Episodes

Announcer:                 Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.

Dan Ferris:                 Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value published by Stansberry Research. Today, we’ll talk with Michael Covel of trendfollowing.com. We’ll talk about trends that speculators are following today and see what Michael thinks of the current market environment. In the mailbag today, lots of questions. Gold, bitcoin, insurance stocks, the price-to-sales ratio, all kinds of stuff. And remember, you can call our listener feedback line,  800-381-2357. Tell us what’s on your mind and hear your voice on the show.

For my opening rant this week, I just want to share a really wonderful article with you that I read in the Financial Times. And once you find out what it’s about, [laughs] you’ll know why I’m sharing it. That and more right now on the Stansberry Investor Hour. [Music ends] So, what’s this article that gets a whole rant? I mean, a whole rant on one article in the Financial Times? Wow. So, the one article is by I think one of their best writers, Robin Wigglesworth. And it’s called "The 'Tesla-financial complex': how carmaker gained influence over the markets." And it’s all about how huge of a footprint Tesla makes in the financial markets.

And I wrote about this recently in a recent Stansberry Digest. We have a daily digest for all our paying customers. It’s just something they get free whenever they sign up for any of our products. And I do it every Friday, and lately I’ve been doing it on Tuesdays, but I’ll stop doing that after the first of the year. Anyway. So I read something [laughs] in here. I knew Tesla was making it – had a big footprint in the market. I knew it because I’ve seen other datapoints just sort of tweeted out and things here and there. But I just had no appreciation for it – until I read some of the statistics that Robin Wigglesworth put in this article.

So here’s one. He says – and a lot of this is driven by options. I’ve written about this in the Stansberry Digest, too. The options market is like – we think of it as this thing besides the stock market, but lately it’s like the tail wagging the dog because of the dynamics in the options market, where people buy tons of call options. And the firms, the financial firms that sell these – the options dealers – they’ve sold them. So, they’re short and they have to go into the market and hedge that position by buying stock in that same stock that they’ve sold the options on. So their clients are long. And in order to get neutral again, they have to go long, and it’s like rocket fuel.

And it just goes around and around. Because their buying prompts more buying of call options, and then the call option buying prompts more hedging buying and it’s just this upward spiral. And that dynamic has been at play in things like, you know, the short squeezes that sent the meme stocks – GameStop and AMC Theaters – just soaring out of sight in just a couple of days. You know, hundreds of percent in a couple of days. Well, this option activity is behind that, and it’s been behind the soaring performance of Tesla and the dominance of Tesla. So, here’s one quote from this article.

He says, “The Tesla options market more than 60 times as active as the entire FTSE” – that’s like the European 100 options market – “and almost 7 times greater than the Euro Stoxx 50 options.” Those are big European stock indexes. “Has helped push U.S. option trading volumes above actual stock trading volumes this year.” That’s unusual. Then he says, “In November, options trading was 50% higher” – this is – obviously, this article came out like very recently, like November 22nd. So, you know, it’s like... so what he’s saying is, so far in November options trading volume was 50% higher than stock trading in nominal terms.

And without Tesla and Amazon, it would’ve been 20% lower, according to Goldman Sachs. Did you get that? Total options trading was 50% higher. Without Tesla and Amazon, it would’ve been 20% lower. That’s how much options trading activity we’re talking about. And this one guy estimates historically combined trading activity in U.S. equity options has been between 10 and 20 times larger than activity in the biggest individual equity options market. And there’s – like, there’s a half dozen of these crazy statistics that he cites throughout this article. And it’s just – you have to wonder.

Like, all of this option volume – people are speculating on short-term call options. I’ve seen other data that says people overwhelmingly favor the shorter-term call options, which is more and more speculative and less and less about hedging, right? You’re not hedging an equity portfolio if you’re buying a one-week option, [laughs] right? You’re speculating. So, it’s just part of what is happening now. It’s part of the insane speculative frenzy that we are living through. This is what it feels like. I can’t call the top, I can’t call the bottom. Can’t tell you when to sell it all and run away and make $1 million shorting stocks. Nobody can tell you that.

But I can tell you what it feels like because I’m 60 years old and I’ve been through it multiple times. And it feels like this. It looks like this. I mean, Tesla’s got a $1.1 trillion market cap. It’s more than the next 12 mostly profitable car companies combined, and Tesla doesn’t really make a profit. You know? Their big profit was from selling these regulatory credits, and one of their big customers for buying them disappeared, so their profits have evaporated. You know? It’s not a great business. The car business itself is not great. So, you know, Tesla has just – in every big mania, there’s one stock that captures everyone’s attention. In the 1929 mania, it was Radio Corporation of America. That thing was like – it was something like a 100-bagger.

And then at the end, it finished up like, you know, not even double the price it started out with. So, it was a total round trip. You know? It went from like $1 to $300 or something like that and then back to like $1.50 or something. You know? It just [laughs] got completely obliterated. And same thing happened with Cisco, right? Cisco was like – Cisco Systems, the ticker symbol CSCO, that stock was sort of the No. 1 "no brainer" of the dot-com era. Like, No matter what else you’re into, you couldn’t go wrong with that. It was in 10 of the top 10 mutual funds. Barron's wrote this article. It said, “You can’t go wrong” – like very near the top. You know, “You can’t go wrong owning Cisco.” Right?

And it soared out of sight. I mean, I think it went public – well, split-adjusted if you go back... I’m just eyeballing a Bloomberg chart. March of 1990, it says it was eight cents a share. And at the top, I know that it was close to $80 a share. You know, it’s a 100-bagger, right? Or I’m sorry, a 1,000-bagger, right? So 100-bagger would’ve been $8 from eight cents. To 1,000-bagger, right? And then, it crashed like basically from $80 to $8. It was like minus-90%. So yeah [laughs]. I guess if you bought it at the IPO, you were still way the hell – you’re still a 100-bagger at the bottom, but let’s face it. Tops happen because everybody gets in at the top, right?

You know, nobody got in at the beginning and stayed there. Everybody got in at the top and a lot of people lost a lot of money. And it still – it still – is not back to its dot-com era high. The stock’s like $55, the high was $80. Still not back there yet, right? That’s what can happen. When you buy stocks near the top – and that has been John Hussman’s thing for the whole – for some years now. He says, “You know, the returns from this moment historically speaking, in terms of valuation, have been flat or negative.” And that’s where we are. There’s always one stock that really – it’s the quintessential bubble stock.

And I think Tesla is probably that stock for this era, right? It’s the Radio Corporation of America or the Cisco Systems. And your rational expectation if you’re paying these prices – $1,000 a share, a trillion-dollar market cap – is to lose a lot of money. Really quick. So that’s where we are. Tesla is in charge. Tesla’s practically – it’s in charge of the options market and it’s, you know, practically in charge of the stock market. It’s like everybody believes this is the absolute no-brainer bet. And when everybody believes that – even if it’s a great business like Cisco, a cash-gushing market dominator, which Tesla is not – it still could turn out really, really, really bad.

And I think it’s – if you buy Tesla at current prices, it’s highly likely to turn out really, really bad. That’s all I want to say about that. Let’s talk with Michael Covel and see what he thinks of what’s going on in the markets these days. Let’s do it right now [Music plays and stops]. Today, I want to bring up Matt McCall’s exclusive interview. He recently filmed this for everyday investors. And since I’m the host of Investor Hour radio, I want you to learn more about Matt and what this presentation is all about.

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All right. It’s time for our interview. Today’s guest is Michael Covel of trendfollowing.com. Covel is the author of five – count them, five – books, including the international bestseller Trend Following and his investigative narrative, Turtle Trader. Covel posts on Twitter, publishes his blog, and records a podcast weekly. His clients are in 70-plus countries and he splits his time across U.S.A. and Asia. Michael also admires The Fountainhead by Ayn Rand, collects dinosaur skulls, took a constitutional case before the Virginia Supreme Court, likes the Anthony Bourdain travel life, can still swing a bat with authority, and once ran for political office [laughs]. Renaissance man, Michael Covel, welcome back to the show.

Michael Covel:           Thanks, Dan. Appreciate it.

Dan Ferris:                 You’re a busy guy.

Michael Covel:           I am. And I’m telling you I’m just coming out of jet lag coming from Asia for the last 2.5 years to the States. So I’m getting my sea legs under me.

Dan Ferris:                 Yeah. I’ll tell you when you fly back and forth across the country, it’s one thing. But you come from Asia and you can have a real problem [laughs]. [Audio lost from 14:16 to 14:22] That’s right. Time, the great destroyer, the great healer. So, I’m going to jump in because we’ve had you on the show before, of course. So if anybody wants to hear, you know... we’ve talked about backstory and things and how you got started. But I want to jump into the deep end of the pool. Like, the reason – I felt like I had... I’m like, I have to have Covel on the program again, because he’s the trend-following guy, and it sure seems to me like a lot of people are following – they’re following – into huge speculative bets nowadays. They’re following each other into massive call option volumes. There’s a lot of – it looks to me like there’s a lot of following going on. But I thought, “I should ask the guy who really knows about this. How does the world look to you right now? Am I right?

Michael Covel:           Yeah. I think you got it on the mark. I mean, it’s not the kind of following in my Trend Following world. This is more like bubble mania, lemmings-off-the-cliff following. Now, of course, I’m not really a fundamental guy. But, you know, when I look at some of these value pros out there – the Jeremy Granthams, the John Hussmans, “OK. People have their beliefs about these guys.” But you know what? They’re pretty solid value guys. and when they start throwing these metrics up that we’re in the wild, wild West of speculative mania – I mean, they’ll say we’re past dot-com stage, which on a gut-level feel, I kind of feel like we are too. But from a trend-following perspective, I’m kind of like, “Hey. Look. As long as the bubble is rolling, whatever market you’re in you ride the trend.”

However, there’s the side of me that – even though I don’t use the information from a Hussman or a Grantham – there is a level of respect for their wisdom when they start to look at these metrics. And when they’re looking at value metrics and saying, “We’re off the charts. We’re past the ’29 crash, we’re past the dot-com crash and we’re off into looney land” – and then on my own personal level, when I talk to people that have got millions and millions of dollars, some of them in open profit, and they’re not worried at all... yeah. This has got an odd feeling to it, and I’m sure you feel the same way.

Dan Ferris:                 Oh [laughs]. Oh, Michael, if anyone listens to me for 10 minutes, knows that I am way in the Grantham-Hussman camp. I quote those two. I quote Hussman all the time, quote Grantham all the time. And certainly, like, we have a question that I’ll read in the mailbag later in the show today about the metrics that some of these folks look at. In particular, one of Hussman’s five earnings-related metrics is actually price to sales, not price to earnings.

And, you know, he knows the whole history of it and has correlated like negatively 90% with the S&P 500. So when it’s way high, the subsequent returns are way low. And people are asking, “Well, maybe these metrics don’t work anymore.” You know? And I think to some extent, to at least some extent, you have to believe that it’s different this time, right? And it never is. Like, the metrics might change but human nature never changes, right?

Michael Covel:           We’re animals. We are complete animals. And right now, speculative mania. I mean, everybody is getting rich. And when everybody’s getting rich, there’s often a moment where everybody stops getting rich. It’s really that simple, isn’t it?

Dan Ferris:                 I think so. I think so. What I keep telling listeners and readers is that I’m not going to call the top and look at a particular metric and say, “This is it. You know, it’s all downhill from here.” But what I can do, I think, is – since I’ve got some gray hair, I just turned 60 – I can tell you what it feels like because I’ve been at the top multiple times before. So this feels – and I think you’ll agree with me. This feels as toppy as it’s ever felt and certainly in our lifetimes, right?

Michael Covel:           It sort of feels insane.

Dan Ferris:                 Yeah.

Michael Covel:           I mean, really it feels like we’ve come unmoored. Really. It’s completely off the hook. And for me, spending a lot of time outside the States – of course and looking at the markets, all that kind of stuff. But when you come back there to America and you start to feel this energy and you go to something like Tysons Corner mall and everybody has this gate in their step where they feel like they are a billionaire... and for me personally, it reminds me of the dot-com era.

Dan Ferris:                 Yeah. You know, it’s funny, Michael. Do you remember – I don’t know if you remember this. There was a bumper sticker that got a little bit of airtime during the dot-com bust. And it said something like, “Please, God, just one more bubble.” It looks like they got their wish.

Michael Covel:           Well, you know, what’s really interesting for the audience to think about too is that when we had that dot-com bubble, “OK. Things crashed out, bottomed out in the fall of 2002.” Then everyone knows what happened after the fall of 2002. Because everyone watched the movie The Big Short, right? So, everyone knows what happened until 2008. But, like, it’s almost like we’ve kind of turned off everything and no one’s thought about what’s happened after the Big Short movie. You know? So, there’s like a 13-year window where it’s like, “Oh. We watched The Big Short. We know what happened. But what happened after the Big Short?” “Oh, don’t mind that. We’re all getting rich right now.”

Dan Ferris:                 Yeah. That’s right. It doesn’t matter because there’s another one right behind it, right? “Don’t worry about that last bubble that just blew up. There’s one right behind it.”

Michael Covel:           Yeah. And look. You made the point, though, too, it’s not about – for me, it’s not about – from a trend-following perspective, I’m not trying to time the top. But again, when some of these value pros – not my world. But some of these value pros start to lay out some of the quant metrics on the value side of things, it does perk up my ears a touch. You know, you’re kind of like, “OK." You know, even though I’ve got my stops, even though I’m following the trend, so to speak, when a group of people from an entirely different style of investing start to lay out those metrics and the when you start to see on the ground the behavior of people, and when you start to – when you start to see all of the people that really have no technique at all but an absolute ton of open profits, that’s when you start to have these memories of like, “Oh. You know, this reminds me of something.”

Dan Ferris:                 Yeah, it does. But I’m glad that we’re talking about this and that you mentioned the value metrics and things. Because let’s face it. the advantage of the approach that you have championed for many years is that you can forget about everything except for the price action. And whatever, you know – however you follow price action. And you can forget about everything except for that because it works. And yet, the trend-following guy is sitting here telling me that he can’t – what I hear, Michael, is that you can’t look away from those extremes. You can’t look away from those extremes of fundamentals that are worrying people like Hussman and Grantham.

Michael Covel:           Yeah. I mean, I don’t have it as part of my model. But you can’t help but not see that. You can’t help but see their expertise. And especially just on a basic human level when you’re looking at a 13-year run.. And we all know what happened after The Big Short. I mean, the Fed swooped in and did all kinds of, you know, gerrymandering, so to speak, and other regulatory agencies changed other rules and we’ve had a great run. Now the question is – and what I pose people – is, “Do you ever ponder the possibility of 50% of your net worth just disappearing and not coming back?”

Dan Ferris:                 Yeah. That’s a good question. You know, as we sit here talking around Thanksgiving it’s like the Thanksgiving turkey. Like, “Do you ever consider that scenario where you’re getting fatter and happier every day, you think you go the greatest life you could ever have and then, you know, you wake up and your head gets cut off?” People just don’t – they’re totally unprepared when a bubble turns and becomes a bust. Not trend followers, right? They’re always prepared because they use stops. So to some degree, I can understand the sort of, you know – the more laid-back feeling that you’ve described among some of these traders, right? They should feel that way, right?

Michael Covel:           Yeah. Well, I think if people don’t really have a strategy and they’re just in index funds or they’re playing in crypto and everything is going straight up, – and they have zero strategy, like no planned exit – I don’t really think anybody should ever be in the market unless they know when they’re going to get out before they get in. Like, you know, if you’re going to get in, have a reason to get out before you get in. It seems like a very common-sense way of thinking. But most people don’t approach it that way. They hear something from the news or the media, their neighbor, whatever – they jump in.

And then if they get profits, all of a sudden, they’re an expert. They think they’ve done something. and I’m not trying to be all that. I’m not trying to say I know all that. But if you don’t have an exit point, an uncle point, in an environment like this – again, back to my 50% question. “Are you OK losing 50% of your net worth?” And look. You know, if we have another one of these melt downs – and we’ve had them – the Nasdaq bottomed out at negative 77% in the fall of ’02. Now, can the vast majority of Americas – after a 13-year run bull – can they accept negative 77% as a possibility even? I don’t think so.

Dan Ferris:                 Well, certainly not the ones that are 21 years old, right? I mean, yeah.

Michael Covel:           Well, those poor kids, they’re going to be – I mean, everyone knows right now the Boomers got all the money. The young kids have basically nothing. I think that’s one of the reasons they’ve jumped into crypto. Crypto is exciting and new and some young people went ahead and have made some early money, and then their friends hear about it and everyone wants to jump in. and look. I’m not one of them. But I now plenty of people that have made millions upon millions off crypto. And I salute them for taking that gamble. But again. With any of these types of... I don’t want to call them investments. But any of these types of speculative trades, you got to have an uncle point. You got to say, “When I get in, what will cause me to get out?”

Dan Ferris:                 Right. And helpfully, your uncle point is not at the bottom where everybody’s uncle point tends to be, which is how bottoms are formed.

Michael Covel:           There you go. Right. I mean, that’s how it works. I mean, that is the behavioral finance 101, right? Very few people that don’t have the exit strategy – they’re not going to even when it starts to go down, because what’s the human nature? The human nature is, “Well, hold on. OK., it’s come down 10%. It’s come down 120%. It’s come down 30%. It’s come down 40%. But if I just hold on, it will come back all the way to where I was.

Dan Ferris:                 Yeah. You know, that’s one of the – when you hear somebody talking about getting even or getting whole again, “And then I’ll get out,” that’s cringe-worthy, isn’t it? It’s just, that’s how you know they’re about to lose it all. Or a big portion of it all.

Michael Covel:           How do you feel about this right now? I mean, this is – do you share the perspective that it’s kind of wild and wooly right now?

Dan Ferris:                 Absolutely. I’m super bearish. Yet, like you, I mean, I keep finding – as long as I find long ideas that are attractively priced, I can’t not, you know, write about them and recommend them to my readers and buy them for myself when I find them. So it’s just – I wind up being sort of – I’m long. You know? I don’t think you should ever say – as you’ve pointed out, you can’t call tops and bottoms. You know? They call themselves.

Michael Covel:           Impossible. Impossible.

Dan Ferris:                 Right. So, you have to keep with your strategy, and my strategy includes holding plenty of cash, holding some gold and silver, a little bitcoin if you go that way and then just if you keep finding an attractive stock, you buy an attractive stock. There’s no reason not to. Because you won’t be the one who calls the top. So I wind up just being cautious. And sort of like you, my strategy doesn’t change, right? But I’m looking out of the corner of my eye and I’m thinking, “This thing is going to fall apart at some part and you better be ready for it. And I’m constantly telling people, “Don’t predict. You can’t predict. Just prepare.” Right? You’re saying, “If you don’t have a strategy, you’re screwed."

Michael Covel:           Yeah. I mean, even if someone just takes a casual look. OK. Yes. You know, the Nasdaq, so to speak, is at its all-time highs. But if you look at some of these high-flying-type tech stocks in the last two years, I mean, a lot of these are down anywhere from 30 to 75%. So, I mean, there is a bear market underway, a huge one. I mean, you can argue some of these things have crashed. But the Nasdaq is at – the Nasdaq is at its all-time high still. So, that’s another little part of the side metric for me that kind of raises the red flag.

Dan Ferris:                 Right. So there are sort of sub bubbles popping, right? The ARK funds peaked in February. A bunch of stuff peaked in February. And the clean energy fund, SPACs peaked in March or February and a couple other things that I can’t call immediately to mind. But, Michael, what I keep thinking is, “Well, this represents in a way the topping process that took something like two years, if you look at all of the sectors of the S&P 500... they topped over a period of two years during the dot-com boom and bust. And now, maybe we’re getting the same thing. But on the other hand [laughs] –

Michael Covel:           Who knows? Who knows, right? The extremes of this could go up another 100 percent. Like 1999 Nasdaq. You know, 1999 Nasdaq was 100% that year. So, I’m not sitting here trying to tell anybody to go take an exit right now. I’m saying, “Look. You got to look at historical norms. You got to look at where we are and at least, you know, kind of hold your thumb up in the wind, so to speak, and kind of take a measure of where we are.” Now, that’s not telling anybody to go out and sell everything. I’m saying, you know, you need a strategy. You need that point of like, “What gets me into a market, what gets me out of a market, how much am I going to bet on a market? What markets am I trading?” These are just the basics. And just have a gut-level feel right now that a lot of people are not working with the basics.

Dan Ferris:                 That is – I think that’s just always true. Too many people are not – do not have a strategy. They’re brand-new, they came int eh last couple years, like since COVID started and they’re going to get wiped out. But we agree, though, it’s – we definitely agree, though, you don’t change your strategy and – you have one to begin with [laughs] and don’t change it based on bearishness or worries about a highly speculative market.

Michael Covel:           I think if anything today, you and I are both just trying to tell people like, “OK. If you’ve been out there on the loose, so to speak, and you’ve really not had a strategy, maybe – given to where we are on the all-time highs on equities – maybe it’s worth just having a pause moment over the holidays and doing some assessment. You know, picking up some reading material from some smart voices, doing something to where maybe you just want to not just keep trusting that equities to the moon is a guaranteed fait accompli. Because it’s not.

Dan Ferris:                 No, it certainly is not. I mean, over the very long-term – 20 years, 30 years – we’ve certainly had sideways periods. But you have to buy at the peak to really get hurt by the sideways periods. And most people just kind of keep contributing and keep buying over a period of years. So you can actually buy, you know – if you’re allocating carefully and slowly, you can just sort of average across a really miserable period and wind up doing really well at the end of it, right?

Michael Covel:           You know, I find the one metric from Hussman really interesting. Where he lays out from his perspective – again. I’m not a value guy. I’m a trend-following guy. So, if we’re at all-time highs and we’re going higher I’m following along. Now, Hussman has perspective where he says, from his perspective, that the valuation metrics have U.S. equities so overextended that if we were to stay at this level, you should expect – if you are a buy-and-hold investor, you should expect basically 0% return for the next 12 years. I think I’m phrasing that correctly how he says that, which I’ve always found a very interesting way of thinking about it. Now, that doesn’t mean it’s going to happen exactly like that because the markets can go up or they can go down. But he’s pointing out that’s a way to think about, from his perspective, how overvalued we are.

Dan Ferris:                 Right. So I’ve been telling people, “You can do one of two things. If your dollar cost averaging into a 401k over time, you’re going to contribute – you’re going to buy the least number of shares at the top and you’re going to buy the most if this thing turns into a bust in two years like the dot-com boom and bust. Then you’re going to buy the most at the bottom and across that whole, you know, bottoming process. So you can continue to do that. But if you’re an active investor and you’re buying and selling and trading like all of your clients or traders, then, man, if you don’t have stops in place are you royally screwed. You absolutely must do it, right?

And position sizing and stops. But what I want to know, Michael, is – we agree on that. We know that. What I want to know is if any of your clients or you change anything if you get the conviction that, say, one of the big indexes – you cited the Nasdaq... if you’re convinced the Nasdaq is in a huge downtrend, bear markets are brutal. It’s really hard to make money short or long anywhere throughout a bear market. And I wonder if the trend followers change anything if they conclude that the big indexes are in bear markets.

Michael Covel:           So, this would be confusing for some people listening, because they might be saying, “Well, this guy Mike is talking about Grantham and Hussman. Sounds like a value guy.” But listen. From a trend-following perspective, I’m simply looking at the price. And that means everything that we’re talking about doesn’t factor into the soup, so to speak. So it’s really about, from a trend-following perspective, you’re never going to get the top – if we were just to talk about something like the Nasdaq index. You’re never going to get out at the top. You’re going to get out after some period down from the top.

So, if you can imagine just a market going up and a market coming down, trend-followers always get out after the top. They don’t ever time the top. So, you now, I think a lot of the things that we’re talking about are really interesting just from kind of almost a personal gut-level sentiment indicator. I mean, look. I remember back to the late- ‘90s. You know, basically ’97, ’98, ’99 living in the Northern Virginia area and watching all of these people that seemed almost like cartoon characters working in America Online.

And I thought to myself, “These people are not very bright. Their jobs are kind of silly. The whole thing is kind of silly.” And then at some point in time, we had ultimately one of the biggest meltdowns in the history of America. But I didn’t trade off the fact that I was making these observations, but at least – you can’t help but notice them if you’re human. When some of the people you least expect to be involved in money are talking about money, then, “Eh, sometimes time to pay attention.”

I’ll give you an example. And this is not meant to sound bad or anything. But the numbers of ladies that have come to me asking if now is the time to buy bitcoin when it’s past $50,000 a bitcoin... let me tell you. There’s a lot of people out there that are throwing money at crypto with no earthly idea what it is and no earthly idea what their plan is. And so, those kinds of things – when I see that, that takes me back to the dot-com era. Now, it doesn’t mean I’m trading off that. I’m not making decisions off that. But from a sentiment perspective, it’s telling me something.

Dan Ferris:                 Michael, do you clients mostly trade futures or stocks or options? Is there one overwhelming type of, you know, vehicle that your clients favor?

Michael Covel:           No. There really isn’t. I think traditionally trend followers started with futures. Leveraged ETF’s have worked well, and leaps options have worked well, the long-term options that really don’t leave you dealing with all of the Greeks. You know, no time decay and all that kind of stuff. Because from a trend-following perspective, you want to have a farther-out view, so you really don’t want to be caught up with – if you’re going to trade options, you don’t want to be caught up with all the Greeks and whatnot. I mean, that might be fine if that’s someone’s style. But from a trend-following perspective, that’s not what you’re really after.

Dan Ferris:                 Right. So Greeks are always a factor, but I guess you’re saying if you go farther out, you sort of – and get the trend right...

Michael Covel:           Yeah. It’s more directional. Yeah. So that’s the goal there. But, I mean, I generally will get people to look at either futures or leveraged ETFs. Because leveraged ETFs can still give you – there’s quite a few ETFs out there that are actually comprised of futures contracts. So, one thing we’ve not talked about in this conversation – we’ve talked about equities. But sometimes – and a lot of investors don’t think about this – there are many markets out there that really are not correlated well with equites.

And that’s another reason that trend followers do really well. We haven’t talked about that yet. Another reason that trend-followers do really well during bubble times is because they are diversified across markets beyond equities. And I got to say, too, we have a – again, like I just said, we haven’t mentioned this. But when these bubble things happen, when these bottoms happen – I got to tell you. I’ve done the research. People can see it in my books.

You know, whether you’re talking about ’73, ’74, you’re talking about the ’87 stock crash, you’re talking about the dot-com crash, you’re talking about 1998 with long-term capital management or you’re talking about The Big Short period – all of those time periods, trend following is the absolute No. 1 best-performing strategy. It’s not even a debate. So, if people are concerned about some of the things that we’re talking about right now, trend-following is definitely an option to keep in your holster. Because you will avoid – if some of these terrible things that we’re talking about do happen to happen – and, again, I’m not predicting them, I’m just laying out sentiment – trend following is a great option.

Dan Ferris:                 Yeah. So we’ve interviewed Jack Schwager, the Market Wizards guy. And of course, he’s interviewed lots of trend-following traders and various kinds of traders over the years, including some of the original Turtles and stuff. And he was telling us – actually, he didn’t say it. Some of the folks that he interviewed in one of his recent books were saying, “You know the old sort of chart patterns really aren’t working so great anymore.

Michael Covel:           Well, trend following is not really about chart patterns. Yeah, I know Jack. Jack’s a really – he’s a very accomplished author and he’s interviewed a lot of great people and I’ve interviewed a lot of the same people. From a trend-following perspective, though, anyone that wants to make the case that trend following is dead or the classical trend-following methods have not worked... my gosh. Just look at the last two years. The amount of money made in trend following since COVID really started rearing its head in March of 2020 until now... I mean, it’s been an absolute gangbuster of trend-following performance in 2020 and 2021. I mean, off-the-charts performance, amazing performance.

Dan Ferris:                 Right. So, when you talk about trend following, you’re talking about like quantitative so-called quantitative hedge funds and things?

Michael Covel:           Well, I mean, just price action. Price action, trend-following. The good old, you know – something very simple, “Hey. Here’s a momentum indicator, a breakout, moving average.” You’re taking a position. When you take that position, you have a stop. You know what your position sizing is and you’re not going to bet the farm on each trade and you’re going to have a diversified portfolio of markets that you’re looking at so it’s not just, for example, tech stocks. So that’s really the perspective. But yeah. You know, I’ve seen it over the years. People love to talk about trend-following dying. But we’re definitely not there, that’s for sure..

Dan Ferris:                 Trend following sounds like a really general term. Is it just one thing? I mean, I can’t believe that all those clients in 70 countries are all doing the same thing.

Michael Covel:           Well, I would call it a general term. I mean the way that I write about it, it’s a very specific style of strategy that has been employed by numerous funds for decades. I mean, we’re going on back to Richard Donchian in the 1950s. So it’s been around for quite a while. Now, people might choose to have a slightly different entry indicator. They might decide to bet a little bit more or bet a little less, and that will affect their performance. But the bottom line is, people are – most people are not interested in trend following because they are those people that are out there right now long only with no exit, just trusting the system. So, most people don’t really want to go down the path of where I exist and probably where you exist.

Dan Ferris:                 That’s right. That’s right. And most people are bored by this, aren’t they? They’re just like, “Wow. Really? You just want me to use the same position size on everything and only trade, you know” – whatever it is, a 21-day breakout back in the day. “And that’s it? That’s all I get to do?” It’s not very sexy, is it?”

Michael Covel:           Yeah. I think people do want excitement. They want to pick the stock and they want to believe in it. And they want to have the story. Whereas, I don’t care about the story. I just want to make money.

Dan Ferris:                 Right. And it’s almost like trend following is taking all the fun out of it, though [laughs].

Michael Covel:           I mean, I’m sure some people could look at it like that. You know? I mean, if you want fun, go to Vegas. You know? Don’t use the market –

Dan Ferris:                 Yeah. It’s like, “Covel’s taking all the emotion out of it, but I was having fun.”

Michael Covel:           Yeah. I mean, look. I mean, seriously, I think Vegas is more fun than just gambling in stocks.

Dan Ferris:                 You know, that Vegas line, you hear that a lot from folks – well, you know, on your side and my side. They all focus on taking the emotion out of things and it’s kind of like, “Oh, really? So this is like work? You know, people don’t want to do work. They want to have fun and make a ton of money really fast.”

Michael Covel:           It is going to be interesting to sit back and watch what happens here. Maybe we’ll get some excitement – some real excitement over the holidays, right, before I head back to Asia in January. I’d love to see some real – I mean, because let’s face it. When things really go haywire in the equities markets, it is exciting. Now, people don’t like it. A lot of people don’t like it. Now, some people – I guess some people make a lot of money when that happens. So, the grass is always greener depending on what your strategy is.

Dan Ferris:                 Sure. But let’s face it. The excitement we’re talking about would be like a big move downward and equities finally to blow off some of the steam. And that kind of excitement is, you know – it reminds me of... I was watching one of the old Indiana Jones movies. I think it was the first one. When I first saw Raiders of the Lost Ark, it hit me as a younger man – I looked at the screen and I was like, “Oh. Excitement is a lot of really unpleasantness suddenly in your life. I don’t want excitement.” You know? So yeah. I agree.. All right, Michael. We’ve actually been talking for a while. This has gone by like five minutes.

Michael Covel:           We do well. We’ll have to get another one of these on – I’ll have to get you on my show here soon, too. I know we were talking about doing both, but yeah. I’ll definitely have you on too. And I think this happened last time. We kind of just get on and, next thing you know, the time rolls.

Dan Ferris:                 So, I just want to ask you two more questions. I’ll ask you my final question at the end as I always do. But before that, I just want to know. What have you been up to? What are you doing with yourself these days? I mean, is it sort of business as usual at trendfollowing.com or are you up to anything different or new and exciting?

Michael Covel:           Listen. The best way to say this is, I’m a guy that lives in Asia. So, I’ve always got my hands in something. The big something I’ve got my hands in I’m not ready to announce yet. But beyond that, though – beyond that, if anybody would like to have the trend-following expertise and reach out to me, I’m always – I mean, that’s been my life for 20-plus years. So I’m always there. But when you’re living outside of the U.S.A. bubble, there’s always motivations and influences that inspire. And I’m in the middle of those.

Dan Ferris:                 Yeah. Asia is just the most hustling, bustling place I’ve ever been in the world. There’s nothing like – I mean, and it’s a big continent. And to say that about an entire continent is something [laughs]. But I guess mostly, like, Southeast Asia, eastern – southeastern China, even. Most hustling, bustling places I’ve ever been.

Michael Covel:           You say the operative word. The operative word is hustle. And it’s infectious. It is so infectious. Can’t let go of it.

Dan Ferris:                 What would you tell somebody who, like, said, “Eh, I’ve been thinking about moving somewhere else in the world outside the United States.” Would you still be an advocate of heading, you know, Far East, young man?

Michael Covel:           Well, I’ve been living in Saigon for the last eight years. So is that a good answer?

Dan Ferris:                 That speaks for itself, doesn’t it? That is a pretty good answer. All right.

Michael Covel:           I mean, you know, I don’t know what else to say. I mean, what else can I say? The proof’s in the pudding.

Dan Ferris:                 All right. So, I do want to ask you our final question. Which is the same for every guest and every interview no matter what the topic. And that final question is,, if you could leave our listeners with a single thought today, what would it be?

Michael Covel:           To escape.

Dan Ferris:                 Say that again? You were a little Skype-y on that.

Michael Covel:           The final thought that I would leave people with is the idea of escape. I don’t think the great debates that exist in America can be solved. And I think living outside of America I’m more accurately able to see that this is a never-ending – almost like a game that the higher-ups have put everybody into to have this kind of constant debate that we’re going to get to some improvement and all that kind of stuff. I just say escape: escape mentally, escape physically, but don’t allow the system, so to speak, to wear you down. It’s not worth it. The world is a big place and there’s absolutely no reason to stay preoccupied – for example – with U.S. cable news and U.S.A. politics. There’s never going to be a victor.

And if anything, the trend line for where America is politically is not a positive trend line. So, you know, I think someone might say, “Well, that doesn’t sound optimistic, Mike.” Do I sound not optimistic? I’m not a pessimistic guy. But, you know, they don’t have life extension yet, right? So there’s only a limited amount of time we have, so what are we going to do positive with our life? And I say escape, mentally and physically. But leave it behind, find something you love to do, stop messing around, stop trusting the system, stop trusting the voices on TV, do your own thing. That’d be my single biggest piece of wisdom.

Dan Ferris:                 Excellent. Thank you for that. Well, Michael, it’s always a pleasure to speak with you and get your ideas and find out where your head’s at, at any given moment. And I promise you we’ll be doing it again at some point.

Michael Covel:           Great stuff, Dan. Appreciate it. If anyone wants to find me, I’m easy to find at trendfollowing.com.

Dan Ferris:                 All right. Thanks again, man.

Michael Covel:           Hey. Take care, Dan. Appreciate it.

Michael Covel:           See you soon [music plays and stops]

Dan Ferris:                 Michael is one of those people that it’s always good to talk to him because I just really need to check in with him and see where his head is. Because as you heard, he is devoted to a kind of very specific type of speculative trading where you watch your position sizes like a hawk and you trade a million markets and you use your stops and that’s it. You know? And the strategy doesn’t change. But he’s a human being and he’s paying attention to more than just what he’s doing. And I suspected that – I sort of knew what he might say, but I had to hear it straight from the horse’s mouth and indeed, he’s feeling very cautious. He’s feeling very sort of 1999, 2000 about what’s happening today.

And that doesn’t surprise me, but I hope you enjoyed hearing from him as much as I did. All right. Let’s take a look at the mailbag. There’s lots of stuff in it. Let’s do it right now. [Music plays and stops] Back in October, Marc Chaikin and I talked extensively here on the show about a special event he was hosting focusing on his Power Gauge system that we discussed. Well, he really wants you to have an opportunity to check out the system and he’s even giving away a free recommendation with it. According to Marc’s Power Gauge software, the stock Mimecast – MIME is the ticker symbol – could make you a lot of money. It’s a little-known company. If you act today, Marc says it could make you a lot of money.

Now, if you’ve never heard of his Power Gauge system, it gives you the chance to double your money by predicting tomorrow’s Wall Street stock ratings today; in any kind of market. Last year alone, it pointed to Riot Blockchain before it shot up 10,090% in 11 months, Digital Turbine before it shot up 789% in eight months, and Overstock.com before it shot up 1,050% in four months. And many more. It’s been so successful, Marc once charged his former clients $5,000 a month just to see the output from the system.

But today, he’s turning his back on all of that. He’s turning his back on Wall Street for the first time ever and sharing a way to claim free access to the system. Just go online to 2021tradingsystem.com. That website, again, is 2021tradingsystem.com. 2021tradingsystem.com. Check it out. [Music plays and stops] 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 respond to as many as possible. Or call our listener feedback line, 800-381-2357. Tell us what’s on your mind and hear your voice on the show.

First of all, I must apologize [laughs] because last week I read this e-mail from somebody I thought was a listener named – his name was L.L., let's just say. I don’t want to give him too much credit. I think this is a bot. I think I’ve been had. It’s not a Russian bot, it’s not a Russian spam, but I think they got me. Because I noticed that this L.L. just writes these spammy, nasty e-mails every time and it doesn’t sound like a real person. So they got me. Sorry. I’ll never do it again. First up for real e-mails, from real listeners this week, is Andrew W. And Andrew W. says, “Great podcast. Listening to Rick Rule never gets old. What a legend.”

And he has some questions here. You have a lot of questions, Andrew, so I’m going to answer them in order as you asked them rather than read your whole e-mail and then answer. So your first question is, ‘How much of the lower gold price is offset by crypto demand?” I don’t know. It makes sense that some marginal amount of demand goes from gold to crypto, but I think conflating those two assets is foolish. I don’t think that, you know – crypto doesn’t kill gold or replace gold in any meaningful way. Andrew’s next question. He says, “Every smart person I read seems to be moving some of their assets into bitcoin. How much of gold’s price not moving is due to smaller consumer demand” – oh – “from jewelry from India and China due to less in-person gatherings and prices will resume when the economy reopens?” OK. So that has nothing to do with bitcoin. That’s just this idea that, you know, COVID lockdowns are preventing people from getting out and buying gold. Don’t know, don’t care. I don’t worry about it at all.

The idea that something is going to make people in India and China buy less gold in their lifetime I think is wrong [laughs]. I don’t think – I think those people love gold, and I think – whether they get to buy it this week or this month or next month or the next six months doesn’t matter. They’ll buy plenty of it. Another question Andrew has. He says, “I have several of Stansberry’s property and casualty insurance recommendations. How much of these companies’ success was due to riding a 30-plus-year bond bull market? Reinvesting the float will not get the same returns going forward. Do you expect we can see high-single-digit compounding from this industry? Thanks and keep up the great work.” Andrew W.

So yeah. Andrew, I think you can expect to see excellent compounding from this industry from the better stocks that we’re talking about, for two reasons. The first reason is that the hallmark of these folks is that they’re brilliant underwriters and they make money underwriting, right? Lousy insurance companies either lose money underwriting or they break even or something and then they try to make it up in the bond market or the stock market. So I don’t like that. I like people who make money underwriting.

And so does Stansberry in general. As far as how much of their company’s success is due to riding a 30-year bond bull, I don’t care because they generally hold these things to maturity and they’re pretty good at picking them. So, you know, you could say inflation might hurt the returns a little because inflation will always hurt bond returns. So maybe they’ll earn, you know, slightly lower returns on equity and returns on their investment portfolios in real terms. But I think overall they’re going to perform pretty well. And they can be expected to do so. Hope that provides a good answer. Thank you, Andrew. It’s a good question.

All right. Next comes J.H. And J.H. says, “I hate to say this time is different, but do you really think you could compare the sales ratio of companies in the ‘60s using physical factories to manufacture actual goods with companies like Google and Facebook? I’m like you. I will never call them Alphabet and Meta who have databases and charge fees from other posters or advertisers. In the 2018 Berkshire shareholder letter, King Buffett explained why he is dropping the price-to-book ratio. I won’t say that the P/S ratio should hit the graveyard like the P/B ratio, but don’t you think it’s a bit dated for you to remain so bearish? Thanks again for a great podcast and stay healthy. J.H.”

You know, J.H., certainly price-to-sales ratio has correlated negatively with the S&P 500, 90% of the time. But I feel like you could’ve said this any time in the past century. You know? You could’ve said it in the ’60s. There were a lot of technology businesses there that were different than, you know, the railroads and manufacturers that came before them. And they were themselves manufacturing, but they were better businesses. So I don’t know if this is true. It’s true to some extent, though, isn’t it?

Because a lot of the technology companies that are making up the big indexes that I’m talking about – the S&P 500, most notably – and saying that the price-to-sales metric works and it’s way overextended... a lot of them do earn much higher returns on capital, they have much thicker margins, they gush free cash flow, they require hardly any capital investment at all, if any. They fund their business totally out of their own excess cash flow and have plenty left over [laughs] after that. So it’s a good question, but I do think it’s still valid. Remember, price to sales peaked at like 2.3, I think it was, in March of 2000, and crashed along with everything else.

And it crashed again to below one during the, you know, housing bust. And that was the peak. At the peak of the dot-com boom. And we had a lot of new technology businesses then. And now, it’s 35% above that peak. So, sure, you can tell me the overall level will remain lower – and I tried to get some data on this, just grab it from Bloomberg really quick, but they only go back to like 1990 so it’s not really enough. But, you know, each decade it’s higher during that period. So what you’re saying is true, but that’s a function of a bull market too, so it’s impossible to really – there’s just not enough data there, right? So, while you ask an excellent question, yeah, I do still think it’s better. I think it’s a lot better than price to book.

And I think it does show that we are in a massive equity bubble. Will it bottom out below 1 next time? Well, maybe not. But it can go to 1.5 and get cut in half. And what’ll happen to the sales of all those companies too? I mean, will they stay – maybe some of the damage will be mitigated by their sales not falling as much. We’ll see. We’ll see. But forget all of that. I do think it can get cut in half and I do think that would be a rational expectation in a bear market. I think it works. And you also said, “P.S. I think it’s time for John Hussman to come on the podcast. You quote him so much. Would love to hear him defend his positions.”

Well, he’s defended his positions quite well in his own – on his own website and on his own Twitter feed. I’ve asked him several times. I probably won’t be asking him again because I feel like it’s rude. He’s made it clear he doesn’t want to come on the show. You know, it’s all good. Next comes David S. and David S. just wants to say, “I think the person Louis Rukeyser threw of his show for being bearish was Gail Dudack. I couldn’t remember her name. Thank you, David. I actually looked it up in Maggie Mahar’s book, Bull, and I read that whole chapter again. It’s a great story, and I used it in the November 19 Stansberry Digest. But thank you.

Coach Z. has written in. He writes in now and then. Good to hear from you again, Coach. And he says, “Never miss a podcast. You have a believer here in your value thesis. I always question when to sell. Value is a relative condition. If a value stock becomes expensive or extended, do you normally trim, sell out of the position or just let it ride? I find the sell side of the equation sometimes tricky. All the best. Would love to buy you a beer if I was ever up your way. Coach Z.” Yeah. Me too, Coach. I love beer [laughs]. You seem like a good guy. This is a good question. I can’t give you an off-the-shelf, one-size-fits-all answer.

All I can tell you is this. When you buy something that you think is dramatically undervalued, you have to decide whether it is a long-term 20-year buy-and-hold great business that you expect to grow for decades to come or is it a highly cyclical stock, which many value plays are, that will have to be sold as the cycle turns and the business begins to flourish again and the stock price recovers? You do have to do that. I have made the mistake of overstaying my welcome in cyclical value plays in the past. So that’s all I can tell you. And whether you trim or sell out all at once, that’s up to you. But you do have to figure out whether you’re buying a cyclical or you just got lucky and you’re buying a really great, long-term play that got temporarily cheap.

Allen W. is next. He says, “Nice session with Eric Wade." Thanks for that. "A question for you, Eric. Several months ago, I was prepared to purchase Ethereum through Coinbase and quickly discovered that as a resident of Hawaii I was not allowed to make the purchase online. Are you aware of this or know the reason for the state of Hawaii to not allow crypto purchases? While I realized that I could purchase through an account on the mainland, I’m curious whether you have heard of this or if other states have taken a similar stance. Keep up the great Investor Hour sessions. I rarely miss your program and appreciate your frank and honest responses. Regards, Allen W.”

Allen, I sent your question to Eric and he says – he wrote back and says, “That’s a pretty common question because, yes, each state has its own rules for the exchanging of money for digital or virtual currencies. Among the most difficult are Hawaii, New York, and Washington. The alternative is over the counter, that is peer-to-peer, or even mining coins” – turning time and electricity into coins – “or seeking out providers who have taken the time to file the paperwork necessary to deal with Hawaiians, such as Abra, Gemini, Kraken, or Swan.”

Again, Allen, that’s Abra, Gemini, Kraken, or Swan. That’s what Eric says. Good luck to you, sir [laughs]. And thanks, Eric, for chiming in. On the next question, I got our former guest – the geopolitical investing guru Marko Papic, to comment. And the question is from Lodewijk H. And Lodewijk says, “A geopolitical question. Yes, I’m from Europe, unfortunately.” And he says, “Lukashenko threatens to cut the gas supply to Europe. While the pipelines are managed by gas pumps. So, if it happens, it would be in line with what Moscow wishes. Would this not be the move for Russia to get Nord Stream 2 operational? Russia is almost finished. Russia can simply say that they are redirecting, ruining the situation in Ukraine and Poland. Lodewijk H.”

I sent it to Marko and he says, “I went long ruble-USD at the time. Given how much the USD is appreciated, the 3% return on that trade is kind of impressive. In my view, Russia is testing the new incoming leadership in Germany,” Marko says. He continues. “That is really the overarching issue here. The new SPD, Green, FDP government is being put under pressure. Moscow wants a recalibration of a relationship and is simply illustrating to Europe/Berlin all the different ways in which it can create headaches: One, transportation of natural gas... two, migrant transportation... three, geopolitical tensions in the Donbass region of Ukraine.

Moscow wants the new German government to resolve all these issues by, yes, as the client asks, approve the Nord Stream 2 pipeline. Although, note the German approval still has to go through the EU Commission as well. In addition, Moscow is probably angling for more than that. Russia has wanted a complete rest of relations with Europe – a sit-down tête-à-tête with the Europeans that excludes Americans so they can get a more favorable deal from Europe. Cheers, Marko.” Thank you, Marko. Thank you, Lodewijk, for the question. 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 investorhour.com, Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy.

If you liked this episode and know anybody who might enjoy listening to the show, tell them to check it out on their podcast app or at investorhour.com. Do me a favor. Subscribe to the show in 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. Have a guest you want me to interview? Drop me a note, [email protected], or call the listener feedback line at 800-381-2357. Tell us what’s on your mind and hear your voice on the show. Till next week, I’m Dan Ferris. Thanks for listening.

Announcer:                 Thank you for listening to this episode of the Stansberry Investor Hour. To access today’s notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail: [email protected]. This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network. [Music stops]