Episodes

Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan talks with David Cervantes, founder of Pine Brook Capital Management.

Dan Ferris: And Corey and I have to talk about all kinds of stuff, Sam Bankman-Fried, WeWork, bond yields, and some depressing stuff about the economy.

Corey McLaughlin: That's true, but we're OK. And remember, you want to ask us a question, or tell us what's on your mind, e-mail us at [email protected].

Dan Ferris: That and more right now on the Stansberry Investor Hour. It turns out you're not allowed to commit fraud. You're not allowed to take people's money and do all kinds of other stuff that you didn't tell them you were going to do with it. Sam Bankman-Fried has been convicted of fraud in the New York court system. It's official.

Corey McLaughlin: It is official. And you know what's interesting about it? Bitcoin hasn't been better in the last year, the price, but I've been thinking of these headlines in my mind, comical ones. "Bitcoin at 18-month highs on Sam Bankman-Fried going to jail." No. That's not it. Yes. He was convicted and finally this part of the story is over. Yeah. Just shows you he was who we thought he was. When all this stuff started happening, we were wondering what was going on and it kept getting worse and worse and worse and so it was.

Dan Ferris: Yep. I remember I was saying that I didn't necessarily think he was fraudulent, but I just thought he was so dizzy and incompetent and spaced out and just so egregiously incompetent. He never should have been running a company. That was certainly – that was his persona. He was definitely putting that out. He said, "Oh, I screwed up and I'm so sorry. It's terrible. I feel terrible. I'm trying to make it up to people," blah, blah, blah. The courts, the jury, whoever did not buy it. Nobody bought it. They said, "Nope, nope, nope. You weren't just incompetent. You were fraudulent."

Corey McLaughlin: Right. Yeah. It's funny you bring that up because I haven't been paying super close attention to this trial just because I figured he'd be found guilty no matter what. But from what I had heard, the prosecution got to that very point was they laid out six very specific instances where he was caught lying and then deliberately doubled down on that specific part of the lie and that part of the fraud. So they showed it like it was all done deliberately and he wasn't just a dumb crypto bro. He knew what he was doing. No offense to any dumb crypto bros out there or anything like that.

Dan Ferris: Yeah. No offense to dumb crypto bros everywhere. Well, the crypto market seems to love it. Thank God Sam is gone. We can trade again. We can run bitcoin up again. I just think –

Corey McLaughlin: Yeah. I do think there is something to be said for that. This is taken care of, this fraud story. All right. We have our big crypto fraud that went public in mainstream. Maybe we can get past this.

Dan Ferris: You're right. There is a serious point. This doesn't taint all of crypto. It certainly doesn't taint bitcoin or Ethereum or whatever you like. It's just this one person's activity and it doesn't screw up the whole market. Most frauds don't even if they seem to at first. I just think that this is just another typical sign of what you get after decades of declining interest rates and then more than a decade of 5,000-year-low interest rates. You get all kinds of crazy stuff that has to work its way out.

Another thing that appears to be working itself out is WeWork. WeWork, the coworking company, the company that leased buildings for 10 and 20 years and then turned around and tried to find clients who would occupy space in them for as little as one month, the coworking business model, which there are companies that do it. There's a company named Regus or Regus – R-E-G-U-S – that does it. So it's not necessarily a terrible model, but this company never had anything but operating losses.

They took in tens of billions of investor capital and lit it all on fire. Now, the Wall Street Journal is reporting that its sources are saying that they're preparing a bankruptcy filing as early as next week. So they missed a bond payment. That kicked in a 30-day grace period. They negotiated an extra seven days, and I'm pretty sure the seven days are up next week. Depending on how much more the bondholders want to put up with this basically, they will be filing probably pretty soon. Not a big surprise.

Corey McLaughlin: So the free beer and the nice furniture didn't do it? I guess that wasn't enough for WeWork.

Dan Ferris: That's right. The glass and brick and free beer in the buildings and stuff. If you go and you look through the timeline, I was looking back through some of this. There was a point where the headlines all said, "No more free beer at WeWork," because they were losing money and losing and losing and losing. They had to cut somewhere. So they cut the free beer and wine from the break room.

Corey McLaughlin: I imagine that maybe – I don't know if you saw anything on this. This just came to mind the timing of this. I wonder if the push to going back to the office has anything to do with this from different companies and whatnot because they're an office-sharing space, especially, or were.

Dan Ferris: Sure. So the classic – I agree that this – I think that's – actually, I hadn't thought of it and I think it's kind of a brilliant observation that this could be the moment of capitulation in the office space. The crappiest coworking company, the crappiest deal in the whole space is finally going bankrupt. That will – that's the final washout in the office space. I know that certainly our parent company has said, "Hey, we'd like to see you guys back in the office." They're not going to see me because I live 3,000 miles away, but I will be there visiting more often, much more often than I have been. So you will see me there. Just won't be commuting every day.

Corey McLaughlin: Well, that's good. There's something to be said for people actually seeing each other and getting things done that way as opposed to this virtual world where you're pretending things don't exist necessarily. You're pretending more things don't exist in real life than they do at least from my view. Anyway, if that's something that is significant in this WeWork story, then it is. Maybe it's also a sign of – if that is true – of trouble in the office space in general moving ahead if – I don't know – 50% of companies or whatever don't say, "Hey, we're going remote for the next five years or whatever. We'll try it." I don't know. Could be. Just something to think about. I know it's all been out there, the commercial real estate market, that discussion for a while.

Dan Ferris: Yeah. It has. It's been ongoing and of course COVID just obliterated an already developing trend and just cranked it up to 11. Now we will see. Now we will see if the washout has been sufficient and if this really is a sign that the distress types like we have a stock in Extreme Value that is just loaded up with cash. I think they still might own one or two office buildings, having sold almost all of them. So it's paid out some of its cash, but it's got lots of capital. It's ready. These are some of the greatest real estate investors of the past decade... century, even. So if there's a truly attractive opportunity and the risk reward is right, I bet those guys will find it before anybody. Now I'll be looking for it.

I haven't even thought about that stock. We just sort of update the price and dividends or whatever and we don't think about it. Now we'll be thinking about it. Now that WeWork appears to be going bankrupt, when they actually file I'll think to myself, "OK. Are there any leases to take over or buildings to buy?" because I think they do own – they might still own some, but they mostly lease overwhelmingly. We'll see. It's an interesting thought.

I hadn't really entertained that. I was just entertained by WeWork period because they released – when they released their initial filing document in 2019 in their failed IPO attempt, it started out by saying something about this is dedicated to the energy of "we." The energy of we and their mission statement was to elevate the world's consciousness. The whole thing has generated lots of fodder for the Stansberry Digest, as you know. So I've been entertained by it, but I have not really thought about office space seriously until you just mentioned that. So thank you.

Corey McLaughlin: Well, you're welcome. Thank you for the entertaining commentary on WeWork, we. It sounds like a religion. I didn't know about that, the culture of we. I wonder if –

Dan Ferris: The energy of we.

Corey McLaughlin: Oh, the energy of we. Well, that's surprising to me that I would have thought that they would have filed for bankruptcy already. I guess the fact that they haven't also tells you something about this environment in general that there's probably a lot more bankruptcies to come from actual – if the environment stays tough from actual decent companies.

Dan Ferris: Well, yeah. Bankruptcies are up this year. They're almost – in the first three quarters of this year, we're two or three bankruptcies shy of the total for 2020 in the first nine months of 2020. Then it's going back to 2010 or 11 or something. It hasn't been that high. So, bankruptcies are definitely ticking up and the companies like Yellow, the trucking company, and Bed Bath & Beyond. There's lot – there's 15 or maybe 17 of them with more than a billion in liabilities so far this year. Seventeen bankruptcies with more than a billion. So, wow. They're fair-sized bankruptcies and I think you're right. We're probably going to see more of them.

It's totally – when you go from abnormally low rates, which WeWork was totally a product of abnormally low rates. It was founded in 2010, two years after they pushed the fed funds down to zero and the market was recovering and everybody was feeling a little better. Then these guys came into –

Corey McLaughlin: Yeah. So they had the full QE runway. They had the full thing. There's probably no perfect story.

Dan Ferris: Perfect. Two years of tailwind and then the full QE runway ahead of them and they did it. Their founder was just like – I don't even know – eccentric doesn't even cover it. The guy is smoking weed, drinking tequila. Said he was going to be the world's first trillionaire. He said he wanted to be the president of the world, I think, with a straight face.

Corey McLaughlin: Interesting. I guess you'd have to be elected president of the world or you just decide you're the president of the world.

Dan Ferris: I think so.

Corey McLaughlin: Well, this also reminds me of we were talking about the economy in general. You've written a lot of – recently a lot of notable investors, big names that you would recognize like Stanley Druckenmiller, Bill Gross have been sounding the alarm on the economy as well. You wrote about this detail last week or two weeks ago.

Dan Ferris: Yeah. Boy, I tell you what. They did it just in time for bonds to start ripping. I got – I actually got long a little bit in options on bonds and they're out performing. I did some call options on bonds and a little bit on equities. The bonds are out ripping the equities. They're just really have done extraordinarily well. Of course the 10-year Treasury yield, it hit 5%. Now if you look at a chart of it, it was like boom, from 5%, wham, back down to four and a half. They really –

Corey McLaughlin: It's a big move in a little bit of time from –

Dan Ferris: Very little bit. Yeah.

Corey McLaughlin: – from what I was writing about last week was we had the Fed meeting where they stood pat, which we thought was going to happen. Then the Treasury Department got some attention over their plans to practically fund the government by not increasing the amount of bond issuance by as much as they had previously said. It was by a billion dollars and I think 10-year and 30-year, which less of an increase in issuance for this upcoming quarter than what they were saying. So I think that gave a jolt to bonds as well. I just wonder though, is that short-lived, on the longer end. I don't know. How long can that last or not? Have we seen the peak in the longer term rates? I don't know. Seems like we could, but I'm not totally convinced yet.

Dan Ferris: I'm not convinced of that at all. I don't hear – no matter what Jerome Powell said at the press conference on Wednesday in the statement, I just don't see them cutting. Maybe they won't hike anymore, maybe. That's a big maybe. I don't see them cutting. I even have my little FOMC statement analysis tool and it actually came out slightly more hawkish than the previous one just solely because of one single word in this thing.

I found one single word more hawkish, which was the very first sentence of the previous statement in September was, "Recent indicator suggested economic activity has been expanding at a solid pace" – emphasize the word "solid." Then the new statement on November 1, "Recent indicator suggest that economic activity expanded at a strong pace in the third quarter." I called the solid pace statement and I called this one hawkish. Going from solid – I think solid just doesn't communicate it as much as strong. I could be wrong. I could be totally off.

Corey McLaughlin: No. I think the same thing. When you look at – I took that as a reference to the GDP number from the third quarter was almost 5%, which if you have GDP of 5% inflation, it's still at almost 4% by the Feds preferred measure. That's not a "cut rate" environment any time soon. I'm with you there.

Dan Ferris: Right. If GDP weakens maybe things will be a little different, which I think is not out of the question at all. It wouldn't surprise me if they revise that big number downward later on because that's just the way things go. Then we'll see. Then we'll see about – I've said all along that I thought things had changed and that the bias was now "higher for longer." It wasn't the old bias from Alan Greenspan to Ben Bernanke where they were biased to ease and to lower rates.

I thought, "Well, I think this has changed and Jerome wants to be the guy who stopped inflation." So we will see. If we do get a downward revision and we do get a lower GDP number and stocks have come up too a little bit lately. But if bonds continue to go up and discount a slower economy, then we'll see. If unemployment ticks up, which it did recently, if that continues happening, then we'll see. Then we'll see if Dan is right about Jerome's resolve to be the guy who stopped inflation instead of saying, "Oh, I can't do this. I've got to cut."

Corey McLaughlin: Right. Well, I'm totally with you on that point, too. I think the short answer to all of this is just more "higher inflation for longer." Higher inflation for longer is where my head is at with all of this until further notice, until some sort of something changes. I see – there's tons of risks for more inflation and very few, I think, to deflation right now. That may happen, but right now it's – from Fed-land it seems like higher – keep rates where they are, inflation go – what we keep forgetting is the Feds keep saying they won't get to 2% inflation until 2026.

This is not – they're not – that's – what, two years from now. So they're just banking on these numbers like slowly – like their balance sheet, just running off on these base effects and just getting down to normal average eventually. That's what they're banking on and I think we forget that. So they're just going to keep rates where we are until – or raise them if they need to until anything else.

Dan Ferris: I agree. That's why, among other things, I think long-term tips with real yields north of 2%, which hardly ever happens, are pretty gosh darn attractive. Bob Elliott, who we had on the show, former Bridgewater guy at Unlimited Funds now, he's got a whole thread on Twitter about this. I just thought – I responded to it and I said, "Sold. I'll take them," because it's – they're Treasurys. This is Treasury inflation-protected securities, inflation-protected Treasury bonds. It's like, wow. That's hard to beat when they're real yield of two and a half. You're lucky to get any real yield in the past several years here. So two and a half is like whoa.

Corey McLaughlin: Party on.

Dan Ferris: Yeah. So that's good. We're still in "income is back, investing is back." There's a real benchmark, all that stuff that I've said before. It's a pretty good move here recently, the 10-year losing 50 basis points just like that. Just like boom. Gone.

Corey McLaughlin: Yeah. The – I've done some reading on the Treasury market, too, recently. Just because of the volatility in it, the last six months, a year, it turns out there's 10% of Treasury holders are hedge funds, just trading them. Central-bank percentage has gone down to 50% of holdings. So the Treasury market is now – it's always been a liquid market. Now it's being treated like bitcoin. The hedge funds are really amping up their exposure to it. I think we'll see some of these moves higher, lower, whatever the volatility as we – as all this uncertainty around the Fed and rates and the economy continues for at least the next little while.

Dan Ferris: Yeah. I would suspect that the markets are going to act the way they always do and people will be sucked in. They'll say, "Oh, it's a new bull market in equities. Look, bonds are coming along for the ride." We're back to where we were and you can do everything you used to be able to do, 60/40 is great, whatever. I just don't think that is in the cards at all. I think a lot of people are going to get whip sawed and a lot of traders are going to leave the market in the next year. I think the next year is going to be really super difficult.

I think 2024 – I titled my presentation in Las Vegas a couple of weeks ago, "2024, the worst year since 1932," just because that was super high unemployment and one of the worst bear mega-bubbles burst and worst bear market bottomed in July of '32. Other things happened, too, like the Lindbergh baby kidnapping and murder. It was a bad feeling in the country. I'm really afraid that we're going to get a year like that and I think it's within the next couple here.

Corey McLaughlin: Yeah. Unfortunately, I'm there too because of GO politics and inflation. It's all coming to a head this year. I wrote a Digest a couple of weeks ago to this point about the wealth gap in the country and I've got – it's the most comments I've gotten on anything I've written in a while about... like, "Are you OK, man? That was pretty grim what you're talking about." I was like, "Well, personally I'm semi-OK," but when you look at the economic environment and culturally, things are crazy. It's not over yet. I don't think we've gotten to a breaking point yet unfortunately.

Dan Ferris: No.

Corey McLaughlin: So I'm with you on that.

Dan Ferris: That wealth inequality, that just – and the unwinding of low rates, that just gets amplified because when everybody seems to be pretty OK it's happening, but nobody is complaining about it. Then when Treasurys lose 30% of their value and the economy starts behaving poorly – which I expected it will – then the inequality becomes a big problem and then you get actual violence in the streets. I have to admit, I do fear that in the back of my mind and I'm very happy to live in a small town... hour's drive away from anything like a big city, really. We'll see. Maybe we shouldn't go too deep into this. We don't want to be that kind of a show.

Corey McLaughlin: Yeah. Let's save that for another time.

Dan Ferris: Yeah. All right. We won't save for another time our interview, which actually a conversation that I had with a previous guest named David Cervantes of Pine Brook Capital. David and I had a really interesting conversation about a topic that's been in the news quite a bit lately. He has some very definite ideas about it. It's the weight-loss drugs and their impact on the global economy. When he first told me about it several weeks ago, months ago even, I hadn't heard a word about it. So he was on this before other people were. Now it's become a big headline-grabbing issue. So we're going to replay the conversation I had with David Cervantes during the Stansberry Conference just a couple weeks ago in Vegas and really give a listen to what he has to say. It's very interesting.

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Please help me welcome, David Cervantes. All right. Now I understand that you have some slides and some things that you want to tell us. Maybe we'll just get started with that and you and I will have a little conversation as we go along here. This thesis that David presented to me, you may have heard about it in the news. But when he told me, what, a month or so ago?

David Cervantes: About two months ago.

Dan Ferris: I had never heard a word about it and it's pretty big, to say the least.

David Cervantes: Yeah. It's a funny story. I was on vacation in Copenhagen and came across a news headline that as a result of these new weight-loss drugs, the GDP would have otherwise been negative 1%, was actually raised by 2% to hit a 1% positive just on the sales of these two weight-loss drugs. So I'll just run over a couple of big topics, let you know where we're going and go from there.

So obesity is a huge problem. It's not just an American thing. It's everywhere. Not just a developed-world problem, but a developing-world problem as well. There's a huge macro cost associated with this... not just in terms of funding and paying for treatment, but there's also a loss of productivity and a drag on GDP-growth rates.

Dan Ferris: Except in Denmark.

David Cervantes: Except in Denmark because everybody rides a bike. We have these GLP drugs and I'll go into what this really is. Medical science has effectively delivered us a potential game changer that could have massive impact on the macroeconomic landscape, not just in terms of how much we spend on health care, but in terms of future growth rates and also sustainability of our budget deficits and our health care system, which are basically spiraling out of control at this point.

Dan Ferris: Yeah. So bigger than AI is what David told me when we were talking out in the hallway.

David Cervantes: So just to give you – no pun intended on the scale factor – but half the population in 34 out of 36 obesity countries is overweight. One in four persons is obese. In the United States, that number is 42% –

Dan Ferris: Forty-two percent. Wow.

David Cervantes: – is already currently obese. Obesity is responsible for 70% of all treatment costs associated with diabetes, 22% of all costs associated with cardiovascular disease, and 9% of cancers. So this is a huge, huge thing. A little more perspective on scale, the U.S. spends around 18% of its GDP on health care. That's around $4 trillion. Of that $4 trillion, roughly $600 billion is obesity related.

Dan Ferris: I didn't put this together before, but cancer and cardiovascular, aren't they the two big killers in the United States? More people die of those two things than anything else.

David Cervantes: Correct, but the link with obesity and cancer is less though with cardiovascular. But to your point, absolutely correct.

Dan Ferris: But they're – yeah.

David Cervantes: So this is a projection here by the OECD. Between now and 2050 obesity will drag U.S. GDP down by about 4% a year.

Dan Ferris: Wow.

David Cervantes: This is bonkers. This is more than we spend on defense.

Dan Ferris: It makes me wonder how. Simply by what? Medical costs must be the main thing.

David Cervantes: There's medical costs. There's absenteeism from work. There's people are getting out of the work force earlier. People getting on disability sooner. It's a black hole of problems.

Dan Ferris: I see. So it's a hit to productivity among other things.

David Cervantes: There's over 236 medical ailments associated with obesity. It is just – it's really the root cause. If we could just fix this, we are on a whole different plate of economic development.

Dan Ferris: OK. I believe you.

David Cervantes: So yeah. I already mentioned some of these stats. Just also the growth in the epidemic. What I didn't mention in these slides is in 1974, the year after I was born, 12% of the U.S. population was obese. And then by 1999, it was 30.5%. By 2020, now it's 42%. So this thing is just going – it's nonstop.

Dan Ferris: So all those Internet memes showing pictures of people at the beach in the '70s next to people at the beach in the modern era, they're true.

David Cervantes: Correct. They're also smoking, but they're definitely true. So yeah. It's a huge thing. Again, this is not just the United States. This is a global phenomenon. I lived in Europe when I was studying abroad as a student back in the '90s and it wasn't there yet. Now when I go back, you see more of it. It's just basically a lag effect with the United States.

Dan Ferris: Wait a minute. The U.S. will spend about 14% of its $4.3 trillion budget on obesity?

David Cervantes: Yeah. So correct. Of that $4.3 trillion, 14% is around $600 billion. So that's how much of the carve-out from the medical budget that goes toward obesity just on the hard cost spending, not productivity loss. Just hard dollars.

Dan Ferris: Wow. I didn't know any of this. Let's go on.

David Cervantes: So now we got these GLP-1 drugs. GLP, what it stands for, glucagon-like peptide receptor agonist

Dan Ferris: Very good.

David Cervantes: Oh, God. Basically what that does, it slows the rate at which food passes through your digestive system. It also tricks your mind into thinking that you're full. We think these are new drugs, but they're not. The first generation of GLP-1 drugs came out in 2005. It was marketed by the name of Byetta, and it was for diabetes only. There was no real weight loss associated with it. Then there's been subsequent iterations of the technology culminating with the 2022 release of Wegovy and Ozempic. So Wegovy is specifically for weight loss and Ozempic is for diabetes, although there is some weight-loss benefit with Ozempic.

Dan Ferris: And these are like – weight loss is not off label here? It's an approved use so that you can go to your doctor and say, "I'm obese. I have a terrible problem," and he will prescribe Ozempic, not for diabetes, but for weight loss, specifically?

David Cervantes: For Wegovy. The answer is yes. So Wegovy is the only one that's currently defined for weight loss.

Dan Ferris: So we're still off label with Ozempic, but –

David Cervantes: Ozempic is for diabetes, but there is a benefit of it. It's not as aggressive. Typically with Wegovy, you will lose around 26% of your body weight within a year.

Dan Ferris: Wow. That's pretty good.

David Cervantes: It is so effective, the people that go on it start suffering from malnutrition because they just have no appetite. One of the side effects is they get these gaunt faces and hair loss because they're just so calorically starved.

Dan Ferris: Now I'm no doctor, but a drug that causes people to lose their hair and starve sounds like a problem. It sounds like more of a problem than a way for GDP to get a 2% boost.

David Cervantes: It'll keep you from being obese, which solves a lot of problems.

Dan Ferris: Right. So we're talking about an extreme – this is not for losing a few pounds. This is not for losing 10 or 15 pounds.

David Cervantes: This is not a vanity thing. In fact, there's – they call it "Wegovy gaunt face" because the people that take it, they just get so gaunt. They lose so much weight. So it's not – we're early days. There's going to be more iterations to tweak this technology. There are currently over 50 new GLP-1 drugs in the pipeline in development right now.

Dan Ferris: So that answers my question about competition.

David Cervantes: Exactly. So right now Novo Nordisk has a monopoly with this technology. Soon it will be a duopoly. Eli Lilly has a drug, Mounjaro, that is for diabetes, approved for diabetes, in use for diabetes. Is under review by the FDA for weight loss and they expect for that to happen this year. So once that comes into the market, Novo Nordisk will cease to be a monopoly and it will become a duopoly.

Dan Ferris: And so on and so forth. We assume that within five years maybe there will be more than just two.

David Cervantes: Well, there will be somewhat of, no pun intended, a Viagra curve here where currently this therapy is about between $900 and $1,200 a month. A lot of insurances don't cover it. So right when Viagra came out in 1998, it was $88 a pill. It's now $4 a pill. That's a 95% reduction in price since then. So the economics are so rich, and the market is so big. That $900 price point probably will not last very long, especially once these patents roll off.

Dan Ferris: That's right. More competition, lower prices.

David Cervantes: More competition. This is currently, early days, $2.2 billion in sales. It's expected to hit $40 billion within the next five years. Total global addressable market is probably about $100 billion. This is a huge, huge market. It's a huge opportunity. Novo Nordisk is up 48% this year. It's a five-bagger over the past five years. Eli Lilly is up 64% and it's a four-bagger – I'm sorry – six-bagger over the past five years. This is a huge area.

Dan Ferris: Now you tell me. Now you tell me. One thing I wonder about this, it's a philosophical issue. I'm totally full of sh-t all the time. So philosophical issues are my thing. So we're talking about taking a pill to return to a better state of health, right? This seems like something that could get out of hand. It reminds me – I know this is a dystopian sci-fi scene that I know has appeared. I remember in Blade Runner they would show those big billboards for people taking pills for everything that you could think of in life. This makes me wonder. I know obesity is bad. It's bad for you. It causes all the problems we talked about, 260-odd illnesses associated with it.

So you definitely want to get rid of it. You definitely want the benefit economically, of course, because that economic benefit is part of the human health benefit. There's something that just is starting to bother me about this, about taking a pill to lose weight. When I think of all of the foods that have appeared, all of these unnatural foods that have appeared since the '70s, maybe we're eating a lot of garbage we just shouldn't be eating. I'm like, well, maybe it makes you want to eat less, but are you still eating the same junk, just less of it? There's a lifestyle thing here that I wonder about.

David Cervantes: A hundred percent. What people end up doing is eating less. They eat the same stuff. They just eat less of it.

Dan Ferris: Fewer calories.

David Cervantes: Fewer calories. We're talking 700, 500 calories in some cases.

Dan Ferris: Wow. Again, that sounds like it's bad for you.

David Cervantes: Like anything else, there's – economics is the study of trade-offs. The consumption that you just mentioned, there will be winners and losers. Apparently this wonder drug also cuts heart attacks by 20%, helps with kidney failure. When the tests that were studied in the kidney failure issue were announced, the world's largest dialysis company, Fresenius, they're based in Germany, they dropped 24% on that news instantly. So this thing is a very disruptive technology. Walmart has noticed patterns in its sales associated with these drugs. There's to be a real big shift in consumption patterns going forward whether it's vanity things, sportswear, dating apps. When you're not obese you're more likely to date and engage on these apps.

Dan Ferris: I've seen stories about companies like PepsiCo, snack foods, basically, feeling the effects of it somewhat. Seen a story about – I forget which airline it was.

David Cervantes: United.

Dan Ferris: United.

David Cervantes: Correct.

Dan Ferris: What is it like?

David Cervantes: So it's – if the average United passenger lost 10 pounds, the airline would save $80 million a year. And those results carry over to every single airline on the planet.

Dan Ferris: Wow. So then what happens? Hopefully, the tickets get cheaper because we –

David Cervantes: Yeah. You'll have a little more room in your middle seat.

Dan Ferris: That's right. Oh, boy.

David Cervantes: But this is really disruptive. Going back to your earlier comment about how just a little under 20% of the U.S. economy is devoted to health care... of that, there's a significant portion that's devoted to the care of obesity and treatment of obesity. Those people that are in that – there are a lot of vested interests that are not going to want to let go. People that have jobs and built businesses around that whole platform is going to get transformed.

Dan Ferris: Right. So interrupted you to get philosophical. If you have more slides, let's –

David Cervantes: We can get – no. You're right, though. At the same time, we have to get philosophical. This is a public-policy question, right? If we're spiraling out of control in terms of health and in terms of the cost associated with that health and for whatever reason – whether it's people can't manage themselves or food supply is terrible – for whatever reason, it's not sustainable. Now, 15% of kids under 18 are obese. That's the next generation. That's going to compound way into the future. All those problems that we see currently, they're going to grow as those kids grow. Think about that. So, aside from an economic issue, it's a real policy issue as well. Does the government – I don't have the answer. It's a policy choice that people have to – it's a dialogue that we'll have to have a society. How does the government get involved? To what degree?

Dan Ferris: Getting back to how you make money off of this.

David Cervantes: Why we're all here for.

Dan Ferris: It sounds like we missed our chance on Novo and Lily.

David Cervantes: It's early. There's 50 other developers. There's also a whole ecosystem around this. The way these drugs are administered currently with an EpiPen-style type intervenes injection. So there's a manufacturer – I forgot the name of the manufacturer, but that manufacturer is booming. So there's a lot of businesses associated with this. It's not just the drugs themselves.

Dan Ferris: So maybe we go through a period where you move from monopoly, duopoly, and then there are more of these introduced. I can see for some period of time returns on just the drugs continuing to be quite excellent. Correct me if I'm wrong, this is very early days.

David Cervantes: It's very early. Yeah. That's right.

Dan Ferris: So early days, we miss the five-bagger and a six-bagger, but it's cool.

David Cervantes: It might be a 10-bagger. If we're looking to grow this market from $2 billion to $40 billion to $100 billion, I think there's more in the pipeline. At some point the insurance companies are going to get involved because the insurance companies have to manage their cost. So, look at insurance companies that are starting to take this more seriously. The insurance companies that are putting their heads in the sand and not wanting to get involved with this are going to lose. The ones that face the issue head on, embrace the technology as it is, change their business model around it, will thrive and do better.

Dan Ferris: Now you mentioned a minute ago we were talking about this $900-a-month figure and insurance not paying for it.

David Cervantes: Some –

Dan Ferris: Some don't.

David Cervantes: Some do. My understanding is it depends on the state of your health.

Dan Ferris: Explicitly for weight loss. They'll pay for diabetes, but explicitly for weight loss they won't do it.

David Cervantes: Correct. Say you're obese and you're overweight. It's a matter of time before you get any one of these parade of horrible diseases, mainly diabetes and high blood pressure and cardiovascular. There's a medical reason. It's still a fight. This is not cheap stuff.

Dan Ferris: Right. It's not cheap, but you have to think about what's the pain point. Why does the insurance company eventually sort of have to pay?

David Cervantes: Well, it either pays $900 a month for the drugs, or it pays for your kidney transplant or your immobilization or it pays for your hip replacement because now you're obese. Now your joints are worn out prematurely. So there's a whole range of factors to consider that govern the economics.

Dan Ferris: Obesity swaps.

David Cervantes: What's crazy though, this technology is not just – remember I mentioned it tricks you into thinking you're satiated and full? Now they're starting to experiment with addiction. So people that have alcohol cravings – this is currently in the pipeline to treat alcoholism now with the same – they'll modify. It won't be the exact same drug, but it's the same class of drug and they'll modify around it, change a molecule here, tweak it, and boom. Now if you have addictions issues you can be administered a drug that will heal that.

Dan Ferris: So this is interesting because forget about alcohol for a second, but there are food – people who have food addictions who aren't necessarily obese. That would be a sticky issue, but assuming other things being equal, I suppose that's the same. Then I would think in the alcohol application you'd have to be careful with that because an alcoholic is not necessarily obese.

David Cervantes: Correct.

Dan Ferris: So I'm not a scientist. I don't know how things are tweaked in the lab, but that sounds like a hell of a tweak to me. If the main outcome is you're losing weight, that sounds interesting to me. That sounds like a hard problem to solve.

David Cervantes: Well, here's another dynamic or dimension to it. The time dimension. If you go back and look at other disruptive technologies, whether it's the Internet, rail transport, most disruptive technologies really revolve around moving something or someone whether it's people, goods, products, information. The biggest technological revolutions have occurred around moving something, getting it from point A to point B faster.

If you look at the life cycle of discovery, introduction, adoption, heightened expectations, crash, and then mass adoption, like what the Internet went through, the Internet was really invented by – I think it was DARPA, Defense Analyst Research Program. DARPA develops the ARPANET back in the '60s. Then it became an academic tool. Then in the '90s, I was experimenting with e-mail at the library in college. Then you get the browser. Then you get the dot-com boom. You didn't get mass Internet, especially on the mobility side, until the late 2000s. So we're going to see a similar type of evolution with this class of drugs.

Dan Ferris: Right. Keeping in mind that we're already 18 years in. They started in 2005.

David Cervantes: Well, the good thing is we have the data now. We have a lot of data. Insurance companies, they love data. The insurance companies, they know when you're going to die. You tweak an eyebrow, they know that that tweak is going to lead to your mortality. The benefit of having that class of drugs out in 2005 is that we just have all this data.

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All right. So do you, founder of Pine Brook Capital, have an allocation based on this idea?

David Cervantes: So when I got back from vacation in Copenhagen I bought some Novo Nordisk. It was more of – it was a small punt just to get my toes wet. I'm still on the position. I'm looking at it from a macro standpoint. Long term, we've all heard about hard deficit is unsustainable. Basically by 2090, our economics will be – at their current trajectory will be completely upside down. Right now we take in around 20% of GDP and receipts. We spend maybe 3% over that. We have a 3% GDP deficit every year. We have a 100% debt-to-GDP ratio. Over time, starting around 2032, there's going to be a huge divergence between what the government takes in and what it spends. It's going to get bonkers.

Dan Ferris: It seems pretty big now.

David Cervantes: This is nothing. There's going to be a 47%-point difference between what the government takes in and what it spends. That effects what interest rates.

Dan Ferris: Oh, yeah. Rates all day long.

David Cervantes: That's the macro part, but if the government – right now the government is on a fiscal collision course with reality. The medical situation is also on a similar unsustainable collision course. These drugs sit in the middle of where those two lines meet and have the potential to change those trajectories whether it's the sustainable of the medical system or the sustainable of our budget deficits. Why? Because if people retire less and they're more productive and they remain in the work force longer and they don't take social security on the first day that they can, that puts that at a different trajectory. There are so many second, third, fourth, fifth-order effects as a result of these paradigm shift.

Dan Ferris: Right. All the second-plus-order effects, it sounds like it makes it harder to bet on. I can buy Novo. I can buy Lilly maybe. Other than that, I want to, what, go through every pharma and biotech that is developing right now? That seems like the next step. I got to know every pharma and every biotech that has one of these in trials or whatever stage they're at. Got to know that.

David Cervantes: Right. So all the big brokerage houses, I think, are putting research out. I don't know how much I trust it. I would trust Stansberry a lot more obviously.

Dan Ferris: There you go.

David Cervantes: But this is a huge ecosystem. I'm still trying to wrap my arms around this. This is very new for me as well.

Dan Ferris: Right. And United Airlines, apparently, we can buy that one, too.

David Cervantes: But just – I'm sorry. Go ahead.

Dan Ferris: Not that I want to buy an airline ever. So let's look at some of this. You just talked about employment, jobs equivalence, productivity gains, reduced absenteeism. What is rSTAR? What the heck is that?

David Cervantes: So rSTAR is this wonky way of saying "What's the optimal interest rate that doesn't cause inflation or bleed the economy dry?" That's it. It's real simple. RSTAR is, depending on the level, is typically associated with stagnating the economy, like Japan for the last 30 years had very low interest rates. They couldn't debase their currency fast enough. They were basically suffering from economic stagnation. So we, on the other hand, didn't have that problem, although we flirted with it prior to the COVID pandemic. What you want to have is an rSTAR that helps breed innovation, that helps breed sustainable growth. If it's too low, everybody just buys bonds and sits down and that's what happened in Japan.

Dan Ferris: This is so weird to me that we're talking about obesity drugs and that's normally a reason to buy pharma stocks and not think about much else. You're talking to me about interest rates and Japan.

David Cervantes: This feeds into demographics. It feeds into productivity and growth rates and interest rates. It really – in a funny way, this is the Rosetta Stone that brings all these forces together.

Dan Ferris: Well, why am I wasting my time thinking about anything else? I'm thinking about all this other stuff.

David Cervantes: Honestly, I think this is bigger than AI. I think AI is going to suffer the way a lot of other hyped up technologies suffer. It'll get promoted and then there will be some disappointment when it doesn't deliver on the expectation.

Dan Ferris: That would certainly be – yeah.

David Cervantes: But the difference with this though is, this – the people that lose weight, they do so within a year. So all these other transformational type technologies that it's a 30-year bet into the future. This is happening real time. This is happening now. People lose the weight. They get healthy quick. That's what I think makes it a lot different than other transformational technologies is the speed at which it impacts all these things I mentioned.

Dan Ferris: So then the next question becomes how soon do how many obese people wind up on these drugs for this purpose and then a year later everything is wonderful?

David Cervantes: There's the obvious. The big elephant in the room for now is the cost and also there are, as I said, there are some vested interests that are going to get push back. People that are currently employed in these jobs, practitioners, people that have built businesses around this, there will be some push back. You can't stop – this sounds maybe philosophical, but it's hard to stop – once the technology is out of the bag, it's hard to keep it in the bag whether it's nuclear, whether it's whatever. It's really hard to put technology back in the bag once it's come out.

Dan Ferris: All right. I keep trying to figure out how I'm going to play this though. Tell me about interest rates. Am I going to see – are we going to go back to...

David Cervantes: So here's a practical way to play it. I mentioned the disruptive factor. Fresenius, they got whacked 24%. So identify the companies that are at risk of being disruptive. So if you're a dialysis provider, your time is up soon. If you're pacemaker manufacturers, all these – this whole ecosystem that revolves around treating these ailments that will soon basically – can go away, those are the shorts. Those are the ones that at least you don't get involved with.

Dan Ferris: Well, I know Walmart is the No. 1 seller of diabetes. So they're screwed. I should just short Walmart tomorrow.

David Cervantes: Well, they said they have the pharmacies, right? They have the pharmacies and they sell the drugs.

Dan Ferris: Yeah. They do. Right. They sell them for cheaper than anybody else.

David Cervantes: Probably.

Dan Ferris: There's going to be a much longer line there than there is – it's going to be like the bakery line is the longer one now. Then all those people are going to be over in the pharmacy line.

David Cervantes: The other one too is all the fast-food places, McDonald's, Taco Bell, all those. Those are ripe for disruption.

Dan Ferris: They are ripe for disruption. I know McDonald's sells burgers all over the world, but they have done a reasonable job over the years of incorporating whatever people want to eat. So I could see them adapting, but they're going to sell a lot less of that super-high-margin stuff they sell, sodas. Soda cost them two cents, and they sell it for $1.50 or something crazy. So yeah. This reminds me of the moment when everybody was in love with the nifty fifty almost because there were things in there that people said would grow forever and McDonald's was one of them. It actually did a lot better than some of the other ones. Then along came various technologies and wiped a bunch of them out. I feel like you're telling me that we're going to see a bunch of things get wiped out now. I just want to get my pen out and write the list down right now today.

David Cervantes: I got to put one together myself. Like I said, I just came across this stuff two months ago. Maybe it could be a product for a research publication.

Dan Ferris: Yeah. I'm sure if we had David Lashmet up here, he would tell us every technical aspect of this and has already looked at it deeply. Right now I just want to know how long it's going to take for me to get my five-bagger. It sounds like it's not going to be very long. It's a serious question though because if this works as fast as you say it does, that feels like it doesn't give me a long time to sus out every biotech and pharma company that might be developing something. Then I've got to figure out who's going to succeed there and then who to avoid. I don't know if I avoid Walmart, but I avoid maybe Nvidia and –

David Cervantes: Coca-Cola.

Dan Ferris: Coca-Cola. I avoid Coca-Cola. I avoid obviously Fresenius and Nvidia. I wonder if Buffett is going to sell Nvidia. I don't know if it's him, but I know one of his guys, maybe Combs or one of his guys like it. They've got a big position in it. It took a big hit. Those stocks took a big hit recently within the past couple of weeks here in one day. Boom.

David Cervantes: Was it linked to this? I wouldn't be surprised if it was.

Dan Ferris: Yeah. It was linked to the kidney – it's the kidney link.

David Cervantes: Got it.

Dan Ferris: Because they're dialysis providers. So every headline that comes out you're going to be like, "Oh, yeah. This thing has a wide – I thought this thing had a wide moat, but there's no more wide moat." I think moats are narrower generally, aren't they?

David Cervantes: Well, with technology, sure. Technology is the bridge. It's going to either bridge them or fill them in.

Dan Ferris: Right. So when I think of wide moat stocks that everybody loves I can't help but think of the magnificent seven. I wonder if this is the just overwhelming macro theme that you're painting a picture that's effecting every part of life, every part of the economy or all the big important parts. It makes me wonder about any effects on the magnificent seven, Apple, which is already not growing so great and people are still putting –

David Cervantes: Apple is going to have negative 1% of revenue growth when they report. So yeah. You're right. They're stuck. Apple is going to be – is really a margin story at this point.

Dan Ferris: Right. So Apple, Nvidia, Tesla, Microsoft, Meta Platforms.

David Cervantes: Amazon.

Dan Ferris: Amazon. Google. I don't see any direct – I don't find a direct connection in any of these.

David Cervantes: The only direct connection I would see is if once this medical echo system grows, and it will grow, if investor attention animal spirits – if AI does not deliver on its promises and this stuff is actually performing as advertised, then I could see investor animal spirits shift their attention to these names to the expense of the mag seven. I don't think that's a today thing. It's not a "this quarter" thing, but it could happen.

Dan Ferris: No. The only today thing I can see is the biotechs and pharmas researching the effects on the snack foods, on Pepsi, Coca-Cola. Coca-Cola is an obvious connection.

David Cervantes: Gyms, sports equipment.

Dan Ferris: Sports equipment.

David Cervantes: It's amazing how this pervades almost every dimension.

Dan Ferris: Wait a minute. Are we saying people buy sports equipment because they think it's going to help them lose weight and they won't buy sports equipment?

David Cervantes: Either they won't or they may be encouraged. It really depends on the kind of equipment. If it's something like Peloton, it's a high price point. If you're spending $900 a month on these drugs, you're not going to spend $2,000 or $3,000 on a Peloton machine.

Dan Ferris: Well, they're highly cyclical anyway. I don't know. I think I'm satisfied enough that I need to go do a whole lot of work on biotechs and pharma. I think that'll take me a month or two or three. So unless you got something else.

David Cervantes: I'm just putting my arms around it right now. It's also a product for me.

Dan Ferris: Just generally, because this is something I'm interested in, what do you think this does to interest rates in a longer term?

David Cervantes: I think if we can manage to tackle this public-policy crisis, reverse the unsustainable path that the medical system is on and that the budget deficit is on, it'll keep interest rates from having a supernova event in 20 or 30 years.

Dan Ferris: Oh, OK. So it'll keep interest rates from soaring out of sight?

David Cervantes: You have to – when you have to fund your deficit.

Dan Ferris: Right. Got you. OK. Again, that's farther out.

David Cervantes: That's not a today thing. Correct.

Dan Ferris: All right. I think I'm pretty satisfied here. I think I just need to – I think these people are now going to be like, "Tick tock, Dan. Let's get to work on to find us" –

David Cervantes: The cat is out of the bag and I think we've got to go chase it.

Dan Ferris: All right. Well, thanks for being here. And I encourage everyone to follow David on Twitter, PineBrookCap.

David Cervantes: @PineBrookCap.

Dan Ferris: @PineBrookCap on Twitter.

David Cervantes: And my website is PineBrookCap.com.

Dan Ferris: OK. Sounds good. Hopefully, we'll be talking again soon. Thanks for being here.

David Cervantes: Thanks for having me.

Dan Ferris: You bet.

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