On this week's Stansberry Investor Hour, Dan and Corey are joined by Joel Litman, the founder of our corporate affiliate Altimetry. Joel gives our listeners an in-depth explanation for his bearish outlook on U.S. equities and details why market conditions today are so concerning.
Dan and Corey kick off the podcast by discussing the latest Federal Reserve meeting, a recent study about what happens to stock price when artificial intelligence ("AI") gives answers at earnings calls instead of humans, and the emergence of a robot CEO for a rum company. Plus, they talk about AI in general – whether it will replace jobs, how it's similar to the advent of the Internet, and what the future could look like. As Corey says...
All kinds of stuff is going to happen in the next 10 years with AI. The more I hear about it, the less I think the [AI-related stocks are in] a bubble. There's something to it.
Next, Joel joins the conversation and gives the reasons for his growing bearish sentiment. He points out some significant red flags that have caught his and his fellow analysts' attention, including the historical pattern of a credit crisis preceding every major bear market. Joel explains that the current sentiment and valuation trends are heading in the wrong direction. Additionally, he observes signs of a credit breakdown that remind him of the 2008 financial crisis...
We're almost getting a combination of early 2020 red flags with early 2008/late 2007 red flags. That means it's not going to be a pretty 2024. We're very, very concerned.
Joel then moves on to the impact of high interest rates on the market. He explains that he and the folks at Altimetry employ "Uniform Accounting" principles, meaning they do not use the same price-to-earnings multiples as Bloomberg or CNBC. Instead, they perform their own calculations. Joel argues that, to control inflation, interest rates need to be maintained at a level higher than what Fed Chair Jerome Powell seems to favor. Though, he does doubt Powell will cut rates as aggressively as many investors are expecting...
[Inflation is] nowhere near down as much as [Powell would] like, and that means why not keep interest rates up to slow things down a bit? I don't see him cutting as much as market valuations are pricing in.
Finally, Joel discusses U.S. stocks being overallocated in investors' portfolios today and why this serves as a concerning indicator of market conditions. Plus, looking globally, he details why he finds Chinese and Russian stocks unattractive for investment.
President and CEO of Valens Research
As Altimetry's chief investment strategist, Professor Joel Litman advises individual investors in equities, corporate credit, and macroeconomic strategy. He is also the president and CEO of Valens Research.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan interviews Joel Litman, the founder of Altimetry Research.
Dan Ferris: And today, Corey and I will talk about, of course, the recent Fed meeting. But we'll also talk about ChatGPT and the new robot CEO.
Corey McLaughlin: Looking forward to that. Remember, if you want to ask us a question or tell us what's on your mind, e-mail us at [email protected].
Dan Ferris: That and more right now on the Stansberry Investor Hour.
So we've got to talk about the Fed because it's like an elephant in the room and everybody wonders about it and does it mean anything, etc., etc., etc. I think it does mean something because I think Jerome Powell is crystal clear. He's finally beating it into people's heads. Don't think about cuts. We've got at least one more hike coming in 2023, maybe next year, higher for longer into '24 and '25. So, just chill out.
Corey McLaughlin: Yes. It seems like to me, based on the price action last week that was reflected in the moves last week, stocks had a rough week, bond yields up again, the dollar up again. So it's more of that same "higher for longer" story. If you look at the future, the fed-funds future, they are pricing in 50 less basis points of hikes next year and pushing back the expectations for cuts at the second half of next year.
So that's to me what I saw happening off of that Fed meeting, which in and of itself, as I mentioned to you just before, was a plate of hot garbage to me in terms of the messaging. It was just a mixed bag of messaging from what they were saying and then the projections that they put out, which was one of those quarterly meetings where they did projections. It was just a little confusing as we've come to expect here from the projections of the Fed.
Dan Ferris: Yeah. The summary of economic projections, the SEP. Actually, I read it once or twice in the past. I didn't read this one and I don't read it anymore because I think for me the big enchilada is what's the monetary policy action? Are they staying? Are they hiking? Are they cutting? What's in that statement, I think the statement has a lot of information in it because it's uniform from meeting to meeting. So if anything changes the statement, that means something.
They consistently – every statement says we are devoted to getting inflation down to 2%. I'm pretty sure that means PCE down to 2%. It's more than double that at the last reading. So that's important. If that disappears or if it says around 2% or just above 2%, that would be a big change. So to me, SEP, summary of economic projections, it's almost like something they're required to do. So they do it and they try to make it as nice as possible. It doesn't contain good information, I don't think.
Corey McLaughlin: Right. I agree. It's probably not worth the time hashing through it. I will say, the two little things that I heard out of this Fed meeting or the press conference was one, a little bit of Powell criticizing Congress and the Treasury department about the reasons for higher bond yields. Basically, mentioned slightly the Treasury, the amount of Treasurys that they've been issuing since the debt ceiling. He didn't say since the debt ceiling deal, but since the debt ceiling deal. Just in the past he's totally avoided even mentioning any influence of Congress or the White House on anything. I'm saying that because to me it sounded like he was – it felt like the Feds has done what it can do in terms of raising rates so quickly and is maybe asking for a little help from here, is what I was hearing. So that was interesting to me just because –
Dan Ferris: Help a brother out, man.
Corey McLaughlin: Yeah. We're coming up on the political cycle, the election cycle and all of that. So I think it'll get a little more interesting as the year goes on there.
Dan Ferris: Let's move on to this story that I caught. I saw it actually in the Financial Times first with – I follow a guy named Robin Wigglesworth. He sounds like something out of Harry Potter, but he's a real reporter at the Financial Times and he's a good reporter. He's covered this paper that came out in June by these five folks from various universities in Boston and one in Hong Kong. The paper is called "Executives versus Chat Bots: Unmasking Insights Through Human AI Differences in Earnings Conference Q&A." So what they did was, they took the introductory remarks, the earnings press release, and the financial statement data from a real earnings call, several of them, and fed it into ChatGPT.
Then they asked it the questions that were asked during the conference call to see what ChatGPT would say. The ultimate finding – this was also reported on in some detail by Matt Levine at Bloomberg. The ultimate finding was basically there's two groups. There's like the one group that could essentially be replaced by ChatGPT because they're trying hard not to give you more information than they've already disclosed through the earnings release and the financials and the introductory remarks.
Then there's another group whose executives during the Q&A gave more information. That group, the stock went up or down more as a result of the call. So because they gave more information that wasn't contained. They're the one that ChatGPT could not imitate. So Matt Levine came up with this conclusion. He said, "So if your earnings are bad you want ChatGPT to do it. If your earnings are good, you want to do it."
Corey McLaughlin: Yeah. That makes sense. It reminds me of what's been my thought on ChatGPT and this generative AI, how could they replace me as a writer of words. Yes, if I was just regurgitating data and had no insight or thought or creativity with it, yes. Yes, it could definitely replace me right now. But if you're thinking of something original, original ideas that aren't on the Internet already or at least presented in a creative way even if they are on the Internet already, then no. You can't be replaced. To me, that's the CEOs who are saying more stuff and sending their stock either up or down. You could also – that could go for any job, right? You do something good or bad. At least you can't be replaced because if the good part is valued more, at least somewhat.
Dan Ferris: It's like there's a level of risk taking we do when we express ourselves and if it's good, it gets rewarded. If it's not it gets punished in a general marketplace of human interaction and ideas and the real marketplace of the stock market. So from there, I have to move on to this other story, which I can barely believe that it really happened, but I do believe because I think it's ultimately a gimmick. This Polish drinks company called Dictador, as in "dictator," because they make tequila.
Corey McLaughlin: I got it.
Dan Ferris: Or I'm sorry. They make rum. Sorry. They make rum. Rum and tequila, I associate them with Latin American countries and I guess dictatorships and revolutions and things. Apparently, they do too in Poland. So it's a brand.
Corey McLaughlin: It's branding.
Dan Ferris: So this company, they hired a robot CEO. They actually signed a contract with it on, I think, it was August 30. It's a robot. It's a female robot named Mika.
Corey McLaughlin: Hey, Mika.
Dan Ferris: Mika. Yeah. Like she did a Reuters interview. It's creepy. I saw in the Reuters interview, she really just looks like a particularly lifelike child's doll and her mouth doesn't really move with her words. Her hair bounces the way a doll's hair does, not a human's hair. There's something really cheap and gimmicky about it. She was originally hired to look for new customers and clients. I assume that meant new distributors for the rum. Then she was tasked with finding designers to design fancy new bottles for their luxury rum products.
Corey McLaughlin: And this is all over video or is it sending e-mails or what's going on here?
Dan Ferris: Yeah. I don't know. Is she doing e-mails or conference calls? I don't know. But she did a video interview. You can go on YouTube and find the video interview with Reuters that she did. She's standing there talking in her weird robot-y, childlike-doll way saying, "I'm always on 24/7. I don't have a weekend. I'm always up to stir up some AI magic." The magic is not much if she's only got these two tasks to do. I don't know. It's just creepy and weird. The creepy, weird part for me, this robot-looking woman with this dark outfit that already looks – this is already sci-fi dystopia. Then it says right on the front: "Dictador." It's straight out of dystopian sci-fi of boys, you guys, you need to read the room a little bit here. She's awkward and just doll-like and it's very weird.
Corey McLaughlin: Yeah. So you don't think all of America's or the world's CEOs are going to be replaced any time soon, Mika and her friends?
Dan Ferris: Yeah. I think there are some whose jobs are definitely should be in danger for sure. I was talking about – in our recent Stansberry Digest, I was talking about Adam Aron, the CEO of AMC. I was like, "If I were on that board of directors, the minute before I resigned and got the hell out of there, I would shoot off a memo that said, would ChatGPT have spent $28 million buying 22% of a shuddered gold mine that's never going to be worth jack squat? I don't know. Would Mika buy that gold mine?" I don't know. I don't think she would.
Corey McLaughlin: It's hard to think she would have the imagination to do that, which would be again, that's the bad part of human nature. That could be that you take with the good. The AI story... obviously are talking a lot about it. There's so many – these things are going to happen, the deep fakes that I've seen just on the Internet with people. Good stuff with ability to say things and produce videos in different languages and whatnot. There's that part of it. Then there's the other part that's going to confuse the hell out of people and trick them into all sorts of things, good, bad, whatever. AI is definitely here. The generative AI stuff is developing.
I was talking to our friend Dave Lashmet about this. He was talking to me about Apple's new chip and its next generation iPhone 17, I think it is. It's got a section on it devoted to AI. So you don't even need to – you just use the phone and it'll have the AI in the phone in the chip. So all kinds of stuff is going to happen in the next 10 years with AI, I think. The more I hear about it, the less I think with the stock stuff it's a bubble. However, not so sure on that. There's something to it, is my point.
Dan Ferris: Sure. I think AI is like the Internet. It was – that was a huge bubble. The dot-com bubble was really a bubble, but the Internet, that doesn't mean the Internet, it wasn't a huge development in human history obviously. So companies like Amazon and others, just did really turn out to be that valuable and then some and then a lot more. So yeah. I think AI will probably be the same way. We'll get a flurry of garbage takes on it and then it'll all crash, but it'll still be here and it'll get better and better and better. And one day Mika will be real. One day you'll actually want to hire her.
Corey McLaughlin: Yeah. AMC definitely sounds like they could have used a little data-dependent number crunching rather than what they've done the last two years or whatever it is.
Dan Ferris: Yeah or they could have used the conservative –
Corey McLaughlin: Yeah. Conservative.
Dan Ferris: Lack of imagination that you described. Please, dear God, if we just could lack imagination and hang on to the money that we've raised from all these apes. All right.
Corey McLaughlin: I think we got somewhere there on AI, not the Fed, but AI.
Dan Ferris: I think we did. No. We'll never get anywhere with the Fed, but I think you're right. I think we all – we agree and it's not just you and I. It's other folks at Stansberry too. AI is serious. It's here for the long term and if it turns out to be a minor stock market bubble, oh well. Deal with it. I don't know if our guest, Joel Litman, will have a lot to say about AI, but gosh, wouldn't it be fun if he did because he usually talks about very technical accounting issues, which sounds boring, but I promise you, it's exciting. Nobody has the kind of focus on investing that Joel Litman has.
Rather than try to flush that out, I think we should just talk with him so that I can prove to you that that is correct. So let's do it. Let's talk with our guest, Joel Litman. Let's do it right now. The Fed wants you to believe they've got inflation under control, but I believe we've only seen the beginning of a devastating new crisis. If you don't prepare now you could see your savings evaporate as inflation and interest rates soar even higher over the next two years. It all traces back to a golden thread that ties together the biggest financial calamities in America's history.
But it seems the entire financial world is falling into the very same denial trap that led to massive devastation the last time this crisis played out. If you know your history, you know there will be winners and losers and now is when you decide which one you'll be. I've spelled it all out in an urgent new report. Go to www.bankrun2023.com to get your free copy. I'll also show you how to get my complete playbook for navigating this crisis including the three critical steps to take immediately. Again, that's www.bankrun2023.com for your free copy of my new report. Joel, welcome back to the show. Good to talk with you again.
Joel Litman: Dan, thank you for having me. Great to be back on.
Dan Ferris: All right. So our listeners – let's bring our listeners up to speed on the two of us. I've been consistently bearish for the last couple of years, but during that time I've heard you strike a really bullish tone on more than one occasion and you, quite rightly and I totally agree, referred to sometimes to the awesome power of the U.S. economic engine, among other factors. Among other factors. Had you wanting to be long and buy stocks and I was – at the very same moment I was telling people it was the top of the biggest financial bubble in all recorded history and all this stuff. So we've had a little bit of difference over the past couple years. That's worked out well for you. You've made some good calls and your subscribers have made money, etc., etc.
Joel Litman: My track record has been very good, I'm happy to say. Long stocks and certain stocks not just along the market, but specific stocks.
Dan Ferris: Right. So these days though you tell me you're coming around to my way of thinking.
Joel Litman: Yes, sir.
Dan Ferris: I'm really super curious as to what in the world you could be seeing that brings you around to do that.
Joel Litman: Yeah. It's the same thing that I saw in 2008 where I spoke in front of a CFA society in New York and they're some of the biggest money managers and analysts in the room. And we started seeing some really big red flags at the time and some of them that we'll be talking about are credit related and credit has been the canary in the coal mine for equities. It always has been going back 150 years. Every major equity bear market has been preceded by a credit crisis of some kind. That's an important point, preceded. Preceded.
One of the reasons that we were so bullish in March, April, May, and June of 2020 while the economy was looking down, was that credit formation was unbelievably healthy. We feel that we wouldn't have widespread bankruptcies in the S&P 500. Now people said, "Yeah, but there are bankruptcies in the economy." I said, "Well, there's a difference between buying the economy and buying the S&P 500 or the S&P 1,500, even." And because of that people are left confused saying, "How can the stock market be up?" I'm like, "Because when the economy is in such trouble and there's closings," I'm like, "Yes, every mom-and-pop restaurant is considering closing or going bankrupt, but man, did Domino's have a great year," and many, many other public listed companies that were dine-in and shifted to eat at home, work at home, play at home and all those companies did very well.
So that was because there was such good credit formation for that to allow it. Right now we are seeing signals that scare the heck out of me almost like 2008. We're seeing some heavy signals and also sentiment. So the early 2020, before the pandemic, we did have a "market is expensive" call. You and I aligned. We aligned. We felt that the markets looked expensive at the beginning of 2020. That wasn't because we were expecting – we weren't predicting shutdowns and a pandemic lock-up across the world. It was simply because we were seeing sentiment indicators that after 2019's 30% run or thereabouts, we were like, "The beginning of 2020 looks really toppy. There's a lot more downside than upside." It was more of a sentiment and valuation call.
That's sort of what we're seeing right now. So right now we have a similar, to the beginning of 2020, more bad could happen than good sentiment and valuation being in the wrong direction for wanting to be long equities for the short term. We also see some credit breakdown, which is more like 2008. So we almost get a combination of early-2020 red flags with early 2008, late 2007 red flags. That means it is not going to be a pretty 2024. We are very concerned.
Dan Ferris: OK. As am I of course. It's nothing new with me. It's new with you on this occasion. So it's hard not to talk about the fact that the Fed just had their meeting and they voted to keep rates unchanged and signaled maybe one more hike in 2023. I believe the comment was higher for longer than most analysts expect in 24 and 25. So it's funny to me, Joel, because I criticize the Fed sharply, heavily, a lot. But I have to say this about Jerome Powell, he's been very straightforward. He's told you exactly what he was thinking and he's wanted to make it crystal clear all along the way. I remember when he said, "We're not thinking about cutting at all," because people keep asking about it. Finally, it seems like he's starting to get through to people. Does the fact that rates are going to be higher for longer, does that weigh on your mind at all?
Joel Litman: Yeah. Dan, as you know, we do Uniform Accounting. So we don't accept the same price-to-earnings multiple that you'd see in Bloomberg or Factset or on CNBC or whatever. We do our own calculation of it. That calculation of that PE multiple for the U.S. market is already pricing at a bunch of rate cuts. Meaning, to get to the current evaluations based on Uniform Accounting, you need the rate cuts to happen and that's just to make where we are now. So if we have no rate cuts or we have a rise in rate cuts, I think that's very bad for the market and that's part of the reason we're saying the market is really toppy right now, frothy, if you want to use Seth Klarman's term in terms of what we're seeing.
Meanwhile, the earnings revisions keep coming down despite where we see price-to-earnings multiples at these – under Uniform Accounting again at these peak, peak levels. And sentiment based on whether you look at equity allocation or you look at market correlations, they're all lining up with this is the top of the market. So I'm not screaming that it's going to fall 40% next week, but I don't see it going up another 30% or 20%, like it did in the first seven months of the year. I don't think there's any chance of that really. And I think the Fed – because the Fed is a nice one, two punch combination. It's we want good employment, but we want to keep inflation down.
Well, he's got good employment in spades. He's already solved the issue. So he only has to focus on one other thing, which is keep inflation down and it's nowhere near as down as much as he'd like and that means why not keep it just rates up to slow things down a bit. I don't see him cutting as much as market evaluations are pricing in those cuts will happen. We see it holding, if not rising, which is frankly, what he seems to be communicating.
Dan Ferris: That is interesting because we had Bob Elliott on the show from Unlimited Funds, formerly Bridgewater Associates... a guy who worked with Ray Dalio. He was on Twitter saying – he had a similar viewpoint. He said earnings are going to have to grow a solid 10% in each of the next two years to justify this right here.
Joel Litman: Yes. To justify current evaluation and the face of earnings division is down.
Dan Ferris: Yeah. When I also look at it like a year or two ago, Vitaliy Katsenelson, a friend of mine who has also been on the show, a portfolio manager, he was saying, "Look, just take the last 10 or 20 years or whatever it is and invert it." One of the inversions that I feel like I'm seeing now – one of the big inversions of course is interest rates. It was 0% from '08 to '15 and then again from, what, '19 to early '20 – or I'm sorry – from 0% again from '20 to early '22. So we got all the 0% interest rates. There's no hurdle rate for investors. So it naturally encourages less risk aversion. People just become naturally less risk averse because they want a return on their money.
I believe the opposite happens when rates go to 5% and you can roll T-bills over two years or whatever it is that you want to buy and get 5% on it, it creates a natural hurdle for investors. It makes it a little more difficult. I feel like what we're adding up here are these forces that are weighing on really high evaluations. It's got to come down. I don't see the alligator jaw going the other way with the bottom coming up and the growth coming up to meet the evaluation. I don't see any of that.
Joel Litman: Yeah. With the Fed continuing raising rates one of the things we do is we run – I'm a forensic accountant, but we also run forensic analysis on the actual audio of management teams when we're picking stocks or billing or doing a buy list. We also run those audio forensics on Powell. As you said, he is quite transparent. Even when we run those forensics we're like, this does not sound like someone who is sandbagging or really is going to lower rates. It sounds like someone who is still concerned deeply about inflation, is happy that unemployment is maybe where it's at, maybe even too good. So his two green signals for keep rates high or keep raising are there versus a six-quarter-straight rate cut, which seems to be what you'd need to have the spur in earnings and growth to justify current evaluations, as you were saying.
Dan Ferris: Yeah. It's funny. That forensics stuff sounds really cool. What actually do you do? What do you analyze, what he's saying or his tone of voice or what?
Joel Litman: Yeah. We studied – years ago we studied visual basic body language detection. The problem is you can't get CEOs' good video on that often, but thanks to Reg FD, you can always get good audio. There is some linguistic methods where you can look at word choice and word patterns. The problem is, I've also done training for National Investor Relations and I can tell you, the Investor Relations people, the better ones are definitely coaching their clients or their CEOs and CFOs on which words to use. So the linguistic word choice we think has sometimes been weeded out.
We can't use body language to make a good video, but the audio under wonderful Reg FD, Regulation Fair Disclosure, we can always get audio of management's calls and with that, we run a number of voice stress and voice audio tests. We've done more than I think 40,000, 50,000 earnings calls. We've been running the Fed. We'll run the ECB when they talk about things and it does give us insights on things like interest rates as well as specific companies. One of the things we've found, people say, "So you're running basically a lie detector?" I said, "Yes, but we're also running a truth director." Meaning we're looking for deception, but we're also looking for confidence.
The point that you were just making is when you listen to these calls and listen with that kind of technology, what's scary sometimes is people have reasons to be deceptive cause maybe Powell doesn't want to tell something or doesn't want to tell what he's thinking. When he's confident about certain issues, like when he's confident that he's concerned about inflation, you walk away going, "He's really concerned about inflation. This is not just saying it for the benefit of trying to manage or manipulate expectations.
He really is concerned because we actually see – it's a confidence marker that comes through when someone is speaking with that level of conviction. We go, "All right." That means rates, if anything things might change in the next three months. If things are more similar then we see him being more worried about both inflation and frankly, very, very strong employment, very, very low unemployment and that means raising rates or at least keeping them the same, at least keeping the same.
Dan Ferris: At least. Yep. Keeping them the same is – I do a primitive version of this. I just take the statement that he reads. It's like 16 sentences and I rate each sentence dovish, hawkish, or neutral as much to see if I can rate it dovish or hawkish or anything. It's turned out 56% hawkish the last few times. What I note is that the 2% target just comes up again and again. It was three times. There were three separate mentions. Sixteen sentences, three separate mentions of the 2% target. They're devoted. It's almost like they're saying, "We are going to hit this 2% target if there is rioting in the streets of every large American city and they're selling White House furniture to pay the bills. We're going to hit this 2%."
Joel Litman: Come heck or high water.
Dan Ferris: Yes. It's a standard thing. The folks at the Fed are essentially a bunch of academics who got jobs with the government. You know how they are. They are slavishly devoted to their target. I just feel like, "Wow." We're going to see the target. We'll hit the target, but we'll be waving at it driving 60 miles an hour in the other direction toward 1 and 0, right?
Joel Litman: Well, they're still better than the Financial Accounting Standards Board, but I'm in agreement with you directionally.
Dan Ferris: The FASB is bad, is worse than the Fed.
Joel Litman: George Stigler talked about regulatory capture 40 something years ago. He said regulatory capture favors the incumbents and it can be seen by signals like revolving doors and whatever. One of the reasons we don't trust a PE that comes from as reported statements filed based on the FASB's GAAP accounting, which the SCG just simply approves. They don't go in and change anything. You've got a board of unelected officials, the seven FASB board members, who make more than $1 million a year, each one. It's a seven-year contract. So every FASB board member – look, I was an accountant. What on earth are you doing that guarantees a $7.5 million contract over seven years? These are unelected officials. So if they do something that people disagree with the accounting you can't vote them out.
So you say, "Where do they come from?" They come from a board of trustees who make $150,000 to $200,000 a year of the financial accounting foundation, which no one even understands, who then appoint these seven FASB members. Well, who do you think appoints those trustees? Members and the heads of the ICPA and the American Accounting Association. So low and behold, the former head of the ICPA, who helped in voting in the trustees, then leaves the ICPA and becomes the head board member of the FASB. Does that not sound like George Stigler regulatory capture, revolving doors between quote, unquote commercial interest and the regulatory interests?
So when people wonder why, "Why is the accounting so messed up?" I'm like, "Well, who's watching the watchmen?" Imagine what the casino industry would like if the casinos regulated themselves. Well, why would you think the accountants, because they're nicer people? Maybe they're not as aggressive, but human bias kicks in and this is one of the reasons we have to do Uniform Accounting on the market, on [inaudible] or every other company that if you're using GAAP accounting and you don't even know where it's coming from and then you realized, "Well, no wonder it's so messed up," because the more complex and obtuse and difficult the accounting, the more you ensure the job of every accountant, which is what regulatory capture is.
So you're down to four accounting firms, four. Big Four accounting firms. Really you don't have a lot of choice if you're a published company. You could go with a couple others and there's good firms below that, but most of them go with the Big Four. When you look at the revolving door between the accounting firms and the ICPA and then the FASB, it is – people talk about pharma and the FDA have a revolving door. You've never seen this. You've never seen this. It is amazing in terms of these pay out $7.5 million over seven years. To do what? I've been in that building. It's not like people are working till 60 hours a week trying to come up with the right accounting. It is unbelievably academic.
So when you brought up the Fed, I was like, "Yeah. It's still not as bad as the Financial Accounting Standards Board," which is why Uniform Accounting is so necessary because you cannot trust GAAP accounting. You just can't. It's a mess. It's a colossal mess.
Dan Ferris: I remember years ago I went to – went down to Austin, Texas at a meeting of investors who were clients of a guy named Arnold Vandenburg, who is really sensitive to –
Joel Litman: Oh, yeah. One of the greats.
Dan Ferris: Yeah. He was sensitive to accounting issues. Oh, yeah. One of the all-time greats. Vandenburg said – I forget how he put it. It's been years ago. So forgive me for not knowing exactly what he said, but it was something like, "If you did real accounting, S&P 500 earnings would drop 10% in a heartbeat." He said you can't trust any of it. He had four or five things listed on the slide that I can't remember, but it amounted to earnings are not anything like what you think they are due to accounting issues. This was 20-some years ago.
Joel Litman: Yeah. Well, all the followers of Graham and Dodd, Ben Graham, which basically means the CFA Institute and any of the greatest investors, Buffett, Klarman, I'd say Marty Whitman in that list, they all repeat what Graham said and Graham was – "Reported earnings, he said, "is readily understated or overstated and you're going to need to adjust it." So that's going back to the fundamental Bible investing, intelligent investor and the Security Analysis, the Bibles, if you will, by Ben Graham out of the Graham and Dodd. And Vandenberg, who I'd say follows in similar footsteps, why would he?
How many times has Buffett railed on accounting? I think eight of the last 10 shareholder meanings. He opened up talking about, "Don't ask me about my GAAP accounting numbers. I'll talk [inaudible] earnings. I'll talk others, but I'm not going to talk about the bottom line because it's capricious, it's moody." People paid attention. You look at Berkshire Hathaway. Their quarterly numbers swing between negative $40 billion and positive $30 billion in profits or losses every single quarter. It's because how bad the accounting is. It's not because Buffett is suddenly doing a bad job and a good job and a bad job and a good job.
It's accounting that makes it swing so much. That's what Uniform Accounting is necessarily for, not just for individual companies, but when you're looking at a sector and obviously when you're looking at the market as a whole. When you put that together right now, the market looks awfully expensive.
Dan Ferris: Awfully expensive. Can you put a number on it for me or like a multiple of –
Joel Litman: Yeah. I'd say on a Uniform-Accounting basis, it's something like 24 times. Relative to history and relative to similar interest rate environments, meaning we can go back 150 years. We can go back 130 years or so and we can say, what are U.S. market multiples relative to where interest rates are? Not surprisingly, low inflation, low interest rates you see higher multiples. Higher inflation, higher interest rates you see lower multiples. If you say, "We're now going into a higher interest rate and definitely a higher inflation environment than we've been for the last 20 years or so," then that 24 times is not only expensive, it's very expensive.
If it was Bush tax cuts of 15% capital gains and 15% dividends where you'd basically get taxed almost nothing. So '97, '99 you'd say, "Oh, 28-times multiple?" That's crazy to say, but it's actually reasonable in '97, '98, '99 because you had such low inflation, such low tax rates and whatever. But in this environment with – if people would, I think, agree, we have rising taxes, non-falling taxes. Then on top of that, you put in higher inflation and higher rates, 24 times suddenly in that context looks very expensive, not just relative to history, but relative to context. I think that's what the market sometimes is late in getting.
Dan Ferris: OK, folks. That's not me talking. That's Joel. He's the one telling you it's very expensive. Not just expensive, very expensive.
Joel Litman: No. Part of the problem is though that people don't want to – bonds are not a great place to put your money. Cash is a terrible place to put your money. So even Treasurys relative to inflation may not be the best place to put your money. So we think for that reason – and if you go around the world, China is definitely not a place to put your money. You can't put your money in Russia or that area. So you're left with U.S. equities if you do have an equity portfolio. That may be why we see what I'd argue is an overallocation to equities right now, which when you look at investor allocation surveys when they ask the biggest active investors about their allocation, that is also at a many, many year peak level in terms of sentiment and being overallocated equities at this moment, meaning as we're speaking right now.
That is a scary sentiment indicator for me, it really is, because where is the upside? If anything, it means the market goes sideways. More likely sideways and if something happens and the market tanks. It's scaring me right now. Now look, you know I'm a giant believer in the U.S. economy. If someone says to me, "I've got my money in a 401(k). I'm not going to touch it for 20 years," I'm like, "Just let it ride. Let it ride. Ride it out." The problem is if they sell now what's the chances they're going to get back in two years from now? All those people that sold in 2008 did not get back in in 2009 and they missed out on one of the biggest bull markets in history.
So if you're in it for 10, 20 years I'm unbelievably bullish about the U.S. stock market. But if you need your money in the next two to five years, you cannot have your money in U.S. equities, period, end of story. If you need your money, if you're going to take it out in the next two to five years it cannot be in U.S. equities. It doesn't make sense from a risk/reward standpoint. It just doesn't make sense.
Dan Ferris: Again, not me talking. That's Joel talking. Wow. So that's – I almost feel like we should end there because that was such a dramatic statement. Can't have your money in U.S. equities.
Joel Litman: Well, the obvious next question is, "OK. Then what do you do?" We've got this program Wednesday, September 27 at 8 p.m. Me, our director of research, Amy, we're getting together and we're going to talk about some specific signals. We're going to show the actual charts. We're going to talk and walk through why it looks so scary and actually walk through chart by chart details and then we're going to talk about the strategy that we see. I think you know 230 or 240 of the biggest 300 money managers in the world are using our work. They want us to do the Uniform Accounting. They don't want to have to do it themselves.
They want to use our Earnings Call forensics because they don't have that technology or that capability. So we have that and we get to see some of the greatest investors and we see a strategy that they're lining up for. Believe it or not, we are seeing a lot of money lining up in a particular strategy in the credit markets and it's not just buying bond funds because bond funds will do bad in a recession also, bankruptcy risk and whatever, but a specific type of credit. We're actually going to walk through what we see some of the – our greatest, best clients lining up and I'm seeing literally billions of dollars to move into this particular credit strategy and we're going to walk through that also on Wednesday at 8 p.m., September 27.
Dan Ferris: Oh, I got to tune in for that. I got to find out what that is. I know you can't tell me because –
Joel Litman: That will be fun.
Dan Ferris: – you want to do it in the presentation, but yeah.
Joel Litman: Well, I'm big on Reg FD. If we're going to tell our clients, we should tell them all at once. So we announce it. We tell everyone we're all going to tell everyone at once the exact same thing so they understand. So we're also not frontrunning or allowing a front run. So I'd rather say, "Yeah. We'll tell everyone after that. If you want to wait, that's fine, but at least people know ahead of time what we're doing from an asset allocation strategy standpoint."
Dan Ferris: Right. You're doing these strategies through – you and I are published basically by the same people. We're sort of all under the same umbrella. So you're publishing this same advice in what publication?
Joel Litman: So Altimetry is our flagship publication. Altimetry is our flagship brand. Altimetry, we're launching a newsletter, which is a newsletter and a strategy with specific recommendations for a credit-based strategy, which historically has done very well. I'm saying we have stock picks that will do 100% or 200% returns. You're not going to get that, not in the market we're coming into. We can show 10% to 25% plus with very, very low risk going into this kind of market. It doesn't work as well actually if you're in a raging bull market, this kind of credit strategy. It does work very well during these periods of time.
So for the next 24 to 36 months, maybe more, maybe a little less. Who can predict that? Going into what we're seeing and that kind of trend, why take the risk? Even if the equities are going sideways, why take the risk if you can really lock in 10% to 25% gains, not in bond funds, but particular credits? That's what this new publication is all about and that's what we're going to launch all at once, so all our clients and readers and subscribers here at once versus anybody getting a jump and that will be Wednesday night at 8:00 PM.
Dan Ferris: OK. And if listeners are interested, and you should be. I certainly am. You can go to CrashAlert2023.com and sign up for that and they'll tell you when the event is happening and you can tune in and find out everything that Joel is talking about with this credit strategy. I'm starting to scratch my head and say, "What is he talking about?" I've got a number of thoughts, but I'll keep them to myself. So CrashAlert2023.com.
Joel Litman: Well, I can give you a hint. Do you think Moody's, S&P, and Fitch are doing Uniform Accounting when they do credit analysis? They weren't doing it in 2008. They weren't doing it – go 10 years back from that. So what's to believe that suddenly they got religion and they're doing credit research that's reliable, corporate credit anyway. Just a hint, but yeah. In many cases because we can actually do credit analysis using Uniform Accounting and see frankly, big differences and build a strategy around that. By the way, we're not the only ones. I'll actually mention some of the big, big investors that we see piling money into these kinds of strategies and I'll talk about that also if you join CrashAlert2023.com and register there. It'll be a fun event. It'll be a fun event.
Dan Ferris: Yeah. I'm sure it will. Joel's events are great. Charts, lots of data, lots of great information, I guess, is just the easy way to say it.
Joel Litman: Thank you, Dan. Thank you, sir.
Dan Ferris: Well, it winds up being compelling. Nobody likes somebody to just tell a general story. You're always very specific. You always have all your data and your ducks in a row. It winds up being this very sort of detailed thing, but you unravel it for people in a pretty good way. I feel like I just described what all our subscribers respond to over the years. They don't want a guru. They want someone who's got real skill as an analyst and a real strategy who really knows what they're doing. It's like the old days of trying to be a guru in the newsletter business are gone forever, thank God. Thank God. I'm really lucky and I think we're both really lucky at Stansberry to just be surrounded by evidence of this trend because there's just like one great analyst after another. We've had many of them on the show.
Joel Litman: Well, you have to have an alternative. Wall Street right now – I think I just ran this analysis three months ago. Wall Street is still 92% buys line by line, 92% buy recommendations and only 6% – sorry – buy and hold.... 92% buy and hold and only 6% sell. I'm like on what planet could that possibly be correct? That's across – if you take all the buzz bracket, that's Goldman and UBS and JPMorgan and everything and put it all together. They're all the same, 90%-plus, because the real client is not us or you, the investor.
The real client is the corporation and they want to keep the corporation happy. So they always give these glowing things that even if things are bad, "Oh, no. The company is going to work around it and navigate it." That's why I've got to buy or hold, buy or hold often, over and over again. In fact, I said just buy – so take out the holds. Buys are still outrunning sells by seven to one or eight to one in terms of recommendations by Wall Street across the board. So yeah. Dan, the reason why you have an audience, why we have an audience, why I think some of our fellow authors and editors are doing well is because we're not beholden to this bias of I better not say anything bad about the company or S&P, Moody's, or Fitch, same thing. Who pays for a credit rating?
Dan, you can get a credit rating on any company right now. When is the last time you paid for it? Because under John Moody you had to pay for a subscription. John Moody said specifically, "I will never" – he said this – "I will never take money from the issuer because the bias," he goes – he quoted it a slippery slope. He goes, "There will be no turning back." Well, who pays for credit ratings today? John Moody would be turning over in his grave. The issuer. GM pays for GM's credit rating. How can you not have bias? So when we build – and this credit strategy, what's different is you really are seeing something very different than if you went to the big three agencies or anything by Wall Street.
Dan Ferris: Except for Sean Egan, right?
Joel Litman: What's that?
Dan Ferris: Except for Sean Egan, Egan-Jones.
Joel Litman: There's some good independents out there, but – there's some good independents out there, but there's a few.
Dan Ferris: They're small. I've enjoyed Sean's presentations over the years. He's been at Grant's once or twice. I'll never forget when – it was a while ago when two of the big home builders were merging. He called it two drunks holding each other up. I've used that line many times since.
Joel Litman: I like it. I like it.
Dan Ferris: When I see a bad merger it's two drunks holding each other up. I got that from Sean Egan, who is an independent credit – investors pay him, not companies.
Joel Litman: Yes. Right. That's John Moody. John Moody originally was, "Hey, I need the investors to pay me an SEB subscription so that I give unbiased, say what I think. I might be wrong. I might make a mistake, but I'm making a mistake from an unbiased standpoint versus clear mistakes by Wall Street and the big three that have a lot to do with who's paying the bills." It's unfortunate.
Dan Ferris: This is a big issue because this credit rating, it's a utility function in the market. It's something that a lot of people rely on.
Joel Litman: A lot of the general public, but not my clients. My institutional clients, the biggest in the world –
Dan Ferris: Not Joel's clients.
Joel Litman: No, no. I'm saying, the biggest investors in the world, we'll walk in there and we'll sit with them. They're like, "Yeah. We only use the ratings for compliance. We're required. We're compliant to show here's what we're buying, here are the bonds we're buying, and here's the rating from one of the big official NRSROs," Nationally Recognized Statistical Rating Organization, which by the way, is another regulated monopoly meaning regulatory capture, coming back to that George Stigler talked about.
The difficulty of us, if we wanted to become an NRSRO, the hoops are massive. The cost is enormous. Regulations favor the incumbent. They favor monopolies. They kill competition and it makes it very, very hard for someone like us to say we'll be a nationally recognized rating organization. It's just because the regulatory capture is in. It's in.
Dan Ferris: Joel, you're sounding more like me every second. I've talked about this in all kinds – it's true. It's especially in finance. Who is always on the front lines of wanting more banking regulation? Well, JPMorgan, Bank of America, all the largest incumbents. They want that expensive hurdle for the competition to have to get over. It goes in every country.
Joel Litman: It leads to consolidation. It leads to fewer players and it's worse for the consumer and society as a whole, but man, do those commercial interests get the benefit of not having to work as hard as they used to get people to buy their product.
Dan Ferris: Right. That's right.
Joel Litman: Now Dan, where we differ is – it's not a big difference, but it's a difference is we are running a global research house. We're running credit and credit analysis and equity analysis on 32,000 companies. And what I can tell you that, as bad as these things are in the U.S., it's a comparative advantage because it's far worse in pretty much every other country in the world with the exception of maybe some tiny little country that has adopted U.S. Bill of Rights or a U.S. like Constitution. Other than that, you go around the world. It's so much worse, which is why people are like, "Well, if you're so down on these things that are happening in the U.S.," I'm like, "Yeah, but it's 10 times worse in China. It's 20 times worse in Russia. It's 50 times worse in the Middle East where you really don't have any level of this thing."
And regulatory capture is 100%, not 10% or 20% of what's going in the industry, but 100%. Because of that, that's one of the reasons we're still bullish on the U.S. So for all its faults, it's a lot worse elsewhere. We can say that with data, with evidence that China is in deep trouble. China is lost for 40 years. This idea that a post zero pandemic, zero tolerance pandemic COVID thing is going to result in a boom in China. We were very big, if you remember last year at Stansberry's Vegas conference and people were saying, "Oh, China is going to come back. They're going to open up."
We're like, "No. This is out of the frying pan and into the fire." They're getting out of the pandemic issues and they're going back in the horrible credit issue. So while yes, I am concerned about U.S. credit issues and we'll talk about that on our program Wednesday. China is a lot worse. What China is going through right now is worse than 1929 U.S. Worse than that.
Dan Ferris: Worse than –
Joel Litman: Worse than bankers jumping off of buildings. It's atrocious. We've got the data to show it. The problem is the big three don't have that data. They're not running credit ratings on every company with debt. They're running on clients. We're running on every company with debt because our clients, as subscribers, ask for it. That does give us some insights about yes, I think U.S. is going to have a tough two years. China is going to have a tough 2020. Russia is going to have a tough, well, maybe forever. I think we've seen the end of the Russian federation as we've known it. It's probably because of these issues that aren't just military oriented, they're how are they funding and financing their businesses and what do they do without foreign direct investment. It destroys – these economies can't survive as islands. The more they're either forced to become islands or choose to become islands, they can't survive.
The U.S. can replace a lot of what happens in China with Mexico. China cannot replace the U.S. consumer with anyone else. The U.S. can get by without China. I'm not saying it's pretty. China can't get by without U.S. as a consumer. They're going to – and unbelievable, terrible leverage issues. So no. I'm very, very bullish on the U.S. 10, 20 years out. It's just going to be a really rocky and tough couple of years.
Dan Ferris: Yeah. I'm afraid it'll be a rough sideways several years, but that's for me a possibility, not a probability.
Joel Litman: No. I think – yeah. Hard for me to say is it one year, is it three years or more. You heard me say, if you need the money in five years, your money cannot be in U.S. stocks, frankly any stock market really. It could be in some individual names. Don't get me wrong. I think we're still picking individual names. It could be an AI related. It could be supply-chain related. It could be particular health care, medical things that we're like, "No. This is still going to do well no matter what." So we can still be active stock pickers, but you can't passively put your money in the U.S. stock market if you need that money in the five years. You have to be active.
Dan Ferris: Yeah. I saw a chart of the Russell 2000 Equal Weight and I thought, "Well, it's only 7% of the market cap," but it's two thirds of the names and it's down for the year. The magnificent seven has propelled the S&P and Nasdaq up whatever 20%, 25% or whatever. No. At this point actually it's quite a bit less, isn't it? But I was just looking at a chart here, but it's not on my screen. So the big indexes look like they're doing fine, double-digit returns or whatever, but most of the market is down for the year, which it just makes me wonder when am I going to see the other shoe drop.
When is the rest of the market going to fall in line? I think you're pointing to some of the issues and I've pointed to similar issues. Next year doesn't look so great. So we've reached the point where it's time for my final question, which is the same for every guest, no matter what the topic. You've answered it before. I hope you don't remember it because it works better if you don't know what it is.
Joel Litman: I don't.
Dan Ferris: Good.
Joel Litman: I just enjoy our conversations. So I don't feel it. Yeah. Shoot.
Dan Ferris: Besides going to CrashAlert2023.com and signing up for your presentation next week, if you could leave our listener with one thought, one idea today, what would it be?
Joel Litman: I have never been, and I say never. When you look at the long-term data, I have never been so bullish about long-term U.S. economy and U.S. equities, long term, long term. And at the same time I have never been so bearish about U.S. equities in the short term with the exception of maybe 2008, with the exception of maybe early 2008 and that CFA conference where I sure did show some scary, scary signals. The signals now are _____. So yeah. It's long term still super bullish about U.S. and U.S. equities and U.S. economy. Short term, and by short term, as we've discussed, that could be one year, that could be three years, I'd be deeply concerned, deeply concerned about any passive investments in U.S. equities.
Dan Ferris: All right. You heard it here first. If you want to know any details of that, go to CrashAlert2023.com and sign up for Joel's presentation. Joel, thanks again. It's always a pleasure to talk to you, man. I feel like we just don't get to talk enough.
Joel Litman: Thank you, Dan. Well, I'll be seeing you in Vegas, right, for the big conference?
Dan Ferris: Yep. We'll be there.
Joel Litman: Maybe we'll be able to break bread there.
Dan Ferris: Yes, we will.
Joel Litman: Awesome.
Dan Ferris: Thanks, again, Joel.
Joel Litman: Thank you, Dan. Much appreciated.
Dan Ferris: Folks, stocks are near all-time highs. AI has added trillions to just a handful of stocks and everyone is convinced the market can just shrug off the biggest and fastest interest rate hikes in history. It's textbook bubble behavior and it's why my colleague, Joel Litman, is stepping forward with the biggest warning of his career. Now Joel warned of the coming disaster in 2008. He nailed the market bottom in 2020 and the top in 2022, both nearly to the day. Now he says he's more worried about stocks than he's been in the last 16 years. The next crash is under way for a specific reason that almost no one is paying attention to.
He's issuing a rare recommendation to put nearly everything into a completely different approach, the one that the rich have used to make a fortune in every crisis for decades. It's not gold or anything else you've likely considered. But Joel has used it to show his deep-pocket, professional clients an 87% win rate with gains above 100%. In the coming crisis it could show you double-digit income and hundreds-of-percent gains over and over. I urge you to tune in and hear Joel's stunning warning along with one of the greatest market secrets you can ever learn.
Just head over to CrashAlert2023.com for full details. Joel will go live on Wednesday, September 27 with all the critical details. You do not want to miss this. Head to CrashAlert2023.com right now to make sure you're on their list for updates. Again, that's CrashAlert2023.com. It's 100% free. Well, listening to Joel Litman talk is always a great pleasure for me because obviously he knows an awful lot about an awful lot of companies and from a perspective that we don't often hear, we hear a lot of analysts and investors and traders on this show, but we don't talk with a lot of accountants who focus solely on accounting. Joel is exactly that.
He works with, gosh, I don't know. He's worked with the U.S. government, with the Department of Defense, and all kinds of – the U.S. Marines War College and just all these huge investors, the top 240 or so as he was mentioning investors, institutional investors. So he's got a fantastic perspective on things. He's made a lot of good calls. He's been bullish at the right times. I've been consistently bearish, but he's called the bull runs in the past couple of years that I've – I won't say I've missed them because I've been recommending long stocks that have done very well in the past couple of years, but I've continued to warn about what I think is going to be a sideways market.
You heard Joel mention that too. What I'm afraid is going to be a crash in the next six to 12 months here. I started saying that in what, March, April in my newsletter, The Ferris Report that I thought a really, really sudden crash with the market down 20%, 30% in a big hurry. I thought there was an imminent danger of that. I still think it's imminent. Hasn't happened yet, but the action recently has been not great. Joel is starting to see the same things. Before we hit the record button on this podcast he said, "Dan, I'm starting to coming around to your way of thinking at least in the short term."
So I hope you take all these warnings seriously because they don't just come from me. They come from people like Joel, who he – I do a lot of my own type of work, but I don't do – Joel and I overlap on some viewpoints, but the type of work he does is completely different. He's focused primarily, almost solely on accounting issues and finding good stock picks by knowing the accounting issues very well whereas I build some of that into my analysis, but I don't focus solely on that. It's really great to hear someone like that talking. It's really valuable to you. If you don't think so, go through – listen to the podcast again. I'm not kidding. It's that important.
Whatever you do, go to CrashAlert2023.com and sign up for the presentation. The guy is a genius. He'll teach you all kinds of stuff I promise you don't know. CrashAlert2023.com and sign up for the presentation and view the presentation. All right. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
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