WeWork is in the news with preparations for its IPO, and Dan targets his weekly rant on the company’s mission you’ll never be able to deduce from its IPO filings.
With its mission statements reading like mantras – “elevate the world’s consciousness, community company committed to maximum global impact,” Dan gets to the really damning statistic buried deep in the filing – “the bigger they get, the bigger their losses get. This thing ain’t working.”
Dan then gets to the bubble in late-stage private financing, vulture capitalist Martin Shkreli’s latest antics, AT&T’s huge move, and the similarities between stocks today and stocks in 2018 right before the 20% plunge.
He then gets to this week’s guest, Kevin Muir.
Kevin is the author of the MacroTourist newsletter. A former institutional equity derivative trader for a big bank who decided that bank-life wasn’t for him, he proceeded to trade for his own account for a couple of decades before joining his current firm, East West Investment Management where he works as the Market Strategist.
You won’t want to miss his thoughts on falling bond prices – and why, unlike what most “perma-bear bond traders” think, bonds can fall for good and healthy reasons, as well as a hidden strength in the economy almost no one detects.
Author of MacroTourist
NOTES & LINKS
1:37: Investors thinking about backing WeWork will have to hire an investigator to find out what the company does, since its IPO filings won’t tell you. Here’s what Dan makes of the “community company committed to maximum global impact.”
08:33: Dan pinpoints the fatal flaw in WeWork’s business model: “The bigger they get, the bigger their losses get.”
11:44: The average founder’s name is mentioned in the IPO prospectus around 25 times – wait until you hear how often Adam Neumann, WeWork’s founder, is mentioned there.
18:01: Dan explains why so many companies with awesome, life-changing products are still doomed. “I drove a Tesla, it knocked my socks off. I don’t think they’ll be around in a few years either!”
32:50: Dan introduces this week’s guest, Kevin Muir. Kevin is the author of the MacroTourist newsletter. A former institutional equity derivative trader for a big bank who decided that bank-life wasn’t for him, he proceeded to trade for his own account for a couple of decades before joining his current firm, East West Investment Management where he works as the Market Strategist.
35:50: Kevin explains what the best-performing pension plans of last summer have in common. “They’re all stuffed to the gills with this negative-yielding paper because it went even more negative-yielding.”
38:11: Kevin explains why he believes bonds will go down in price – not because of supply but because of a hidden strength in the economy no one expects.
44:26: The economy is telling us both our monetary and fiscal policies are too tight, Kevin says. “That’s why yield curves are flat, that’s why bonds are bit.”
52:06: Kevin believes we’re finally at a moment of truth in the markets where it comes undeniable that looser monetary policy won’t turn things around – here’s what’s coming as policymakers turn to fiscal remedies and bonds become truly terrible investments.
1:11:40 Dan answers a mailbag question from Matt K., who responds to Dan’s weekly rant alst episode with his own anecdote on Peloton.
Intro: Tune in each Thursday on iTunes, for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive, at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello and welcome, everyone to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, a value investing service published by Stansberry Research. And I'm talking faster because I can't wait to get to my rant, this week. Let's do it right now. OK. [Laughs]
Now, last week's rant was about Peloton, the exercise equipment company, and we got lots of great feedback about it, and we'll talk about that when we do the mailbag, later in the show. This week's rant is something of a follow-up, sort of – it's in a similar vein, OK? And it's about a company called WeWork. WeWork has been in the news, this week, because their IPO looks like it's falling apart. So your first question about any company is, "What do they do?" Well, if you want the company to tell you what they do, you'll have to be very patient or hire a detective, because it's hard to find out what they do by reading the IPO prospectus.
Here's how it starts – this is the beginning, this is where they're supposed to be telling you what they do. And it says: "Our story. We are a community company committed to maximum global impact." Already throwing up in my mouth again, here. "Our mission is to elevate the world's consciousness." [Makes throwing-up sound] Excuse me. "We have built a worldwide platform that supports growth, shared experiences, and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity, and the energy of an inspired community, all connected by our extensive technology infrastructure."
And it goes on and says, you know, "Over the past nine years, we have rapidly scaled our business – " that's kind of a lie, and I'll tell you why. "Over the past nine years, we have rapidly scaled our business, while honoring our mission. Today, our global platform integrates space, community, services, and technology in 528 locations, in 11 cities, across 29 countries." Et cetera, et cetera, et cetera. So what do they do? [Laughs] Well, you don't know by reading any of that, do you?
The phrase "space as a service" is used 40 times in the prospectus. So you know, there is such a thing as software as a service, where you don't have the software living on your computer. You log in and you kind of subscribe to it, right? And they say, "We pioneered a space as a service membership model, that offers the benefits of a collaborative culture, the flexibility to scale workspace up and down, as needed, and the power of a worldwide community." I didn't search the word "community" – it's probably in there 300 times. So you know, what do they do? Well, who the hell knows.
What about the mission? Let's check in with the mission. Maybe that'll tell us what the hell they do. "Nine years ago, we had a mission to create a world where people worked to make a life, not just a living." OK, nothing there. And this is the real mission, this is the mission today: "Our mission is to elevate the world's consciousness." And their prospectus has a dedication – never seen that before: "We dedicate this to the energy of we, greater than any one of us, but inside each of us."
OK, now would you like to know what they really do? WeWork leases office buildings – and they buy them, too, but they mostly lease office buildings – for an average length of 15 years – they commit to a 15-year length, on average, lease – spend a ton of money to make them beautiful inside. Then they sublease the space inside the buildings to companies with as few as one employee – you can, like, rent a desk in this place. You know, you walk into a giant room and you're the only one from, you know, your company, just an individual. It could be, you know, 300 companies in one building, could be 100 companies on one floor or something, right?
OK, but those people are – they call them "members," they can buy memberships, or they can do, literally, minute-to-minute, hour-to-hour, or, you know, by the year or by the month, month-to-month, for an average of 15 months, right? So they're kind of like when banks borrow short and lend long, these guys are leasing long and, you know, letting short or something – [laughs] I don't know how you put that. But the idea is called "coworking," right? It's just, you know, where you just let anybody, you know, rent space in your office building. And you wind up with all kinds of people just working right next to each other, who don't work together in the same business, right? It makes sense. It's not a bad idea.
And here's an interesting quote from, let's see, so, yeah, they do acknowledge that, you know, they're basically letting for 15 years – they're leasing for 15 years. And then they say their average member commitment term, as of June 2019, is 15 months. OK. So then there's another interesting quote where they say, "Across our global portfolio of locations, we offer individuals and organizations the flexibility to scale workspace up and down, as needed, with the ability to consume space by the minute, by the month, or by the year." So: minute, by the month, or by the year. So that's interesting to me, because one of the good things about real estate is that, you know, if you own a rental home, for example, it's a big priority for people to have a roof over their heads.
So even if the guy loses his job, he's going to find a way to pay the rent, even if he doesn't pay other bills, right? You go into this thing and, in a recession, this is like the one thing – this is the one business you don't want to be in, in a recession. Because it's going to be hotter than hell, everybody's going to want to be in these spaces when the economy is on fire. And then, when the bottom drops out, there are going to be tumbleweeds blowing through these things. And there are 520 locations, 111 cities, 29 countries – this is not a small operation.
And they claim, in one of their videos – of course, you know, they're trying to do an IPO, so, what are the two things you got to have? You got to have vision, right? "We're elevating the world's consciousness" [laughs], "creating beautiful spaces." And you got to have growth. And they've got growth: they've been doubling their membership, every year, since, like, 2014, you know, more than 100% growth a year. So you know, just in the past three years, you know – and, of course, they're growing their locations, as well, to – you know, the whole thing, they're getting more locations, more members, et cetera, et cetera.
And they claim, in one of their videos, at one point, they're adding new locations as frequently as one to two per day, right? And they've 534 locations in three years, according to one of the graphics in their prospectus. And this reminds me of a lot of things. One of them is Waste Management from the 1990s, the company that bought 444 companies, from 1993 to 1995, and blew the hell up in a big accounting scandal. Any time you see a rapid acquisition of assets like this, you know, the alarm bells should go off. Rollups are OK, they can be, actually, very good – there were some interesting rollup plays, over the years.
But when they go really fast and light cash on fire – and this company, you know, they've got – they say their run rate revenue is, like, $3.3 billion, and the losses are in the billions, now. The losses just climb in proportion to the revenue. So he said they're scaling up their business – "scale" means, as you get bigger, you head toward profitability – and they're not doing that. The bigger they get, the bigger the losses get. This thing ain't working.
The other day, on CNBC, Sam Zell, who's made a few bucks in real estate, probably one of the greatest real estate guys, you know, in the last 50 years ago, he says, "You know, everybody who's ever gone – every company that's ever come out in this business has gone broke." And in fact, their only meaningful publicly traded competitor, a London-based company, IWG, declared bankruptcy in the 2008 crisis, right? So it's a crap business, from top to bottom. Now, so, they're on the hook for these 15, you know, average 15 years of rent, and they've got all these 528 or 500 and – they've added 534 locations in 3 years, but they say they have 528 – I'm not sure.
And if they're adding the one to two per day, since they had 528, they should be up to, like, 600 or 650, or something like that. So who knows how many locations they've got? They're just adding them all the time. But as of June 30th, their future undiscounted minimum lease cost payment obligation – like, the amount of money they've got to pay on these leases – $47.2 billion. [Laughs] You say, "OK, but the memberships are growing fast, too, Dan, right?" Oh, sure, they are: "Our growing membership base," it says, "combined with increasing average lengths, has provided increased visibility as to future revenues, as we continue to scale globally. Driving an increase in our committed revenue backlog, from approximately half a billion, December 31, 2017, to approximately $4 billion, as of June 30th, 2019." [Laughs]
So you know, hey, almost five times as much – or let's see, I'm sorry, my math is really bad, there – almost 12 times [laughs] as much in stuff we got to pay as, you know, money that we're going to get. But, hey, you know, this can work, this thing can work. This is actually a common problem in finance schemes is what they call duration mismatch, right? Usually, it's in a financial company like a lender, you're borrowing short and lending long, you know, you're borrowing – you can borrow short-term at a lower interest rate, and you can lend longer-term at a higher one, yay. And some people think that's business, that's, you know, banks do it, I guess.
And you can get in trouble, right? If there's, like, a spike in short-term rates or something, or if long-term rates are dropping. So yeah, not a great business, a few little problems here and there, a lot of, you know, new-agey – which, I really pronounce that word "new-agey" because it rhymes with "sewage-y" – new-agey-sounding stuff about how they have a great vision. I mean, it's just, you know, baloney times 50. And who runs this thing, you say? Well, the founder is this controversial guy named Adam Neumann.
Adam Neumann's name is mentioned, in the prospectus, 169 times. The average founder mentions in a prospectus is, like, 25 or 30 or something like that. A guy named Scott Galloway, who's a pretty good analyst – who also has a giant bee in his bonnet about WeWork [laughs] – he says, you know, he looked at – I think he looked at half a dozen prospectuses, recent ones, and found an average of, like, 25 mentions. But, you know, I think Adam's success has gone to his head. But, you know, maybe Adam's smarter than the rest of us, because as this company tries to prepare for an IPO – that I think is never going to happen, by the way – as they prepare for this upcoming IPO, he's sold out to the tune of $700 million-worth of, like, equity sales and loans and things.
So "Hey, I'm taking $700 million out of this thing, but you buy our stock." Somehow, I don't think it's going to fly. And there's other stuff, too, like, in May, WeWork reported it'll raise $2.9 billion to buy some buildings, OK, instead of leasing them. Oh, OK. Well, including four buildings owned by Adam Neumann, [laughs] you know? And they're on the hook, WeWork is on the hook, at this moment, for, you know, future undiscounted minimum lease obligations of, like, $236 million, to Adam Neumann. [Laughs] And he insists, "OK, well, you know, we'll sell the buildings to WeWork for what I paid, and it'll be fair, and nobody will get screwed."
Sure. Whatever. You're the guy who's cashed out for $700 million. [Laughs] He tried to sell – actually, he did sell the company, the We – he had the word "we" trademarked, and he tried to sell the trademark to the company for $5.9 million. And he almost got away with it, until they had to disclose it, the whole world found out, and then he gave back the $5.9 million. And that was, you know, things like this, I think, really have not helped in the IPO. And I think when you – when things fall apart, they tend to fall apart really quickly. And I don't think the IPO is actually ever going to happen.
They raised money, earlier this year, to $47 billion valuation, from SoftBank [laughs], who, they're supposed to be geniuses, you know, run by Masayoshi Son. And SoftBank is on the hook, according to the prospectus, for, like, about $11 billion that they've already invested or have committed to invest. And as far as I can tell, this thing is not worth half that, or it's maybe worth half that. And they've come out recently, the reason they're in the news, recently, is because they said, "Well, maybe the IPO will be less than $20 billion valuation." So less than half, already, because the thing is just caving in, they're not making money, as revenues grow so do losses, there's no scale, everybody who's ever done this has gone broke.
And the one competitor I mentioned, IWG, they trade – that $47 billion valuation, that's 14 times the sales. IWG trades for, last time I looked yesterday, was 1.4 times sales, OK? So at 1.4 times sales, I think WeWork is worth – it's worth less than $4 billion. [Laughs] Boy, I bet the folks at SoftBank are pretty unhappy about that. Of course, they should've damn well known it, shouldn't they? 'Cause IWG was out there, the whole time, for them to look at it as a comp. And, you know, at $20 billion, it's, like, less than eight times sales, and $10 billion, less than – and at 1.4 times sales, less than $4 billion. Versus the $45 to $50 billion they used to be talking about.
This is insane. These people are lighting money on fire, they're making up all these flowery words in their prospectus, and, you know, I mean, they're doing what anybody would do in a similar position, right? They're trying to get as much out of this as they can get. But I think there's something else, here. I think this is a sign that the speculative froth is really starting to come off. And in the September issue of my newsletter, Extreme Value, which comes out this Friday, I'm going to tell you what the other side of that looks like. When the speculative froth comes off of the top of the thing, oo, there's some murmurings of real good stuff for value investors, at the bottom, that are just starting to happen.
And I've been talking about it for a couple years, our previous podcast guest, Jesse Felder, has talked about it frequently, and it's starting to happen. And even today's guest, Kevin Muir, mentioned, you know, he mentioned Jesse Felder talking about it, and he's seen it, he's started to see it, too, this turn from speculative froth to value investing. And this is a sign, this is like the most overhyped piece of garbage, and it had this big famous – it has this big famous investor, Masayoshi Son, involved, at an exorbitant valuation, and it's a business [laughs] that just doesn't work. I mean, it just can't work, you can't keep doing this. They have to raise money, or they're going to go bankrupt. They're lighting money on fire, to the tune of billions and billions a year, at this point, you know, a couple of billion a year.
And as they grow larger, they're just going to keep doing that. And by the way, let me make something clear: go to their website and look at the buildings: they're gorgeous. They spend a ton of money, they employ, like, I think it's, like, 500 architects and designers, it said in the prospectus. And they make these spaces look gorgeous, and that can't be cheap. And they give you, like, you know, and some of the amenities are, like, kegs of beer and coffee and free Wi-Fi and all kinds of good stuff. I mean, you want to work.
If you've got to work someplace other than your home, surrounded by books and your wife and your dog like I get to work, if you've got to go someplace, you want to go to one of these buildings – they're gorgeous. And they had these common areas with, like, hammocks, and I saw one there's, like, a tree, a big tree in a planter, really nice. But really nice, I mean, Teslas are really nice. I drove a Tesla and it knocked my socks off – I don't think they're going to be around in a few years, either, you know? I'm sure the Peloton bike is awesome as these things go, you know, it's just awesome, for $2000. But, you know, they're lighting money on fire, too, to, you know, to the slightly more modest, you know, mere $200 million a year, there.
So I think this is the one, I think this – because, you know, there's been a bubble in late-stage private financing going on – gosh, one fellow wrote an article about it, in 2015, that I read. And so, you know, you don't necessarily see a bubble – people think a bubble looks like the housing bubble or the dot-com bubble. We're going to talk with our guest, today, Kevin Muir, and he's going to talk about another bubble that just kind of – I mean, it's there and it's obvious, but it's not the kind of thing that gets people excited in the same way. It's a different thing, but it's equally enormous, OK? So you know, WeWork, oy.
And, you know, they do so many other things, like, they had this community-based EBITDA metric that they use. They should just use – Matt Levine, from Bloomberg, said they should just use EBEE. Instead of community-based EBITDA, they should use EBEE – "Earnings Before Everything Else." [Laughs] Right? It's ridiculous, I mean, there are so many little things – I've got a bunch of little notes, here, but you get the picture: they're lighting money on fire, subletting space, claiming to be creating community and all this stuff, right? It's a really typical wishy-washy kind of, you know, connection-based – it's almost like a social media type of a hype, you know? "We're connecting people."
Anyway, that's the rant. You can write in about WeWork. I mean, anybody who writes about WeWork [laughs] and says I'm wrong or I'm outside my circle of competence – which one of the people writing in about Peloton said – I'm sorry [laughs], this one I've got nailed top to bottom. The IPO is not going to happen. The thing's probably going to go bankrupt – it's crazy, all right? So let's move on and see what's new in the world.
OK, what's new in the world? Well, there's a lot that's new in the world. Some of these things, I always try to pick news that means something to you as an investor. But every now and then, something is just so frickin' weird that, you know, I – [laughs] it's like the scene of an accident: I can't turn away from it. And that thing – there's actually a couple of them.
One of them is, do you remember Martin Shkreli, right, the young guy who, he took control of a drug company in 2014, and he raised the price of some life-saving drug, I think it was called, like, "Retrophin" or something like that. He raised the price from, like, $13 to, like, $700, something like that, and there was a huge, huge uproar about it. As there probably ought to be. [Laughs] So you know, he was eventually arrested. He was convicted of, like, defrauding his hedge fund investors. I think he took money out that he wasn't – more than he was supposed to take, or something like that.
And there was talk that he was kind of, you know, like, looting one of these drug companies that he was invested in. But it was really just like the hedge fund fraud was the thing with him. Well, the weird thing about him that's in the news, now, is that an investor lost $100,000 in one of his hedge funds, back in 2012 – last name is Yaffe. The son of that investor, a guy named Lee Yaffe, is getting sued by Martin Shrkeli, OK? So Lee Yaffe, his father loses all this money in Shrkeli's hedge fund, $100,000, and Shrkeli says that Yaffe – that the son pressured Shrkeli into signing what he says is an invalid promissory note for $250,000. [Laughs]
And, you know, Shrkeli says, "Well, he's a sophisticated guy, he's a Wall Street broker, in fact, and he knew what he was doing. And he knew I didn't owe him a penny, his father a penny, and that this promissory note was no good, blah blah blah." It just seems so weird to me, because what does pressured him into signing it mean? Did he have something over him? Did he say, "I know you're a fraud, and I'm going to tell the whole world"? What kind of pressure – because, you know, Shrkeli obviously had, you know, guts, let's just say. I wouldn't imagine you could easily intimidate him.
You know, this guy is willing to go up against the whole world and raise the price of a drug from $13 to $700, and this guy is going to pressure him to make up for a loss in the hedge fund? You know, he's not just going to say, "Hey, your father took his chances. You know, he paid his two cents and took his chances, and it didn't work out and that's it. You know, he bought his ticket, and that was it"? But, no, he says he was pressured into signing a promissory note, and that's the weirdness. He's a weird character anyway, but what does it mean that he was pressured into signing a promissory note? You tell me. I have no idea.
Another weird thing. So Manny Pacquiao, the professional boxer – and, you know, my Spanish pronunciation stinks, but other people say "Pacquiao," so that's what I'm going to say – professional boxer Manny Pacquiao has launched a merchandise-backed cryptocurrency called, of course, the Pac. Fans can use the currency to buy Pacquiao merchandise, or opportunities to speak with Manny. [Laughs] What else do I need to say? I mean, the weirdness is coming out of the woodwork. But you know what, it makes a weird kind of sense, doesn't it?
If you could, why wouldn't you. You know, your fame and your name in that kind of thing, it's, like, you've got to use every avenue to exploit it while you can, because your career isn't going to last very long, you know? Any professional athlete, you know, soon, he's not going to be able to get the crap beaten out of him and beat the crap out of other people for a living, so why not try to make the most of it. And of course, this is the world we live in, where, if you want to get weird and make the most of something, you create your own cryptocurrency. [Laughs]
So that's the weirdest stuff that's happening right now. And, you know, otherwise, Elliott Management, run by a guy named Paul Singer, they took a big stake in AT&T – that seemed like an important thing. Paul Singer is a really great investor, and, you know, the stock was up substantially. He says it's worth $60 a share. They own, like, $3 billion _____ _____, and he says it's worth at least $60 a share. I think it's trading in the high $30s, $37-ish, the last time I looked, a short while ago before I started recording the program.
And, you know, that's a huge move for a giant stock like that. And he wrote this letter, he says, "While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination." So you know, maybe they think they should undo that, I don't know. The point there is, any time Paul Elliott does something, you want to know about it. And I'm not saying you should bet alongside him – that's your decision to make – but, you know, you could probably do worse than betting on Paul Elliott. [Laughs]
So I noticed something. So in May, I read an article – I think it was on Bloomberg – that said we were having, like, the best May in four decades. And I read another Bloomberg article that was, like, dated last couple of days, maybe 28th or 29th of August, that said August was the best month in the bond market, in four decades. And, you know, these days, those are kind of opposite – for the last few couple of decades, especially, you know, sort of like bonds have been the hedge on stocks, right? So when your bonds are going up, your stocks are going down kind of thing.
And I just find it interesting that, you know, within a couple months of each other, they can have these, you know, once-in-four-decade moves. And I think that's the kind of volatility you find when things get a little bit crazy. And we'll talk about, like, how crazy they are in the bond market, with our guest, today, Kevin Muir. He's got some things to say about that. [Laughs] And I don't know, I just wanted to point this out, because earlier this week, on Monday, a guy named Jason Goepfert, from SentimenTrader – who we quote somewhat frequently on the show, a few times in the past – he pointed out that the worst-performing stocks of the year performed best on Monday.
And the best-performing stocks of the year performed worst. And the next-worst-performers performed next-best on Monday. And it went right down the line like that, and he said it was the biggest shift in momentum since 2009. So there's – I feel like there's big change afoot in equity and bond markets. And, you know, last week, our guest, Colin Roach, said it's really, really tough out there, and I know what he means. And these big moves like this, they're telling us that big things are happening.
And I don't even know what those big things are, I just know that markets are really frothy and bubbly, and they get volatile when that happens. So these things don't really surprise me, at this time. So and the latest thing, here, had a historic first week for corporate bonds – first week of September – sorry – historic first week of September. Companies sold at least $150 billion equivalent of bonds, in the first week of September – highest weekly volume on record. Apple sold $7 billion – they haven't done a bond deal since November 2017. Coke and Disney also issued new bonds. Berkshire Hathaway issued these yen-denominated bonds, and restaurant brands – they own, like Popeyes Chicken and Burger King – they issued junk bonds at pretty low rates, historically low rates, in fact.
So it's really, it's a bond frenzy, isn't it? Best August in four decades, and, you know, best first week of September, highest weekly volume on record. Amazing. Big things. God knows what this is all going to look like in a year or two. Be careful.
So the last thing we notice in the news is this little item that my producer, Justin, found for me. It says, "Stocks today mirror the market before the 20% 2018 plunge." So although the S&P 500 is trading near all-time highs, a number of investment managers believe that there's some key negative factors that are going to, you know, dampen the prospects for equities for the rest of the year, basically. There's a lot of hedgies and people worried about a downturn, and betting on a downturn, I think. And so, they think that we may be set for a replay of the situation a year ago, when the market was down I think it 19.2%, through the Christmas Eve bottom
From I think it peaked September 21st and bottomed Christmas Eve, for 19.2%, just shy of the 20% mark that marks bear markets, right? People say it's a bear market if it's 20% down or more off the highs. What do I think? You know, I think it goes the other way, actually. I think that people have been – you know, people were really negative on stocks in May, they were really negative again in August. And I've tried to make this analogy, before, in my newsletter, where I said you got to think of the market and volatility and stuff, it's like this set of shock absorbers that becomes used to the terrain, you know?
So if the terrain is very smooth, it's used to the smooth terrain. And then if the terrain suddenly becomes rough, whoa, it really gives you a jolt and, you know, you break an axle or something. But then you fix the car and it becomes used to the terrain again, it becomes used to the big bumps, OK? So none of these things happen in straight lines, and if we're headed into a bear market in equities, it won't happen in a straight line. It'll be a highly, highly volatile affair, and Mr. Market will fake you out time and again. You'll think, "Oh, yeah, I'm going to get short now," and then the market will surge 10 or 15%.
So you got to be real careful on the downside, real careful, if you're betting that way. So you know, a replay of the September through December route that we saw last year? Oh boy, I don't know if I'd bet on that. Would it surprise me to see it? Well, no, because, you know, people are – it could go both ways, right? People can get too bullish and then there's some buying that kicks in and the market ratchets back up. Or they can just keep selling, you know?
But I don't think they're going to keep selling. I think, you know, we saw a bit of a breakout, recently. Not that I'm a technician or anything. I don't assess these – you know, I'm not a technical analyst. But that's just how it feels to me, if I had to say one way or another. And I think gold probably corrects, too, right here. So you know, you'll get a chance and – actually, with some gold equities, starting right now, there are some of them that are still pretty cheap, and, you know, they might get a buck or two cheaper in the next few months. But, yeah, so, that's what the news looks like to me.
Let's talk to our guest, man. I can't wait to talk to this guy. He's a pretty cool guy. I follow him on Twitter. Let's talk to Kevin Muir.
OK, it's time for our interview – really looking forward to this one. I follow this guy on Twitter, his name is Kevin Muir. And Kevin is the author of The Macro Tourist newsletter. He's a former institutional equity derivative trader for a big bank, who decided, one day, that bank life wasn't for him. So he proceeded to trade for his own account, for a couple of decades – pretty cool, huh? – before joining his current firm, East West Investment Management, where he is market strategist.
Kevin Muir, welcome to the program, sir.
Kevin Muir: It's great to be with you today, Dan.
Dan Ferris: So Kevin, we had Colin Roach on, last week, and then, I wanted to get another macro voice on the show this week. And I follow your stuff on Twitter, and I read The Macro Tourist, now and then. And I guess before we get to all that, let me just ask you – I like to ask people in your business a question, like: How old were you when you got the first inkling that a career in finance was for you? Were you very young, or did it come later in life?
Kevin Muir: Yeah, I loved games from the time I was a little. So actually, I grew up in a household where my father was a research director for Canadian kind of independent securities dealers, so I grew up with a lot of stock talk at the table. And I knew, from a very young age, that I wanted to be not a research analyst but a trader, much to my mum's kind of upsetness, because she always wanted me to be a lawyer. But I kind of knew that I wanted to do trading, from a very young age.
Dan Ferris: Well, there's probably too many lawyers in the world anyway, so I think you made a good choice.
Kevin Muir: [Laughs] Unfortunately, there's too many traders, as well, these days.
Dan Ferris: I know [laughs] – I thought that, as soon as I said it. So look, Kevin, there's a – you know, you were kind enough to send forward some ideas for what we would talk about. But I got to tell you, you didn't need to. Because anybody who has, like, followed you on Twitter or read, you know, Macro Tourist, like, lately, knows what the big issue. And you did a 25-part tweet on the bond market, and, you know, you were saying there's a bond bubble, and that we – and you also make the point that we've entered, like, a third highly speculative bubble phase, now. That's correct, right? That's where we are, right now?
Kevin Muir: For sure, and I don't know how anyone can dispute that there's a bond bubble. When you're buying a negative-yielding bond, the only way you're going to make money is if you sell it to somebody at an even more negative yielding rate.
Dan Ferris: Yeah, so I've talked about the kind of people who buy this stuff, and of course, a lot of it's sovereign debt and people, you know, institutions and others have to buy it. But can you add any color to that for me? Because it just seems insane, like, you know, even if it was your job, wouldn't you be telling your boss, "You know, we're going to lose money on this," don't you?
Kevin Muir: Well, I think that that is the case that, when we first went through the zero rate, there was a lot of pushback. But if you go look at the top-performing pension plans of this last kind of summer, you'll see that the ones that did the best were the ones that were stuffed to the gills with this negative yielding paper, because it went even more negative yielding. And what's kind of shocking to me is how people have kind of, you know, embraced the price momentum and said – you know, very famous people that are talking about it, even in the U.S., saying if you draw this trend line, you know, we're currently 1.5 or 2% on the 10-year whatever we are right now. But, you know, if we look at this trend line, we could go to -4%, and there's lots of people that have taken the price action in the bond market and simply extrapolated it forward, and kind of come up with even more outrageous negative-yielding kind of price targets.
Dan Ferris: Right, so if you're a European, you know, bond fund manager, your career is made, this year, right, you're having a career-making year.
Kevin Muir: For sure, some pension plans are up 30%, I believe, this summer.
Dan Ferris: My god, that's an enormous, enormous move for a bond portfolio. So one of the most interesting things I thought you said in your 25-part bond bubble tweet – which by the way, folks, look Kevin Muir up on Twitter, because this 25-part bond bubble tweet has these wonderful graphic images, that are hilarious in some cases. But you said that you thought bond prices would fall, but for good reasons, not bad reasons. What do you mean by that?
Kevin Muir: Well, a lot of people that are bond bears will say that eventually we're not going to be able to fund our debt, and that's why the bonds will collapse. Or that the Chinese will stop buying our bonds, and that's why the bonds will kind of fall out of bed. And I argue that those things aren't going to happen. I don't worry about bonds going down because the Chinese have stopped buying our bonds. In fact, you can see that they have done that, and very quickly there were other kind of investors in other countries that were willing to step into the void.
And I don't think that we're going to have a problem because we can't fund our deficit in terms of the bonds become too large and that's why bonds have to go down in price. Like, I don't think they should go down because of supply. I think they're going to go down because we're going to find that the economy ends up being stronger than we all expect. So I see that that's kind of a good reason for bonds to go down. And I'm hopeful that we stop, as a kind of government and central bank, of trying to apply more and more monetarism to this, like, problem of every economic slowdown, we lower rates to even more negative levels.
And you can see that in Europe they're doing this, they continually try to go more and more negative. We're -50 basis points right now, and we're talking about going to -75, or whatever the number is. And I say to myself, well, if a company doesn't want to borrow at -50 basis points, why are they going to borrow at -75 basis points? And I think to myself that eventually we're going to hit a point where we realize that, instead of us trying to solve all of our problems with easier and easier monetary policy, we're going to actually look at what the issue is, and we realize that we need to do some fiscal spending.
And especially out of Europe, which is where I think most of this bond kind of bubble has kind of manifested itself, and a lot of the problems are occurring there. So if we look at Germany, Germany is running kind of their ten-year Bund is actually -55 basis points, which means that the German government can be paid to spend. And right now it's such a kind of whenever someone says that the government should spend, it ushers in kind of horrors to a lot of people, and they say the government could never spend well. But you have to think back to, like, the '50s when Eisenhower came, and he spent on infrastructure and put all those GIs to work. And you realize that that's what's really needed is that the government should take the fact that there's a lack of demand, private sector demand, and they should be stepping up to the kind of trough, and they should be spending.
And that's what I foresee happening is that we're going to get increased fiscal spending going forward, and bonds will go down, not because there's a problem but because there's actual growth in the economy again.
Dan Ferris: I see. Wow, you sound a lot different from a lot of voices in the press, today.
Kevin Muir: For sure. Most people think to themselves that there's too much debt out there, and the last thing you can do is solve it with more debt. And although I do understand that argument, I think that that's the kind of thinking that has got us into this place in the first place. So I ask them what do they, you know, how do they see us solving this problem? Because it's very clear that their solution, which is more and more kind of easier monetary policy with QE is doing nothing but making inequality all the worse. And in fact, if you look at Europe, it's causing their banking system to kind of seize shut. It's just not working.
So if we go back to the great financial crisis, we think to what we did – or, you know, I'm a Canadian, but I think we did some QE – the Americans did a lot more QE. If we go back to the great financial crisis, I would've argued that instead of us going out and doing quantitative easing, we would've been much better off, you know, issuing a 100-year bond – when the bond market was starving for product, issue a 100-year bond, and then gone and put fiber into everyone's house, or fix the airports, or fix the bridges. Invest in the country, invest, because the fact is that the private sector isn't stepping up, and that's when the government should do it.
Dan Ferris: Why isn't the private sector stepping up, Kevin?
Kevin Muir: Well, the private sector isn't stepping up because they have too much debt. Because over the last few decades, all we've done is, every time there's been a problem, we've kind of thrown easier and easier monetary policy at it. So it's encouraged, you know, corporations, and even individuals, to lever themselves up. And what happened during the great financial crisis is we hit a point where they couldn't lever themselves up anymore, and monetary policy became ineffective. And the Fed is, in essence, pushing on a string.
Dan Ferris: I see. So in other words, part of the sort of common narrative about this, over the past couple decades, that I've heard, is that basically central bank policy encourage misallocation of capital. And other, you know, really bad ideas, like taking on too much debt. So people take on lots of debt, and they do things like buy back stock with it instead of investing in their business. And now, they're stuck with debt and they're sort of gun-shy, they don't want to take any more risk. So you see a general sort of economic stagnation, for lack of a better word, correct? No?
Kevin Muir: You got it bang-on. And if you think about it, if you have – there's two ways that money can be created in our system, it can be created on the private sector side when banks make loan and create money. But there's also another way, which is when the government goes and runs a deficit and actually puts money into the system. And we've relied, for too long, on that first one, to kind of fuel the growth. And what you find is that when that one goes away and when you can't get that private sector kind of credit creation, and you can't put anymore debt on it, we're all kind of looking at each other and scratching our heads and saying, "Why can't we get any economic growth?"
Well, the reality is that the system is getting starved because it doesn't have enough kind of liquidity going into it by actual government going out and spending. And so I know that a lot of people will say, "No, no, the government is the problem, not the solution," and kind of I'll say to you that I'm fine with fiscal stimulus also being in the form of cutting taxes. Because in essence, what the economy is telling you is that, both from a monetary and from a fiscal point of view, we're too tight. That's why the yield curves are flat, that's why bonds are bid. And you don't need to fix it with looser and looser monetary policy, because we've hit a point where we can't do that, so we need to do it from a fiscal side.
Now, one way you could do it is by the government spending, but there's no reason why we can't also do it from kind of the fiscal side of the government cutting taxes. So if Germans don't want to go out and invest in their country and spend, I would argue that another solution would be for them to actually go and cut their tax rate. And ironic as it is, I kind of look at the American policy, over the last couple of years, and I say that the reason that America has been the best economic kind of grower, for the past couple of years is because Trump came in and actually did fiscal stimulus. And so, you guys were the only ones that were actually doing fiscal stimulus. Everybody else was trying to balance books, and trying to, you know, put in austerity. So they were doing fiscal austerity with monetary ease, and then wondering why they couldn't get any growth.
Dan Ferris: I see. I wonder if we could shift gears, because I can't get a macro guy on the show without asking him a question that I come back to frequently, although I admit I forgot to ask Colin, so, I'm going to have to get back to him. And the question is this, Kevin: a lot of folks talk about the Federal Reserve as causing inflation, as being now in the business of supporting asset prices. And can you either, like, disagree with that and explain it to me, or, you know, show me the mechanism that goes from a rate cut to higher equity prices, for example? I don't take the two for granted, so I need somebody to draw me a map one way or the other. Which way do you go on that?
Kevin Muir: So I used to believe that the quantitative easing would cause inflation. I was a big believer that, if you had would ask me to sign that open letter to Ben Bernanke that was signed by very famous individuals in the Wall Street Journal, at the time of the second or third quantitative easing program, and they were worried about devaluation of the currency and then kind of inflation getting out of control. I used to very much believe that that was the most likely outcome to all this monetary stimulus. I have come around in my thinking and realized that the monetary stimulus isn't actually going to cause inflation in regular goods and services. So although I won't disagree with you that quantitative easing will cause misallocations or changes in financial asset prices, and that you will get a situation where the stocks are bid higher and corporations are bid higher, you know, corporate bonds, because of that, I will not kind of say that that will eventually translate into regular inflation the regular inflation that we see.
That regular inflation that we see will only be created when we get more fiscal stimulus. And see, this is part of the reason that I'm kind of more inclined to solve or to think that we should solve some of these problems with fiscal as opposed to monetary. Because when you do the monetary easing, all it's doing is making the holders of the assets, the financial assets, richer – those are getting bid up. And, you know, the most financial assets are held by the very rich. So this is why you're finding a situation where, you know, the Gini coefficient is basically back to the level.
And the Gini coefficient is the kind of the measure of inequality between the rich and the poor – we're back at the level of the 1930s. And I worry that the longer we continue down this road of doing quantitative easing and more monetary stimulus, that's only going to get worse. And eventually, it's going to cause the whole system kind of, when the poor realize that they're not getting a fair shake, here, you know, we could see a situation where it causes instability from a political point of view.
Dan Ferris: Yeah, that's my big worry about inequality is that one day, you know, the violence in the streets gets worse and worse and worse, and one day, you're living in a riot. But, you know, and we've seen some of that, I mean, we do see some of that, nowadays. You know, I live near the city of Portland, Oregon, and, you know, those folks were in the streets not too long ago, and – and they always tend to get a little violent. I don't know where you're based, but, you know – I don't know, what do you see? Do you think that some of the violence in the streets that we've seen – and there's been little, I admit, but it's been there – do you think it's just random acts? Or do you think that we're headed in a bad direction already with this?
Kevin Muir: Well, I think that people are frustrated. And I think that there's a lot of people frustrated, and it's not just the poor. Even the ones that kind of are on Wall Street understand that the system is increasingly kind of manipulated by kind of banks that have _____ more clout than they really should have, in terms of lobbying. They look at the, after the great financial crisis, and they say, you know, those banks were too big to fail back then, but, you know, they haven't been broken up. And I think that it's an increasing kind of frustration by most people, to realize that the system is not working for the average Joe nearly as much.
I think we need to have some more policies that are more geared towards Main Street instead of Wall Street. And I look at this monetary ease that we have, and I just say, "How can we think that this is working?" because it's just not. And all you have to do, even, like, look in Europe, you can see that it's not working. And I contend that the reason that the U.S. is doing better than most other countries throughout the world is because they were willing to go down the fiscal road. And Trump went and ran a deficit that was four percent of GDP. You know, Germany and Brussels are getting mad at Italy for running a two-and-a-half percent, you know, deficit to GDP.
And so, I look at this and I think to myself that we need to have a rethinking about what we're really trying to accomplish on the economy base, like, policies. And whether this idea that what's worked for the past kind of, I would say, three decades that we're all so sure is the way to go, maybe we've hit a point where it no longer works, and we should be thinking about some other solutions.
Dan Ferris: OK, so, so far, we're wringing our hands about, you know, bond bubble monetary policy. What do you like? What assets do you like? What do you think people should own, right now?
Kevin Muir: So if I'm correct in that we get more people that understand that the idea that we can't spend is purely a self-imposed restraint. And that going forward, we're going to find more people, young millennials voting and leaders that do MMT-like policies, or even just, you know, Germany willing to accept some fiscal stimulus. If I'm correct and we are at the end of the kind of monetarism, if we are at the point where we all kind of realize that there's no way that monetary policy is going to solve this issue, then I think that one of the things you'll find, going forward, is that bonds will be a terrible investment. You know, if you go look at, you now, the ten-year – let's just pull it up, here – the ten-year is currently trading at a yield of 1.68. The Fed has told you that their target inflation rate is two percent.
If they achieve their target, that means, on a real basis, the best you're going to do is have -40 basis points of real loss. So if we do get a situation where the tide turns and we get a switchback into kind of non-deflationary assets, then the last thing you want to own is bonds. And what should you own? You should own things like real estate, and in fact, you should own stocks. But I do think that one of the things about stocks you're going to find is that there's going to be a wholesale shift in terms of the types of stocks that we own.
Right now, there's been a tremendous kind of reach into what's known as safe kind of low-volatility stocks, but they're nothing more than bond proxies that people are once again just trying to desperately find a yield somewhere. And as we speak, we're taping this on Tuesday, we've had one of the greatest kind of moves from kind of those crazy low-volatility stocks, out of those and into what we call value stocks. And I think that if – this just might be the start of something new – I'm a big believer that we should be buying the kind of Main Street stocks and value – value ETFs might be one of the things that people should be looking at.
Dan Ferris: Sounds good to me, I'm a bottom-up value guy. But you're talking about capturing the value effect, which I know is slightly different than being a bottom-up value guy. So there's a question that I just remembered, that I've meant to ask a lot of guests and somehow it's never come up, and I hope you'll indulge me, here. It seems to me – I'm not a macro guy, Kevin. I need people like you – I need to follow people like you, to kind of just keep my finger on the macro pulse. But it seems to me like a lot of macro folks and a lot of economists, they talk about the global economy or, you know, large developed economies, they talk about them as being based entirely on spending.
Whereas, I always kind of thought it should've been – that capital formation should be thought of as primary. And, you know, those are totally different you might even say opposite priorities, in some ways. Because capital formation requires saving, which is, you know, kind of the opposite of spending, in many people's eyes, although it's really just a different kind of spending. But what do you think about – I realize I'm speaking in very general terms, but do you have any insight for me on this? Can you help me out, here?
Kevin Muir: Well, are you kind of going down the road of the broken window fallacy? Or, like, the idea that if I go as a company and I take out, you know, $1 million to go invest in getting some new computers and new – a press or whatever it is, some new equipment, that it's very different from the idea of just going out and spending it on a big party. And this is one of the things that I know I get frustrated with Paul Krugman, where he talks about the fact that any spending is good spending. And there's the idea that you could dig a ditch and then fill it back up, and we'd be better off. And that's where the broken window fallacy comes into play.
And I'm in your camp, that you can't just go and spend money without thinking about how you're going to go about – like, doing it into something productive. And too often, the government just gives away money and does stupid policies, and this is what a lot of people push back against. And the reason that government spending is kind of, you know, causes a shudder of horror in many people, because they've seen the waste that's out there. But I still contend that there's a difference between kind of spending frivolously and wasting it and also investing in your country. And I go back to, you know, I already mentioned that period in the '50s with Eisenhower.
But, you know, part of the reason that America was the greatest nation, you know, of growth in the '50s, '60s, '70s was because they had, you know, invested in their country, with all those GIs that had come back from the World War II, and set up infrastructure that enabled the growth going forward. So by no means do I think that the money should just be handed out in tax rebates, you know, cash for clunkers, or policies that don't make much sense. But at the same time, I don't buy the idea that governments shouldn't be investing in the infrastructure that is so desperately needed throughout the, you know, most Western countries.
Dan Ferris: Right, so the things you're talking about – and, for example, the highway system is like an example of what you're talking about – you know, these are large capital projects. It's not just, you know, like you say, cash for clunkers [laughs] or some other crazy scheme like that, just to make money move from one place to another. It's actual capital assets being put in place, that enable other entrepreneurial activity to flourish.
Kevin Muir: You're absolutely correct, that's – and that's the line that needs to be drawn and it's something that needs to be monitored very carefully. But unfortunately, I just feel that we've gone completely the other way: we've become somehow thinking that that sort of investment by the government is a bad thing, and that there's no way we can do anymore of it. And I almost argue that we can't afford not to do anymore of it. You just have to look at the decaying nature of much of the infrastructure, to realize that it's sorely needed. And here we have a situation where the bond market is almost begging someone to go out and issue a whole bunch of bonds and spend it. And it just kind of boggles my mind that governments throughout the world are not seizing this opportunity.
Dan Ferris: Yeah, you'd think when you can either get paid to spend or, you know, or have to pay, in the United States, a tiny amount to spend, that politically – especially, you'd think some enterprising politician would say, "Jeez, we can borrow for two percent," or one percent or some crazy thing like that, "Let's do it, and I'm going to get elected pushing this thing through." [Laughs] Where are those people? You'd think they'd be everywhere.
Kevin Muir: Well, I think they are coming, and I think this is what you should be – if you're taking a long-term view of kind of the markets and thinking about it, ask yourself what is the more likely scenario. Is it that these politicians never show up and that nobody ever decides that borrowing, you know, at almost zero and spending is a good idea? Or is it more likely that these politicians end up being elected in the next cycle, and as the young people _____ kind of become more and more of a larger force – because let's face it, even though the Baby Boomers own the most assets, if you look at numbers, pure numbers, there's actually more millennials out there, right now, than there are Baby Boomers.
And how long are they going to sit there and continue with these kind of deflationary policies, to protect the value of their assets? The millennials will say, "That's it. I don't want any of this." They're going to elect, you know, an AOC that's going to go in there and willing to spend. And so, when you think about your portfolio on a long-term basis, I think the largest risk out there is inflation, not deflation. I think back to history and, you know, I don't know about you, but I can't name a single country that has ever collapsed because of deflation. But I could sure name a whole bunch that have seen very high inflation. And over time, I think that that is the natural state of things: the governments will spend, and you will get inflation.
Dan Ferris: Kevin, let's just entertain another thought, here. Look, I hear what you're saying, and I think, you know, you're probably right with a lot of this stuff, with, you know, government spending on infrastructure and things. And I think that's the world we live in, where that's probably the most realistic kind of a development that you could expect and could actually happen. But I have to admit, in my heart of hearts, I've felt for a long time, now, like, we have too much government, they have too much influence in our lives, and it's too big, and they spend too much. They spend a lot more than they take in.
And wouldn't it be better, even, if someone could actually not just cut, you know, not just raise taxes or cut taxes, but if they could actually, instead of merely cutting taxes, actually shrink the size of government? Doesn't that sort of free up resources that can be used by entrepreneurs who probably net-net would put that money to work in a better way, overall?
Kevin Muir: But we already have a situation where money is practically free, and nobody's going out and doing that. We're starved for demand. So although I'm sympathetic to the idea that it would be better if the private sector did it, I don't know how you're going to go about achieving that.
Dan Ferris: Right, but why are people cautious, though? Is any amount of this caution that we're seeing in private sector capital spending the result of uncertainty created by massive government? That's my question, that's [crosstalk].
Kevin Muir: Yeah, so, I understand that, and, you know, a lot of people will talk about the good times under Reagan, and not realize that, under Reagan, he actually expanded the deficit huge. And that – I'm not sure – although I'm sympathetic to the idea that kind of excessive bureaucracy in terms of not allowing entrepreneurs to go do stuff will definitely kind of cause companies to be less, you know, created less. And there's no doubt that part of the reason that America is a more dynamic country than, let's say, France is that America allows entrepreneurs and it has more of a risk-taking mentality and less bureaucracy than France. So there's no doubt about it that those things are all good things that help in kind of making the economy more efficient.
I just don't think that that is the source of the problems. And I don't think that the idea that we have to cut spending is going to solve anything. Like, I just don't see the situation where – like, I would contend that if Trump had gone and not run a fiscal deficit, over the last couple of years, I would say that the U.S. economy would have been weaker, not stronger.
Dan Ferris: Right, even though technically, the government would be in a technically stronger financial position – that's probably true.
Kevin Muir: Yeah, and it gets – to me, there's – the government's spend kind of deficit is someone else's savings. And so, it's actually the private sector is on the other side of the government's spending. Now, it gets a little more complicated because there's relative issues between countries. But on the whole, the government spending and creating deficits is then the private sector's savings. And therefore, if the government is not spending and not doing that, then the private sector is not saving, or not creating wealth that way.
So listen, this is getting into the MMT-kind of side of things, which I know a lot of people just, like, think that's a terrible socialist policy. But if you look at it, I contend that MMT, in a lot of ways, explains what we're seeing in the macro landscape, for the past decade. MMT would've told you that quantitative easing wouldn't have caused the inflation that everyone was worried about. And in fact, I would argue that Trump is the most MMT president that we've ever had, because Trump – or, I don't know if he understands, at the very least, he believes – that he goes and, eight years into an economic expansion, he goes and puts fiscal stimulus.
You know, Keynesian would tell you that they should be paying down the deficit, because, you know, you should be paying it down in times of good times, and then in recessions, you should be expanding it. An Austrian would tell you that you should be cranking rates because, you know, that's what really causes – you know, sound money is what really matters. Well, Trump goes and says, "No, we're going to go and we're going to do fiscal stimulus." And then, when they say to him, "Well, listen, if the economy is so good, why are you encouraging lower rates?" And what came out of his mouth was pure MMT when he said, "There is no inflation."
And this is where I'm kind of going, until we get a situation where we get inflation, until we get a situation where the government is competing for those real resources, it makes sense for the government to spend. Now, you might push back and say, "Well, once the government's spending, it's very difficult for them to stop spending," and I completely understand that argument and I'm sympathetic to it. And by no means do I think that the government is going to be able to go spend and then very easily take their foot off the accelerator. But I just, I look at what's more likely, over the next little while. And what is more likely is that, as the cost of this government spending is so low that we're going to see governments throughout the world doing this, and it won't be –
And it'll feel great at first, because they're going to spend, and there's actually going to be very little issues, and it's going to cause the economies to do better, there's going to be very little inflation. But eventually, they will hit a point where they're competing with the private sector, and at that point, they will cause inflation. And that's when you should be worried. But, you know, right now, there's no worries with the government spending. There's a lack of demand, there's a lack of spending out there, and that's why we need them to go do it.
Dan Ferris: You know, when people say there's no inflation, I got to tell you, I feel like I pay more for everything but money. You know, I pay more for everything, over the past, you know, couple of years.
Kevin Muir: I'm sympathetic to that, as well, because – and especially in areas where there's being credit created. If you look at one of the areas that's the largest growing fastest areas of credit creations has been in student loans. And then you go look at the inflation that's occurred in the university side of the kind of your colleges, it's been astronomical. And there is some question about whether it's really being measured correctly, inflation, even on a general basis. Then if you go look at the shadow stats fellow that kind of uses old methods of calculating inflation, he argues that we're closer to five or six percent.
But if that is the case, that's all the less reason why you should own bonds. Because that means that on a real basis, you're getting kind of devalued by that amount – you know, like, in real rates, you're losing that every year. And then it also can explain why the stock market is being much stronger than everyone thinks, because to some extent, stocks are a real asset.
Dan Ferris: Yeah, they're real businesses, that's right. Well, Kevin, this has been fun. We're out of time, but if I could ask you to leave our listener with one thought about all this, is there one that you could leave them with, or no?
Kevin Muir: Well, I would just be very, very worried or cautious about the bond market. I just think that we are at the end of monetarism, and just like Volcker in 1981, nobody could imagine that inflation could have been stopped at that period. And they were all falling all over themselves to sell bonds and, you know, buy gold, because they thought that there was going to be inflation forever. And for the next three decades, we've seen a persistent trend of disinflation. I would argue that we might be at the kind of reverse-Volcker moment, where at the point where were become the most convinced that we're never going to be able to create inflation is the point where it becomes the scariest to invest in those assets. Because, very likely, what we think will never happen often occurs.
Dan Ferris: Oh, boy, I really like the sound of that. Thank you for that. Excellent. So Kevin, we'll have to get you back here and see how things worked out, in a year or two, OK?
Kevin Muir: Sounds great. It's been a pleasure doing this with you, Dan.
Dan Ferris: OK, yeah, a pleasure to talk with you, as well, Kevin. Thank you so much.
Kevin Muir: Take care.
Dan Ferris: All right, bye-bye.
All right, it's time for the mailbag. This is one of my favorite things to do, each week, is just to read all the feedback and see what you guys have to say. And it's where you and I get to have a conversation about investing. What's on your mind? Write in to [email protected] with all your questions and comments and politely worded criticisms. I will read every single one, for as long as I can, until the show just becomes so popular that I can't possibly read thousands of feedback every week. But until then [laughs], I will read every single one, and I did so this week, once again.
And this week was really cool, because I did my rant about Peloton, last week, and lots of folks wrote in. So I've got, like, seven feedback items that I've picked out, but obviously, I can't read all of each one of them. But, you know, I'll just take bits and pieces out of many of them here, and we'll see what people had to say about Peloton. And particularly interesting is the kind of people who wrote in. We had a cardiologist, we had a fitness club owner, somebody who owns a similar product that's not a Peloton, and somebody who bought a used Peloton – it's really an interesting group.
So first, I got to read Bernie B., just because it feels so darned good. Bernie B. says, "Greetings. Your personal credibility just took a might leap. The Peloton rant was a thing of beauty. Probably too much reality for the average millennial to swallow. Bernie B." I don't like to criticize millennials [laughs], because I'm stepfather to three of them, but I hear you, Bernie. Thank you.
Next, Matt K. writes in. He says some very kind things in his first paragraph, says I'm doing a good job. Then he says: "I write you in response to your rant in Episode 118, Peloton. I agree with you that fitness equipment is a waste of money, and the best thing for your mental health is eating right, and I don't align with Peloton's current business plan. Aside from that, I did purchase a Peloton bike, secondhand, earlier this year, after searching Facebook Marketplace for months. I got the bike, shoes, and other accessories for about a 50% discount." Good for you, Matt. Excellent.
"I wasn't about to pay retail price," he continues, "and the bike was only ridden a handful of times. You're right, exercise equipment is a sales pitch. I am, overall, very pleased with the Peloton bike and services. Had to call customer service with an issue, and I wasn't put on hold. They got to me and fixed the problem in 10 minutes. I do believe that the different workouts on demand and live are intense and unique. For your reference, the $39 a month also comes with access to downloading the app for streaming on your iPad or smartphone or take strength or yoga classes remotely. This is great for me when I travel for work.
"I don't know about all this product design company, logistics company, apparel company business. It all sounds like a bunch of fluff they're just trying to sell. So – " and he says some other things, "Matt K." Thank you, Matt, and excellent job getting a 50% discount. Moving on – I just want to hit some of these, and I'll react here and there.
This is Tom B., and Tom B. says, "Thirty-year-plus fitness industry club owner/investor." He said, "Your take on Peloton is spot on. The product is fine for the higher-end enthusiasts, but not for mass adoption. I think most of their low-hanging fruit market has been penetrated and future growth will be challenging. Also, as you suggested, their subscription retention rate in excess of 90% does not pass the smell test – very hard to believe. I wish them well, but will look to short the stock if it takes off."
Then he tells me he thinks I should buy, you know, keep an eye on Planet Fitness, "I have an investment interest in over two dozen operating Planet Fitness stores, and they're cash machines: quality product, low price, $10 a month. They will be the McDonald's of the fitness club industry, with a club just down the street in most of America. I look forward to every Thursday, to get your next Investor Hour. We have similar investment views. Be well. Tom B." Thank you, Tom, very good input. Obviously, Tom is, you know, he's kind of competing with Peloton [laughs], right, so I've got to keep that in mind.
Next, this is from – this is a long one, so I won't get the whole thing – Ozzie W. And Ozzie W. – I'm sorry, Ozzie, I can't really read your whole thing here, it's so long. But you were very thoughtful. I'm glad you wrote this thing. So folks, what Ozzie is saying is that he saw the Peloton bike advertised during the Tour de France, and they went to Somerset Mall in Troy, Michigan, and he said, "Somerset is where you will find things, in Michigan, like Armani and Peloton," right, [laughs] expensive stuff. And he said they tried the machine out and it's really a smooth ride. He says, "The primary advantage over other stationaries is that the resistance is provided by electrical inductance, not by friction. This means almost entirely silent operation and very smooth pedaling."
I don't dispute, by the way, that the product is superior in every way. It'd better be [laughs], right? But he says, Ozzie says, "However, we abhor subscriptions. $40 monthly just won't work for us. The workout videos are actually pretty annoying. There is someone on-screen yelling something like, 'Damn it, pedal faster, bitches.' [Laughs] That is the least annoying part of their tirade. Annoying spin videos are available on YouTube for free." [Laughs] And he says, "Shop around and one may also find an inductance resistance bike for a few hundred instead of a few thousand dollars.
"I shopped around town at the local cycle shops, and none had an inductance resistance bike, so I tried online and got the inductance stationary bike off Amazon, with optimal price-rating ratio. It works like a charm." So in other words, folks, I didn't realize this, the technology is nothing special, so there's nothing special about the technology that makes the Peloton ride so smooth. And they're charging $2,000 for it. Well, good for them if they can get it, right? He also has a Bowflex that he paid $200 for. So look, these guys getting $200 Bowflex and 50% off of Peloton, I love it. Do that. Brilliant. Thank you, Ozzie.
So that's really all the – actually, let's see – sorry, here's one that I missed before. This is Stephen S. – he's the cardiologist. He says, "Dan, I await each podcast, eagerly. I especially enjoyed Episode 118 and your rant. I am an interventional cardiologist, and for years I have said the same thing about exercise. And have told any of my patients who wanted a treadmill, to exercise, to not buy a new one but to look for a used one, because they were used [laughs] to hang clothes on by their previous owners. I found myself laughing out loud at your rant. It made my day. I also listened twice to Colin Roach, as he had great words of wisdom. Please continue as you are doing. You are invaluable. Stephen S."
Thank you for your kind words, and I'm glad that we had, you know, a doctor writing in and saying [laughs] you don't need to spend all this money on exercise equipment. So we had a couple other questions. One of them was from Steve T., he says, "Do you think the whales, big investors, have enough pull to move precious metals the way they did bitcoin." Bigger market, but still pretty small, gold. So yeah, I think people with billions of dollars could move gold around. I don't think they can manipulate it endlessly, but, you know, they can impact the market on the short-term, for sure. So there's one more, just getting to it, here – I should be more organized – here we go.
This one's by Bernadette G., and Bernadette G. says, "Dan, you do a wonderful job. I look forward to your podcasts. Each one is very informative, and it's helped me become a better investor. Can you recommend a short book that explains the fundamental ratios one should pay close attention to when conducting due diligence on a stock as a value investor? I know free cashflow is important, but are the five to 10 most critical ratios found in one book that you can recommend? I'm sold on value investing. I just need a quick resource for knowing which ratios I should use when conducting due diligence as a value investor. Thank you. Best regards, Bernadette G."
OK, Bernadette, here's the thing: Let's not get too wrapped up in ratios. The better thing to do is learn what's a good business and how much you oughtta pay for it. And the best introduction to that, that I can name, is by Joel Greenblatt, it's called The Little Book That Still Beats the Market. And it's a wonderful read, it's easy to understand, and the concepts in there of buying good businesses at reasonable prices is invaluable. So I highly, highly recommend that. I also recommend you read a very short nice little book that I discovered recently, and we recently interviewed the author, Tobias Carlisle, is The Acquirer's Multiple. That'll give you an interesting multiple to screen stocks with.
Other than that, just focus there for now, and, you know, other than that, you should really just learn about businesses. Learn about what makes a good business. And Warren Buffett can teach you a lot about that for free. There is a nice compilation of, you know, some of the really good parts of his letters, over the years, in a book by a guy named Lawrence Cunningham. God, I forget what the title of the book is off the top of my head – it's around here somewhere, and I don't see it [laughs], but it's around here somewhere. But if you just type "Lawrence Cunningham," you'll figure out which book is just the one of the excerpts of Warren Buffett.
So Joel Greenblatt, The Little Book That Still Beats the Market, Tobias Carlisle, The Acquirer's Multiple, and Lawrence Cunningham's book about Warren Buffet, which is a compilation of really great excerpts for investors, from Warren Buffet's letters. Do that, do those three, and I think you'll learn what is really much more important than just learning five or 10 ratios. I mean, in Extreme Value, we do look at – we look at things like, you know, whether or not they're gushing free cashflow. We look at the balance sheet, to see how much debt they have, like, debt to equity. We look at the margins, over time, to see if they're consistent.
We look at what they've done with their capital in terms of dividends and share repurchases – I just call that shareholder rewards, just as an easy name. And the other thing I look at is return on equity, although return on invested capital is also really good. So I hope all that works for you.
I also wanted to give a quick shout-out to Mark S., Joe V., and Allen M. for writing some long and thoughtful e-mails that I just, I'm sorry I couldn't get to them this week.
And that's the mailbag, and that's another episode of the Stansberry Investor Hour. It is my privilege to come to you once again, as it always is every week. And be sure to check out our website – you can listen to every episode, you can see a transcript of every episode, and you can enter your e-mail address to get all the updates for every episode in the future. So that's www.InvestorHour.com. Check us out there. That's it for this week. Thank you so much. Talk to you next week. Bye-bye.
Ending: Thank you for listening to 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 at [email protected] This broadcast is provided 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 decisions based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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