maybe a real "risk off' move lower. And the reason that I say I think we're going to have a credit event is the damage is done and there's a delay in terms of interest rate movement and how it impacts the economy. One of the things that's been really remarkable about last year in the carnage of the bond market is that it really wasn't the classic carnage you would've thought.
In other words, it was a duration collapse. It was a duration crash, right? Whereas credit spurts stayed relatively tight, right? In other words, the market did not reassess default risk premiums among highly leveraged borrowers. Because there's a delay and because we just went through the fastest rate height cycle in history and because housing still, no matter what lumber does, is going to have some kind of real pain going forward independent of short-term wiggles and optimism. That to me is the setup for typically what you see in major capitulation moments, which is big spikes, credit spreads blowing out, real "risk off" where Treasurys go back to that sort of flight to safety status, which was what was missing all year and is what hurt my funds so dramatically.
I don't think it's necessarily here now, but I think it's probably looming at some point this year, this kind of real risk of a wave lower that looks more like a classic type of correctional crash.
Dan Ferris: Gotcha. So with all of these things that I see you tweeting about and talking about, you are very much about assessing conditions, like you're very much into timing and about assessing conditions at any one given moment.
Michael Gayed: And let's kind of explore that because I think this is important.
Dan Ferris: Yeah.
Michael Gayed: What matters when you're driving is not knowing the exact mile marker that you crashed your car. What matters when you're driving is it rainy or is it sunny? Now just because it's raising doesn't mean you'll crash, just because it's sunny doesn't mean you won't, but they set the conditions that set the probabilities, right?
Dan Ferris: Gotcha.
Michael Gayed: So I don't believe in making calls. And it's funny because it's like even with those threads where I explicitly on Twitter said I don't believe in making calls, people said, "What happened to your Melt Up call? What about your crash call?" These are not calls, right? I'm trying to say this is what you typically see as the surrounding set of conditions under which an outcome likely takes place, right?
It's a really, really important nuance because it means that you have basically look at history to see if multiple rolls of the die get you to the probabilistic expected value and outcome. OK. So conditions are always changing, right? Every single second, you can argue, is changing. Probabilities are always changing. It's not static when it comes to markets.
It's never, oh, let's be equal because nothing's every fully equal. There's always new information, always new movement, always new reassessments. So you've got to be kind of aware of that. Just like when you're driving, every single, you know, foot further in the mile that you're driving could be more rain or less rain, right? But you still have to kind of adjust to that.
Now is it timing? This is also I think really important. There's a difference, I would argue, between asset class rotation and market timing. Why am I saying that? All of the studies around market timing correctly show that market timing doesn't work, meaning you're timing the asset class or cash.
Why does that not work over time from a back-testing strategy development perspective, market timing? Because cash does not allow you to be wrong and make money, right? So if you get a signal to play defense and your expression is to get out of the stock market and be in cash, you don't have a chance of momentum compounding. Same reason for why shorting doesn't work.
If you're wrong in your expression of playing defense and making an outright directional bet on the downside, you're going to get destroyed because markets tend to go up more often than not. So you're going to be wrong actually in your defensive signal quite a bit. However, if you view it from the lens of rather than going in reverse when it's raining or outright stopping when it's raining, slowing down, then you can maybe avoid the accident. Now the two primary ways of quote/unquote slowing down are defensive sectors if you're a long-only equity manager, utilities, consumer staples, healthcare.
But then the real way to play it is long duration Treasurys, right? That flight to safety trade, which again, is what failed last year. Now I built my funds around that ATACX, RORO, JOJO. All of them use different signals, right? They're all using different indicators of the weather, but they all have the same problem. They all slow down with the same brakes, which is long duration Treasurys for a reason because that's what history would suggest.
So I think that will be ultimately – and that even releases the credit event argument – that is going to be what's really critical this year. Did we truly go, as I believe, through an anomaly where the flight to safety broke? And if we did, now you've got money that you can make being "risk off" in Treasurys in another highly volatile sequence when the conditions reassert themselves, saying you might want to slow down.
Dan Ferris: OK. And what I was going to say before, without – you know, I never ask anybody to give away their secret sauce, but I'm still inclined to just ask how do you make these assessments? What changes suggest to you the conditions are right for a melt up or for a crash or whatever?
Michael Gayed: So it's not a secret sauce. The ingredients are all public. It relates to these different – even the Research Digest, even these different funds, RORO and JOJO, what people don't understand on Twitter is that they're rules based and they have indices, which are available and run by VanEck. They have a business line market vector. So it's a rules-based index and the ETFs are attempting to try to track those indices based on certain indicators, right?
That methodology is public. Anybody can actually download the PDF guide of how those indices are created, which means they can replicate conceivably what was horrible performance for those funds last year because of the failure of Treasurys. So look, the reality is there are very few real predictors when it comes to markets. I know this because I've tested everything you could possibly mention, and I think unless you've really done a lot of back-testing, you're not going to get a full appreciation of just how cynical one should be when it comes to anything anybody says as to why stocks would do what they do.
These five different research studies that I've put out there that won these different awards, which doesn't mean anything except that they were validated by peers and industry, shows that certain indicators tend to get ahead of highly volatile regime shifts in equities which is what "risk off" is. It's not no risk. "risk off" is ultimately about volatility dynamics changing. Utilities against market, lumber relative to gold, long-duration Treasurys against intermediate, where you are relative to the moving average, and then VIX levels at extremes.
Those are your main indicators. All of those basically relate to the same concept, which is that what ultimately drives the likelihood and the conditions is the demand for money changing. So what do I mean by that? Utilities are the most bond-like sector of the stock market. Highly levered, the bulk of their earnings variability is driven by interest expense. So they benefit when rates are falling.
Why would rates be falling? Demand for money is falling, right? Lumber is about housing, which is about mortgage rates. Same idea. Demand for money is falling, not rising. The moving average even, I'd argue.
Usually when you're below a 200-day moving average, you're already in a recession, historically, right? Long-duration Treasurys get intermediate, a form of yield curve flattening further out in the curve, demand for money changing. So the point is typically when you have a really sunny environment or a really rainy environment, all the signals will line up in different ways even though someone at one point made this with another, but when they all kind of give you the same message, that's your tell, right? Because they all tell you about volatility, right?
So I'm kind of using this methodology of, yes, my funds are based on specific single indicators, but if you see multiple single indicators that tend to get ahead of major changes in volatility confirming the same message, that tends to maybe tell you to think a little bit differently about markets.
Dan Ferris: Let's talk about one of those relationships that I've seen you post about a number of times. Lumber to gold. I can honestly say that I never really heard anyone talk very much about this, but to you it's a pretty important relationship.
Michael Gayed: Yeah, only because I live in a house.
Dan Ferris: [Laughs]
Michael Gayed: Right? But that's kind of the thing. So I'm a big fan of behavioral finances. You probably listened to it – the "Invisible Gorilla" study. So there's a study – I forget the gentleman's name, but there's a great book called The Invisible Gorilla and it's a study – you can actually go on YouTube and see the video.
I'm going to butcher the exact way that the study was done, but basically a bunch of psychologists or whatever, they wanted to try to test attention spans to some extent and to see if people could focus on things the proper way. So they had a bunch of participants sit down and watch a video, and they were told, these participants, you've got to count how many times a basketball is being passed around these different players, these athletes in a gym. Count how many times the ball is going back and forth, back and forth, back and forth.
So participants come in, they sit down, they watch the video, and they're counting the balls being passed, and then somewhere around the middle of the video there's a big gorilla suit, a person in a gorilla suit just walking across as these players are throwing the ball to each other. This is literally just clear as day when you see it. You see a gorilla.
Dan Ferris: Right.
Michael Gayed: When they ask the participants how many balls were passed, how many times was the ball passed, they give the number, and then they say did you notice anything unusual about the video? They said, "No, what do you mean?" So half the participants did not see the gorilla that was directly in front of them because they were so focused on the counting of the basketballs being passed.
Dan Ferris: Right.
Michael Gayed: So I'm relating to lumber in the sense that it's so obvious, it's like right in front of us, but we don't even think about it. Lumber is the key commodity that goes into framing, lumber is incredibly corelated to housing starts. Housing is the No. 1 asset, homes are the No. 1 asset for most consumers. So to the extent that housing tells you something about the economy, and to the extent that lumber tells you about housing, it makes sense that lumber should be paid attention – people should pay attention to lumber more because of that fall through to construction, credit creation, wealth, all that stuff.
Dan Ferris: Got it.
Michael Gayed: The idea of comparing it against gold is that gold tends to act as a safe haven as a commodity when you have these kinds of high-risk periods in equities. So that's pretty well documented, at least in a short period of time. So you basically compare a very cyclical commodity, which is a tell on housing, to a noncyclical commodity, gold, which tends to be a tell of a little bit of "risk off". It actually tells you a lot about sentiment changes, and again, volatility regimes shifting.
Dan Ferris: I see. So when you see gold rising versus lumber, this is risk-offish. When you see lumber rising versus gold, it's kind of maybe economically good.
Michael Gayed: Yeah, or at least it's more liquidity expected to come again. Because again, if it's about demand for money, it's about liquidity.
Dan Ferris: OK. It's funny because I ask you these things and the answers are all so simple.
Michael Gayed: It's very simple, yeah.
Dan Ferris: They are the guy in the gorilla suit, and I'm like, oh, yeah, OK. I think just the fact that, you know, it's sort of like not sexy but it's got teeth and you're the guy who understands that, I just want to underscore that for our listener because it has a lot of value, and that tends to be the way things are in investing, isn't it? It's not about being a physicist and knowing how to do complex calculations in your head or anything. It's just like honoring these simple relationships and simple compounding over time and all these sorts of things.
Michael Gayed: It's also I think about understanding and respecting that it's more than just signal, right? So all three of my funds – ATACX, RORO, JOJO – they all use different signals. I have every incentive for them to work by the rules because I'm not applying a discretionary way of thinking about how to rotate, right? It's based on these relationship – lumber, gold, utilities, all this stuff. OK. The signals pretty much have been right all throughout 2022, meaning the bulk of 2022, lumber was weak, "risk off," high volatility for equities.
The bulk of 2022 utilities were strong, "risk off," high volatility for equities. Usually the way to play high volatility in equities is Treasurys, long duration. Again, long-duration Treasurys ended up being more volatile than equities. Now this is also I think important, and that's why I always go back to every strategy is a function of signal – lumber to gold, moving average over this – opportunity set, how you express the signal, and then lookback period meaning what time frame you're evaluating the signal over.
The problem last year was the opportunity set, right? In my world, it was long-duration Treasurys as the expression of "risk off" where in the first time in history, long-duration Treasurys lost more money than equities and had a very unusual path against stock market volatility. That doesn't mean the signals were wrong because I had drawdowns in my funds, right? The drawdowns on my funds were explained by the behavior of Treasurys interacting against the signal.
This is also I think really nuanced because I think in finTwit in particular a lot of people focus on a particular indicator, but you have to really ultimately focus also on what you're expressing the indicator on, which means you need to have a cycle also favoring your opportunity set for the indicator to ultimately generate returns. A good example of that. Forget about lumber to gold, forget about utilities.
Let's just use a stupid momentum signal – which everyone uses on everything. If you were to do a momentum trading strategy on the S&P 500 for the last 10, 12 years, you did pretty well. If you do the exact same indicator on emerging markets, death by 1,000 cuts because it's based on momentum. Every time you try to play it doesn't persist. But the indicator's the same, right?
So my point is you need to also think – I think most investors underappreciate how important having a secular tailwind from a cycle perspective is to what you're expressing a signal on, right? It's more than just lumber to gold or utilities. It's "Is there some kind of tailwind that favors the indicators not only being right but actually profiting – being aware of volatility but also profiting from the volatility changes?"
Dan Ferris: Gotcha. Yeah. Nothing is simple. Nothing is static. It's always changing. It's a great point.
We talked to Jeffrey Zuckerberg, the guy who wrote the book about Renaissance, and I was amazed that he got people to talk about Renaissance. And he said, you know, they're constantly looking for new signals. It's endless, and it's an army of people constantly looking for new signals. So that makes a lot of sense. It's a point well worth making in front of this audience because I promise you so many people that I talk to in our business, you know, customers and clients and things, they just tend to want to get that sort of perfect indicator and then keep pressing that button, you know? So thank you for making that point.
Michael Gayed: And by the way, you're hitting on something actually which I think is really interesting and important for the audience, which is that you always hear this line that you need to have the mindset of adaptability. OK, so this is an important point. I do these Twitter spaces, these conversations, and I always get people saying that, well, you know, you have to have the mindset of being able to adapt to the current environments, that if something's not working you switch to what's working and this and that. I have a real problem with that.
I have a real problem with that because the assumption there, the implicit assumption, is that you can create a strategy which is working at all times independent of the environment that you're in. That's nonsense. You can't always adapt to the here and now because it assumes the here and now persists, right? So it's an impossibility to create a perfect strategy.
Dan Ferris: Right.
Michael Gayed: So I think rather than sort of focusing on the idea of what do you do to adapt to the current environment, what people should focus on is can you stick through your approach in an environment that is not favoring you, which is a very different way of thinking about things.
Dan Ferris: Yep. Absolutely. Every strategy underperforms for some period of time even if it's the best thing in the world, and the idea that you're going to swap strategies in and out at the right moment, you know, it's just ridiculous.
Michael Gayed: No, it's nonsense. It's chasing optimization. I mean, Madoff pulled it off.
Dan Ferris: Yeah. [Laughs] There you go. That's how you get perfect returns, just commit fraud.
Michael Gayed: Yeah. I mean SBF knows that himself... until that one day, right? So I think that's important. And the thing is, like if you have the mindset of cycles and sticking through a cycle, that brings really kind of two interesting dynamics, one is it means that hope is a strategy. Hope is a strategy, right?
Dan Ferris: Right. Yeah.
Michael Gayed: Because it's like you have to hope the cycle comes your way in order to stick to it, right? That's No. 1. But also, it just makes you appreciate that if you're going through a cycle where your approach is not working, the dislocation that you've tested, that you believe in, is probably getting bigger, which means the forward returns are naturally going to be higher. It's like most people worry about a drawdown after a drawdown's already taken place, whereas the best way to avoid a drawdown is after one's already taken place.
The returns are naturally higher after a drawdown than before, but they get nervous after the drawdown that it's going to go further down.
Dan Ferris: Right. Yeah. That's right. The classic example of this, of course, is like everybody abandons value at the top of the technology cycle, right? And then they magically rediscover it at the bottom. [Laughs] We've seen some of that too this time around.
Michael Gayed: Right.
Dan Ferris: So Michael, I just want to make your position clear. Right now you're looking for this credit event maybe because the conditions favor that you think. At the same time, you're looking for a Melt Up. Can you give us magnitude on that or no?
Michael Gayed: I have no idea. OK, a couple things.
Dan Ferris: No idea.
Michael Gayed: And no one knows, right? So again, it's about sequence. I suspect you probably have – because the relief rally in lumber is there and long rates are falling and at least at the margin that's perceived to be positive because it means inflation probably overshoots too on the downside. So that, I think, means that you have, in the short term, a bullish setup, and then again at some point some kind of credit event kind of kicks in.
Now the magnitude question though is tricky because you never quite know. I had a lot of people throughout December say to me how would you define a crash? And I purposely never really quite fully answered it at least then, although I've done it publicly many times before. I don't view a Melt Up in terms of percentages. I view it in terms of time.
I don't view a crash in terms of percentages. I view it in terms of time. So historically, you'll get major crashes. You go back in time nine, 10 months, historically the Melt Up is going to end up having in a very compressed time, you know, an undoing of the last several months of weakness. So magnitude is ultimately a function of perception, right?
Somebody might think 17% is a Melt Up in a year, but in reality it's probably not. 17% in two months is probably more of a Melt Up because of the time component of it.
Dan Ferris: Interesting. So now within a very short period of time I've had not one but two professional traders on the show who have talked about time. You know, we talk to dozens and dozens of people. I've been doing this for a few years. I must have interviewed, you know, a few hundred people, lots of traders.
Very few of them talk about time as you do. You're like the second, maybe third – maybe I'm forgetting one. Let's lean into that a little bit. When you say you think of a Melt Up in terms of time, you just mean like the time frame over which you expect it to occur. It's like a weeks' long thing maybe and not a months' or years' long thing, for example.
Michael Gayed: Right. Yeah, it's like if you were to annualize a fairly sizeable, outsized move in a short time frame on an annualized basis, that's a huge number, right? So you can't view magnitude by itself without factoring how long it takes for the move to occur I think is kind of the point. I also think, by the way – this is more of a side note – it's amazing to me how people only hear what they want to hear whenever they choose to hear a distorted version of reality. So a lot of people think Melt Up means S&P going to 6,000.
It's like, no. The term never meant that. It was always used as a way of you can argue hyper-volatility, arguing that stocks could have a stampede higher, but it's more just a descriptor of the conditions, the environment. It's not necessarily sort of question of, oh, it means you're going to break to new all-time highs at all. Some people popularized that and they changed the definition and that seems to be the case nowadays.
Everyone's changing definitions of things left and right. But that's not the real definition of what a Melt Up is. Or same thing with a crash. It's like, all right, so if junk debt goes down 5% in a day, equity investors would say that's not a crash. Of course that's a crash. That's a crash in junk debt adjusted for time and the way that junk debt moves, right?
So that's what I'm saying. I get it. Everyone always wants to get a percentage of magnitude but it's more than that, is my point.
Dan Ferris: Yeah. No, that's a great point. I'm glad you said that because that was my next thought. So what you're saying then is like – I mean, I feel like people have become inured, they've become used to drastic moves. We just went through this period, which I was kind of calling a mega-bubble, and people thought it was normal for some crazy stock that probably shouldn't even exist as a company to be going up 20%, 30% in a single day.
You know, people get used to that and they don't understand how utterly unusual it is, and now here you're coming and say a 5% move in junk bonds in one day is a huge deal. That's a crash. And I feel like as we speak, we're still getting meme stock action. I feel like these spirits, this idea still hasn't been crushed out of people. It's like they haven't unlearned it. It's like if you think there was a bubble, it's still popping, it's still here.
Michael Gayed: Yeah, yeah, yeah. So this is actually – I did rants on that all throughout 2021. I would say multiple times on Twitter. You could look it up. I'd say the level of uneducated speculation is astounding. Uneducated speculation, right? That's not to say that this is a domain only for educated people, right?
But at least you've got to know what the hell risk is and know how numbers work and know history, right? So I'm with you. I still see it even today. I still see the memes, I still see – it's like, all right, I'm beaten but the bell hasn't rung yet is that kind of mentality by the same uneducated speculators who didn't view the past year and a half, two years as a lesson.
They viewed it as a bump in the road. That mentality is I think – and that's also why I believe the bear market is not over. And if you think about that line, I've also used that line many times before. The bear market can make fools of bulls and bears. Bear markets make fools are bulls and bears.
Dan Ferris: Right.
Michael Gayed: I'm using that terminology purposely because in bear markets stocks are volatile. In bear markets, stocks can have significant, meaningful bear market rallies or Melt Ups or whatever term you want to use. They can have significant, sudden collapses. That's what volatility is.
Dan Ferris: Yeah. We had another guest on, a guy named Christopher Cole who's kind of a volatility-focused trader, and he talked about volatility like truth, you know? He's very profound about it. Volatility is like it finds you out. It finds the bears and does a rally to take them out and then it finds the bulls who are getting back in and cuts them off at the knees again.
It is. This is a time of – I feel like the truth is coming out. The truth comes out in bear markets. We find out who's been swimming naked, right?
Michael Gayed: Yeah. I'd argue it shakes conviction and confidence, right? I don't view volatility as fear. I view it as doubt. So if you were to overlay the VIX index and the volatility index against credit spreads, differentials between junk debt and AAA, you see pretty much a one-for-one relationship.
So when you have volatility, inequities run higher, you have a VIX spike, junk debt becomes junkier. The differential between poor-quality debt and high-quality debt widens even though VIX is about equities and credit spreads are about bonds. Why is that? Well, if volatility is about doubt, inequities, it stands to reason that that which has a higher claim on collateral on the balance sheet, which is liabilities, the debt side, that there should be doubt about the possibility that a company stays in the distance, which is default risk.
Dan Ferris: Right.
Michael Gayed: And that's the relationship, what "risk off" is, basically.
Dan Ferris: Sure. Exactly. If equity is the cushion that the debt investor looks at, I mean the first guy above that is the junk holder, right? So he's going to have a problem quicker than anybody after the equity guy gets wiped out.
Michael Gayed: Right.
Dan Ferris: Yeah, yeah. Good stuff. So I feel like I could just hit on so many topics with you, but we've actually been talking a little while, so I'm going to throw my final question at you and you can go anywhere you want with this. It is the identical question for every guest no matter what the topic. And the question is simply if you could please leave our listeners with one thought today, what might that be?
Michael Gayed: Read.
Dan Ferris: Read.
Michael Gayed: Read. No, really, I'm serious when I say that. It's like people are too busy drawing lines on a chart, which anybody can do, including a toddler. It's like you've got to – I tend to be of the just mindset in every domain that if you want to get good at something you've got to put the time in. You've got to put the concentration in.
You've got to read the books that go into it. You've got to read the textbooks and the non-textbooks. You don't read Tweets to learn about markets. I had somebody say, somebody direct message at Lead Lab Report say to me, what's your advice for somebody wanting to learn more about markets? Which account should I follow?
I said get off Twitter, which is counter to my own best interests, right? I use Twitter for marketing, obviously. It's a persona with my account and the way that, to your point, I've branded it. But I'm using it as a way of hopefully some degree of interest by an audience that may be willing buyers when the time comes for funds or anything else that I do in my life and my career. But you're not going to learn something unless you spend the 10,000 hours, the old Malcolm Gladwell arguments of just the grind.
I think the biggest thing is people just need to either go on your Kindle and actually read these old books and go back in history and see how behavior doesn't change in the way that markets are described and the way that people felt about prices, whether it's the '20s, '30s, '40s, into 2023, right? I think that's the biggest thing. I feel like we – I don't know if it's a generational thing, and maybe this is me as I get older, the old man yelling at the cloud kind of thing, but I worry about every generation's ability to know what it takes to be at something long enough.
Now look, a cynical person would say, well, you know, your funds didn't do well at all last year. My mutual fund I launched in 2012 just before QE3. It's "risk on, risk off" just before one of the smoothest risk on periods in history where it's all about the S&P and it rotates around emerging markets and small caps. I keep the fund alive, open, and I had a hell of a year in 2020. It was up 72%.
I say all that because only with experience and knowledge and study do you know that cycles are a thing. That's what keeps you energetic even in the short term nothing seemingly is going your way.
Dan Ferris: Oh, man, that's a great answer summed up in one word – read. Yes, get some depth. Get off Twitter. I love that. Thank you. And I love talking with you.
Thanks for coming back and talking with us, and you can better believe that, you know, sometime in the next six or 12 months you're going to get another call from us.
Michael Gayed: You understand this.
Dan Ferris: [Laughs] There we go. Perfect. All right, thanks a lot, Michael.
Michael Gayed: Happy to do it.
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Hey, that was something. That was the second time, the first time being recently with our interview with Greg Diamond, that we had a trader talking about time. He said time is the most important thing. And it's an abstract topic, and you can listen to our interview with Greg Diamond and obviously this interview to know exactly in what way time is important.
With Michael, he talked about the path, right? So the path from here to a credit event might include a Melt Up in stocks, for example. So path is really important, and that plays out through time, doesn't it? And then, you know, he just talked about time frame. We mentioned the time frame for a Melt Up or a market crash, you know, it's not years, it's probably weeks. So time becomes very important there as well.
I like hearing about this. It's one of the 10 heresies of finance in Benoit Mandelbrot's excellent book called The Misbehavior of Markets, and he has these 10 heresies of finance, and one of them is something like – I forget exactly how he put it, but I think basically timing matters. Timing is important. He talks about time throughout the book as being important.
Lo and behold, we finally got a couple of traders right in a row talking about it. And other than that, I just think Michael's an interesting guy. His Twitter feed is @leadlagreport, L-E-A-D, L-A-G report on Twitter there. I encourage you to follow him just for the sheer fun of it. He's insightful but also very entertaining in his insights.
Really a fun conversation. I hope you enjoyed it as much as I did. [Laughs] We say that a lot, don't we? Yeah, so that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you like this episode and know anybody who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And 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. If you have a guest you want us to interview, drop us a note at [email protected], or call the listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host Corey McLaughlin, till next week, I'm Dan Ferris. Thanks for listening.
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