In This Episode
In a week with the latest drama with WeWork on full display, Dan breaks down the ultimatum it faces from SoftBank and its founder Adam Neumann’s $1.7 billion parachute, and also shares insights from some of the more insightful Vegas speakers from last month.
He then gets to this week’s guest, Jason Goepfert.
Jason studied finance and economics in college, but got his real education helping a major bank and a billion-dollar hedge fund build its brokerage operations. He founded SentimenTrader almost 20 years ago to help individual and professional investors understand the state of others’ emotions in markets, using objective and quantitative tests to help overcome the biases we all have, and avoid succumbing to the herd mentality.
With the Dow dropping as much as 1,000 points last month, you won’t want to miss Jason’s thoughts on the edge that sentiment analysis can give investors – and how it can put both your and everyone else’s emotions to work for you.
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
- To check out Jason’s website SentimenTrader, click here.
1:06: Dan goes through some of the highlights of this month’s Alliance Conference in Vegas, including some of the greatest hits of a conservative comedian speaker.
6:20: Tony Deden’s concept of “permanent irreplaceable capital” is a lost art in a financial world obsessed with quick profits and alpha – here’s how it was explained to Dan through the story of trees that won’t bear fruit in their planter’s lifetime.
9:36: Bernie Sanders wants to tax America’s richest at a 97% rate while Elizabeth Warren will settle for only 62% — here’s Dan’s take on when being required to pitch in crosses the line to “a culture of larceny.”
12:35: With WeWork’s biggest investor, SoftBank, poised to take control of the company, Dan breaks down their deal to give Adam Neumann a $1.7 billion farewell gift.
18:10: Dan introduces this week’s guest, Jason Goepfert. Jason studied finance and economics in college, but got his real education helping a major bank and a billion-dollar hedge fund build its brokerage operations. He founded SentimenTrader almost 20 years ago to help individual and professional investors understand the state of others’ emotions in markets, using objective and quantitative tests to help overcome the biases we all have, and avoid succumbing to the herd mentality.
20:20: “People are weird” as Jason notes, and that’s why behavioral models in finance are so often wrong. The curveballs thrown by variables like religion, sex, or politics all come down to this – “people are weird.”
23:10: No matter how much you love a stock, it will never love you back – here’s Jason’s story on how things ended in the 1990s for one woman who always called his brokerage firm to ask how “my Qualcomm” was doing.
28:47: Dan asks Jason about his background before college, and how it helped him put two and two together in a way that so many others who also studied finance still haven’t.
34:40: Jason explains how scrutinizing sentiment metrics can provide for a strong edge some 200 days of the year, and why the data can be far more important than the ultimate conclusion.
42:35: Dan asks Jason about the credibility of the AAI’s weekly sentiment survey, and Jason goes over the practical uses of an admittedly noisy stream of data.
100:20: Dan responds to a mailbag question from Peter G., who asks about Mark Dow’s disagreement with Dan over gold, interest rates, and sovereign debt.
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello and welcome, everyone to another episode of the Stansberry Investor Hour. I'm your host Dan Ferris. I'm also the editor of Extreme Value, a value-investing service published by Stansberry Research. We have a really cool show lined up today. Yes, we do have a guest this week. I know I said I changed the format, but we already had this guy scheduled so we thought, eh, why not?
So, let's get to it. I'm going to talk about a few things before we do our interview and then we're going to talk to Jason Goepfert from SentimenTrader. Should be cool. Listen, I just wanted to talk a little bit about the Stansberry Conference that happened a couple weeks ago in Las Vegas. One of the highlights for me that I wanted to tell you about was meeting Dennis Miller, the comedian, the guy who used to be on Saturday Night Live, and for a long time he's been a kind of political conservative commentator.
He was on Fox with Bill O'Reilly for several years, but now he just kind of wants to get back to being funny... and he was very funny. He was hilarious, and if you've ever seen his act you know that it's just this incredible flow of ideas and arcane cultural references and just kind of weird jokes. At one point he said, "Former presidential candidate Hillary Clinton had been cheated on more times than a blind woman playing Scrabble with gypsies." And the crowd erupted in laughter.
And there were people in that crowd I know who came up to me and said, "You know, I don't like all this political stuff" but they cracked up at that and they laughed at all his jokes. He was really entertaining, and he was really gracious and engaging backstage before the presentation. Folks just walked right up to him, readers and attendees at the conference just walked right up to him and said, "Hey, love your work. Been a big fan for a long time" and he was really, really gracious, which is not always what you get with these big celebrity types, right? So, I was kind of impressed that he handles his fame and success like a gentleman.
Another cool thing about the conference is I get to catch up with all these people – like my favorite people, some of them in the financial world like Grant Williams, who we've interviewed him on the program not too long ago, maybe several months ago. He writes a financial newsletter called "Things That Make You Go Hmmm." He's also the cofounder of Real Vision media group with his partner Raoul Pal.
So, I walked up to Grant – it was at the annual Alliance cocktail party, the Stansberry Alliance cocktail party. It's like the last thing in the three-day conference event and he was standing there, talking to a guy, and he was talking about a legendary investor who (I bet you've never heard of)... who I would like to tell you a little bit about right now. The guy's name is Tony Deden and he runs an investment holding company called Edelweiss Holdings. Deden is like no investor you've ever met, and he's very media-shy.
In fact, Grant is the only person I know who's ever interviewed him. He won't appear on camera – he just won't do it. Deden views his clients' assets as permanent irreplaceable capital, which frankly, investment people just don't even talk like that anymore. They're always trying to get alpha and they're always trying to have a good quarter and a good month, even. They do monthly return reporting which is insane to me.
So, his portfolio, the Deden Edelweiss portfolio contains investments in – this is just a little quote off the website – it says, "Natural monopolies and economic niches with high barriers to entry, pricing power, scarce economic substance... in the production, chemistry, and technology of food, aquaculture, materials, forestry, resources, and various industrial and engineering endeavors." And the portfolio also "holds substantial reserves" of "physical gold."
So, kind of an unusual portfolio right off the bat, and this company, Edelweiss, they've been around since 1985. It was a family operation for several years, then it became a fund in 2002, then it became an investment holding company in 2015, but the mission and values have never changed. It's always been like this. And a typical story, so I walk up to Grant Williams. He's talking to this guy about Deden, and he's telling this story about this date farm that Deden visited. Dates, you know, you eat them, right?
So, according to Williams, the farmer was explaining to Tony Deden that when you plant these date trees it takes several years to grow one large enough to begin producing dates. I think he said nine years. I had a couple glasses of wine, so sue me if it was eight or ten, right? But it takes like 40 years he said, 40, for the tree to produce really high-quality dates that they feel like they can sell. 40 years.
So, of course, Deden asks the farmer the obvious question, "Why plant trees when you know you'll never see edible dates in your lifetime?" If the farmer is 50, he's probably not going to be around 49 years later. So, the farmer smiles and he points to the nearby fields where he and Deden are talking, and he says, "Well, my father planted that field and my grandfather planted that field over there, and my great-grandfather planted that field over there" and you get the picture, right?
So, that is permanent capital. It's as permanent as land, and that farmer was a permanent capital kind of guy. He was Tony Deden's kind of guy. It's just a story I think that's worth telling because I talk to a lot of people who would really like to find a permanent place for their capital. According to the most recent presentation on the Edelweiss website which is from last year, Deden had 60% of his money in publicly traded equities and 35% in gold. Again, an unusual portfolio makeup.
And then he had like 4% in cash, 1% in unlisted private investments. Deden and maybe Warren Buffett and few others have demonstrated that it's possible to keep a lot of your money in the stock market for an indefinitely long period of time as long as you pick the right stocks. Of course, you and I know it's another matter, entirely, to have a sufficient amount of conviction and sheer guts to ride out the storms that blow through the market every five, 10, 15 years... whatever it is.
And one storm, moving along here, that can happen every now and then is like a political storm, right? Somebody comes into office and they have different policies that have different sort of impacts on different industries. We were long gun stocks back when Obama was in office and everybody thought he was going to take everybody's guns away, and so the gun stocks had a terrific run and people were buying. They were lining up outside of gun stores.
Then of course Trump got elected and that sort of deflated that, but there are lots of other potential political impacts. One of them of course for investors is taxes. At least two democratic presidential candidates are what I would call card-carrying members of the culture of larceny. They think if you can just steal enough from the most productive people, everything will be just fine. That's really important to talk about stealing enough from the most productive people.
So, there's this website – which I seem to not have written down – from a pair of professors at University of California, Berkeley. Bloomberg reported on this a couple weeks ago. They say if Bernie Sanders gets his way, they conclude that the richest Americans, on average, will be taxed at an effective rate of 97.5%. Wow. They conclude the number for Elizabeth Warren if she gets elected and gets her way it's like 62%, and that's a combination of income and wealth taxes.
So, you know what income tax is. You pay plenty of that. Wealth tax is when the government shows up and says, "Hey, I'm going to take 5% of your net worth this year" or whatever the amount is, and that's the way it's going to be, and I don't care if it's illiquid and you have to borrow the money or whatever it is to pay the tax. This is life under Elizabeth Warren and Bernie Sanders. Whatever. Deal with it. They think this is fair, right?
I call it culture of larceny. Look, we all have to pitch in. Everyone has got to pitch in, but when you get as nasty and extreme as these people Sanders and Warren, and they're not the only ones, I start to object a little bit. Sanders says billionaires shouldn't exist at all. I mean, personally I love that billionaires exist. They're the financial equivalent of Olympic athletes and Nobel Prize-winning scientists, and rock stars, frankly. They're inspirational, right?
I mean, look, besides being a financial guy I'm also a classical guitarist. Without the inspiration and examples of John Williams (not the Star Wars guy, the classical guitarist John Williams), Manuel Barrueco, and David Russell – the three greatest guitarists of my lifetime – I doubt I would be nearly as interested in playing. I listen to something by one of those three people every single day, and it inspires me and makes me want to play.
People have the same effect in business, in sports, in everything, and to punish people for being at the peak of their thing is ridiculous. It's medieval. They're the best people in society in certain ways, right? And you're going to take them out in the public square and have them drawn and quartered. Positively medieval. Ridiculous.
However, here's what I want to know, and I bet you're thinking this already. We've talked about it once before with our guest David Levine a couple episodes ago. Here's what I want to know. Is it the same to tax somebody who's built a business and maybe they're worth $100 million or $1 billion or something, they've built a business, their customers love them, they got rich, and their employees have great jobs. They've created a lot of wealth. Should that guy be penalized 97.5%, and should he be taxed the same as oh, I don't know, let's just say Lloyd Blankfein, CEO of Goldman Sachs, the "vampire squid" of Wall Street?
These people get paid, they take high fees and commissions for standing next to a giant pile of other people's money, and every now and then knowingly shoving the odd dose of pure financial toxic waste down people's throats, all the while telling them, "It's safe. It's safe." To me, those are two different kinds of people.
Sanders and Warren want to go after Wall Street? Have at it. They deserve it. They need cleaning up. But to go after productive people, get out of town. It's ridiculous. It's the culture of larceny. It's ridiculous.
Before we move on, I do have to talk about one thing, and that one thing is a little company called WeWork. I've talked about this before, right? We did a whole rant on WeWork. Up to the minute here, as I'm recording this, this is breaking news, that WeWork's biggest shareholder SoftBank is expected to take control of the company soon, and they're going to inject a bunch of money, and they are going to basically save – for now they're going to save the company, take over, and I can't even believe I'm going to tell you this, but part of the deal of SoftBank taking over the company, and this is going to happen.
They've won board approved. I don't know exactly when it'll happen, but the board has approved it. part of the deals they're going to give the cofounder Adam Neumann, the crazy guy who, sure, he built the thing, but he did all kinds of crazy stuff. They're going to give him $1.7 billion and the report from the Wall Street Journal, which is an exclusive with the Wall Street Journal as I'm telling you about this, says he'll sever most of his ties with the company.
Let me tell you something, you give me $1.7 billion, I'll sever an arm. I mean, I'll sever anything you want me to sever. It's ridiculous that they're giving this guy $1.7 billion, and hey, by the way, Porter, if you need to fire me, $1.7 billion is fine if you just need me to go away. Whatever you want to do. It's crazy.
So, the expected value of the company at this point, they're going to inject a few billion bucks. It's kind of complicated. I don't even care. It's like maybe $4 or $5 billion or something, but they value the company now at around $8 billion. Do you remember back in January when SoftBank spent $2 billion on WeWork? They put $2 billion into WeWork back in January valuing the company at $47 billion.
The IPO was supposed to go out at like $45 to $50 billion valuation, and then all of a sudden it was $20 billion, and then all of a sudden it was less than $20, then it was $15, now it's $8. The thing is lighting money on fire. They're burning – operating loss is like $2 billion a year at this point. It's horrendous, and if it's $1 billion, don't write in to correct me. I haven't looked at the financials recently. I don't remember off the top of my head, but they're lighting money on fire is the point.
To give this guy a big and seven, he tried to sell the company his trademark on the word "we" for $6 million and then they had to report it on the IPO prospectus, and everybody went, "What?" And so, OK, I'll give you the $6 million back. Of course, ever since the prospectus came out, people have looked at this thing and decided, whoa, no way, I'm never going to get near this. And so, a month ago the thing was going to be a hot new IPO. Now it's a save-the-company situation.
Now it's dying right before our very eyes, and SoftBank is throwing good money after bad trying to save the thing. It's ridiculous. So, that's up to the second, up to the minute on WeWork. I just think the whole situation is crazy. I don't think the guy should get $1.7 billion. I think he should just be fired and go away. Sure, keep his equity, whatever that might be worth, but he really screwed things up and that shouldn't be rewarded.
A weird, weird comment on this came out in Fortune magazine, Fortune.com. The CFO of Peloton, my favorite exercise equipment company in the world, the CFO of Peloton was at the Fortune Most Powerful Women Summit in Washington DC, and the CFO of Peloton said, this is a quote from Fortune, she said, "I look at WeWork and I have so much sympathy." Wow, first of all.
Then she says, "When I look at how quickly the market sentiment can change and companies don't live up to expectations, it's absolutely gut-wrenching for management." Yeah, it should be gut-wrenching when you make a promise that you have, really, if you're not insane, you know there's no way you'll ever keep it. That $47 billion valuation, valuing at thing at like 15-times sales, it was a tech company valuation on a crappy real estate model.
There's no way anybody should've ever thought that they could keep the promise of that kind of valuation and keep the promise of making a success of this business, right? Sam Zell was on TV several weeks ago saying, "Hey, by the way, every company that's ever done this has gone out of business."
So look, I'm going to keep talking about this because I think it's the time to notice this stuff, and I've said this before. It's time to go back and read your history books and read about 1929 and the dot-com bubble... and the tulip bulbs and the South Sea bubble and all this stuff... and remember and understand what it feels like. So, I'm going to keep telling this story in real time for that reason, OK? Let's just move along and talk to our guest Jason Goepfert.
Our guest this week is Jason Goepfert. Jason studied finance and economics in college, quickly learning a college education in those fields had little relevance to what actually happens in the real world. He got his real education helping a major bank build its brokerage operations, then the same for a billion-dollar hedge fund.
He founded SentimenTrader almost 20 years ago to help individual and professional investors understand the state of others' emotions in the markets using objective and quantitative tests, to help overcome the biases we all have and avoid succumbing to the herd mentality. What a profoundly wonderful mission. Jason, welcome to the program.
Jason Goepfert: Thank you, Dan, very much.
Dan Ferris: We talked a little bit on the phone earlier this week, and you told me a really wonderful story. Well, I think it's a wonderful story. It's kind of a pristine anecdote that one might encounter in one's career in finance, and I don't know if we want to use her real name, but there was a particular client. Maybe we should call her "Mary." I would like you to tell that story because it's just such a perfect tale. It's a perfect way for a guy like you to start something called SentimenTrader.
Jason Goepfert: Yeah, it really was. Like you had said, I went to college for finance and economics and accounting, all of which was pretty much useless. Unless you're going to be a deep value investor – maybe credit investor – anything beyond a rudimentary understanding of accounting is good enough. The academic concepts of finance and economics for anybody that's going to be involved in trading markets, analyzing markets, is somewhere between useless and damaging, just because so many of the theories that you're taught simply don't work.
They all sound good, there's probably academic evidence to back many of them up, but when you get into the real world and how people actually behave, that's not it. That's not how people work. People are weird. It's really hard for the academic side of finance to acknowledge that, that people are weird especially when it comes to money. Money, sex, and religion – people are weird.
That's how the world works, and academics do a very poor job of recognizing that. So after college, I went to work for – it was Norwest at the time in their mortgage operation, which was interesting, but once you've learned that part of it there's really not much more to learn. I was always interested in the finance-side of things, so I went to a temp agency and I said literally, "I'll take any job that you can get me at a brokerage. Whether it's the mailroom or whatever, just get me in."
Of course, they got me into the mailroom, so that's where I started at Norwest, which was great. At the time, it wasn't – I was making $16,000 a year – but you learn it literally from the ground up. So, for that I was thankful. Started the mailroom, just worked hard, and tried to learn as much as I can and eventually got to the point where I went over to their online brokerage.
And to tell you as an anecdote of how old this was, their WellsTrade product at the time – as a customer, you could submit an order online and then at some point, you get a confirmation in your account that the trade had gone through. How it actually worked on our side, on the operations side, was they would submit an order and then it would print off on a dot matrix printer in our trading room, and then whenever somebody would happen to see that an order would come through we would walk over to the printer, get the order, enter it into our system, and then it would eventually feed back to the customer.
Very different from now where it's just instantaneous execution and everything is transparent. At that point it was online, but it was still a manual process. So, we had a lot of contact with customers, checking on orders and asking for quotes and customer service, basically, but it was essentially a trading desk, so a customer would call in and then we would enter their order. This one lady in particular, Mary, so this was mid- to late-90s as the Internet bubble was ramping up. She only had one stock and it was Qualcomm, and she would call in every single day and she would ask how "my Qualcomm" is doing.
That's how she called it every single time, "my Qualcomm." And that really stuck out to me. It's been 25 years later, or whatever, and it still sticks out to me that she had personalized that stock so much. She would get margin calls every once in a while because it was her sole holding and she was very heavily invested. I think it was well over $1 million account, and she would always contribute money to cover the call.
She was personally affronted when it would go down and she would get a margin call, and it wasn't because she was worried about the finance side of it. She was hurt by the stock that "my Qualcomm had let me down" and that's how she'd phrased it. That triggered something in me that everything I had learned in the years prior to that, everything I had been taught was just, it made no sense. It couldn't account for somebody talking about "my Qualcomm." That's not something that anybody had ever addressed, but that's how people actually felt about these investments.
So, that's really what triggered my interest in what makes people tick and why people buy and sell. I'm really grateful for that experience because going from the mailroom into management, I started when there was just a handful of people and by the time I left, there was over 300 in the organization, so I got to touch every piece of the business... and from a really hands-on point of view, I really got to understand how it operated and basically how people made their decisions.
Part of my responsibilities was overseeing the margin and options department, and so, if you ever want to get in touch with people's raw emotions, listen to a margin call. As the manager, I would hop on and oversee the calls from our margin clerks and listen to the margin calls and make sure that we were covered from a risk point of view and that the firm wasn't exposed.
We would typically make margin calls twice a day, one at 10:00 a.m. Central Time and one at 2:00 p.m. so that people, the morning call people would have an opportunity to contribute more money if they wanted to or sell or whatever they wanted to do, and then 2:00 p.m. if we didn't hear back it was our responsibility to sell their account and get the equity up.
Like I said, if you want to hear people's emotions, certainly listen to a margin call. We heard anywhere from people cursing out the margin clerks to crying to screaming to everything. That also stuck with me, that lesson, that when people are leveraged, that's when their emotions really come to the fore. That's something that I've always focused on is when we're trying to gauge sentiment to really look at not necessarily surveys, although surveys can help in what people are saying, but often what people say and what people do are two different things.
So, looking at real money gauges if possible, and particularly those who are leveraged. So, margin options trading, etc. is I think a really good reflection of sentiment. That cuts right to the quick. When you're leveraged, you have a very vested emotional interest in the outcome. That's where I learned that lesson was just on the front lines and listening to these customers. And so, from that, I had developed some internal indicators looking at who would cover a margin call when they wouldn't answer their phones, and that was actually a really interesting indicator because it was really only times of outright panic in the markets, and there was only a couple at that time in the late 1990s.
When we would have a bunch of margin calls and people just wouldn't answer their phone, almost invariably it was a market bottom. That was fascinating to me and just looking at the volume of margin and option applications that we would get. If the market had been up quite a bit over the past few months, we would suddenly get a flood of applications for margin trading or options trading, and so I just kind of use those internal indicators. To me, it was just really interesting that they tended to line up with extremes in the market.
It wasn't perfect by any means. It was a very general indicator, but to me, it was something so outside of what I had been taught in school about how markets function, that there was a very one-on-one relationship between earnings and stock prices, or economic growth and stock prices, which clearly was not true, but they had the academic literature to prove it, and so that's just, that's what I was taught.
So, it was these kinds of things where I learned that that's not true. That's not how markets operate. It's not how people operate, and markets for the most part are made up of people. That's what really kind of got me started on this whole thing. So, after Wells Fargo I went to a hedge fund, assuming that it was going to be kind of a different environment. I'm not a corporate guy. I don't like to play games. It kind of drives me nuts, so I wanted to get out of that environment and move to a large hedge fund here in Minnesota.
It was kind of the same thing. I just felt like I wasn't really learning anything new. I was always really interested in the sentiment-aspect of the market. There were a few services out there that had some basics out there. Schaeffer's Investment Research I think had some things on put-call ratios and short interests, etc., but I couldn't find one site where I could just get the information that I had before.
While I didn't have access to some of those internal indicators, I could find mostly somewhat similar things with public data from the NYC or CEBO or whatever. I just started putting together some of these indicators that I had before. At the time, Yahoo! was kind of the big domain name registrar, and they had this special for $19 where you could register a domain name and you could create a free website, so I spent the $19 and came up with SentimenTrader and started with that.
Just kind of went from there and started getting subscriptions. Found out pretty quickly that other people had an interest in similar types of data, and there weren't really too many resources out there where they could have kind of a one-stop shop to see where some of these symptom indicators were. There was kind of a demand for it and just kind of took off from there.
Dan Ferris: That is a wonderful story, but there's one thing about it that still kind of trips me up a little bit. Jason, most guys who study finance in college, they're all taught the same thing and they might even have some of those same experiences, but they don't put two and two together the way you did. It makes me wonder, how were you raised before college? Were you raised by a finance guy, or was there some experience before this that set you up to kind of figure out what the difference between academic nonsense and the real world?
Jason Goepfert: God, no. I grew up in very rural Wisconsin, so finance was not a big focus. I grew up as a family of lumberjacks and whitewashers, so farmers in Wisconsin, if they want to sell milk, their barns have to be whitewashed. They have to be clean. There can't be insects on the walls and you have to scrape the cow dung off the stanchions, etc.
So, that was our job as we would go into these barns. We would clean them out, we would scrape them all down, and then we would spray them with a mix of paint and insecticide. So, we did that in the summers and we lumberjacked in the winter. It was a very much hand-to-mouth. That was my background. There was no finance.
In fact, I had asked my mom – I think I was 12 or 13. I had asked my mom – we had one local store and she went in to get milk or something – and I asked her to pick up a Wall Street Journalif there was one, because I had heard about it and I wanted to see what it was. She walked in and she asked for it, and they just gave her this blank stare like, "What are you asking for?" No, those resources weren't available, and that's not how I grew up.
But it was a very entrepreneurial – my family does not like working for people. We prefer to be independent. That was a strong part of it, and the other was a sense of skepticism. Don't accept what people tell you necessarily, to just think beyond that. It wasn't about finance, but it was just kind of life in general. It's good to be an optimist, but it's that old saying "Trust but verify."
So, that was my upbringing and kind of my personality that was ingrained into me that went through generations. Learned as much as I can, but just don't take it at face value. I didn't really apply that in college. I just kind of took what they served because these people were much smarter than I was and much more worldly, there's no question about that.
I had barely moved out of the state. So, I assumed that they knew what they were talking about, and I carried that with me for years until kind of these anecdotes where I saw that, yes, it's maybe one or two people, but I realized that really wasn't the case, and maybe it wasn't the case – kind of in a macro sense as well.
Dan Ferris: I wasn't exactly sure what you were going to say, but I thought it was something like that. So, basically you came from this no-nonsense upbringing where you were scraping cow dung off the walls, and now you're scraping the financial-emotional cow dung off the walls of the market if you will.
Jason Goepfert: Yeah, absolutely.
Dan Ferris: So, let's get into what you do now. I follow you on Twitter a lot, and it seems to me like the basic thing that you do at SentimenTrader is you look at the history of almost anything, it could be a certain amount of up days in the market or almost any data point, you look at the history of it and then kind of figure sort of a probability based on that. Is that a fair sort of summation of what you do?
Jason Goepfert: Yeah, definitely. Typically, the biggest knock against that type of analysis is the idea that this time is different, so you can't really look at historical precedent because this time is different. So, it doesn't make any sense to look at what happened 10 years ago or 20 years ago or 50 years ago, because we've never had a time where the Fed was so accommodative, or we've never had a time of so much social strife, or whatever the excuse is. But there's always a good excuse that this time is different, and it is.
There's no time in history that's exactly similar to another time, but our approach is that if you look at enough samples from enough different types of data that you'll get a pretty good sense of what the base case is. Typically, the base case is a lot more optimistic than people assume it is. There's this natural tendency – especially over the past ten years naturally since 2008 – to just kind of assume the worst. Maybe that even goes all the way back to 1987.
It's just that historically that's not the case, and the probability leans towards the upside, and so that typically is the base case. We just operate from the idea that is this far enough from the base case. We try to look at as many samples from as much data as we can, different types of data, with a focus on sentiment and that type of data, but we'll look at anything from price action to technical to fundamental data points to economics to macro, etc.
Basically, we're trying to look for an edge. In particular, we're looking for a downside edge because that's where you get the information. The market tends to go up especially the longer timeframe you look, so if you have something that's counter to that, that's where it starts to be interesting, and it doesn't happen very often. People go to our site and for some people it's very frustrating because most of the time there isn't an edge, especially when you're looking at sentiment-type indicators.
Depending on the volatility – maybe three times a year where there's a real solid edge, where pretty much everything that we look at is saying, "Yep, we're likely to go up or likely to go down." But other than that, the other 200-some days, there's not that strong of an edge, and so it's just kind of coasting from the previous one. That's frustrating for some people, and other people, they don't like the data. They don't want the data.
We have a pretty good mix between institutional and retail customers. The institutional side absolutely they want the data. They don't really care what your conclusion is. They want objective analysis and good data. The retail side couldn't really care less much about the data. They want the conclusion. What should I buy or sell? You can't really blame them.
People are very busy. To some extent they're lazy, and also, to some extent they want somebody else to blame, so if they do take an action, they want somebody to say, "Well, you told me to buy and it went down." So, there's a mix of all of that, but it comes with the territory and we accept it. It's part of the business.
Dan Ferris: I know that territory very well, Jason.
Jason Goepfert: Yes, I'm sure you do.
Dan Ferris: So, just a couple of tweets here. You had two tweets on October 18 on the SentimenTrader Twitter account, and they seem kind of bullish because one of them shows the equity put volume spiking up, says highest since February 2009 as a percentage of NYSE volume, and then there's another one on the same day that says the housing market index just made a 20-month high, which seems to be kind of a bullish thing. It seems like we're in one of those times. I'm going to ask you, but I'm just saying it seems like we're in one of those times where there might be an edge to be had from stuff you can learn at SentimenTrader.
Jason Goepfert: It's really interesting because there are a few that are extremely troubling, and then there's a whole bunch that are not – that are very encouraging. You have things in a general sense like the proportion of IPOs that are coming to market that are losing money, and I had showed something like this in 2015 where it was extreme... and it's four years later and the markets are still going higher.
When you look at the proportion of IPOs that have not been able to basically become a viable business, it's extremely high, and it's basically never been higher except for the year 2000. We're seeing that also just looking at venture and private equity backed funds. I think it's 69% of the offerings from those types of companies that have been backed by those types of funds are losing money. The only time in 20 years that's exceeded that is 2000, where it was like 80-some percent.
So, that kind of thing where bankers see an opportunity to really unload poor inventory on unsuspecting public is really disturbing to me. We typically only see it near market peaks, generally. It's not a precise timing indicator by any sense. You know, one of those is one of your favorites, Peloton. I'm less bearish on Peloton just because I've been using it for five years, but I'm also an avid cyclist, so for me, there are a number of huge benefits to having that bike and that bike in particular versus some bike trainer.
But as a stock, there's a difference between product and a stock. So, as a stock, yeah, some of that New Age language drives me nuts, that and WeWork. So, when that kind of stuff, and there's an appetite for that, that's disturbing. Now, maybe it's a good sign that WeWork didn't get to pull this off, that there was enough skepticism at least, and that this blind risk-taking mentality that WeWork couldn't come public.
So, maybe that's kind of an encouraging sign, but it's not the only example. There have been a huge number of money-losing IPOs this year and so that kind of thing is disturbing, that momentum crash that we went through, and then the rebound in September. That too is also disturbing. If you look at going back to the 1920s, it's not the decline in momentum stocks, really, that's the problem. It's just the volatility.
When we see a rising market and then these types of stocks have this kind of momentum, it's typically a really bad sign when you look out to the next six months to a year. A couple of things like that are really pretty disturbing and it kind of puts me back on my heels, but then you look at things like margin debt. Margin debt is declining, and those stocks are rising. That's been invariably a positive sign.
You look at equity fund flows which are hugely negative, almost the most negative since the financial crisis, and it's hard to say that's anything but bullish. You look at some of the consumer confidence surveys, not the headline confidence, but the percentage of consumers that expect stocks to go up or bonds to go down. When you combine that, there's an extreme amount of pessimism in that sense. Hedge-fund exposure is extremely low.
There's been huge flows into defensive sectors which, again, is typically what we see near a market bottom, not a market top. Some of the surveys like AAII, it's been unbelievably pessimistic. Put-call ratios... things like this are almost invariably things we see before a market rise. There are a few things out there where you kind of have to sit back and say, well, you know, that's not very encouraging, like the IPO stuff, but then there's this whole gamut that are counter to that.
This is one of those times where there doesn't seem to be an overwhelming edge where everything that we look at is pointing one way or the other, but when you look at the weight of the evidence, you have to say that it's mostly pointing to the positive side for stocks.
Dan Ferris: It's interesting because that's a – I'm generalizing here, but we had a bunch of macro analysts on the program in the past month or two here. And they conclude similarly as a group – not all of them – but they're all really pessimistic about the bond situation because yields are so low and negative yields – there's at this point I think $13 or $14 trillion of negative-yielding debt. So, they're not predicting a bear market in stocks. The bond market is another matter entirely. Do you separate the two or do you mostly just pay attention to the stock market?
Jason Goepfert: We focus on the stock market just because that's where most people's interests lie, but we also touch on the other markets. Bonds there doesn't seem to be as much of an edge. I was on a podcast with Porter on Stansberry a year ago, and at that point there was a very clear bias actually for long bonds, so that was one of those points where we just happened to have a podcast right where there was kind of an inflection point of sentiment.
This time we're not really seeing that. It's very mixed. I operate on kind of a shorter timeframe of months as opposed to years, so even on that kind of timeframe we're not really seeing the kinds of readings that would give us an edge either way.
Dan Ferris: Right. I wanted to ask you about the AAII survey, and I hope you don't mind. I just want to jump around on topics with you because there are so many, it seems. The AAII survey when we talked earlier this week, you were saying some people are taking that survey... now aware they're being used as a contrarian indicator, and it makes me wonder how valuable it is.
When I see the data – especially when I see it on a graph, it seems too volatile. They just go from really bullish to really bearish really quickly, it seems like. But how valuable is the AAII survey, do you think?
Jason Goepfert: Yeah, it does. It's a noisy survey, so we prefer like most others is to use a moving average and that kind of takes out some of the noise. There are a lot of knocks against it. There are a lot of reasons why it shouldn't be effective, but doggone it, it's still really effective. It still works. As long as it keeps working, we're going to keep following it. we've looked at the surveys from different perspectives to kind of get an idea of who's taking the survey, and so there are some economic data that parse data by different demographics.
So, by comparing the two, we can kind of conclude that the survey is dominated by old people, basically – old, crabby people, primarily, but there's not a big difference between white and black or men and women... Republicans or Democrats, even. But basically, it's crabby old people. So, when you kind of assume that that's who's taking the survey, and I think it's pretty accurate, you kind of get an idea for that particular demographic anyway and their read on the market. They've been unbelievably pessimistic, and again, maybe that's just one of those things.
There's always some exception, so maybe the market is going to go down and these guys happen to be very prescient, but 95% of the time that's not the case. That's not the base case. Most of the time when they reach an extreme like this, they're wrong. Again, maybe there's this observer effect where they know they're being a contraindicator, so they actually say they're bearish when they're actually bullish just so they can throw off the survey. I don't know.
Until it starts to fail consistently, I would still say it's useful when you take kind of a longer-term view of it, use some kind of a moving average. The mainstream media will say, "Well, sentiment rose this week" because of the survey. Well, I think that's ridiculous. The survey bounces around too much. Week to week is useless, but longer term, yeah, there's still some use for it.
Dan Ferris: Great. That's good. I'm one of the crabby old people who takes the survey now. So, let's do a little listener education or just maybe a little refresher here. You've mentioned the base case a couple of times, and we've heard that term before because we interviewed Michael Mobison who talked a lot about it. What does that mean? What is the base case you're looking for? What does that mean?
Jason Goepfert: Well, I say stock. So, if stocks go up on average 65 to 70% of the time over the next year, that's your base case. That's what you should assume is going to happen. If you know nothing, just assume that the S&P is going to be higher 70% of the time over the next year. If you've got a bunch of bullish indicators that say stocks should rise, that's fine, but does it really add that much information?
The base case is that stocks are going to rise anyway, and so when you find something that's contra to that – and that says that there's a high probability the S&P won't be higher a year from now – that's probably telling you something more because it goes so far against what the base case is.
Dan Ferris: And when you say the base case is stocks are going to rise over the next year, what you mean is historically speaking in any given year going back however far you want to go back 50 or 100 years, mostly the market is going to rise over the next 12 months, just say that's our base case.
Jason Goepfert: Yep. Exactly.
Dan Ferris: It seems like what I should really do is I should get you to ping me when my crabbiness is like at its trough or something and all the crabs are saying that everything is going to be wonderful, and then I can have you back on the program and say, "You see? Everything is going to crash now. It's just like I always said."
Jason Goepfert: Well, it has been rebounding in recent weeks, and again though when you look at times when this particular population was very pessimistic over four to eight weeks like they have been, and then suddenly become bullish... that's not a contrary signal. That's a good thing. In order for stocks to rise, people need to become more and more bullish.
So, when you see rising bullishness that's a good thing until it hits an extreme, until people are extremely optimistic. I think it's really hard to make the case that that's where we are now. We're not seeing the kinds of readings we were for the most part in 2006 to 2007 or 2000... 1999. It's a much more nuanced, it's a much more mixed picture at least for the broader U.S. stock market. There are certain sectors – energy is one – even value stocks are probably another, a lot of overseas stocks.
We're seeing much more of an edge than we are in just the broader U.S. stock market. People want to assume that everything is a contraindicator all the time and it's not. Most of the time it's not. There really has to be true extremes – and typically over an extended period of time before it's reliably a contraindicator. And I think that goes doubly true for something that moves a lot like that survey.
Dan Ferris: The survey though is individuals. What about, the thing that kills me is like you can do this same sort of stuff with professional active investment managers, and you think they would be smarter, but when you look at the data for all of them, they're really not, are they? They're as good an indicator contrarily speaking when they get to extremes as individuals, aren't they?
Jason Goepfert: It's almost as good. It depends. Barron's does a big money survey of large money managers, and we've studied that back to 1998 and that's pretty mixed. There is a slight contrary bias to it, but you look at hedge fund returns, you look at – well, one of the popular bearish arguments right now is that CEO confidence right now is extremely low, and CFO confidence is extremely low. All of these C-suite executives think that we're going to head into at least an earnings recession but probably an economic one as well, so that's a reason to sell everything.
Well, historically, no. When they've been this bearish, stocks have risen afterwards almost exclusively. So, what should be smart money typically has not been in the past, and it doesn't matter. Certainly, there are smart guys individually, probably all of them are, but in aggregate whenever you get some group of investors together and they all think the same thing, they're almost always a contrary indicator. Doesn't matter how smart they are or how dumb they are.
In fact, even the AAII survey, sometimes that's been the smart money. They turned pretty bearish ahead of the 2007 peak, so in that sense nothing works all the time. Generally, whenever you get a group of investors that think the same way, no matter what group it is, typically it's a contrary indicator, but it's got to be pretty extreme.
Dan Ferris: Okay. What about insider selling? Do you guys look at that?
Jason Goepfert: Not really. There are definitely good sources for it. Insider Score is very good. I think it's very useful. It's especially useful on an individual stock or sector basis. Market-wide, we haven't found much success using insider selling, and again, the old trope is that insiders sell for a lot of reasons, but they typically buy for only one, and that's that they think the stock is going up.
We subscribe to that idea that if you see a bunch of insider buying especially in aggregate it's probably a good sign. In fact, it's almost invariably a good sign, but insider selling just has not been that consistent, so we don't pay that much attention to that part of it.
Dan Ferris: I've often said the same thing, and I'm looking for some confirmation from somebody who might actually know.
Jason Goepfert: Yeah. Looking at the data, it's hard to use as a sell signal. There are certain examples where it works. There have been some really good times where it's given a good heads-up, but it gives too many false signals from the data that we've seen and tried to use.
Dan Ferris: Right, but when you see the buying, lots of clusters of steady or big transactions, I've looked at that myself and found some pretty good winners a couple of times over the years.
Jason Goepfert: Yeah, absolutely. They're people. They've got families to take care of and they don't want to lose money, so when they put a lot of their own money on the line and they know intimately what the prospects are for that company, whether it's on a stock, sector, or aggregate level, it's been a really good sign.
Dan Ferris: Right, so it makes sense to me, I guess where I'm headed with this, it makes sense to me that insider selling is not a great indicator and that CEO and CFO confidence can be just as good a contrary indicator than anything else, right? You can't tell from the selling, so if they're pessimistic and they're selling, there's not a lot of meaning to be taken from that.
Jason Goepfert: Yeah, that's what we've found. Again, it's just looking at the historical precedent and yes, this time could be different of course. Maybe they're going to be especially prescient at this time and call the top, but when you look at consumer confidence which is very high – not confidence about the stock market but just confidence about the economy – it's extremely high. Supposedly the dumb money is extremely bullish right now in the economy, and then you've got the smart money, these CEOs and CFOs that are extremely bearish.
You look at these bearish accounts and they're all saying clearly this means stocks are going to collapse because looking at the dumb money is very bullish and the smart money is very bearish, but it's happened twice before in 1989 and 1997, and both times stocks roared higher afterwards. So, yes, this time could be different, but again, we always try to go back and see what's happened before, use that as the base case, and it's not a good reason historically to use as a sell signal.
Dan Ferris: Yeah, so Jason, we're getting to the end of our time now and I'm reminded of a previous guest, Chris Mayer, who is a friend who manages money, and he likes to say, "The hardest time to invest is always right now." I feel like from following your Twitter feed and being a subscriber to SentimenTrader and stuff, I feel like people are overall, just overall over the long term, they're just a little too pessimistic, and that gets them in more trouble. They can get plenty of trouble being too optimistic. You and I both know that, right?
But it seems like that tends to cluster around certain events, but overall, they're just too twitchy and they're too fearful and they're too likely to respond to headlines by selling when they should just kind of ignore it. You want to be on the lookout for the extreme tops and bottoms, but they're such rare events. I feel like part of what I've learned from following you is that people are just too darn pessimistic overall. Is that fair or no? Do you disagree?
Jason Goepfert: I don't. Well, all you have to do is read the headlines or watch the national news and you want to go out and _____ news because it's nothing but a drumbeat of bad news. My point is always there's a sense that this is the worst time in history, that there's so much social strife and all this stuff, and people have no sense of history because people have thought that for going back centuries that it's the worst time ever, and it's always gotten better. This is probably one of the best times in history, all things considered.
But it's remarkable. One of my favorite indicators is this one that looks at the smallest of options traders and what kind of options they're buying, either puts or calls, and right now over the past four weeks they've bought more put options, protective put options relative to calls, than they have since 2009.
Again, there's some exceptions like the IPO stuff, but in aggregate there's such a sense that we're headed to this place of doom that people are hedging so much that it's pretty remarkable considering that stocks are up again today and knocking on new highs. It's a really rare point of time because typically when stocks have performed like they have, we would be saying the opposite where almost all of our indicators are showing optimism. Right now it's remarkable how that's swung to the other side.
Dan Ferris: So, what you're telling me, Jason, is it really is different this time.
Jason Goepfert: I think it is different this time.
Dan Ferris: I'm joking. Oh, boy. That's going to get us a few e-mails, I promise you.
Jason Goepfert: I'm sure. Of course.
Dan Ferris: So, Jason, if I could just ask you to leave our listeners with one brief thought and tie all this up for them a little bit. If there was only one thought you could leave them with, what would it be?
Jason Goepfert: Just keep an open mind. Try not to go into whatever you're looking at with a bias, and be a little bit skeptical, especially when you're reading or watching mainstream media. These are mostly reporters. They're not journalists. They will take what a source says at face value and just kind of report what they're saying without kind of looking at whether what they're saying makes any sense or whether it's proved historically accurate.
I mean, just in the past week there have been so many that it's just so unbelievably misleading, and I think that does a real disservice. You don't have to have fancy tools. You don't have to have a Bloomberg. A lot of data you can get for absolutely free from regulatory agencies or exchanges or whatever, and using free data and Microsoft Excel, you can test out a lot of these assumptions just using very basic tools. I think spending a few minutes to actually test whether some of these things are true can really help, because it helps you check against those biases that we all naturally have.
Dan Ferris: Well, it sounds to me like I would rather just be a SentimenTrader subscriber than go test all that stuff for myself. Really, truthfully, I'm not just saying that because you're on the program, and I think that's probably how most people listening feel, and that's a good thing. Jason, thanks a lot, and we're going to talk to you again soon. You're going to be as regular as you want to be here on the program. Your message is one that can't be repeated often enough, and I thank you for it.
Jason Goepfert: Well, thank you, Dan. I appreciate it.
Dan Ferris: Thanks a lot, and we'll talk to you again soon. Bye-bye for now.
Jason Goepfert: Okay. Bye. Thanks.
Dan Ferris: Well, that was really cool. I love SentimenTrader. I love following him on Twitter. There's always all kinds of good stuff. He just puts out all kinds of free stuff on SentimenTrader on Twitter. I encourage you to follow him. I mentioned a couple of the things, the housing indicator and the put volume and just go check him out.
Hey guys, real quick I just want to tell you something. As host of the Stansberry Investor Hourpodcast, I also enjoy listening to other podcasts. It helps me figure out ways to make the Stansberry Investor Hour a better experience for you.
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Now, the mailbag is where you and I get to have a conversation. I really enjoy it. I read every single feedback e-mail, even the Russian spam, and I have to say, even the insanely long ones. I got an insanely long one this week, and I read every word of it. I was like, "Oh, god, look at this thing," but you know what? I read every word because I want to be able to say to you that I read every word of these, because I want to. I want to exchange ideas with you.
So, write in with questions, comments, politely worded criticisms to [email protected] I read them all. I try to respond to as many as possible. Let's see what we have in the mailbag today.
Today I'm going to start off with Peter G. who has been a pretty good correspondent and a regular listener. Good to hear from you, Peter. Peter says, "Your guest this week", this is regarding Mark Dow who was on last week, and he says, "Your guest this week seemed to take the other side of your position with regard to gold stocks, interest rates, and sovereign debt. While I believe your positions in these matters, his experience with macroeconomic research is compelling on its own. Do you care to comment on the obvious differences between the two outlooks? Thanks, Peter G."
Yeah, I do. I'm long-term bullish on gold. I think there is a lindy effect in gold where it's been around for 5,000 years, and I think it's probably going to be around for a few thousand more, maybe 5,000 more. Stocks are very expensive right now. Interest rates are very low, and sovereign debt, $13 to $14 billion at this point. It reached a peak of $17 billion in August of negative-yielding sovereign debt. There's just something insane about that, even though as Mark Dow explained to us last week, there are good reasons why it happens.
But there is a basic insanity to it that I cannot turn away from. I'm going to get more questions, Peter, so just stick around. I'm going to talk more about these things. The next one is from Liesel P. I hope I'm saying "Liesel" right. "Your interview with Mark Dow during your October 17 podcast was very thought-provoking. It was helpful for me to hear someone with a viewpoint aligned with the Fed, especially someone with so much experience and so able to clearly explain himself."
Amen, Liesel, I agree. Liesel continues, "While I learned a lot from his depth and breadth of knowledge, I did find myself disagreeing with him on a couple of points. First, his opinion that gold has become obsolete as money, and second, that the most recent Fed easing was a one-time fix for a temporary anomaly related to additional cash being required for tax payments. Those are both so in conflict with what I'm seeing that I was hoping you might comment on them. I really enjoy your perspective on things, Liesel P."
You know, I haven't really come down with a firm decision on this repo thing, and I'm asking people like Mark who have been, he worked for the Treasury at one point and he would know more about it than me. So far, no one is throwing up alarm bells. It seems like a crazy extreme event, and I don't like the Fed meddling in the markets, and I don't like the existence of the Fed. I think it's insane.
But we have to deal with reality, right? We don't get to deal with the reality we wish were in place. We have to deal with the one that's there. This is the way the world works, and I'm not going to get worked up about it until I learn enough that I'm justified in getting worked up about it. Certainly, the market isn't crashing, right?
Then you said his opinion that gold has become obsolete as money, well, lots of central banks don't see it that way. They're buying the stuff, and China and Russia are propping up their currencies with it, so I disagree with that one too. I don't think gold is becoming obsolete as money.
Next is James H., and I think I just have a couple more of these. James H. says, "I've really enjoyed the format and contents since you've taken over the podcast. Thanks for your balanced and open-minded approach to covering the investing landscape. With regards to your guest this week, I was curious about your thoughts on gold. Mark mentioned that he expects a pullback in the short- and long-term. I'm long gold and silver because I view them as alternate currencies.
Mark failed to comment on some larger macro issues in play, currencies of Western nations being devalued, central banks loading up on gold – and as I mentioned a moment ago – emerging countries, Russia and China in particular, continuing to strengthen their currencies. With gold while I understand a short-term pullback since gold has run from $1,150 to $1,500 in the last couple years, I couldn't understand Mark's analysis for long-term bearishness. It seemed his view was a re-spin of "ancient relic" position.
As I understand the pullback in gold during 2008, many investors were liquidating GLD", the big gold ETF, "presumably to access cash, but then gold resettled and went on a big run outpacing many other investments. So, it does appear that gold did perform its role as a safe haven. Can you comment on this? Thanks for your consideration, James H."
You know, the situation in 2008 was strange, wasn't it? It was very clear that when things were at their most pessimistic, like you say, people were liquidating gold in whatever forms, and the price was dropping, and they wanted cash. They wanted currency. I'm not going to stick my head in the sand about that.
Having said that, of course, as you pointed out, it has run from below $1,200 up to in the $1,500 region, actually like $1,480 last time I checked, and it wouldn't surprise me – here's what I really want to get to, James – it wouldn't surprise me if this correction were very severe, like back to $1,000 or $1,200 or something like that, and if it is, I will be pounding the table until it breaks to buy the three gold-oriented stocks that I have, really resource-oriented, but two of them just straight up gold that I have recommended in Extreme Value.
I'm not going to sell. I'm not going to use trailing stops on them because I know the managements. They're all brilliant. They take care of your money. They're exactly who you want in charge of your money, or some small portion of it, right? Anyway, yeah, correction, possibly a big correction in gold. I also view them as alternate currencies like you, James.
Okay, John A. says, "Hi, Mr. Ferris. I'm quickly sliding along the scale towards the gold, guns, and butter portfolio." I think you mean gold, guns, and groceries, John. He continues, "With all that is going on, I feel like I'm living in the twilight zone. I've heard you address negative interest rates a couple times. There are institutional investors who have to buy bonds and speculators who are looking for gains with further negative interests." Yeah, to see rates go more negative is what you mean.
He continues, "But I haven't heard the answer to why wouldn't you just hold cash instead and not lose principle? I realize I may be the stupidest noob investor, but I would rather be safe and wait until the cycle turns. John A."
No, not stupid at all, John. The answer to this is large institutions do have to pay essentially a negative rate when they deposit cash, so why not own the bond instead especially if the rate is a little less negative? Because there's less negative yielding debt in the world right now than there was in August, like about $4 trillion less.
That's one reason, and certainly individual investors, individual depositors I should say, have not been penalized in this manner yet. Yeesh. Hopefully never, right? Hopefully you'll never see an individual go to the bank and deposit money and be charged to keep it there. That's a big part of the answer to that is that the big institutions do have to pay, and sometimes it's cheaper to just hold the bond. But it's a good question.
All this stuff about negative rates is a good question because nobody knows anything about it. Howard Marx from Oaktree who I've recommended his book a zillion times, his book The Most Important Thing, he's got a fantastic piece on negative rates out that you should go to Oaktree and read it, because he concludes nobody knows anything about this and it's true. Nobody does know anything about it because it's never happened before.
So, the next and last question is from Don S. Don S., you got a lot of questions. You got a lot on your mind. I don't know if I'm going to get to all this, and I'm going to pick and choose here because you got six items. One of them, I'm going to just pick and choose. Number five is regarding negative interest bonds.
"What are the sellers saying to the buyers as to why this is a good idea? Seriously, what is the sales pitch? Best I can figure is that the negative yield would be better than what inflation will do if you keep your money in cash. I just can't understand what the value proposition would be for someone to actually buy a bond with a negative yield."
Mark Dow told us one of the things. If you think the European Union is going to break up and you live in Italy, you're going to buy a German bond priced in Euro right now because, let's face it, you would rather have a German than an Italian, and if the thing really breaks up, you're going to make 30 or 40% just on instant currency appreciation.
So, there's that reason, and the big institutions that have to buy them and the bond fund managers who have to buy them and the bond fund indexes that need to hold them, and then there are banks that have them for capital requirements. So, there are a lot of reasons. There's no sales pitch. People come up with this on their own.
Your question number one is interesting: debt bubble. "Why exactly is there a bubble? Can you walk me through what is overpriced and why? Best I can tell it goes something like this. As yields continue to go lower, even negative, this keeps driving prices higher.
Therefore, if people are trading bonds, they keep buying expecting the prices will continue to go higher until they're in bubble territory. Sooner or later, yields cannot go any lower, which means the bubble will pop as the yields begin to rise again. Is that it, or is there something more to it?"
You know something? That is basically it. of course, yields in price, they move in opposite directions, so as yield goes lower, that means people are buying bonds and pushing prices higher, and I don't even know if – one of my kind of big points about all these things when I sound really bearish is I'm just looking at prospective returns from given levels of price. So, your prospective level of return from something that's like yielding -0.5% to maturity is about -0.5% a year. You see what I'm saying?
So, it's not even that – you won't hear me saying, "Okay, today is the day the stock market has topped out. Sell everything. It's going to be a bear market." I don't talk like that because it's silly. You can't make those predictions, and you can't do it with the debt market either. But what I can do is point it out to the absurd value proposition for an investor at any given moment.
So, that's why I say that the bond market is a bubble because yields are so low and there's negative yields in the world, which is really strange, and I don't need to know a whole lot more than that, I don't think. When spreads on junk debt are really low, there's actually – I don't know if it still is the case, but there were actually like 14 companies in Europe whose junk bonds were negative yielding earlier this year.
So, how hard is it to take a look at that and say, that's really a bubble, right? That's all I'm doing. I'm going to take one more of yours and then we'll call it a day here.
This is Don's point number two here. He says, "If there is a bubble going on, what is the other side of the bet? In other words, how can we profit from it? I'm not looking for specific recommendations, just ideas of how we should be positioning ourselves to benefit from this bubble."
That's a good instinct. I do know people who are shorting bonds here and there, but that's tough and you generally need to have a giant account with someone, millions and millions of dollars, and shorting bonds can be tough, can be difficult. You can short bond indexes. You can buy puts on big bond indexes, but I don't even know if I recommend that. It's kind of an avoid-situation.
The point is to look around, assess the expected return from things, and avoid things if the expected return is negative – like it is on a lot of this debt – and just to be leery of anyone trying to sell you a bond that's yielding 1 or 2% and they want you to hold it for ten years or something. That really is as bad of a deal as it sounds. If there's nothing else to do and it's a good credit, OK, you've got to do something, but I think there are some better somethings in the stock market here and there if you know how to look for good value.
That's where I am. I haven't changed. Hold plenty of cash, hold gold, and buy value where you find it. That's my three-part plan and it just hasn't changed for a couple years. Until something kind of breaks in one or all of those markets, cash being a proxy for bond markets, so bonds, gold, and stocks, until something kind of breaks and changes much differently, I'm going to keep singing the same song.
One more from Don S. Finally, he says, "Any good reading recommendation regarding bonds and the bond bubble and how to profit from a coming pop?" Now, I don't know about profiting from it, but if you want to read Money of the Mind by James Grant, that is probably the best kind of book just solely devoted to like a bond bubble and bond markets, and it covers quite a bit of history.
It's Money of the Mind: Borrowing and Lending in America from the Civil War to basically the era of Michael Milkin, the 1980s. So, it's a great book. James Grant is a great writer and a great historian and you'll learn a lot from it, but this idea of profiting from it, it's not bad, but the only thing I got for you is shorting a bond ETF if you find one that you think is really ripe for a fall.
You can't just get shorted any old time. Shorting is a quirky, crazy kind of thing. It's not like being long, right? We were talking with Jason Goepfert and we decided, you know something, people are just too pessimistic most of the time. So, that means that being long is kind of an easier proposition especially in the stock market most of the time because people tend to get too pessimistic, and the market mostly goes up.
So, it simply follows from all that you should have kind of a long bias and not be overly pessimistic all the time, and therefore, it also follows, doesn't it, that shorting is really difficult and you've really got to get the timing right? You haven't heard me recommend people buying put options very often at all. I've done it, I think, a total of actually twice, and one time I did it – the first time I did it in my entire career of yelling at the world about finance was in October of 2018.
I said buying some put options here is not a bad idea at all. Never said it before, right? And I might've said it one time since then, but that was like the big, hey, head's up, this is it. And you've got to time stuff right. Bottom line here is that I can't sit here and tell you go out right now and buy put options on a bond ETF. There's a lot more to it than that, and if you want to try to do that, you're going to have to take on the task of timing it, OK? I hope that helps, Don.
You had a lot of good questions. I couldn't answer them all. I answered the ones I thought were the best, and that's it. That's the mailbag for this week and that's another episode of the Stansberry Investor Hour. Folks, remember to go to InvestorHour.com. You can get everything there. You can get transcripts from every program we've ever done. You can listen to every program we've ever done, and you can put your e-mail in to get updates and tell you about every program we're ever going to do. So, it's all there.
Of course, you can send us feedback at [email protected] Comments, questions, politely-worded criticisms... [email protected]. And I will read every single one of them and try to respond to as many as possible. It's my privilege to come to you this week and every week. Thank you so much for listening. I'm really grateful that you're there and I will talk to you next week. Bye-bye for now.
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