On today’s show, Preston and Stig talk to the popular investing blogger, Jesse Felder. Felder has an impressive financial career including the founding and management of a billion dollar hedge fund. In this episode, Jesse discusses his opinions on the expensive valuations of FANG stocks. Additionally, he talks about some macro trends and the recent boom in cryptocurrencies.
- In this episode, you’ll learn:
- The risks of investing in FANG stocks
- If investors in Apple should be worried about the sales of iPhones
- Why you should look at stocks compared to their history and not the market
- Why undoing quantitative easing might be inflationary
- Why you might want to diversify even if you’re holding cash
- Ask the Investors: How do Bitcoin futures influence the price?
Get The Investor’s Podcast blog posts and podcast episode updates on your Facebook feed by liking We Study Billionaires.
Podcast Transcript and Summary (automated)
Preston: [00:01:23] All right. So we’re really excited to have Jesse Felder back on the show. Jesse welcome back to the investor’s podcast always such a pleasure to have you here.
Jesse: [00:01:31] Thanks for having me guys. You know you said a couple years ago you guys turned me on to the whole cast world. I really didn’t know much about it and it’s just awesome. And so it’s a pleasure to be here with you guys again. Look at where we are now.
Preston: [00:01:44] Jesse you’ve got your own show and everything. It’s awesome. I was inspired by you guys. So we wanted to chat with you in particular about FANG stocks to open up the discussion we opened up this to our Twitter followers as well we said hey we’re bringing Jesse Felter on the show. They threw a lot of questions at us to ask you tonight. So talk to us about how you’re seeing the stocks and before we do that just tell our audience what fank stocks are in case they don’t know that terminology.
Jesse: [00:02:12] I mean that’s a good question. So the stocks is the term the acronym was coined by Jim Cramer and it just stands for Facebook Amazon Netflix and Google which is technically now that the acronym doesn’t work so well. But I also add apple and Vidia into that so you get a couple days in a cup and in there. So yeah that’s that’s why I look at things stocks that six really awesome.
: [00:02:39] And so Jim started talking about them because they were just you know taking off like a rocket ship and when we talk about FANG stocks you’re of the opinion that they don’t have much more to climb. So talk to our audience about this idea and why you have that opinion.
: [00:02:55] Oh really. You know I was reading Howard Marx’s latest memo and he talked about in every bull market you get getting Ruby stocks have become priced for perfection. And I started looking at the stocks and obviously it’s facing stocks in this market. And when you look at them individually so the way I look at valuations of stocks is not necessarily the company relative to the broader market to look at that stock’s valuation relative to its own history. I include aplan to Apple’s you know not expensive relative to the broader market. Apple is actually very expensive relative to its own history. That’s kind of what I’m talking about. Terms of valuation. So I look at these stocks and I see they’re almost across the board trading at their highest valuation relative to their own history in the last five or ten years if not more. Nvidia is a great example trades 15 times revenues which is just absolutely insane and at the peak of the dotcom mania Nvidia traded at about seven eight times revenues and at that time revenues were growing 100 percent year over year. Today it trades at 15 times revenues and revenue growth is 30 percent and 28 percent last quarter and projected full percent or maybe even flat in subsequent quarter so revenue growth is much much lower today than it was and peak in the dotcom mania the valuations twice what it was back. So that’s kind of what I’m talking about with the stocks just trading at really high valuations despite the fact that their growth is slowing. Apple’s gross margins are falling in almost every case. Buy stock. Netflix is another great example free cash flow has plunged from 300 million positive to two billion negative. And still the stock trades at its highest valuation in its history. So yeah you’re absolutely right. These could not get any better.
: [00:04:55] So just to specifically talk about the valuation of Netflix so I just looked up the stock here and the looks like the process sale is seven point six. Price to Earnings almost 200.
: [00:05:07] And the reason why I asked this is because Netflix has gradually changed strategy and now they’re looking to go into content creation I guess to me. Does sound like higher margins. If anything that sounds rather expensive but I guess my question also comes from an appreciation of knowing that you could be wrong and the mind could be right.
: [00:05:29] You know you’re absolutely right say when you look at Netflix you know back in the you know 10 years ago when they were putting Blockbuster out of business you can make the case that they’re going to own DVD you know business. And so yeah I’m willing to pay a high multiple because they’re going to take all that business from Blockbuster. Then they went to video on demand. While this is a new market they’re doing something brand new. So maybe that does earn it a higher valuation Rose premium today. Right. They’re getting into content creation. When you look at every single one of the company’s competitors in content creation they trade 1 to 2 times sales. So you know they have Netflix free cash flows. And the reason is because this concentrations very expensive and the return is you know very minimal very hit or miss right had some hits. You have some misses. And so cash flow goes up and down deeply negative for them right now. And I don’t know how you justify a seven and a half times sales when you have Disney and two and a half for three times sales which is the best in the business. And Disney is an interesting example to me because they’ve decided to take all their video you know product away Netflix and create a competing platform. So it’s a very interesting situation to find them now.
: [00:06:46] You know the thing that I can understand about Netflix doing their own content is back in the day you’d turn on your TV and you’d flip through the channels and try to see what was on and you’d give things kind of a try because you just had to. There wasn’t like you could do on demand TV. But now with on demand like when you go on the Netflix you’re looking for something specifically you’re not just perusing and seeing what pops onto the screen anymore.
: [00:07:11] There was a lot of discovery that happened with these original shows that were maybe coming across the network. So I think that’s a major problem for them as they’re trying to. I mean we all know why they’re trying to do what they’re trying to get people to stay hooked on some type of program that’s decent that keeps them subscribe to the service. But I think that it’s a harder sell than it used to be back in the day when you’re just channel surfing than it is now because of the way on demand TV works. Would you guys agree with that or do you see it a little differently.
: [00:07:38] I absolutely agree. I you know I think Netflix also when they had the first mover advantage you know for a long period of time in the video on demand. You know there was a great case everybody had to get Netflix but now you have Disney creating your own platform. You have Amazon Prime you know has its own platform. HBO GO YES Hulu you have a lot of different platforms a lot of choices for people and a lot of people you know were well placed in the media and you’re talking about a price war on the horizon. And so I think that’s another risk to Netflix.
: [00:08:10] You know something that I think a lot of people that just invest based off of the brand or they really don’t they’re not a numbers person. This is how I would like to describe this for people who are thinking about Netflix specifically so if you bought one share of stock for 183 dollars right now you could expect the profit after an entire year of buying that 183 dollar business to be 43 cents. That’s what it was at the end of 2016. Looks like the past year it’s about a dollar let’s just say best case scenario it’s a dollar you’re paying 183 dollars to run a business that’s going to give you one dollar after a year.
: [00:08:46] I wrote a blog post recently about this and this goes to the broader market too. You know this specifically in regards to Nvidia Facebook stocks trading ten times revenues or more back in 2000 one time late 2001 I think Scott McNealy gave an interview to Bloomberg and this is after his stock had just gotten Rush and he was talking about the valuation of some micro. He called the dotcom mania and I got to be as as early for what we’re seeing today. So ten times revenues to give you a 10 year payback. I have to pay you 100 percent of revenues for ten straight years and dividends as soon as I can get past my shareholders. That assumes I have a zero cost of goods sold which is very hard for a computer company. That assumes I have zero expenses which is really hard. Thirty nine thousand employees. That assumes I pay no taxes which is very hard and that assumes that you pay no taxes on your dividends which is kind of legal. And that also assumes zero or in the next ten years I can maintain the current revenue run rate. Now I haven’t done that would any of you like to buy my stock in sixty four dollars a share. You realize how ridiculous those basic assumptions are. You don’t need any transparence you don’t need any sidenotes. What were you thinking. End quote. So that’s the video today and that’s Netflix today Facebook today. All these companies that trade very high price deals ratios. And interestingly at the peak of the dotcom mania we had 29 of the S&P 500 components traded at ten times revenues were greater. Today we have 28.
: [00:10:18] So it’s very very similar situation actually you know so we had a comment from an individual on Twitter that said hey are some of these prices justified because interest rates are a whole lot lower than they were in 2000. What do you say to something like that.
: [00:10:30] So I think that’s what I’ve heard about. That’s the thing about this is there’s an incredible dichotomy of low interest rates imply low interest rates implying very low growth justifies a high multiple Koenig’s high growth. So Jim Grant said you know we have boom time equity valuations and depression era interest rates and so you have a bond market saying there is no growth. Then you have the stock market saying growth is off the charts. And so you know we could get into the math. We it just kind of a cash flow model. You know if you discount the discount rate you lower the discount rate to 1 2 percent or whatever you want to lower it to don’t lower the growth rate in the discount model. You’re making a massive mistake. In fact the Federal Reserve has written that he promised help every single cycle investors make this mistake. You cannot lower the discount rate without lowering the growth rate when you are both at the same time. Does it matter if you grow a 5 percent discount of 5 percent attend a discount of 10 valuations just saying mean it doesn’t justify higher valuations. Oh it does help explain it. Investors are desperate for returns so that Tyldum you know out on the skirt and push junk bond prices way too high and prices way too high and it’s just a sign of desperation on the part of investors. But it doesn’t mean they’re not making a great stake you do so.
: [00:12:00] Let’s talk more Bob delegations GSE you know here with the Fange stocks. I’ve heard a lot of different arguments in terms of how to assess valuations. Because typically we’d be talking about this kind of cash flows as you talk about like how much money is flowing back to the owners. Now you hear other valuation metrics like the networking in fact for something like Facebook or the top line growth for something like Amazon. How much should we pay attention to these new valuation metrics.
: [00:12:32] Also giving that these Fange stocks are impacting our lives in a way that perhaps you can argue we haven’t seen before.
: [00:12:41] I mean in every cycle it’s different in some respects but the iron law of valuation you know is never different.
: [00:12:50] Ebay you know literally you know my friend John Huntsman likes to say that any security essentially at today’s price is discounted the future cash flows. And so you know for a company like Amazon to justify today’s valuation they have to be able to turn on the profits eventually. And when I look at the valuation of Amazon specifically it’s trading at its highest valuation in ten years and there’s no price to sales again that there really is no income. You can’t look at a price earnings ratio you’ll get a price to sales ratio and at the same time Rose has been cut in half by two thirds over the last 10 years slow growth rate is falling dramatically and you see this and Amazon trying to get into other industries. The risk there is that Amazon now is drawing the interest of regulators in terms of antitrust. I talked to my friend Peter out water about this and he says you know welcome to the backlash era. We’re now seeing you know people around the world this populist movie people are tired of being taken advantage of. We’re tired of being bullied. There’s been a backlash towards politicians. There’s been a very very justified backlash towards sexual harassers and that’s not just a you know a trendy thing that’s very very justified but I think we’re also going to start seeing a backlash towards these companies that are taking advantage of you know Facebook and Google’s especially Amazon destroying the retail sector and destroying competition has so much power so much monopoly power that it’s drawing a lot of antitrust interest. And if they were to start saying I’m sorry you cannot get into your privacy but as mentioned we will not let you into these industries because you already have too much monopoly power then the growth declines not. And then how do you justify you know sky high dilution.
: [00:14:43] Yes very interesting point you bring up about regulators because it seemed at least so far not to be something that investors are too worried about. But obviously if it will happen if there will stop to get regulated this is something that we all need to consider in terms of our valuation. So where do you see this going in the future.
: [00:15:04] Well I think there’s a very big difference to be made between the way investors feel about these companies and the way the general population feels about these companies. When you look at the way that politicians and the general population feels about these companies. USA Today did a poll and more than half of respondents said These companies have too much power and were afraid of their own. More than half of those people were afraid of how they can use that power. And then now you have you know in Congress there’s a bipartisan effort. I think this is one of the things that could pass Congress very easily. Is new legislation to rein in the power companies because it’s not just liberals you know talking about this is Steve Bannon came out and said that you know the Republican Party at least kind of the Tea Party side of that is going to make it their top priority to rein in these companies next year. So you have both sides of the aisle saying you know it was really the Russian influence in the elections that helps people to wake up to these out risks and to the unchecked power that these companies have. I think that was just a catalyst to understanding really like you said the power that they have. I recently just haven’t show that I recently had a conversation with Roger McNamee who was one of the first investors in Facebook.
: [00:16:22] He convinced Mark Zuckerberg not to sell Facebook to Yahoo for a billion dollars. He also introduced Sheryl Sandberg to Mark Zuckerberg. And the guy’s been instrumental in Facebook’s evolution as a company and 18 months ago he went to them and said to Sheryl and Mark said this platform has become extremely dangerous because there is no oversight. You guys will allow anybody to come in and pay any amount of money to use what what he calls your brain hacking for hacking people’s brains to get into consume would you want him to you. Why would you want him to buy votes. You want him to vote for. And they both kind of have been rebuffing his efforts to get them to fix this and now Congress is realizing the dangers involved. You know it was actually the chief Google ethicist who’s now coming out and saying that this is a legitimate brain hacking. We have used these psychological principles of gambling and persuasion in order to create a platform that manipulates human brains more effectively than anything in history. And so I think that as people wake up to this these companies they’re going to be more highly regulated they’re going to find a way to take greater control. Other platforms.
: [00:17:42] You know one of the things I think about whenever you’re using social media is confirmation bias in how powerful and how reinforcing it’s like an echo chamber for people.
: [00:17:52] You know you’d like a couple things are you. Let’s say you’re a liberal or you’re conservative pick whichever one you want and you start liking things that are specific to that one thing. Well next thing you know the only thing you’re receiving in your news feed are those things. And so it has this positive maybe negative reinforcement to that’s the only thing you’re seeing and now that people or getting so much of their news through this stuff it’s just the ultimate confirmation bias mechanism.
: [00:18:19] So you call it brain hacking. I completely agree with you and I think that most people aren’t even aware of confirmation bias and so how can you set up your feed so that you’re not being susceptible to something like this. I mean it is a major concern. I think it’s something that I think a lot of people need to think about.
: [00:18:35] Yeah that’s a great question. I think that social media these companies Twitter and I’m I’m as guilty as anyone on Twitter Twitter. I’m an addict. I confess that. But I think social media is just not the ideal platform to get most your news from I use it as my go to source. But I also read it you know a bunch of the major media outlets which you know have to double check their sources they have all said things so I read the Financial Times Wall Street Journal New York Times. I mean I think you have to broaden them.
: [00:19:05] You just can’t get all of your news from social media because it is so unreliable at times when you have one little preconceived notion and you start liking a few things and now it’s just it goes off on like a total tangent. That’s all you’re thinking about.
: [00:19:20] Yeah absolutely. And they’re not all legitimate sources either. I mean there’s a lot of different people with a lot of different interest out there trying to shape public opinion.
: [00:19:30] So when we think about all this this is from an investing standpoint positive negative continues to exist for more years because it’s not at a breaking point. You know one of the things that I was looking at Jesse was when you look at each one of these companies top line the topline still growing. I mean it’s definitely not growing like it used to. Like you’d pointed out but it’s still growing and these things are definitely being traded off the top one and not the bottom line. So if we expect the top wind to continue to grow and to continue to expand should we expect the price to kind of go with it until that breaks.
: [00:20:04] That’s possible but we might not know about the rest of the top line until well back. You know it was interesting for me to talk to Roger because I said you know what are the biggest risks in this company. You know investors in Facebook and Google should be framed for a much tighter regulation right now because if Washington doesn’t regulate them they’re not going to regulate themselves because that hurts top1 too much if they don’t get regulated and people are going to start revolting from these platforms that are going to start realizing I’m being manipulated and I don’t like being manipulated like my data being sold to the highest bidder and you know regardless of who that is. As investors we should hope that they’re going to get regulated because that’s going to make them better citizens. You know Scott Galloway also makes a great point.
: [00:20:53] In business school one of the case studies uses Johnson Johnson in the title scare and you know when Tylenol pills you know had killed a few people there was a huge scare about what a Johnson Johnson do. It pulled every bottle and every show on the planet. We are going to protect our customers at all costs. Right.
: [00:21:15] That is your business school 101. When you had a crisis you’d literally just shut it down. You do everything it takes to make it right. It was scary I think for investors of these companies is not doing this is still allowing you know we’re going to auction off brain hacking to the highest bidder. We’re not going to change our business practices and nothing’s changing and so they’re not taking that lesson to heart. And so I think as an investor that’s a huge risk. People would have so much more faith in the platform turning over their data turning over their lives to Facebook and Google if they started shooting those hey hey look your interests first we’re going to make sure you are not manipulated that you are not you know that would be a long long way to giving people confidence he’s using the platform. I look at all those things as rapidly growing risks to the underlying business models.
: [00:22:12] Ok. So this is the last question I have about the fank stocks and this is also the question I’ve been looking most forward to asking because I kind of knew that there would be some kind of bashing. So let me ask this counter question if you had to hold one on the fank stocks for at least a decade you couldn’t sell it. You have to hold for a decade. Which stock would it be and why.
: [00:22:37] It’s tough you know so for me I want to own stocks I think are very cheap out of favor. Classic value. My favorite way to think of it is the way Jim Rogers put it which is I want to wait until I see five dollars lying on the ground all after does it get up like is that obvious. And I don’t really see any of these stocks as being that fly on the ground right now. But I think for me it would probably be between Apple and Alphabet. I think those two have legitimate moats to their business that are probably more proven than any of the others and that the valuation battle is obviously more reasonable than the others.
: [00:23:16] So interesting that you should mention Apple and you know reading through their financial statements it seems to me that they are perhaps too reliant on the iPhone. Can’t remember the exact number but it’s something like 70 80 percent of the revenue that comes from iPhone. So as an investor even though this is the biggest market cap in the world quickly approaching a trillion dollars should we be concerned that consumer preferences might simply change.
: [00:23:48] I really do think that’s a legitimate risk cap. I mean the thing about all these companies is people don’t remember a time before the iPhone. They don’t remember a time before Facebook. But the history of technology is that I mean somebody had a great tweet recently it was a cover of Forbes 10 years ago. Will anybody ever be able to chip away at Nokia’s ownership of the cell phone market. This was 10 years ago. And so there’s always the king of technology but it changes you know it doesn’t seem like it changes very rapidly but it does every 10 years there’s a new king and you know for me I am an Apple fan totally sucked into the ecosystem. I was just looking at Google Trends you look for searches for feature phone and a feature film does talk text and music.
: [00:24:39] That’s it and feature phones I think can be the next big thing in mobile devices because people need to be able to get away from social media and get away from notifications to so many more studies coming out that these things make us depressed more time to more notifications on yourself more frustrated and NXT builds up inside of you and social media does the same thing. So you know people want breaks from these things and I think that is maybe a risk to Apple. I don’t know. I mean they had such a wonderful ecosystem and they do have a strong moat that will protect it doesn’t always be fancy. But for me I think there are risks.
: [00:25:18] Wow that’s a great story I’m glad you shared that. All right. So Jessi let’s transition into talking a little bit about something you were hitting on earlier which was inflation and growth and intrinsic values when you’re doing discount models. Because I think that this is something that a lot of people are wanting to hear more from you on. So what would you say as you’re looking at this moving forward into the next ten years what are you looking at for a growth rate like what do you think is reasonable.
: [00:25:45] Gosh you know again my friend Jon Huntsman has done some really interesting work here. And it really depends on where you are in the cycle when you have worsened unemployment. There’s just not a lot of potential left in the economy to create a ton of new jobs and that’s a lot of the times where growth comes from you look at you know Curie’s is really good growth and you start with a high unemployment rate and then you know the jobs take care of the rest. You guys had Eric Sinnamon on the podcast recently. And Eric has been writing about inflationary pressures building you know here in the United States at least for me is more interesting from his bottom up perspective. You know he’s tracking the list and how it does it all 300 conference calls a quarter you know. And when he does all that he’s hearing like you know wage inflation becoming a big problem to these four percent unemployment it makes a lot of sense. The only time you know real interest rates were held this low this long was during the mid to late 60s. And what was experienced after that was inflation just took off. And you know I think there’s a lot of pent up inflation wage pressures building and things and you know we saw the Fed funds rate it you know one percent change.
: [00:27:01] I think it’s very possible that the Fed is far behind the curve. Wage inflation is going to take off. It was a great stat today that I tweeted Japanese beer brewers just raised prices for the first time in 10 years. We’re starting to see wage pressures in Japan. You know the epicenter of deflation. And so if deflation is potentially ending in Japan we’re starting to see wage inflation there. This is a global phenomenon and if we start to see inflation around the world all of these central banks are going to find themselves so far behind the curve. You have to you know raise interest rates rapidly to try and play catch up. So it’s a very interesting time.
: [00:27:45] I mean so when we talk about what does that mean. Are people that are listening to this and they hear you know if let’s say that that is a true statement and that happens what happens if they have to start raising interest rates quickly like that.
: [00:27:57] Well the first thing I think about is if you justify high volume low interest rates your premises immediately evaporated. So higher rates. I don’t think that means much in the minds of a lot of bulls today. But when you look at you know junk bond yields in Europe and you know less than 3 percent and you know companies that borrow it incredibly low interest rates. You have a drunk bond yields your states five saying these low interest rates have enabled the whole army of zombie companies to stay alive. And that’s you know kind of prolong the cycle and prevented a real wash out of businesses. If you had been financing your business that you know three four or 5 percent the last 10 years and all of a sudden you got a refinance of 6 7 8 percent. Zombie companies are toast and you’re going to have a new credit cycle where defaults start rising in and at a corporate level and then spreads start widening and that’s you know not good for risk assets of any sort.
: [00:29:03] Yeah that’s I mean this has been the story for so long that we’ve been talking about is how much longer can the Fed do this now.
: [00:29:11] Something that I find really quite interesting is when you go back and you look at the balance sheet of the Bank of England the ECB the U.S. and Japan. And when you look at the balance sheet and you look at the QE that’s been conducted and you look at that time whenever the U.S. stopped doing its QE and then the ECB picked up and you look at that transition point we had a big correction in the markets here in the US back in 2015. You go back I think it was in 13 2013 was 2012 I can’t remember. You saw another similar event where basically the quantitative easing was swap than you saw a big correction in the market when this is when the ECB just started doing some QE. Right now you turn on the news and you see guys like Ray Dalio that are saying hey the central bankers are done they’re going to start pulling this back come 2018. They’re not going to be doing the QE like they’ve been doing in the past and I’m really curious to see how that plays out and whether that’s even a true statement. That’s what race saying the Fed has obviously stopped at the ECB still has it turned on full throttle. So are you hearing anything different or are you seeing that the ECB is going to start pulling back on some other quantitative easing efforts is that going to be something that we see a major transition in 2018.
: [00:30:24] I think you’re going to have to I think you know we’re running out of buy. You know there’s certain Japanese on a ton of you know huge percentage in more than 50 percent of the market and the ECB is running up against their constraints on that they’re allowed by and they’re going to have to start tapering. But it’s also you know the inflationary phenomenon and this is very very interesting to me because I talked to cure Sokoloff about this recently and William White who is condoms. Yes we talked about the same topic that you know it turns out quantitative easing was actually deflationary because it allowed for a massive debt creation when you had a bubble. Yet it reduces the amount companies can spend or consumers can spend so it actually slows things down the inflationary impact. And I think that’s what we learned during this cycle so that when you reverse QE that’s potentially an inflationary impact. And so I think that’s something that a lot of people aren’t thinking about that is fueling this deflationary and doing QE or tapering QE by all the central banks potentially to be inflationary. Then what do they do then they have to obviously raise interest rates rapidly to catch up.
: [00:31:39] All right. So say that we don’t want to be invested in stocks or bonds. Whether or not we believe it’s because interest rates is up. We just don’t see any kind of yield. So basically we just want to hold cash.
: [00:31:51] Now how do we hold cash. Should that just be us dollar or should we divide that into call the USD yen euro perhaps pounds as well even though some of these currencies starts to look more vulnerable than they have in the past. What are your thoughts on that Jesse.
: [00:32:09] That is a great question. And I and you know bearish on the dollar. I think we started a new bear markets for the dollar and you know to me it’s very simple. Look at the way the federal deficit is going and this is potentially the first time in modern history where the federal deficit is widening during an economic expansion that’s intentionally a big problem that’s saying you know this entitlement spending. So every economic expansion we’ve had tax revenues is growing things are raised for the federal government. That’s not happening right now. That’s actually really worrisome. And you know the federal deficit is only going to widen. And if you look at it shirt the dollar is very highly correlated to trade the better the U.S. federal government finances are and that the dollar does you know the worse the deficit widens or the dollar does. And then you also look at you know the Japanese yen is very very cheap relative to the dollar you get things like purchasing power parity where you know the Big Mac index you know and the very key. And so if you pan is going to see an end to their evolutionary scenario and the central bank’s going to have to start to tighten the yen is going to do very very well against the dollar. I think the euro probably will do well against that I think it you know relative to central bank policy the Fed has been tightening for years now really and the ECB has been loosening for the last few years.
: [00:33:41] When that changes you know the ECB has to start tightening and this then goes Oh no we maybe started a new recession led us to start easing again. The dollar is going to tank against the euro yen but honestly you know I think you mentioned Ray Dalio earlier rate said everybody should have at least 5 percent of their portfolio in gold. And you know when the dollar does Orley gold does well. And so if you’re bearish on the dollar or say you have to be bullish on gold and so financial assets are extremely expensive we have bonds and stocks I can’t remember which we came out recently that research house came out and showed that since 9700 combination of stocks and bonds has never been this highly valued in history. So you are both extremely expensive financial assets are something that you have a lot of risk there. I think real assets are something you’re going to want to own. The next 10 years and so that to me is real estate commodities gold generally TIPS Treasury Inflation kibitz purities. My favorites are real estate and gold. I think those two probably an inflationary environment do best. So I mean a lot of these things tie in together dollar bills down that creates inflation. And so it’s really kind of a holistic view over the next 10 years that I think real assets will do better and gold will probably do well because the dollar is down.
: [00:35:02] The next few years if interest rates are going up wouldn’t that be a concern for real estate though because the prices are going to go down.
: [00:35:09] It could. When you think of residential real estate but when you look at investable real estate it’s mostly commercial. Yeah and the nice thing about commercial is when there’s inflation they can raise rents and so yes real estate prices are very very high. I agree with you. So maybe that’s not the best area but you have pricing power in an inflationary environment. So.
: [00:35:31] Gotcha. So the next question obviously becomes because this is the hottest thing that everyone’s talking about. And you smiling because you know where this is going. What are your thoughts on that thing.
: [00:35:46] Is it asyik mania. It’s the classic mania. And I think it’s just so fascinating to watch it play out real time. And I know a lot of research on it and I understand and every time I say this because you don’t understand what it is I understand what bitcoin is and I was typing with a friend of mine today is in order of course he was asking about this and you know I think Bitcoin is a technology block changes to new technology block chain possibly has a lot of potential value but if there’s any lesson from technology it’s whatever is raped today then somebody is going to come up with a better version of it tomorrow. And so yeah I mean that’s the simplest in terms of 2072 create a better bitcoin tomorrow. You know central banks are talking about creating their own bed Hoying and you know these types of things. But fundamentally you know the argument for only bitcoin is only can only be 21 million coins created in the show’s limited quantity but there is no limit to the number of digital currencies or crypto currencies that can be created.
: [00:36:49] So I don’t understand at all why between should have any value over something very very minimal because the higher the value harder it is to become a medium of exchange. Wall Street Journal wrote about trust me there well a lot of companies are trying to use it and accept it when people don’t want to spend it so long as the price is going up. So it actually works against its volatility. And there’s another point to be made to that my friend Fred Hiki made in his latest newsletter which is now the IRS considers every purchase to be made when a sale has to be you know you have to pay capital gains tax. You don’t have to do that on your dot. Yeah I think that’s a that’s a big concern. Yeah a lot of these companies are saying OK we can’t accept it anymore because you don’t want to be responsible for reporting it to the IRS. And so there’s so many issues with so many problems. It’s modern day tulip mania in my mind.
: [00:37:47] Cm I’m a fan of it. I really am. But I think that there’s I have some concerns obviously and I think that there’s concerns of it going into the mainstream adoption. I think that’s a lot a risk a whole lot of risk if you’re going down this path. And I think the point that you just made I think is a huge point with it being treated as if it’s a security because companies are not going to want to accept this if it’s being treated as a security for all those reasons. I think the other concern is really from the government side of it. You know how is the government going to play with this as it continues to mature. The part that you had mentioned there Jesse about people not wanting to spend it because the values going up. I think that that has a potential to even compound the interest into it even more and I think that it has a potential to drive a network effect maybe even a case war based on that. But man there’s a lot of there’s a lot of smart people in this space. There a lot of coins trying to beat Bitcoin. So like even though you own Bitcoin today there’s a lot of ones that are very high a market cap that are trying to rise up in there and man I think if you’re in this space it has a potential huge upside if it actually does become some type of world currency.
: [00:38:57] Yes it’s an interesting my friend Steven Bregman rising kinetics. I mean brilliant brilliant thinkers there some of my favorite guys it’s hard to read their thoughts in bitcoin for a long time. They’re very early in it and the way they look at it I think makes no sense that you look at it as a lottery ticket as it is it does take over a portion of a global transaction you know market gain is worth a ton of money. But I think you know for people to put any more than 1 percent of the portfolio in it is taking away too much risk and what you’re seeing today you know the classic mania signs. People selling their homes putting the all the money and equity you know Neel Kashkari that wasn’t enough that it was her bank of Minnesota said somebody stopped interest money stopped him in line to delay action he’s trying to get plants. What do you do. Oh as your. Well I just hold up thirty five thousand dollars at home and put it in bed. What do you think like those types of decisions. Classic signs of a mania. Yeah and peaceful people most people are not looking at it like Steve Rebmann Inveresk kinetics or looking at it.
: [00:40:14] That’s exactly what stick and I’ve been saying on the show is you know it’s almost like a venture capital play you know if you’re in this year kind of looking at it is like the odds of this turning up are probably 20 percent 10 percent. But the upside is absolutely astronomical it’s huge. And so like if you’re throwing more than 5 we were saying 5 percent if you’re taking more than 5 percent of your net income and it really depends on the person like you know 5 percent for Jesse might be different than 5 percent for Preston which is different than 5 percent for Steg because it’s really about you know if you lose all that is that going to impact your life.
: [00:40:49] That is actually a real point and that’s what I tell people about trading about anything. Create yourself a nice diversified portfolio stocks bonds and real assets. You think most people overlook and it could be a third a third a third. Very very simple. And then you want to speculate in the stock market you want to learn how to trade. You want to use your speculative bitcoin take as much money as you’re willing to lose. And I’m kind of you know in trading stocks you know don’t put more money into that than you’re willing to lose because even just in learning how to trade stocks you’re in market wizards one of my favorite books. These are the most brilliant minds in the business and almost every single one of these guys is going you know completely wiped out their trading account as they’re learning how to be good traders. They’re learning how to be good investors. A lot of times more than once you know two three times about their trading accounts. But they look at it like and I love this term tuition at the School of trading. You know it’s OK to lose money as long as you learn something from it. And so I think most people with the money in bitcoin but don’t know more than you’re willing to lose. So but look at it that way and I think that’s also Altaïr Jones you know preaches about your risk. Don’t think about how much money I could make think about you know the risk first.
: [00:42:08] Absolutely. Some sound advice right there.
: [00:42:11] I was just going to say I don’t know how. Environmentalists are not already completely up in arms about the whole thing. You know bitcoin just by itself excluding the other crypto currencies a block chain behind it started using more energy than Nigeria and if it does get bigger the estimates are it can use more energy than Japan. And so you know for me that energy usage too is also just massive and costly and I don’t understand how you can be an environmentalist when investors sit tight because they are mutually exclusive it is one great point Jesse.
: [00:42:50] So I would like to bring up the concept of trust here because whenever we are talking about money in the conventional sense it doesn’t really have any type of utility. The only reason vides worth something is because we agree is worth something you trust the system to trust. You can actually get mill or whatever you’re trying to buy for your dollars. So how does trus into this discussion about the validity of Bitcoin in your opinion.
: [00:43:20] That is a really good question also and I think bitcoin has yet to be really tested in terms of trust. I worry about platforms. We saw the other day when some higher volatility. Now you know Coinbase went down you know so you couldn’t be traded as biggest trading platform or it was an accident were a bunch of bitcoins were wiped out because somebody hacked a platform by accident you know for me I just come back to you know gold has been money for 5000 years and no matter what you can take a gold coin and somebody will trade you something for it because it’s been an accepted in society or a very very long period of time and every time every single time throughout history when money has been debased to a great extent people have fled to gold. And that’s just a historical fact. And so I think if you’re looking for something that is has a historical basis in protecting you against money creation protecting you against those types of things you know gold is really the answer. Bitcoin is very interesting to me and I really do sympathize with the underlying story of it the lack of faith in central banks who created these bubbles and printed a ton of money. You know I’m it’s something that I’ve written about for a long long period of time. So I do sympathize with it but I just think there are too many problems in the fundamental hazier owning it too many inconsistencies that it’s hard to really put much faith in and then looking at it as an option or as a lottery ticket. Why is that.
: [00:45:02] Yeah I would have to agree with you on the fact that there’s no incentive. If anything they’re incentivized to manipulate their monetary base line to manufacture growth. And so for me it’s really exciting to know that there’s technology that’s out there that could potentially fix that or to peg that on a global level and that’s where I know Steg is also very excited about the technology that it could potentially do that but it’s just a matter of what is this going to actually look like as it shakes out because there’s so many unknowns. There’s so much risk. I mean you don’t even have to start going into all the risk to know that there’s a lot of risk in this and I think that anybody that’s going into this space has to come into what their eyes wide open to know and not just to buy into the narrative like this is going to replace everything and they have to really do the due diligence on a lot of hard work try to understand all those different variables if they’re in the space.
: [00:45:54] Absolutely. And you know I think when you think about how do you rein in central banks. There’s a reason why there’s a gold standard with some central bankers who can print money because it had to be backed by gold and central banks after World War Two. You know one by one when the gold standard you know that was the beginning of all these problems. Now I’m not an expert on this but Emil Howes and his thesis works turning you know brings up some very very interesting points about where we are in this cycle. And you know I really do think at some point if the monetary policy gets so out of control we do start seeing hyperinflation potentially and some governments that the central banks will be reined in and they will have to be forced to save Germany did to go back to a currency that’s backed by something a lot of you know speculation but when you look at the trajectory of the U.S. federal spending in a hundred trillion dollars unfunded liabilities and how much will is there at Congress to reduce Medicare to reduce Social Security. Do you vote for that. You’re going to get voted out of office and so there’s a lot of people hypothesize that you know those things will never be reformed and the only way they’re going to get hate for is that printing a ton of money. And so yes I do understand and it makes a lot of sense want to own something like 100 something like gold that protect them against that scenario. Hopefully you know someday we’re going to hit some debt crisis that forces people to rethink the central bank policies and to rein them in and take away the powers that they have used very interesting discussion.
: [00:47:44] All right Jesse such an honor to have you back on the show. We always have so much fun when you come on. If people want to learn more about your work and they look you up.
: [00:47:52] I train and write on a regular basis. But are there really active on Twitter at training. You know I do tend to read research each week is just the older Twitter and like us most of the stuff that I read that I read it out.
: [00:48:11] Awesome thank you so much Jesse for coming on the podcast.
: [00:48:15] All right. So this is the point in the show where we play a question from the audience and this question comes from amid high price and on embezzlement from New Zealand.
: [00:48:25] Thanks so much for putting together the show. And my wife and I are really big fans. My question is What do you think will happen with the current price if that CMA offers that kind Future’s thanks and keep up the great work.
: [00:48:38] All right so admit kind of cheating here by answering this one because the the futures started this past Monday actually Sunday night. So it’s been active for a couple of days now that we’re recording this on a Wednesday. So it’s been about three days since the futures went active and what we actually saw was the price spike up and it’s plateaued and now it’s coming off a little bit. But I think it’s still really early to have kind of any idea what kind of impact this is going to have into the long term. Before the futures opened up I was talking with Parashar about this and I told them that you know for me it was a 50/50 split as to whether this was going to make the price pop or make the price go down. I think a lot of people on Wall Street. My personal opinion having friends on Wall Street are very skeptical with crypto and in bitcoin in general so I think a lot of them are anxious to short bitcoin and to sell it short but I think that a lot of them aren’t stupid either. And they’ve seen the price go wild for the last year and I think a lot of people are hesitant to step in front of that freight train. So I think what you might see with this is if you do see the price start to pull back which I think is a very real possibility at this point because the price movement has been just going wild and I mean on a on a tear. And so I think if Wall Street does see this start to pull back and start getting a little bit momentum and a pullback I think you could see the futures market really heavily compound on that and really cause a pretty abrupt pullback. Maybe even down like 5000 bucks or something like that. But there’s no way of really knowing. I mean that’s the thing with futures.
: [00:50:16] I’m curious to hear what stock thinks for some of the business that might be. Yeah like her. Futures bought but. What is it really. So I think before we talk about bitcoin perhaps the easiest way to think about a future as to think about a typical commodity could be something like oil. So if I’m an oil producer and I plan to produce you know 10 Dellis of Aurel and you know six months time I can plug in that price already so it’s actually a very convenient mechanism for a lot of producers in terms of budgeting and scheduling knowing that you have that price and obviously the prices go up and obviously you’d be paying up to the cost of the price going up. But you can also make the counter argument so it’s basically a question about certainty. So what’s going on with the kind futures. Well one thing I would like to add here is that a big future is settling cash so it’s not like you actually went when you buy a future fiscal delivery for someone like oil you actually own that oil. That’s not the case. So it’s all settled in cash. And basically what that means just giving an example is that if you buy one because contract and a contract is composed of 5 bitcoins. So right now here’s the middle of December. You know the prices are on 16000 so it will be around eighty thousand dollars for one contract. You would have would see what’s called a tech. It’s basically just a fancy way of talking about the minimal fluctuation that will be five dollar per bitcoin.
: [00:51:51] So if you have a tick up there’ll be twenty five dollars. So that means that if you are having that long position to that contract you’ll be gaining twenty five dollars and then you counterpart who ballooning twenty five dollars probably doesn’t come as a surprise that most people will be if I look at the future with the expiration date in March middle of March 18. It’s trading up 17000 280 right now. It’s their interest just to see what happens when the money is in the hands of the bull. If you see it a transfer of wealth if that accident materializes or as present talked about if you see the offset perhaps I do want to point out again that you know this is not like an ETF you know it’s not like an ETF where you will buy that ETF and the S&P 500 and then there will actually go into the market and then buy those 500 securities in the S&P 500. That’s not how it works. This is all cash based and that is kind of like a separate market. You can now pour a lot more money into the market. But it’s not like you would necessarily hold bitcoin which would clearly move the market to a lot more for the new futures that you see. I expect almost all of them if not all of them to be cast based but I would definitely pay a lot of attention.
: [00:53:10] If it’s not the thing I guess that I find interesting with the futures side is the if the derivatives are now stood up that now opens the door to ETF which then adds more and more credibility to all of this. And I think that’s for the U.S. to step in and the government to step in and shut down exchanges. I think that that becomes so much harder the more reinforced all of this becomes with derivatives and ETF type products later on. I’m kind of curious to hear what you think about that.
: [00:53:44] I thought a lot about that Preston because you started to see a lot of regulation and regulation is something that people will look at as that is bad at least for the price of of whatever life. This is a stock and there’s a lot of red tape you know. It might limit the growth of a company and whatnot. You know whenever it comes to something like bitcoin I actually see it primarily as a good thing. And if you look at the first regulation that you had about Bitcoin that was in Japan in 2014 after the exchange Mt. Gox was hacked the most welcoming country in the world for bitcoin that’s Seaspan is probably because they’re in the more getting used to it. And also if you regulated you’ll legalize it you accepted and one shape or form. And I think that’s very important. So if you set up futures and perhaps even that link directly to an exchange you need to have to build a system around that you need to have something that’s public that’s going in and handling it. And that just provides a lot of digital Misi to a lot of investors not just private investors but also institutional investors so. So what will happen if we see like an entire ban. I mean because that’s definitely a different concern is actually a very interesting now currently being in Ankara and one of the reasons why the Koreas is one of the biggest markets in the world. And we’ve seen all this volatility lately in this market specifically is because China that you know regulated and said you close down the exchanges a few months ago and basically that doesn’t mean that people stopped buying bitcoins just means that they’re going to Korea and Japan. I’m not trying to sell the story that you can’t just ban it is just but something like bitcoin. It’s just a lot more difficult than for so many other things.
: [00:55:36] You know like that’s impossible it’s impossible to panic globally even if you get the you know the biggest countries in the world and they all banded together kind of like the sequencing that you’ve been seeing with the ECB the Fed and the Bank of Japan recently with the way they’ve been to monetary policy. I mean it’s totally sequenced. They could maybe come together and say hey we got to shut this down because this is getting crazy. But at the end of the day you still have small countries all around the world that would not ban it and it would be allowed. Now I think that that would be the price would get punished in the short term. But Bitcoin continues to march along. The protocol continues to operate I guess for me I’m looking at it more from like what happens when this thing hits a market cap of five trillion dollars. Does the Fed start interjecting with elected officials to start saying Hey this thing’s evil and they start spinning it from a political and media standpoint to try to really manipulate the markets and then try to shut down the exchanges. I think all of that is a real possibility. But I think that it’s a much harder possibility the longer they wait and the more that the finance industry wraps itself around all of this which is what we’re seeing right now. I mean that’s my opinion. I’d be. I would love to hear somebody say something you know good strong counter argument to that because I mean for me it’s a huge risk and it’s something that I really want to fully understand.
: [00:56:59] I just haven’t really met anyone that I think can really make a strong argument around why that’s going to happen. I hear a lot of people say that that’s going to happen but then they have no substance behind the opinion. You know like there’s no substance on why or how they’re going to do that after so much is kind of you know I don’t know shoot us some good articles if people were listening in this and you’ve got good articles police on the way because we’re really curious about that risk and I think it’s a big risk and it’s a concern. But I just don’t have any substance behind it. So we’d like to hear that. So we love these kind of questions. This is really fun for us it’s very speculative but I think it’s an interesting topic for everyone to be aware of for submitting your question. Go and ask the investors dot com and recording your question there. We’re going to give you a free course on our IP Academy website. Some of the courses on there are paid. We’re going to give your intrinsic value. Course stick and I had prepared. It’s 18 lessons long and we’re really excited to be able to give this to you and thank you so much for being a part of our community and asking such an awesome question there admit guys that was all that pressed on I had to this week’s episode of the investors podcast.
: [00:58:04] We see each other again next week.
: [00:58:06] Thanks for listening to the IP to access the show notes courses for forums. Go to the investors podcast dot com. To get your questions played on the show go to ask the investors dot com and win a free subscription to any of our courses Antti IP Academy. This show is for entertainment purposes only. Before making investment decisions consult a professional. The show is copyrighted by the IP network and written permission must be granted before the syndication or rebroadcasting.