On this week’s episode of the Stansberry Investor Hour, Dan sounds off on the price of oil. Why on Earth did this happen? What does it mean for the average investor?
And could it happen again?
Next, Dan brings on Enrique Abeyta, editor from Empire Financial Research, onto the podcast for this week’s interview. Over 20 years ago, Enrique started working on Wall Street, where he founded and served as managing partner at two long/short hedge funds.
Enrique famously generated positive returns during the bear markets after the Dotcom bust and the global financial collapse.
Enrique’s not your typical Wall Street fund manager though. He’s got some pretty controversial views on investing that leave Dan speechless. Listen for yourself on this week’s episode.
NOTES & LINKS
1:32 – Oil prices just went nuts, dropping to negative $40 per barrel at its recent low. Why did that happen?… And how can the average investor take advantage of this rare situation?
9:26 – “So this was a really weird situation. Was this a one-off situation? Ehhh I don’t know… I don’t think so. I think there’s potential for this to happen again!”
17:30 – Dan talks about the number one most important rule of investing.
22:50 – Dan has a conversation with today’s guest, Enrique Abeyta, who spent over 20 years on Wall Street, where he worked at Lehman Brothers and founded and served as managing partner of two long/short hedge funds. Today he works as an editor at Empire Financial Research alongside Whitney Tilson.
23:59 – Enrique shares a story with Dan about a stock-picking contest that he competed in during high school and how he outwitted his classmates to win every single week. You’ll laugh when you hear how simple his solution was…
32:10 – Enrique shares a lesson he got when he was younger from a Lehman executive… “You can’t always control the outcome in the short term, but if you do things the right way, you can control the outcomes in the intermediate and long term.”
34:56 – Dan asks Enrique about his time at Lehman Brothers… “Why do you think [Lehman Brothers] was allowed to go bankrupt when others weren’t?”
39:40 – Enrique talks about how he met Whitney Tilson, and why he left Wall Street to work for him, and what he’s working on now.
44:20 – Enrique shares a belief about investing that stops Dan in his tracks. Let’s just say Enrique gives listeners a vastly different take on value investing.
50:20 – What do most people have wrong about Warren Buffett? Enrique gives an interesting view on one of the most successful investors of all time. “What people don’t understand about Buffett is…”
57:40 – Dan asks Enrique, “if you could leave our listeners with one idea, what would that be?” Enrique gives some astonishingly uplifting thoughts that we all should remember as we go through our trials and tribulations in life.
1:01:36 – Dan answers questions from listeners in the mailbag… What reasons do you prefer the physical components of gold? What about GLD? Is that a good alternative considering the logistics of owning physical gold? Will stocks increase because the stimulus/bailout money has devalued our currency by increasing the money supply?
Intro: Broadcasting from the Investor Hour studios, and all around the world, you're listening to the Stansberry Investor Hour.
Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts, for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive, at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today, we've got a ton of value to dispense. Our guest, Enrique Abeyta, tells us about his time at Lehman, and I push back on his thoughts about the firm's actions during their demise at the last crash. Plus, Enrique's premise that a stock has no value, he'll explain. Your e-mails always play a part, including Matt L., who wants to know about the best way to buy physical gold. And as always, my rant all about negative oil prices, why it happened, and what it means to you going forward. All that and more, right now on the Stansberry Investor Hour.
I suppose there is no way, just no way, to avoid a single topic, this week, the one that's on everybody's mind, and it's pretty important. And of course I'm talking about negative oil prices. For the first time ever, earlier this week, [laughs] the crude oil market went nuts, and the oil futures traded at negative prices, as much as negative-$40 a barrel. In other words, [laughs] there were people so desperate to get rid of barrels of oil, so they did not have to take delivery of them, because, ew, they didn't want them, that they were willing to pay, for a few minutes there, it was as much as $40 a barrel. This is crazy, of course, but before we talk about this I just want to put out, it's unprecedented with oil, but it's not completely unprecedented sort of in this modern era of the last year or two here.
And certainly, recently, we saw a very similar kind of blowup in the gold market, between gold futures and physical gold, and we talked about that, previously. We talked about, you know, the coronavirus shutting down the gold refineries, and impacting the ability to transport gold by air across the Atlantic Ocean, from London to New York, mostly. So, you know, there are similar things going on. And another similar thing, we have seen a negative price, haven't we, in the past couple years. It's called negative interest rates. That's just the price of money, right?
And we've seen that phenomenon happen, and, you know, I would've said [laughs], all day long, "Of course we'll never see negative interest rates," and a lot of people would've said this, "Of course we'll never see negative oil prices. Of course these things – of course we'll never see, like, a $70 difference in the price of physical gold and gold futures. Of course these things won't happen." Well, maybe that's the first lesson here, folks [laughs]: the world don't work the way we think it does. And that's something – that's a theme, we'll return to that again and again: the world doesn't work the way you think it does. You know, we live in a world we don't understand, and all kinds of things are possible.
So, let's talk about negative oil prices. What in the world exactly happened? Well, the May 2020 WTI crude oil contract, futures contract, traded as low as negative-$40 – I think it actually might've gone to negative-$41 per barrel, earlier this week. Why did that happen? Well, it was an unusual confluence of circumstances: a whole lot of people were in gold futures, that's the first thing. The gold futures contract, it's deliverable every month. Not all futures contracts work like this. The Brent crude oil futures contract is not deliverable every month like this, but with the WTI contract, you can take delivery of some amount of crude oil.
You go into the futures market, you go long, you buy futures, say you buy 1 contract, 1,000 barrels, and just hang on to it until it expires. Well, guess what [laughs], you're going to own barrels of oil, 1,000 barrels of oil, at the end of it. You're going to have to take delivery. Now, most people don't do that. Most people exit before they get to settlement, to having to settle in a barrel. So, over the past few years especially, there's just more and more financial players in the market, and hardly any crude oil actually changes hands. It's mostly, you know, mostly, things just wind up getting settled in cash, and people exit and they don't take delivery. As we discussed, the same thing, in gold, right?
But there are some things happened, recently, that changed that just this one time. So, for example, maybe just a couple of months ago, there would've been, I think one report I saw, there was, like, 45 contracts outstanding, to be delivered at the expiration of the crude oil contract, just two months ago. And then, maybe a month ago, it was, like, 3,000. Well, this month, it was, like, over 100,000. So, that is unusual, and the reason for that, I think, there was a huge influx of money into the oil ETF, ticker symbol USO, right? So all this money floods into USO, and they've got to buy – that thing, it's just a bet on the oil price, and they do it by futures contracts, so they have to buy futures.
But they don't want to own oil, so they've got to roll this thing over every month, they've got to get out – remember, like I said, they don't want oil delivered, so they've got to get out every month. And so, you had this record amount of this taking place, so there was a record amount, basically, think of it this way, there's a record amount of people having to ditch these crude oil futures really fast, so that they didn't have to take delivery of physical crude oil. [Laughs] And it was a similar but opposite situation with gold. With gold, there was a shortage, people wanted to take delivery, they wanted to own it, but they couldn't get it because it was stuck overseas, because there wasn't enough commercial air transportation to bring it over. And the refineries were shut down, so there wasn't enough supply, right?
Opposite, here: there's a huge glut, the storage for crude oil, on land and in sea – we'll talk about that, in a second – is filling up to the brim, people can't find storage – you "type crude oil shortage storage," something like that, into Google, and you're going to get article after article after article of oil traders, oil producers, people who own tankers and oil storage, they're all going to say, "Can't find storage. Can't find storage." There's a shortage of it. So, you know, that's a real glut when, you know, it's better to be in the storage [laughs] business than it is to own the stinkin' commodity.
So that's what happened, everybody wanted to ditch it all at once, and when you got to ditch it, it's the opposite of a short squeeze. You know, in a short squeeze, you got to buy back whatever you're shorting, really fast, because you don't want to get stuck with it. And in this kind of a squeeze – I don't know what to call it, a long squeeze [laughs] – you're having to sell as fast as possible, because you don't want to get stuck with, in this case, crude oil. So, the price went negative, because people – they're willing to pay to get rid of it, because they absolutely could not get stuck with it, because there's no place to put it. Interesting, huh? That's how we got where we are.
Now, what's really interesting is, remember I told you, the Brent crude, the other major oil futures contract is not physically settled, and not subject to these same problems, right? And that finished the day, on Tuesday when the May contract expired and, you know, all this stuff started blowing up, but on Tuesday, the Brent finished up at, like, $25 a barrel, something like that. And spot was, like, $25 a barrel. And other contracts, the next months of crude oil contracts, were all in the $20s. So, at the WTI June – the next contract, the WTI June contract, was $20, I think, when it finished the day.
So, this was a really weird situation. Was it a one-off situation? Eh, I don't know. I don't think so. I think there's potential for this to happen again, because the storage is filling up and filling up and filling up. Now, one of the implications, here – it's already started to happen, it was already underway. We had a guest on this show, a guy named Harris Kupperman, and Harris Kupperman said – he was long tanker stocks, remember, he talked about wanting to own Scorpio tankers and – this was before the market got crushed. So, I think the stock's in the $20s now; it was $37 to -$38 then. And he said they could earn $38 a share this year, because the storage is so tight that people are storing oil on oil tankers at sea. It's floating storage.
So, the tankers are being taken out of the transportation market to be put into the storage market, and the rates are skyrocketing, the day rates for, basically, companies renting these tankers to ship oil from where it's produced to where it's refined. And it's causing a huge spike in the tanker rates. There's a guy named Hugo De Stoop, he's the CEO of Euronav, which is a pretty good company – somebody I saw, one hedgie on this one billboard, described him as more conservative than Warren Buffett. So, Hugo De Stoop has been all over the news, lately, because it's a crazy time in his industry, so he's enjoying his 15 minutes of fame.
And he's talking about 90-day voyages on the tankers that his company owns, where he's getting numbers like $150,000, $200,000, I heard, $165,000, on a recent podcast that he did – actually, that was Bloomberg interview where he said $165,000 a day. Now, mind you, his breakeven cost is $28,000 a day. That's a pretty nice margin, isn't it? Yeah. So, you know, there's this huge, huge spike up in rates because people are storing crude oil on tankers. It's an interesting situation. If you bought tanker stocks maybe while they were getting crushed in the coronavirus two-, three-week bear market there or whatever, you know, you're up 30% to 40%, at this point.
And some of these stocks, I talked to Bill Shaw from Stansberry Research, and they had to exit because they hit their trailing stop, but he recommended NAT, North American Tankers, it's up 50%, since December, since before. So, the shortage has been a thing for a while, and now it's, you know, with prices just plummeting to record lows, the situation is tighter than ever. And, you know, De Stoop is going on Bloomberg, this week, saying, "Hey, guess what, I think the rates are going to be higher tomorrow than they were yesterday, and the storage is going to be tighter." Now, I am not the kind of guy who wants to rush in and make a bet in that kind of a market.
So, if you want to buy tanker stocks, you know, like Scorpio or Euronav, I mean, De Stoop said he might earn his market cap [laughs] this year, I mean, one times earnings. That's pretty cheap. That might be worth a bet. But I'm not doing it, because when all this stuff unwinds, you know, you're going to see those tanker rates, those day rates I was just talking about, you're going to see that, like, go into the basement. You know, as fast and as high as it ran up, it will tank [laughs] – no pun intended – just as hard. It will just, you know, the bottom will drop out of it, and you can [laughs] – I trust you, believe me when I say, the bottom can drop out of an oil-related price, [laughs] right? I trust, at this point, that when the rates are, you know, $200,000 a day, for a 90-day tanker voyage, that you'll believe me, now that you've seen what happened to oil, that they can go to $10,000 a day [snaps] like that.
You got to be careful in markets like this. You got to be careful in a lot of things, these days, don't you? I think the reason for that is the potential for these things to happen, like we've seen with gold and with crude oil now, and the utter craziness that is represented by negative interest rates. And there was a precedent for this, like, it was, I want to say, five, six years ago, at our annual Stansberry editors' meeting, I stood up and I ranted like crazy about this insane situation in VIX-related ETFs. Very similar situation, these are futures-based ETFs that just roll over – the VIX is a monthly contract, and they just roll over the VIX futures every month, and falling volatility environment, it just destroys value. And the VIX ETFs are not all ETFs. Some of them were ETNs, exchange-traded notes.
So, you know, a big bank like Barclay's says, "We want to borrow some money and we don't want to pay it back. So, we'll put it in the form of a VIX-related exchange-traded note that pays no interest, and we'll just, you know, this is for people who want to speculate on the VIX, on volatility. And we'll just, you know, we'll roll over the contract every month, and if volatility falls from, you know, 80 to 12 or something, then, you know, they'll just get killed, and we'll issue new shares because there'll be a constant desire to speculate in this garbage." And the VIX is really stupid, because there's no deliverable VIX for the VIX futures.
If you're along the VIX at expiration, you just have to sell and settle in cash, because there's no deliverable VIX like there's a deliverable barrel of crude oil or deliverable bar of gold, you see? So, I thought that was a crazy thing, and I said so at the time, and I said, "This is going to destroy lots of value." Then, in 2018 when it had destroyed lots of value and was down, like, 99.9%, I said, "You know something, people shorting this thing are going to get murdered." Because, two things, volatility, when it's super low, can spike up in an instant, and just wipe you out if you're short.
And guess what happened. I said that in September 2017, I said, "These short VIX guys are going to get murdered," and in February, February 6th, 2018, the VIX ETF blew up and went out of business, it disappeared off the exchange, for that very reason. People were short, it blew up, end of story. It was down, like, 85% that day, and it closed up and went out of business maybe 2 or 3 weeks later, by the end of February. So, these things can happen. And the reason they can happen is we have financialized – we had a previous guest on this show, Ben Hunt, who talked about the financialization of the world – of gold, of oil, of volatility, of everything.
And it's just, it's a crazy state of affairs, isn't it, when the amount of paper gold futures just dwarfs the amount of physical gold. And when the amount of paper crude oil futures dwarfs the amount of deliverable crude oil. It's insane. What does it even mean? I don't know. When the stuff is settled in cash, hey, no harm, no foul, no problem. But when delivery has to be made, man, it gets insane. We're in some sort of bizarro world with this stuff. So, you really, you have to be careful, and you have to understand risk, don't you.
I talk about risk so much [laughs], I feel like it's, you know, it's wallpaper, it's a boring topic. But it's the most important topic that you'll ever deal with, what to avoid, what not to do, how you could get completely ruined. And I always cite Howard Marks because – he's got this book called The Most Important Thing, which is really kind of a joke, because there are 18 most important things in the book, and he acknowledges that. And three of those most important things are risk, risk, and risk. He's got "Understanding Risk" is one chapter, "Identifying Risk" or "Recognizing Risk" is another one, and "Controlling Risk" is yet another chapter. So, the most important thing, there's 18 most important things, and 3 of them are risk. That's a hint, isn't it?
Yeah, risk, risk, and more risk, that's what you need to understand. So if you're long something like USO, that futures-based crude oil ETF, understand you can get ruined, that part of your capital that's in there can be ruined, it can disappear. Understand how you can be ruined. Because I'll tell you something, I don't know if you remember this, but I opened up a show talking about one thing – this was, like, over a year ago, I can't even remember the episode but I'm just remembering it on the fly, here. And what did I talk about? Survival. If you're long crude oil going into something where there's potential for – a situation where there's potential for negative prices [laughs], you need to think about survival, and get the hell out before that sort of a thing develops.
You need to think about survival – getting rich in the stock market isn't your real goal, because that doesn't acknowledge your uncle point, you know, the point at which you just can't take it anymore. But you acknowledge your uncle point by making survival your number one goal. Traders want to survive. Talk to any good trader and they'll say, "I want to survive first [laughs], make money second." And investors are that way, too. What does Warren Buffett say? Rule number one: don't lose money. Rule number two: see rule number one.
And for those of you who are Stansberry subscribers, I did a Digest, earlier this week, the Stansberry Digest, goes out to every paying Stansberry subscriber, about this very thing. And it was more general, it was about understanding things in terms of negative definitions, right, what to avoid. The learning of life is what to avoid, that was – Nassim Taleb said that in his book Antifragile. Okay? And what to avoid in finance is situations where you can get freakin' negative oil prices, and avoid situations where you're long some crazy VIX ETF that has serious blowup potential, minus-85%, not in one day, in a heartbeat. It was minutes that that took.
Avoid ruin. Avoid financial death. Why was it right for individuals, at the individual level, the right thing to do in the coronavirus, earlier on, was what? Panic. Fear death. Avoid death. At the scale of a nation or a city or a town, the panic has gone too far, way too far; we've shut everything down, it's the wrong thing to do. But the level of response for coronavirus should've been a question of scale, and at the level of the individual, that is where the most panic should take place, right? You should panic before you die. You should panic, or, that is to say, avoid ruin in finance before you're long the crazy ETF that can blow up. All right [laughs], you get the point.
Okay, let's move on and we're going to talk to Enrique Abeyta, who I love to death, and you're going to love him, too. He's a great guy. He's got controversial opinions, but worth listening to all day long, I know you'll agree. Let's do that now.
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Today, our guest is Enrique Abeyta. I had a chance to sit down and talk with Enrique at our annual Stansberry editors' meeting in Florida, last month. Enrique is editor of Empire Elite Trader. He graduated cum laude from the Wharton School of Business and the College at the University of Pennsylvania. During his time at Penn, he was one of the early founders of the Wharton Fellows Fund, a student-run endowment investment fund. He also spent three years as the head of research at the Pennsylvania Investment Alliance, the oldest student-run investment club in the U.S. Enrique Abeyta joined Empire Financial Research in 2019. Please enjoy my interview with Enrique.
Enrique, welcome to the program, sir.
Enrique Abeyta: Great, thank you.
Dan Ferris: Before we talk about business and investing and all that stuff, when did you first become interested in finance? When did it, like, really catch hold of you and you knew this was your direction for some time?
Enrique Abeyta: Probably when I was eight years old and we ran out of money for this motel we were staying at and had to sleep in our car out back for about three days. [Laughter] Now, I say that in a funny manner, but I became interested in finance because I grew up real poor. So, I think that when you grow up in a situation where money is a preoccupation and it has a very large impact on your life – you know, look, I think most of us, most people grow up where they have enough money for the basics, and, therefore, money is an influence on them. But it's not the difference between having a place to sleep, or having food to eat, or any number of things.
Unfortunately, with my background, it was. So, you know, yeah, I don't know, my interest in finance began, you know, from the moment I could remember things, because we didn't have any money and that sucked. All that being said, [laughter] my interest in, you know, economics and finance probably began – you know, I remember in high school, maybe senior year or junior year, the economics teacher did this stock picking contest. And I remember it because I won it every single week of the semester, but I won it because they did this thing where they – you had to pick a stock, and it was set, the price was set on Wednesday's close, and then, you would hold it for a week.
But they didn't understand that you could find companies that reported good earnings, companies that had been taken over, or IPOs that would price on Thursday morning. So, all I did was literally get – and this was before the Internet, but I would literally get the newspaper and, you know, Thursday morning, and put into my choice, you know, on Thursday at, whatever, 9:00 a.m. So, yeah, work efficiently. Work hard, but work efficiently, I think, is one of my mottos, so.
Dan Ferris: That was a high school thing?
Enrique Abeyta: Yeah.
Dan Ferris: So, you got to admit, most high school students don't know any of that. They get involved in a stock picking contest, and they look on their feet and see Nike, and they say, "Nike." [Laughs] So, the level of sophistication, there, is already, you know, compared to most kids, pretty good. So you were on your way by then.
Enrique Abeyta: I was pretty quantitatively-oriented, you know, I had – this is before spreadsheets and everything else. I was a big comic book and baseball card collector, and I actually had spreadsheets that I created on – it wasn't even Microsoft Word, but on a Word processing program, for my comic book collection. Where I would go and get the weekly and monthly comic book price guides, and go in and update my portfolio of comic books on my Atari or Commodore Amiga computer. So, you know, understand, this is, like, 1986 or '87, I was probably 13, 14 years old, and I got very excited every week when the price guide would come in, because I could look at my portfolio of, in this case, comic books.
I didn't have anyone to teach me that, you know, I think it just, being poor and then, like, maybe feeling that that gave me some element of control or ability to be involved. But that's just, you know, always been something that I felt very comfortable with, you know, sort of the way that my brain works. And, so, from very early on, I think I was sort of destined to do what I've done, you know, for the majority of my career.
Dan Ferris: Yeah, emotionally and intellectually, the fit sounds pretty perfect, from where I sit. That's really good. When I was, like, 12 years old, I had this can that I would put all my money in. I would go and help old ladies carry their bags, and, you know, just put the change and the occasional dollar bill in there. And then I had the ledger next to it, you know, it said "Money in can" up top, and there were, you know, credits and debits and stuff. [Laughs] So, I'm kind of right there with you. When you got out of high school, what did you study in college? Did you study finance and economics and –
Enrique Abeyta: Yeah, I continued the path, you know, I did very well in school, you know, I was student body president, I was salutatorian, I was founder of the TeenAge Republicans in Arizona. I had worked for Senator McCain and Senator Goldwater for several years, and, you know, I considered a couple things. I considered going to Georgetown to do political science. I think in my heart I kind of wanted to go to Harvard to do philosophy, English, you know, it's what every, you know, broody teenager wants to do. But in my brain I said, "Damn, we're poor. I don't like being poor. My mom struggled a ton. I want to do whatever I can to get out of being poor."
And Wharton undergrad, at the University of Pennsylvania, is the world's leading undergraduate program for business and finance, by far. And, so I basically applied to Wharton, got directly in, and, you know, it was the one decision – you know, so when I say I considered these other things, I didn't really consider them. I said, you know, Wharton's the best in the world to be working in finance, or to achieve my goal, which was to not be poor, as quickly as I could not be poor. And, so I went straight through to Wharton, you know, and kind of continued the linear path that leads to today.
Dan Ferris: Tell me about your first big gig in finance and – you know, I ask people this question all the time, and there's always some big lesson that kind of beats them over the head, sometimes the first day they get in the door. Did you have one of those?
Enrique Abeyta: Yeah, you know, it's interesting, I didn't – the first couple summers, first off, I had a bit of an adjustment to university. I had never even been to Philadelphia. I got in, didn't visit the school – I didn't have any money, so, like, it wasn't an option to come, you know, go visit the school. And, you know, I went from an environment in Phoenix where I had a very big high school, 3,000 people, but I was, you know, whatever, one of the smartest people, maybe the smartest person in the school. You go to University of Pennsylvania and Wharton, and there's engineering, and all of a sudden, the competition or the environment was a lot different.
So, the first couple of years, I struggled, I did okay – this is all going up to the first Wall Street job – but I also didn't have any relationships, you know. So, a lot of the guys I went to school with at Wharton, you know, they were New York guys whose fathers or uncles or whatever worked in finance. So the first couple summers, I wasn't able to get a gig, but then my summer after, I think, my sophomore or junior year – I did five years because I had three majors – there's a program called Sponsors for Educational Opportunity, which basically takes people from minority communities – I am Mexican Uruguayan Native American, yet, Jewish [laughs] – and it sets them up with internships on Wall Street.
So, I got a job at Lehman Brothers, working on the fixed income desk, back in 1993. I don't know if you know Lehman very well, but Lehman fixed income was where Lehman, you know, that was Lehman. Like, actually, the desk I worked on, Dick Fuld, came out of the preferred desk, and I worked with the preferred desk and other desks there. So, that was sort of the journey there. I'll tell you the thing that I remember most, I mean, there were all kinds of weird stories, like, one of the managing directors would pull this thing where he'd say, he'd be, like, "Okay, go get me a Coke." And I'd bring him a Coke and he goes, "I didn't say Coke, I said Diet Coke." And I'd go get him a Diet Coke, he'd say, "I didn't say Diet Coke, I said Tab."
And he used to just mess with me, for the first, like, four weeks, and, you know, and not very nicely. And then, about four or five weeks into it, I was just, I had a ton of stuff; in the beginning, I didn't have anything to do. And I basically got him his drink the one time, and he's, like, "Go get me – " he started doing it, and I'm like, "Dude, I apologize, I got a lot of work to do, I need to get this done." And he just kind of smiled at me and then, like, you know, never asked me to get him something again. But the story that I think is most relevant is one I've shared with people through a long time.
My mentor there, at the time, was a guy named Brad Jack. Brad would go on to be one of the heads of investment banking at Lehman. And at the end of my time at Lehman, we walked out into the parking lot, he said, "Walk me to my car." That parking lot, by the way, is where Goldman Sachs is today; it's literally the building. It was a parking lot for the world financial center. And, you know, he said, he goes, "Look, you know, do you want to come back?" you know, and I'd met a lot of the partners at Lehman, and I go, "Yeah, I think I do." And he says, "Great, you know, you're welcome here, like, we really liked you," and all that. But he said to me, he goes, "You know, just, I want you to think about something."
He goes, "The thing about this business is, it's important to work hard, it's incredibly important to be honest. This world is black and white, there is no gray. If you get caught in the gray, you will be out." He was talking about SEC and regulation and things like that, he's, like, "If you have a decision between black and white and it looks like it's gray, go the light, like, you know, because you'll get drummed out." But he said, "Stay alive. If you stay alive and you work hard and you're honest and you're smart, you're going to do really well." He goes, "But I'm going to tell you something," he goes, "You're going to have a year where you come in and you're, like, "Oh, this is the year I'm going to crush it and I'm going to make $5 million, and xyz is going to happen."
And he goes, "You'll probably get fired that year." And he goes, "You're going to have another year where you're, like, "Okay, yeah, things are good, I'm happy," he goes, "You'll probably make $10 million that year." And so, his point was, you know, is you can't always control the outcome in the short-term, but if you do things the right way, you can control the outcomes in the intermediate to long-term. And, you know, that's a lesson that, when I talk to 28-year-olds, I think it's important to have that context, and I feel very lucky that he told me that when I was, you know, whatever, 21, 22.
Dan Ferris: And someone from Lehman told you that.
Enrique Abeyta: Yep.
Dan Ferris: How about that. That's a bit ironic.
Enrique Abeyta: Yeah, I mean, the whole Lehman thing, though, like, look, those guys didn't do anything wrong, like, in my opinion. They were very smart guys, it was a very well-run firm, they were running similar leverage to what everyone else was running, and they happened to be the one that got, you know, left holding the bag. But they were very, very smart managers and built an incredible firm with a great culture. You will still find Lehman people, as you will Bear Stearns people – I had a lot of friends at Bear Stearns that – I mean, I still have a Lehman sweatshirt that we got from when we got spun off from American Express in 1994. I'm proud of that. Any Lehman people you meet that date probably pre-2005, you know, year 2000, we're very proud of the legacy of that firm.
Dan Ferris: I just can't live with myself if I don't push back just a little bit, right? [Laughs] And who wouldn't really, because you've been inside the firm, so you know the people and you developed a real opinion. But I'm only looking from the outside, and all I see is a firm that was levered 30-plus to 1 and failed, you know, in a crisis. It wasn't set up for that kind of an event, let's just put it that way, certainly.
Enrique Abeyta: And by the way, I don't disagree with that, you know. So, here's the thing, if we have a company that we make 100 decisions and 1 of those decisions is that we're going to employ leverage in the same manner in which a dozen other firms are employing leverage, and then we are hit by a 3 or 4 standard deviation event and we fail, yes, I'll criticize them for that. But that doesn't demean or take away from the other 99 decisions. And I'm not saying that it was only just one bad – but that's the crux of it. I mean, their book that they were holding was no different than the book that was at Merrill Lynch or any of the other banks, they just happened to be, you know, relatively undercapitalized.
So, yes, there was a fatal flaw, but I'm not going to take away from, you know, 90% great decisions. And part of that fatal flaw, I don't know that they had a choice, right? It's not like they came out of a big bank, it's not like they were JPMorgan and they had a ton of capital. They were spun out of American Express, with no capital. So, they took a risk, that risk didn't pan out in that particular situation, but, you know, that's what we do, we take risks in this business, and, you know, unfortunately, they didn't survive that one.
Dan Ferris: Another question that, given your perspective, I must ask is, why do you think they were allowed to go bankrupt and everybody else was bailed out?
Enrique Abeyta: Because they were the first, that's the only reason why. So, I think –
Dan Ferris: [Crosstalk] Bear Stearns wasn't considered the first [crosstalk]?
Enrique Abeyta: No, because – yeah, well, I'm trying to remember – oh, so, okay, no, Bear Stearns was done before Lehman –
Dan Ferris: Right, so that was in the spring.
Enrique Abeyta: Yeah, that was in the spring. So, what I think Lehman – so, I'll answer this differently. Bear Stearns was at a moment in time where the regulators said, "We can control this contagion." Then, when Lehman came, the regulators made a decision, and the government, where they said, you know, "Oh, boy, if we protect another one, we're going to engender a continued risk-taking culture. We have to send a message, essentially, that we're not going to step up every time." And this has as much to do with long-term capital in 1998 as it does in Lehman and at Bear in 2008. And so, I think they made a calculation that, "We'll let this one go, and it'll be okay."
The problem is, when you're looking at the interconnections of these structures, that was a very poorly thought-out decision, which exacerbated the structural fissures and inadequacies that existed prior. So, yeah, look, I think that Bear was, "Oh, we'll do this, because it'll end this." It didn't end it. Lehman was, "Well, we can't do them all, so we're going to send a message, but this – we can probably contain this." And lo and behold, they weren't able to contain it anywhere near the fashion that they thought. But, you know, the issue with all of that, none of this really has to do with Bear and Lehman. Everything has to do with the financial setup in the mortgage market that existed in the previous three to five years.
When you saw regulations that basically vastly expanded the number of people that could get mortgages, gave cheap money, took away the connection between risk taking and liability, what happened is we saw a tremendous bubble in real estate, the same way we saw a tremendous bubble in technology in the late-1990s. And that was the problem, you know, Bear and Lehman are not the cause, they are the effect. They happened to be the vulnerabilities in our financial system that, when we worked off the excesses of a mortgage bubble, that, to be frank, was enabled, in my personal opinion, by government activity, you know, not necessarily private market activity, the private market activity took advantage of the government rules, but the rules were changed from what they were ten years prior. Like, if we kept the same mortgage, underwriting, and Fanny and Freddie rules that had existed in 1998, 2008 never happens, you know, not in a million years. But that's not what we did, and again, you know, I guess maybe one of the lessons of all this is the rule of unintended consequences. So, everyone's to blame, but I think that, you know, Bear and Lehman and JPMorgan and all that, and even WaMu, they were the tail not the dog.
Dan Ferris: It sounds to me like you're almost sympathetic with the idea that, well, of course they're going to push the rules to the limit, and of course they're going to use lots of leverage, and of course they're going to do this. Whereas, this Charlie Munger quote keeps battering around in my head about – I forget the exact quote, but the idea was, you know, just because you can do it doesn't mean you should. You know, just because it's not illegal doesn't mean it's okay. [Laughs]
Enrique Abeyta: So, let's say that differently. If we have 100 participants in an ecosystem, my belief is that you will have a significant number – I don't know whether that's 10, if it's 20, if it's 30, or if it's 60 – that will do exactly what you're saying. I am not endorsing that that is what I would do, or that is what should be done. What I'm saying is that, in a complicated ecosystem like that, you know – and so, that doesn't mean that they shouldn't take responsibility for it. By the way, there were lots of banks and brokers that did not make that decision and went on to survive. I guess I'm just saying that culpability, I don't think the financial crisis really had anything at all to do with Lehman.
I put zero blame on Lehman for the financial crisis. You know, again, that was an effect, not a cause. The cause was the 10 years of decisions around the mortgage market and the housing market, that were put together by a complicated ecosystem of players, but, you know, with the U.S. government playing a lead role in that complicated ecosystem.
Dan Ferris: Right, I feel like we could talk about Lehman all day, but we probably don't –
Enrique Abeyta: Yes. [Laughs]
Dan Ferris: We don't want to do that.
Enrique Abeyta: Yeah, no problem.
Dan Ferris: Let's go ahead and fast-forward to now. You're part of Empire Financial Research, you work with Whitney Tilson. What exactly are you doing there with him?
Enrique Abeyta: Yeah, so, you know, Whitney – I'll give you a little backstory. Whitney and I have known each other for about a decade, we met at my last fund, you know, I'd known who Whitney was, he was obviously pretty high-profile and all that. And, you know, not well-known, I mean, Whitney's a very well-known short-seller; I'm a very not-well-known short-seller. But the reality is, in Wall Street, there's a group of about, I don't know, 50 of us that are the short-sellers that all know each other. Not that we're doing anything illicit, but there's just a – it's a small community. It's a hard business.
And so, you know, I'm one of the better-known short-sellers in that community, and so when I met Whitney, we had a lot to talk about. And I also, you know, I was interested in what he did in the media side. You know, I've always been involved in the media. My primary focus as an investor has been TMT, technology, media, telecom. I was the editor-in-chief of the second-largest newspaper at the University of Pennsylvania, you know, just a lot of that stuff. So, we built a relationship, and then, you know, when he joined Stansberry and created Empire Financial with Stansberry, he sent out a cryptic e-mail, you know, before he really announced it.
And it basically said that he was going to, you know, close this education business that he had, or kind of wind it down. So I hit him up very quickly, because I was working with him on that business, not getting paid, just, you know, helping him out, and I thought it was a pretty cool little business. I said, "Let's go to lunch. I want to hear the story," and he said – you know, he walked me through what we do, which is, basically, we, like you, produce content where we're sharing our experiences and recommendations with, you know, readers. And I thought it was very interesting, you know, I said to myself, "Okay, here is the best part of investing," really focusing on the ideas and the concept, without having to deal with the, "Oh, I've got to go raise money, and I've got to hire an analyst, and I've got to do all these other things."
And then, the other part, you know, and not that business needs to have an aspect of, you know, making the rest of the world better. But when I ran my hedge funds, look, we had pension funds in there, and I felt happy that we could make the pension funds money and all that. But for the most part, I was driving value for just a bunch of rich institutions and individuals. What really appealed to me about this business was the fact that you could take, you know, a doctor from Birmingham, Alabama, who had a million- or two-million-dollar portfolio, or $100,000, you know, it doesn't matter, and be able to share the things that I've learned through the years.
And, you know, professional investing's funny; I use the analogy of dentistry. You know, we're both smart guys, we could go out and figure out how to become a dentist, we could go watch some YouTube videos. We could read some books, not to demean dentists, but I'm pretty sure we can figure it out. Yet, no one ever said, "Oh, hey, I'm going to read a couple books and go out and do dentistry on my family." Yet, when it comes to investing, people will go out and make decisions based on an e-mail or a single thing, you know, without really vetting it. It's just really amazing.
The other example is when people or private business owners use the same dentist, I go to the dentist and say, "Hey, do you want to invest in my practice, my dental practice?" he'll ask me 300 questions. I say, "Oh, do you want to buy this, you know, Internet stock?" he's, like, "Yes, here's $2,000." So, again, what appealed to me about it was the opportunity to do the parts of the business that I really loved. I didn't mind the other parts, but do the parts I love, and share that with others. So what do we do at Empire Financial? That's what we do, you know, we have a number of products. I am directly responsible for a trading-oriented product called Empire Elite Trader, which is focused on more short-term opportunities with sort of a high hit rate, capital management, all that.
I recently launched another product called Empire Elite Growth, where we really focus on a dozen ideas, and I'm only doing ideas that I think can go up 300% to 500%. You know, really, the concept with it is, you only need ten stocks to remove systematic risk from a portfolio. So if you only need 10, why not focus on picking the absolute best 10 on the face of planet earth? And I want 10 that I think can go up tenfold, throw out everything else. And so, I am in charge of those two products, and then work with Whitney on the other products we have there, Empire Investment Report and Empire Stock Investor.
Dan Ferris: It sounds like you're busy. [Laughs]
Enrique Abeyta: A little bit, yeah.
Dan Ferris: Yeah. So, that is a neat idea, if you could only pick ten, which ten would you pick. Now, I wonder if that idea relates to a comment that you made earlier today, when I asked you to do the interview, and you said, "You know, you might find me heretical." In what way do you think I would find you to be a heretic?
Enrique Abeyta: My fundamental belief around stock investing is that stocks are, quite simply, pieces of paper, they do not truly represent the economic value of a company. Now, let me explain. Legally, they do represent the economic value of a company, and if a company goes bankrupt, they represent the economic value of a company. And if a company gets bought out, they represent the economic value of a company. And to a certain extent, to the extent that a company pays dividends and/or buys back stock, the availability or the cashflows of the stock can represent some aspect of the economic value of a company.
But 99% of the time, when you're not going bankrupt, when you're not getting bought out, and if we take out the dividend impact, they're really driven by elements of perception, okay? I don't have, unlike a business in the real-world that has cash flows that I then can control and make decisions about what I'm going to do, invest in another business, buyback, you know, like, take on debt, you know, whatever, I don't really have any of that control with a stock. And so, I have, in my career, seen stocks that trade at certain metrics with certain operational metrics, and then trade at double or triple or quadruple those valuations, with no real material change in the underlying business. So, my fundamental premise – now, I'm going to bring this back – so that's the heresy, you know, that's the initial sin.
Dan Ferris: That's pretty good. [Laughs]
Enrique Abeyta: But let's bring it back. Now, that doesn't mean that I don't think valuation or cash flow or any of those things are relevant. But the only reason I'm going to tell you that they're relevant is because most of the buyers and sellers of the stock think they're relevant. So, you know, I'll use the example of a pop band, right? So, a band gets a song on the Billboard top 100 or top 10. All of a sudden, you know, someone sees it and goes, "Oh, it's on the Billboard top 10. I want to listen to that song, because a lot of other people want to listen to the song."
You know, I don't know what's good music or bad music, I mean, I have no quantitative measure of the cashflow capability of music, so to speak, but that's a real impact. And so, what I've seen is, human beings in the market – because ultimately, it is driven by humans – although we may have 60%, 70% of aggregate volume is driven by quantitative strategies or the robots, even behind them are decisionmakers. Human beings use heuristics, complex, you know, simple rules to govern complex situations. And there are some very clear heuristics, to me, that drive outsized returns. So, you know, let's take two aspects of that.
So I'm saying, ultimately, in the real-world, it doesn't matter, but the reality is people do take things that they use as their measurements of what to buy and sell. The key is to understand what are those five things that are relevant, and then that's how you make money. And I'll share one other – and manage risk, by the way. I'll share one other thought process about this. I always use the reference of the movie The Matrix, you know. So, in The Matrix, Neo is sitting there with Morpheus, and they're sitting in these big leather chairs and he goes, "Okay, you have a choice. You can take the blue pill, which you can continue on with your life, doing what you're doing. Or you can take the red pill, and you're going to see what's really going on."
That's how I think about the markets. I watch CNBC and everyone's living in the matrix, but the reality of what's driving these stocks and what's driving these markets, and, you know, we could talk about coronavirus, for instance, right now, I just don't think it's the case. And, look, you don't have to believe me or not believe me. What you can do, though, is take a look at my recommendations, and watch them through time, and decide whether I'm driving value. So, you know, ultimately, that is the final nice thing about this business, you don't have to agree with me, but if I consistently drive returns and performance, then, you know, something's working, you know, is all I can say. And my methodology, I'm very confident with it; it's my life's work.
Dan Ferris: You know, you've got me thinking about something. Warren Buffett, you know, of course, some people think he's the greatest investor who's ever lived, and he's become very popular. He, probably more than anyone else, is responsible for the idea, the widespread notion that, indeed, when you buy a stock, you're a part-owner in a piece of a real business. But your comments are causing me to say, "You know, nobody ever tells ya how hard that is. He makes it sounds like it's easy and like that's the easy way to do it, just – " You know, he and Munger, they're always about, "Just buy the best businesses and hang onto'em for a good long time." And no one ever tells you how insanely difficult that is.
Because certainly, even when it works, when you can look back 20 years and say, "See? It worked," all along the way, the perceptions are morphing about the macro situation that might affect the business, or, you know, some underlying aspect of the business itself. You know, does it have a wide mode? Does it still have an advantage? People are constantly – change – their perceptions are morphing over time, and the share price is falling and rising, and maybe you could pick a moment along the way and say, "See? The returns are crappy. See? The returns are great. See? The returns are great," all along the way. And it would take you 20 years, in other words, you'd kind of have to be Buffettt, in order to actually do it.
Nobody ever tells you this. That was one of the first things I thought of as soon as you were describing your approach –
Enrique Abeyta: So, here's the thing about Buffettt. I think his advice is great advice, but I think people are misunderstanding, and maybe even he is misunderstanding, why it's great advice. Now, let me make a couple quick statements. No stock ever went up because it was cheap. That's just not a thing. We all know that.
In fact, I can show you that stocks that go down a lot, every stock that ever went bankrupt went down 90% first. Every stock that ever went up 1,000% went up 100% first. And even for Buffettt, and we're working on some numbers for a project we're doing right now, nothing that Buffettt bought went up because it was cheap. It went up because it grew. So, I think what Buffettt has done is something different. He said – and again, whether it was consciously or unconsciously, and who am I to tell Buffettt what he was thinking or not, but I know the data and it's very clear to me, he looked at buying businesses, great businesses that had sustainable competitive advantage, and could grow.
If he could happen to get them cheaply, so much the better. But sometimes, he didn't buy them cheaply. He bought them at what an outside observer on traditional metrics would say were very fair valuations. But Buffettt isn't the greatest value investor ever. Buffettt is a tremendous growth investor, and his advantage is that he's been doing it for 50 to 60 years. So, if I give you a 60-year time frame and I say you have an ability to appropriately identify great businesses that can drive consistent growth for a 30-year time period, you are going to have some awesome stocks. It has absolutely nothing to do with the value of those stocks.
So, you know, I think that his advice to an average investor, find great businesses and treat them like you own a piece of the business, I think what that does is it forces people to get out of the trying to gain perception, you know, piece of it. You know, like, if I said to you, as a relatively unsophisticated investor – you know, not you, obviously, Dan, but, you now, an average person out there – I said, "Okay, I want you to do one of these two things. I want you to try to figure out what the perceptions of the next hot thing are going to be in the stock market," or, "I want you to find a great business." Which is going to be easier to do?
I'm not going to say either is going to be easy, but I'm going to tell you, trying to figure out what's going to be a great business is a heck of a lot easier than trying to figure out the next perception in this vastly complicated ecosystem. So, his advice is absolutely great advice, super powerful for individual investors, but it has nothing to do with value investing. In fact, I would say it has more to do with growth investing, you know, and the brilliance of his track record. You know what Warren Buffettt has done best? I mean, and this is not to demean all of his stuff. He's stayed alive.
You know, he's pushing 90 years old and he's been investing since he's 20 years old. If you can stay active in markets for 80 years, with a positive outlook, you will crush it. You know, hopefully you and I have another 40 to 50 in front of us; we're going to absolutely crush it for that very same reason, so.
Dan Ferris: I like the sound of that.
Enrique Abeyta: Yeah, exactly.
Dan Ferris: I like the sound of that a lot. And it's true, he's a compounder. Peter Lynch said, a long time ago, "You know, I think Buffettt's really a growth investor." That comment was made 30-40 years ago, I think, or at least by the 90s, maybe, Lynch was talking about that. And it's true, he's a compounder, and he even will tell you, Buffett will tell you, "You know, you should buy a business where you think, you know, the amount that they're going to be earning per share is going to be higher in ten years than what you're paying today." That doesn't say, you know, look for net-nets and discounts to book. We know he left that traditional Graham and Dodd thing behind a long time ago.
Enrique Abeyta: Well, and let me say something, it left him, you know? One of the things I talk about a lot, when I started, you know, on Wall Street, in the early- to mid-90s, we still had stuff faxed to us, PDFs didn't exist. I use the story, you know, Solomon and Goldman dominated the risk-on business in the 1980s, you know, Rob Rubin, very famous, all that, at Goldman. Do you know what their competitive advantage was over Morgan-Stanley?
Dan Ferris: What?
Enrique Abeyta: Their offices were downtown, and only a four-minute cab ride from the courthouse. So what would happen is, they literally would get the documents 5 to 15 minutes before the people at Morgan-Stanley would get them, because there was no electronic document, you know, it was literally a guy, a runner, sitting there with this giant 300-page thing. And then they would have a 20-minute advantage versus Morgan-Stanley where they guy had to hop in a car to get to midtown. That made them billions of dollars. I just want that to sink in, that was, like, 40 years ago.
And when you think about the amount of information – I'm sitting here with my iPhone right now with my Bloomberg. I have, on my instant messenger on Bloomberg, $100 billion worth of asset managers, with whom I could converse right now. We're sitting here in Florida, you know, [laughs] like, doing this interview, like, it's just incredible. So, I think that, was there a period where one could identify dollars that were selling for 20 cents? There was, but that died 25-30 years ago. And I think where one has to be focused now is identifying more companies where they're earning $1 and you think they can earn $10.
I think that has always been a better, a more sustainable opportunity, and it's still true, because, you know, you have to have some rules about what you think are companies that get to that point. And I'll share one last thing, I'll tell you why value investing is so popular, in my opinion, because human beings are fundamentally pessimistic. You know, human beings have something called negativity bias; it goes back to when we were cavemen, you know. So a caveman would – the way our bodies literally react is, the meat of a fresh kill generates an emotional chemical response in your brain. It's good, it's great, it lasts a little bit of time.
But the chance of falling off a cliff generates a massive chemical response; it's literally eight to 10 times the amount of endorphins run through your brain, because that's a binary thing, right? A fresh kill's great, but then, you know, the next day goes, "I got to get another one," or whatever. I fall off the cliff, my biological imperative is gone. So, human beings have a negativity bias, and that lends itself to panics in the market. It benefits value investing. I feel like, you know, me – I used to tell this to my analyst: I want to hear "and," not "but." We never made any money by you convincing me out of a position. We made money by you convincing me into a position.
It always sounds much smarter to pull stuff apart versus actually going through and really making a solid case of why we should own this. That's, you know, it's the optimism, it's the positivity, it's understanding our own biological impulses that drive out decisions, and managing, them, right? You know, because I don't know that you can really ever overcome them, but it's really managing them, but that's the discipline of an investor. And, you know, I think that, again, back to my dentist example, really great professional investors, they have that ability, and it's something that you have to work on and hone, and it's a tremendous amount of work. It's, you know, not an easy thing to do.
Dan Ferris: Good answer, [laughs] very interesting stuff, Enrique. We are, unfortunately, coming to the end of our time, which goes by all too quickly on these interviews, sometimes. But I can't wait to hear your answer to what has traditionally become my final question: If I just forced you to leave our listeners with a single idea – and I've realized, you know, it can be an idea about anything at all, but it's your choice – right here, right now, today, what would that be?
Enrique Abeyta: I think that every moment that happens, today and tomorrow and the next day, is the single-best moment in the history of humanity and this planet. I think that, again, we're biologically programmed to look at the negative, but if we think of the world in terms of human suffering – and human suffering is, like, hardcore poverty, war, rape, you know, disease – every single moment that goes by, the world has gotten better, consistently. That's not to mean that there aren't problems out there and there aren't things that can be fixed, but there's always going to be things that are going to be fixed and be done better. And I'll say that that outlook, I mean, quantitatively, I'm very confident in my statement, but I think if you approach the world that way and you approach investing that way, and don't think about the but or the what-if or how does it go wrong –
So, think about it, don't get me wrong, I'm not saying – but don't dwell on it. Understand that the way that you create a better world for your family, for yourself, for your portfolios is by having a belief in progress in the world and yourself. And by the way, that is overwhelmingly backed up by the data. So I'm not saying to be a Pollyanna and believe something that's not true. It's just, you know, to me, it's the matrix, you know? [Laughs] It's like I said, I think people think we live in this terrible time and – you know, look, to every person, every moment in time is the most important time that's ever existed, the most pivotal moment in human history, and blablabla. It's not, you know? [Laughs]
We go along our path, and I think that having that sort of positive attitude and understanding is such a powerful thing, you know? And so, the next time that you're sitting there and you've got angst about the markets or Donald Trump or whatever the heck it is, just remember, you live in one of the greatest periods, if not – well, you live in the greatest period in the course of human history. And embrace that and, you know, think about how you can continue that progress and, you know, be a part of that. So, I think it's a really powerful thought, when you get that in there and keep it in your head, as we go through, you know, our trials and tribulations in life.
Dan Ferris: Wow, that is one of the best answers we've ever gotten to that question. [Laughs] Thank you for that, and I really appreciate you doing this, and I hope you will come back sometime and talk to us again.
Enrique Abeyta: Would absolutely love to. Thank you.
Dan Ferris: Great.
If you really want to know what's happening in the world today, do yourself a favor and go back and listen to Episode 99 of the Stansberry Investor Hour. You can find it at investorhour.com. That's when we talked with Ben Hunt. Ben is a very smart guy, he's been on Wall Street forever, and he's got some fantastic ideas that actually explain what we're going through now, but he did it a year ago. It's pretty amazing. And he's got this really cool thing that he talks about, that nobody else has, it's called their Discovery Map. And he explains it in the episode, and what it means and why it's valuable, really cool.
But the amazing thing is that, one year ago, he was talking about why rising corporate earnings looked bullish on the surface but they weren't really real. They were just the illusion of prosperity. Considering what's happened since then, that's pretty amazing, him talking about that one year ago. Episode 99 at investorhour.com, check it out.
The Mailbag is where you and I have an honest conversation about investing, each week, or whatever else is on your mind. Just send comments, questions, and politely-worded criticisms, please, to [email protected] I read every word of every e-mail you send me, and I respond to as many as possible.
First up this week is Matt L., and Matt L. says: "Dan, first off, I love your show and would like to than you for your well-informed insight into investing." Then he kind of tells me who he is, but he's got this point lower down in his e-mail that I want to get to, and he says, "I have never owned gold before, and it is clear to me that gold is an asset I would like to have in my portfolio. I am having a hard time wrapping my mind around the upside of physical gold, as opposed to the GLD publicly-traded stock. Let me explain further. "Physical gold, you pay a premium, it costs to store the gold, taxed at higher capital gains rate, lower liquidity," and then he's got some returns here – he's got a bunch of information.
Okay, then the GLD that he talked about, "The gold ETF, 15% tax rate on capital gains based on my income level, highly liquid," and some other information. Then he says, "Weighing the pros and cons, it definitely appears there are more advantages to the GLD stock, especially if the returns are very closely correlated with the spot price of physical gold. Is there anything I'm not considering here when weighing these options? What reasons do you prefer the physical component of gold? Thanks for your time. Keep up the good work. Matt L." Also, I want to acknowledge Mark S., sent in almost the identical question, this week.
So, did you list to my rant, today, Matt? [Laughs] The big difference, here, is paper versus physical. Now, if you want to own a paper publicly-traded gold proxy, I would definitely recommend something like the Sprott physical trust, because they are redeemable in physical metal. And they have all the physical metal, every single ounce to cover every single share that they have issued, right? So, there's no way you're ever going to have a situation like what has happened in the futures market with gold first and now oil, right? You're never going to have that kind of a screwup with the Sprott physical gold trust, ticker symbol PHYS.
Or they have a silver trust, they have platinum palladium trust, same thing, run exactly the same way. And also, tax-advantaged for U.S. investors, right, so you get that, which is really cool: you can claim physical metal with your shares, and yet, you can get taxed at a different rate. You know, that 28% tax rate you talked about is the – it's like the collectables, you know, [laughs] capital gains on collectables. The liquidity is there, just like with the GLD, and there's a neat feature – see, the GLD can be redeemed for physical gold, but only by a few big institutional players, basically. I think they're called authorized participants, or something like that.
And, you know, they can redeem, they can turn in their GLD shares and get physical metal, but you and I can't do that, nobody else can do that. However, anybody who owns the PHYS, the Sprott PHYS, can do it, as long as it's 400 ounces of gold. Otherwise, you have to settle in cash. However, even if you only own 1 share, like, $12 a share, these days, this feature of redemption works in your favor. Because I know there are people in Toronto, right this minute, sitting in their office, who are waiting to arbitrage the difference between physical gold and the price of these shares. So, it's never going to trade at a very big discount to the net asset value, whereas, you know, other publicly-traded gold proxies can trade at a discount to their net asset value, you know, a substantial one.
In fact, when Sprott took over the CEF, the publicly-traded gold and silver proxy with the ticker symbol CEF, there was a huge discount. And I've seen that discount, historically, go, like, 5%, 10% crazy. But that discount closed right up, as soon as Sprott took over. And that's a really good feature, the redeemability feature of the Sprott trust is really, that and the tax rate, those – and the liquidity, like you're saying, it's all there. So, I think there are better physical proxies than GLD, but I think it's okay to own them. Great question. But I also think you should have some physical in your possession. I just like it, man: it clanks in my hands when I hold it.
Next question is from Kate S. Kate had a lot [laughs] to say, but let's just get straight to her question. Kate says, "Hi, Dan, love the show, longtime listener," and then she says, "I'm getting lost on the bond bubble. I've heard it forever, now, in various Stansberry articles and podcasts, chats, et cetera, as well as mainstream financial news media, so, my question is, are bonds safe now or not? Since the financial crisis of 2008, it seems we really can't trust the industry ratings. Or can we?" I think she means, you know, the ratings agencies like Moody's and Standard and Poor's. And then she continues, "Is it only officially-rated junk bonds that are bubbled? Or are companies like Exxon, Mobil, and AT&T, which are riddled with debt and have somewhat struggling revenue, at risk of collapsing, too?
"What about TLT, the long-term treasury bond ETF, is that safe? The government is just printing money – isn't it all just dog crap wrapped in bull crap – " she says another word [laughs] – "at this point? I dumped a bunch of money in my IRA into TLT, back in late-February – " blablabla – "no exciting gains, but no loss, either." And then she gets to the money shot, here, "I assume I really just need to buckle down [laughs] and do the research, and avoid companies with cashflow problems or enormous debt loads. But are other bonds from companies who have what we'd consider strong balance sheets truly safe? I wish we had a nice quick Venn diagram here, to show us all the overlap of risk and find the little sweet spot of safety. Thoughts? Kate S."
Well, Kate, you've answered your own question: you've got to do credit analysis on every single company whose bond you buy, I mean, you can't get around it. If you're buying the bonds of individual companies, you have to be able to assess their ability to pay you back. And generally speaking, you're right, a company with a ton of debt is, generally speaking, riskier – ton of debt and falling revenues are the two things that you saw – yeah, ton of debt, falling revenues? Yeah, that's riskier debt than a company with, you know, little or no debt and little tiny bit of debt and rising revenues, generally speaking.
You understand the situation better than you think is what I'm telling you, and just take your time and don't be in a hurry. In general, you know, low interest rates make bonds unattractive. I'll just leave you with that thought, too. Great question. Thank you very much.
One more this week, from Michael K. Michael, thank you for being so brief. This is his whole e-mail: "I wonder if we automatically see stock prices increase because the stimulus or bailout devalues our currency by increasing money supply. Thanks. Michael K." Right, so, another way to ask this is, is money-printing and stimulus by the federal reserve and the federal government, is that causing inflation in equity prices? You know, I feel like I've learned a lot about the federal reserve and their interaction with the economy over the years. And a couple of our previous guests, Colin Roche, Mark Dow, Kevin Muir, all the macro guys, they all understand this.
And what they understand is that, the federal reserve prints a dollar and goes and buys bonds. And then, where do the bonds sit? The bonds sit on its balance sheet. So, effectively, it's just an asset swap. The Fed has printed a dollar, yes, true enough, but they have unprinted a bond. You see? And they've taken income out of the economy. They're not financing any new business, they're not bidding up the price of some asset like oil or housing or manufacturing or anything. They're just buying a bond. You know, usually, most often, a treasury bond or a mortgage-backed security.
They're not causing inflation by doing that. It almost hurts me to say it out loud, because I want to hate the Fed and I want to say that every dollar they print is inflationary. And eventually, eventually, I think that winds up being true, if they print enough of them. But what's really inflationary is stuff that makes prices go up and wages go up, and that stuff tends to be government stimulus, right? So if the money is printed and, one way or another, handed over to the government to spend on xyz whatever, that becomes more – that's more directly inflationary. So, between the two, between – you said stimulus or bailout. Now, stimulus and bailout, I take those to mean, like, the fiscal actions, the things that the government is doing, not the actions of the Fed.
The Fed stuff does constitute a bit of a bailout, because at this point, they're buying junk bond ETFs. So that supports the prices and, therefore, the credit worthiness of junky companies that, without that support, would be descending deeper into junk status, [laughs] and whose businesses might fail. So, there's a slightly anti-deflationary effect there, but I wouldn't call it inflationary. But the stimulus or bailout that comes through the government, that has inflationary potential, but I don't think we're there. There's a neat video with Ray Dalio and Erik Schatzker, from I think Bloomberg TV, and Dalio talks about the hole.
He says there's a $5 trillion income hole in the United States, and there's probably a $15 trillion income hole outside the United States. And you heard a previous guest, Raoul Pal, talk about a U.S. dollar funding hole of – I think he might've said $12, $13, $14-something trillion, outside the US. So, it's hard to – you know, when there's that kind of demand for dollars, it's hard to see inflation. But, you know, obviously, the price of some real stuff goes up, you know, rent goes up and, you know, other things go up, and when working people don't see a real wage increase for decades, you know, it may as well be inflation, right? Because their dollar just – their buying power does not grow, and seems to shrink, because the price of stuff goes up over time, but their buying power doesn't go up.
I hope what you're getting out of this – the issue of inflation is more complex. It's not the primitive Weimar Republic, print money, everything, you know, a loaf of bread costs $1 million. It's not like Zimbabwe, you know? If we get there, that's what it'll look like, but we're not anywhere near there, yet. Michael, I hope that's a good enough answer. That's all I got: it's complicated, it's not as simple as, "Oh, stimulus? Stock prices go up," not at all. Great question, though, fantastic question. This is one of the best questions that we have seen, because it's an issue that I think a lot of people don't get. A lot of people get it wrong, so thanks.
Okay, that's another episode of the Stansberry Investor Hour – hope you enjoyed it as much as I did. Do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen, and also review and like the show, please. It helps the causes and allows us to grow. Follow us on our social channels. Our handle is @investorhour on Facebook and Instagram.
Till next week, I'm Dan Ferris. Thanks for listening.
Outro: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com, and enter your e-mail. Have a question for Dan? Send him an e-mail: [email protected] This broadcast is for entertainment purposes only, and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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