22 May 2016

In this episode, Preston and Stig talk to billion dollar hedge fund manager, Jesse Felder. Jesse talks about the investing approach of a couple billionaires and he identifies some of the biggest risks to the current global economy.

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  • What billionaire Stanley Druckenmiller attributes his success to.
  • Why technical analysis indicate that you should stay out of the stock market.
  • Why investors should pay attention to the NYSE Margin debt.
  • Why there might be a problem in the corporate bond market.
  • Which one piece of advice all college students considering a career in finance should follow.


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Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Intro  00:06

Broadcasting from Bel Air, Maryland, this is The Investor’s Podcast. They’ll read the books and summarize the lessons. They’ll test the waters and tell you when it’s cold. They’ll give you actionable investing strategies. Your hosts, Preston Pysh and Stig Brodersen!

Preston Pysh  00:29

Hey, how’s everybody doing out there? This is Preston Pysh. I’m your host for The Investor’s Podcast. And as usual, I’m accompanied by my co-host Stig Brodersen out in Denmark.

Today we have a big name in finance on the show and his name is Jesse Felder. Jesse is the Founder and Publisher at the FelderReport.com and he comes with two decades of experience in the finance sector. He’s the founder of a multi-billion dollar hedge fund out of Santa Monica, California, and runs a family office out of Bend, Oregon.

I came across your content and I thought to myself, “This is a guy who knows what he’s talking about.” And I took note. So then, I was doing another search. I was looking for something and I was looking for some different facts and data because I like to actively pursue the things that I’m looking for. Then, I come across multiple other articles, all written by this Jesse Felder guy.

So with all that said, we knew you were the person we were looking forward to having on the show. We are thrilled that you were able to take some time out of your busy day to chat with us and present all this information to our audience because it’s very beneficial. So thank you so much for coming on the show.

Jesse Felder  01:31

Thanks for the kind words. I appreciate that. I’ve been writing for a little while to try and just kind of get this information out there because I think it’s powerful and most of the major outlets don’t cover it. So yeah, I appreciate the kind words.

Preston Pysh  01:45

Jesse, without further delay, let’s jump into the questions because I have a lot of things that I want to ask you. I know Stig does too. You like to study some of the billionaires, the smartest, most successful billionaires on the planet and so do we. That’s what our show is all about. So with that said, we are big fans of billionaire Stanley Druckenmiller.

Recently, you wrote a blog post, which we will provide a link to your blog post in our show notes of this episode so people can see what we’re referencing here, about one of the things he attributes to his success in the markets. So can you tell our audience a little bit about this article? More importantly, tell us about what this special sauce or the secret ingredient is that billionaire Stanley Druckenmiller says is why he was able to beat the market by so much. Also, tell the audience about his returns so they kind of has an idea.

Jesse Felder  02:32

Sure, yeah. Stan Druckenmiller ran George Soros’ hedge fund for a number of years. And so, I think people are just starting to hear about Druck because I think George Soros got to take the credit for a lot of his pick trades. But you know, George is a wonderful investor and trader in his own right, but Druck was the guy behind those returns. He did, it was 25 years of 30% per year after fees. So the guy generated probably the greatest money manager alive today, if not of all time. The track record speaks for itself.

But he gave a speech a little over a year ago to a very small group at a… I think it was a country club in Texas, where he started talking about these issues in the markets. And one of the things he said was that the biggest money that they made at the Soros funds was taking advantage of central bank stakes. When the central banks were trying to go against the markets, they went the other way. And it is interesting, too, because you know, Jim Rogers also worked with Soros. He says the same thing in the book Market Wizards. He says whenever the central banks do something, take the other side of the trade.

So this is a common theme among Soros. Druckenmiller, and Jim Rogers that you know, the big money that they made, the biggest trades. And you know, most famously, I think for Soros and Druck was when they broke the Bank of England, shorted the British pound, and made a billion dollars.

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Preston Pysh  04:02

We got access to that speech that you’re referring to about a year ago. We saw it and that’s when he kind of came on my radar as well like this guy knows what he’s talking about. And so we read that. Now recently, and I mean, just this past week, he came out with another presentation. This one’s even more bearish, if you will, where he’s just saying that this thing is going to come unraveled at this point. Can you talk to our audience just a little bit about that speech that I know you have seen and you’ve seen the slides to it? What’s he saying now?

Jesse Felder  04:32

He started talking a little bit about it and that’s that first speech a year ago. But basically, what he’s saying is that these boom-bust cycles that we’ve had over the last 20 years, including the dot-com bubble and even way prior to that, exacerbated. He’s specifically looking at the corporate credit market, companies have been able to borrow money, leverage ratios, at even non-energy companies, are off the charts. That’s where he sees very specific misallocation of capital.

Stig Brodersen  05:06

So Jesse, given that you might agree, first of all, do you agree with his perception of the… especially the corporate bond market?

Jesse Felder  05:13

Absolutely, even Richard Fisher, the former head of the Dallas Fed, has come out in recent years and said… You know, he was the only one at the Fed who had any real-world experience with risk management and managing money. Everybody else is an academic at the Fed. He’s been saying for two or three years, look at this growth and *covenant light lending, this is going to be a problem. You know, in the past when we’ve seen this, to any degree, it’s ended in tears. That’s his quote, we’ve seen it now.10x times.

Stig Brodersen  05:40

How would you play specifically?

Jesse Felder  05:42

I’m just going to defer to Druckenmiller here. He entered his presentation at some conferences by saying get out of the stock market. I think that’s the easiest way to play it is reduce your risk, you reduce your allocation to risk assets. I mean, trying to go short junk bonds and these types of things is pretty complex trade. I doubt that even Druck is doing that. I know there’s some smart money that’s going to be looking for opportunities in distressed debt over the next year or two from the long side, once this stuff starts to blow… But I also thought it was very interesting last week that the Chief Investment Officer at Oaktree, Howard Marks’ firm, they think we’re just now seeing defaults, the default cycle start to take off, and that they’re going to be looking for opportunities in the next year or two.

So I think it’s tough to take advantage of the problems that are going to rise in credit. But I think problems and distressed credit are opportunities there from the long side will start to pop up over the next year or two, and just reducing your allocation to risk assets right now, it’s probably the best way to take advantage of.

Preston Pysh  06:44

So Stig has this big smirk on his face because he’s looking at me and he knows what I’m thinking as you were saying that because back in December, I disclosed to the audience that I was going to invest in a short on high yield debt. So I don’t do shorts. That’s not my thing. But it was something that I wanted to talk about on the show and just kind of document. I was not recommending it to the audience at all. But that’s why Stig was laughing and that’s why we were kind of smiling each other as you were talking about how it might be a good thing to turn on these high yield plays.

You know this is my vantage point. I try to look think of things and like a simplistic standpoint. If there were a bunch of kids living in a neighborhood, and I as a parent wanted to give some kids some money in order to start a lemonade stand. And I just give them you know, 100 bucks or whatever. And they asked me, “Okay, what interest rate do we got to pay you the money back?” And I say, “Nothing. It’s zero percent just pay me back whenever you get a chance.” And then I have the other neighbor kids, and they come over and are like, “Hey, we saw Johnny and Sarah started their lemonade stand. Can you give us 100 bucks too?” And I say, “Yeah, sure. Here are 100 bucks.” And they asked me what the interest rate is. And I say there’s no interest rate. Just pay me back whenever you can. And pretty soon you got the entire neighborhood of kids all selling lemonade. What happens? The price gets crushed. You can walk down the street and you can buy lemonade for like a penny because you got every kid in the whole neighborhood competing.

When I look at the oil sector, that’s how I see this. So whenever people are saying that the price is going to go up in the short term here, like in the next couple months, I’ve just kind of like raised my eyebrows like, “Really, is that what you think because you’re starting to see these defaults in the oil sector start to pick up and it’s almost looking like it’s going exponential?” It’ll be interesting to see what happens next quarter, but you’re starting to see these things finally start to default and I don’t see that the price is going to come back to a $50 or through $70 price range long term and reach some type of stability until you see that deleveraging if you will or meltdown in this sector. Would you agree with that, Jesse? Do you think I’m getting crazy land or do you like my logic?

Jesse Felder  08:55

I definitely agree with you. I think it’s an interesting situation right now. So a lot of the energy companies were able to borrow some, with the kind of rebound that we’ve seen in high yield credit but that’s the problem right now with the economy with the low-interest rates. We’ve prevented a normal cycle of clearing out the deadwood, so to speak, and allowing companies to go bankrupt and with the low-interest rate to prevent that from happening. So we have a lot of zombie companies in the economy right now that are just kind of on life support, but they’re still ticking.

So I tend to agree with you I think, you know, where the opportunity and credit might be honestly is in investment-grade, companies that are investment grade today but will be downgraded because their profit margins are inflated right now. That’s another part of this problem in the markets is profit margins are extremely high and a lot of these leverage ratios are built on record-high-profit margins. So profit margins just start to revert to historical standards, all of a sudden, these companies become incredibly over-leveraged. They start losing investment-grade ratings, etc.

Preston Pysh  10:09

I totally agree with what you’re saying and it’s something that you go back to right around the start of 2015. Right after they turned off the quantitative easing, they said, “Hey, we’re done with this.” Right about that point in time is when you saw those profit margins kind of peak out. And I might be wrong with this number, but I think it was around like 10-11% or something is where they peaked out. Now, they’re pulling back to what 8% or 7% already? Within the last year, you’re seeing those start to contract. For me, that’s a major, major issue because you’re exactly right. They’re issuing their credit rating off of these multiples of their earnings. As these margins decrease, it’s just going to continue to get worse for these companies from a big picture standpoint. That’s a great highlight.

Stig Brodersen  10:53

I know that your investment philosophy is firmly grounded in fundamental value investing. However, I also know that you combine that with technicals analysis and macroeconomic analysis to improve your performance results. Could you please explain your process, Jesse?

Jesse Felder  11:07

I think I consider myself a jack of all trades. I try and utilize a variety of different methodologies. I definitely started out idolizing Buffett and reading everything about him that I could get my hands on and go through all the Berkshire Hathaway letters. And that’s actually, I think, a wonderful education in itself.

So I started trying to incorporate and learn some technical analysis and really, for me, it’s all about momentum. I want to see do we have strong momentum, are we in the middle of the trend or, or is momentum waning suggesting a trend reversal? What I tried to do is find something that fundamentally very attractive, sentiment-wise is particularly hated usually, so it gets to be cheap.

For me, the sentiment is about supply and demand. So when something’s hated, there’s not a lot of supply left to come on the market because pretty much everybody who’s wanted to sell it has sold it. But there’s a lot of potential demand if that situation story about the stock or what have you changes. So as many as cheap that’s hated, has a lot of potential demand and then signs of a shift in momentum.

Preston Pysh  12:11

So I’m curious, do you have any things that you’ve written or something that we could link to in the show notes for those last few points that you said about the wave analysis and things like that? That’s something I’d like to kind of dig into and just read a little bit more on. Is there something that you’ve written for that?

Jesse Felder  12:25

Yeah, I can give you a link. Actually, the best example of it was in March of 2009. I showed some DeMark exhaustion on the S&P 500 on multiple timeframes. So we had daily selling exhaustion, weekly and monthly selling exhaustion, suggesting that the bear market was just running out of steam. We had also hit an important Elliott Wave support level. That’s something I wrote seven years ago. It is just a really simple example of how those things work.

Preston Pysh  12:57

So not to put you on the spot but now here we are on the 8th of May. Are you seeing any of those indicators in today’s market or anything that people need to be aware of similarities or anything?

Jesse Felder  13:06

Yeah, I think we’re seeing… That’s a great question. I think we’re seeing just the opposite of what we saw March of 2009. We’re seeing buying exhaustion on multiple levels. I think back in May of last year, we came within like a quarter of a percent of hitting a very important Fibonacci extension target, the 61.8% extension above those 2007 highs. At the same time, we got some longer-term exhaustion indicators. And then with this most recent rally out of the February lows, the Russell 2008 and 9-13-9 DeMark sequential sell signal, the S&P 500 hit a 13. I think the NASDAQ is the only one we didn’t see a sell signal on. But you know, seeing it also on some of in the oil patch. So those are the things I look at when you see a bunch of those signals on multiple timeframes. That confirms what Stan Druckenmiller is saying get out of the stock market. He’s saying it from a macro fundamental perspective, but the technicals are the same thing.

Preston Pysh  14:07

I’ll tell you what… Stig, have we ever had a person on the show that could talk so much value on one side and so much technical analysis on the other? I’m kind of impressed to be quite honest with you. I don’t think I’ve ever talked to an investor that knew both sides so well. I love it.

Stig Brodersen  14:22

Yeah, Preston, the thing is because most people see those two as opposites, right? Either you’re a value investor, or you’re a technical analyst. And it’s interesting just to hear from you how you merge those two strategies.

Jesse Felder  14:35

I mean, l like I said, I’m a jack of all trades. The other half of that is master of none, right? So, I am definitely not as well-versed in any of these things, as you know, a DeMark guy. But that said, I think the value and it’s you know, Charlie Munger worldly wisdom is kind of where I come from is the more you can understand about a variety of different things, the better holistic understanding or appreciation you have of what’s going on.

Preston Pysh  15:00

I totally agree with you. I love that you brought Charlie’s point of view up there because I totally agree. I try to get inspired by physics and all sorts of different things when you’re kind of thinking about how markets work. I totally agree with you guys.

And just to take your downplay and your modesty out of your comment. I want to remind our audience that Jesse, a multi-billion dollar fund, he does know what he’s talking about. So even though he downplays this, and he’ll continue to downplay it, don’t believe it for a second. He knows what he’s talking about.

All right, so Jesse, I’m going to go to the next question before you can comment. There’s a lot of people saying that the next crash is going to be of central banks and governments not being able to control the magnitude of the credit contraction. So what are your thoughts on this idea that as we look at countries like China and Japan, my understanding is that shadow banking in China is like completely unprecedented? Then you have people like George Soros out at the Davos convention saying that he’s watching a crash right now over in China. So these guys are saying these things but what do you say about this? Do you think that it’s going to be a crash of governments at this point because we had Jim Rickards on the show, just a couple weeks ago, and that’s what he was saying?

Jesse Felder  16:14

Yeah, I think it’s very, very difficult to understand how this is all going to play out. Obviously, there is a problem with central banks, and it seems like it’s gotten completely out of control at this point. I don’t know how it ends. But I do think, you know, my friend Peter Atwater has done some fascinating writing and research about this that, you know, we’ve had the housing bubble, we had dot-com bubble before that. What is the center of this bubble?

I think, he proposed this is the central bank bubble. He backs it up with some interesting data, just from the New York Times. They have a part on their site where they will show you how many times a phrase or a word comes up in their articles, and he was looking at just the term central bank and it just exploded during QE Three. The rate of that popping up in articles and during the taper.

Prior to that, it was like no discussion or that term never came up in the New York Times. And so we look at the stock market is… Stock market valuations are extreme. Real estate has come back. Bonds are extreme in terms of the interest rates and the level of bond prices. But it’s not even just that it’s the startup market. Peter Teal was talking about this. It’s not just the unicorns and the startup market that’s incredibly expensive. It’s every… and so what do we call this? We call it the “everything bubble,” or I saw another, I think it was either an op-ed in the Wall Street Journal or New York Times within the last year. And they said when you put together a composite of stocks, bonds, real estate, and collectibles, never before have valuations across multiple asset classes has been this high. So it is the “everything bubble,” but I think where does it come from? It’s the central bank bubble, as Peter Atwater says.

Preston Pysh  17:59

It’s interesting because when you think about capitalism, in general, part of the process of capitalism is you have to let companies fail. If you never let them fail, you don’t get this reset and this survival of the fittest, if you will. So when we look at what’s happened since the central bank was formed, I think 1913 until now, you had that going on during the Great Depression in the 30s. But as time progressed, the central bank kind of became this mechanism, if you will, for letting some deleveraging occur, but just making sure that a little bit happened, and then we were back on our way.

I think whenever you let this compound for decades, you kind of get in a position where you allow growth to occur in specific industries, where businesses start to get so big, that now they’re in a position that they’ve grown so much that if one of them fails, that has this cataclysmic effect that ripples through the entire system. Now, you get to a point where you can’t allow one of the fundamental ingredients of capitalism to occur, which is you have to let companies fail, or else the reset button doesn’t occur and it creates this growth. It’s almost like a forest fire that has to burn in order for the growth to occur again. If you don’t let that happen, then how in the world are we ever going to get out of this, if you’re in a position where everything’s just too big to fail?

Jesse Felder  19:21

I love the metaphor that you use about forest fires. The central bank and the Fed especially I think it appears as if they believe they can do away with the normal business cycle which is I don’t think that’s debatable. I think that’s ridiculous. But the Fed is trying to prevent every little forest fire from happening and they tried this in Yellowstone before they learned that you have to have controlled burns, at the very least, or allow certain areas to burn. Trying to prevent every single little forest fire allows all of the undergrowth and things…

It’s a perfect analogy, the misallocation of capital to just explode until you get to the point where it’s just a massive tinderbox. Yellowstone subsequently suffered a massively devastating fire, one of the worst fires in the history of our country. And so, I think that who knows what’s going to happen with the central bank issue? But eventually, you know, there’s going to need to be a forest fire that comes in and clears all that overgrowth.

Stig Brodersen  20:27

Jesse, amazing answer. I’m really, fascinated by what you’re saying about the forest fire. I would assume that we can only guess what will happen. I would like to circle back to Preston’s original question about China and Japan because I pulled up some numbers where I’m comparing the gross government debt to GDP.

So for instance, China has a debt of $5.4 trillion, as compared to GDP of $8 [trillion.] Japan, that’s $9 trillion and the economy even is just half the size of China. So we were looking at ratios like Japan is more than two, the US is just above one. To me, that’s very disturbing, Jesse. But I would also assume that you would agree that there’s more to this discussion of debt that we’ll only be looking at the gross government debt ratio to GDP. So which ratio would you be looking at to evaluate the debt situation?

Jesse Felder  21:14

Yeah, I think an interesting way to look at that, and I don’t know if maybe it was George Soros that brought this up, as you look at the explosive credit growth in China right now. I mean, the economy is slowing and credit growth is still exploding. I think that is the sign and because debt can keep growing and who knows what the limit is, you need a catalyst or problem to arise. I think it was Soros who showed that the new credit growth that’s happening in China is not being accompanied by economic growth.

So essentially, all this new debt is not boosting the economy. That’s where the end game starts to come into the picture is that if the economy is not responding to more debt, okay? Then the economy’s saying okay, we’ve had enough it’s time for this cleansing process to happen. I think we’re seeing the same thing in Japan. The Bank of Japan is buying up an incredible amount of the equity market, their government debt, and they’re still in recession.

So at some point, the governments,  the central banks are going to have to realize that no matter what they do, they’re not boosting the economy. They’re not creating consumption. And they’re going to just have to let it play out. I think we’re close to that point right now.

Preston Pysh  22:26

The thing that I’m calling it over in Japan, Jesse, and feel free to use this if you like it, I say that the Bank of Japan is nationalizing all assets. I mean, effectively, that’s what they’re doing. They’re buying everything back.

Jesse Felder  22:40

Well, what happens when you own 100% of the stocks and bonds and that’s the natural limit right there. So and I can’t even imagine what that would look like.

Preston Pysh  22:49

I don’t even know or have an idea to begin to wrap my head around what that looks like, but if I had to guess and I only had one guess. I think it involves the yields on debt just shooting to the moon overnight is how I see that playing out. I could be completely wrong, but that’s how I see it playing out.

I wanted to quickly bring up john Hussman because I love John Hussman. I know you are friends with him. I love reading anything that John Hussman writes. I think he’s extremely talented. I think he’s one of the smartest thinkers out there. And anytime… This is where I struggle with John is, anytime I hand off one of his articles to a friend or family or somebody in the industry saying, “Hey, look what this guy wrote.” They immediately want to throw back in my face that his performance over the last 8 to 10 years hasn’t been so hot. So my comeback, and I’m curious and the reason I’m bringing this up because I want to hear your thoughts because I know you’re a little bit closer with him now…

My thought is that this whole quantitative easing thing just kind of scared the living pulp out of him and he just hasn’t been able to actively start getting back into anything equity-related, because he didn’t trust what was going on. Is that a true statement because that’s what I’m assuming is the case?

Jesse Felder  24:09

Yeah, I’ve talked with John about that process that he went through recently. First of all, when people dismiss something because of the person that came from, usually, you know, there’s two ways I respond to it. One is, that’s just clear genetic bias. You cannot dismiss an argument because of the person making it. You can dismiss an argument based on its own merits, but most people are doing that because they don’t want to take the argument on its merits. They want an easy way to dismiss it because of their confirmation bias, or what have you.

To accuse them of being subject to genetic bias and say, “Hey, don’t judge this because it came from John Hussman. Take the argument on its own merits and if you have something to argue, legitimately, then I’m all ears.” And I have not heard anybody legitimately argue against his valuation case that he’s making right now.

But the challenge that John went through was I think, during the financial crisis, he went back through history and found times where things got much, much more painful economically than they did this time around. I think he felt like, there’s a good possibility that yes, we fall in 50%, that we fall another 50%, easily, kind of like we did after 1929, and again in the late 30s. Those declines were extremely painful. A lot of them had to do with a major shift in the economy.

I think he was looking at the risk of what if I get constructive here in 2009? Like my models are suggesting maybe I should, but the economic situation is changing. So when investors are risk-seeking, he’s not quite as positioned as bearish and he doesn’t position bearishly. He’s either hedged or not hedged, and I think that’s in degrees based on the environment.

Stig Brodersen  26:03

I completely agree with you and I completely agree with John Hussman. I’m a huge fan of his work. And at least, in my opinion, I think that he had the fundamentals in his sight for a long time. And to me, it just proves that what Warren Buffett is saying about how long the market can stay irrational because to me, if you look at the next 10 years, for John, I would assume that he would be being monitored. I definitely trust his research.

Just speaking of John Hussman’s work, Preston and I have been following the New York Stock Exchange margin debt for quite some time, based on his work. And we have noticed the beginning contraction from a very high level. So from a historical perspective, it would indicate that the stock market could expect to enter the bearish territory in the time to come. Would you agree with that statement? And could you explain why you think that the New York Stock Exchange margin debt is of relevance to stock investors?

Jesse Felder  26:56

Yeah, for me margin debt is a sentiment indicator. As I mentioned before, in terms of sentiment, what sentiment tells me is potential supply and demand in the market. When margin debt borrowing is very, very low, people haven’t borrowed very much at all. That’s a sign to me that investors are fearful of the market. They’re fearful of borrowing. And so that’s a sign that *forward returns can be good, and that’s borne out by the data.

But conversely, when margin debt is very, very high, there’s been a lot of borrowing to buy stocks, that tells me investors are euphoric. That’s probably time to be more fearful because that margin debt, that massive… That has to be paid back. Usually, the way it gets paid back is by liquidation and usually by forced liquidation. So there’s a lot of potential… That tells me there’s not a lot of potential demand because there’s not much borrowing that can be done but there’s a lot of potential supply, I those investors are forced to liquidate to pay back their brokers.

So I like to look at margin debt relative to GDP, to tell me how much borrowing is there, financial speculation relative to the overall size of the economy because that way it kind of overtime is relative. And that number, some people look at two and a half year returns, I look at three-year returns. You can just see that when margin debts are very low, returns are very good over the next three years. The margin debt is very high relative to GDP as it is now it actually, I think, last year hit an all-time high in margin debt to GDP *forward of three returns have been very, very poor.

Preston Pysh  28:35

So Stig, let’s throw up a chart of this what we’re talking about on our show notes so people can literally see the graph that we’re talking about how people are borrowing a bunch of money on the New York Stock Exchange in order to buy equities and stocks. Then when you see that contract, you kind of see how the market kind of flows within.

So Jesse, moving on to the next question. So we are big, huge, enormous Warren Buffett fans. kind of got our start, just like you, by studying Warren Buffett. We went through all of his shareholder letters. And we were at the meeting, at the Berkshire meeting, just last weekend. I’m curious, were you at the meeting this weekend? Maybe we crossed paths?

Jesse Felder  29:12

No, I haven’t. I haven’t yet been to a meeting. I’ve been trying to get to him, but I haven’t made it out there.

Preston Pysh  29:17

So you are going with us next year. That is happening. You have to come out with this. We will give you the details. We will make sure that you can go if you still want to go next year.

Jesse Felder  29:28


Preston Pysh  29:29

Just so you know, we do a pub crawl as a community. We had about 100 people from our podcast that came out this last year and we all went on a pub crawl through the old market in Omaha and we had a blast. Let me tell you we had a blast.

Jesse Felder  29:41

Sounds like a great way to do it.

Preston Pysh  29:44

Everyone else is attending like all these high sophisticated meetings. Were out there with like t-shirts on doing a pub crawl. So that’s how we roll.

So anyway, back to the question here. So Warren Buffett was asked this question during the meeting where everyone was bringing up negative interest rates. The question had to come up how many times, Stig, four or five times something like that? And the question is, where are they going with this? I know this question is insanely hard. I know that if somebody asked me, I’d say, “I have no idea. I don’t know what to say.” But I’m going to ask you anyway because it’s such an interesting question of where is this going to go in the next 5 to 10 years?

Jesse Felder  30:27

Yeah, it is a great question. It’s a question that’s on everyone’s minds right now because it’s something we’ve never seen before. So it’s hard to model or even guess about what’s going on.

You know, I think that it’s pretty obvious right now that negative interest rates are deflationary in the short term, but so when banks are trying to charge negative interest rates, all that encourages people to do is take the cash out and stick it under the mattress. That’s not inflationary. That is a deflationary phenomenon. I can’t imagine a better honestly a more bullish fundamental backdrop for gold. I think that’s why I’ve seen gold soar this year.

But so I think in the short term, here’s where it gets interesting… I think they’re starting to see that and unless they’ve outright banned cash, they’re going to have this problem of people just taking their money out and sticking it under the mattress, and that’s slowing the economy. We haven’t seen an outright ban on cash. But I think if the central banks realized, “Okay, negative interest rates aren’t working,” and they have to backtrack, that’s where we could start to see a dislocation in the markets, where the markets start going okay, they have lost their ability to do what they’ve done for the last 20, 30, 40, 50 years. They’ve run out of ammo and that could be a frightening thing for the markets. That’s pretty much as far forward as I can think about it.

Preston Pysh  31:58

Well, so this is where… and I completely agree with everything you just said. And Stig and I see it the exact same way. But the next step to that is okay, so now we have the downturn, we see the credit contracting, and we see this forced selling occur. What do the central banks have at this point, but more QE and more bond-buying in Japan? It’s more at this point now they own the entire equity market. I mean, what tricks do they have left? They can’t… In the last crash, during the 2008 crash, I think the 10 year Treasury was like, what 5%-6%? And so we had this massive interest rate movement where we went from 5% or 6% down to nothing.

Jesse Felder  32:39

For years and years and years, central banks could lower interest rates and narrow corporate spreads, encourage borrowing. We’ve gotten to the point where at a government level, at a corporate level, at a consumer level, we’ve borrowed as much as we can borrow. And so that game is over. The central banks have lost their power to stimulate more debt growth. That’s a huge deal and I’m just repeating what Ray Dalio said a little over a year ago.

Stig Brodersen  33:05

So, Jesse, I’m curious about your response to this question because Preston and I went out to Omaha and I know at least I got a lot of questions from college students about how they should look at a career in finance and asset management. And I don’t know if I’m the right person to ask. I spent a few years as a commodities trader, I didn’t like it. I went into academia, which no one in college would ever dream of, at least, not at that point in time.

But your career advice is probably more interesting to hear than mine because you were at Bear Stearns for a few years upon graduation as an Assistant Portfolio Manager, and you later started three hedge funds, which had capital in the billions, by the way, and you finally transition into managing a small base of exclusive clients. So could you please explain to us about the pros and the cons of each of the three positions you have held?

Jesse Felder  33:56

That’s a great question. I get asked it a fair amount as well. And for me, my experience that at Bear Stearns was great, you know, getting in with. At the time, Bear was doing more business on the New York Stock Exchange than any other firm. But there were, in terms of the pros and cons, yes, I found a guy there who was a brilliant investor but we were constrained in what we could do. We had a hedge fund within there and I had to go find this guy at the firm because the first couple guys that worked for were just salespeople and didn’t really… I want to learn how to make money in the markets and they knew how to make money for themselves, but not how to make money in the markets. And so I found another guy to go work for, but we were constrained by the firm.

Also, I was turned off by the difference between the firm holding itself out to the public, you know, “Hey, give us your money. We’ll help you make money.” And really, in fact, what the whole MO was we’re trying to make money for the firm. And so, ethically I felt that wasn’t right. And so, we moved to the hedge funds, part of it was able to do things our way. So we started our own firm. We only started with about 100 million dollars and grew it to $10-12 billion. And I left in the middle of that process, I was there for the whole growth of that firm.


But with the hedge funds, it was… The challenge there is, yes, you’re managing money and you’re reporting quarterly performance, but your job is to generate good long term returns. And so balancing the quarterly reporting with doing the right thing for the long term is a big challenge there is that you know, Wall Street is a, “What have you done for me lately business, what have you done this quarter last quarter, doesn’t matter what you did last year, the year before.”

And so doing the right thing over the long term. Then, working with individuals is different again, in that as an advisor, your main job is to just hold their hand. And so you’re more a therapist than anything and the research and stuff to do a good job as an advisor, you have to make that your number one thing.

So, I know Warren Buffett’s advice to young people a lot of times is just… Mine would be a little bit different than him. I think he says, “Work with people that you like to work with.” I mean, it doesn’t make sense to, you know… I worked with people for a long time whom I didn’t enjoy working with, although I did learn a lot. It was mostly miserable. So I would say, I tell people, if there’s somebody in this business, who you really, admire, this was kind of my tactic when I was young: just go find that person and tell them you will do anything in your power to make them more successful to just have the opportunity to work with that person.

Stig Brodersen  36:50

Yeah, and I have a follow-up question to the response. And you might already have answered some of that, but I feel like the message needs to communicate with the young person whenever that person asked me. So what should I do is that you should always, always, always make sure that your integrity is intact because I remember from my own personal experience, I was almost consumed by the financial industry. I felt like I couldn’t recognize myself at some point in time and reading your blog post and listening to your response, it would seem like you might have a similar experience. So my follow up question would be how do you make sure that your integrity is intact when you pursue a career in the financial industry?

Preston Pysh  37:29

I love that Stig.

Jesse Felder  37:31

It’s a wonderful question because I don’t have a lot of familiarity with a lot of other industries. But I know that your integrity can be readily and regularly questioned in our finance industry. It’s part of the reason why I write so much and try and help individual investors. I feel like I almost have to pay penance for an industry that does so much harm. But I think that’s just you know, you go with your gut when somebody asks… That’s why I quit, why we left Bear Stearns. I’m also why I quit the hedge fund firm and quit in March of 2000. I felt like we had an obligation to our investors, we had a very fundamental value approach. And my partner at the fund wanted to start putting money into high fliers, the dot-com stuff. And I said, “Hey, look, this is totally against our mandate. And it’s against everything, we used to raise this money, and these people are trusting us to do it a certain way.”

You have to follow your own inner compass at the end of the day. You have to be able to sleep at night and. I think it’s crucial for me to I’ve been in this business long enough that I’ve seen the guys that do push the envelope, end up getting into trouble. The only way to last in this business long term is to do the right thing.

Preston Pysh  38:46

Man, you couldn’t have said that any better. If there’s a note to take of any of our episodes, that’s the note.

So, Jesse, I love how you brought up the timing of what you were just talking about because, in 2000, everyone knows that was the peak of the internet bubble. So you obviously knew something back then as far as this is not a place we want to be, because of the valuations, because of the extreme amount of risk.

Before we started recording, you were talking about how you had been blogging about real estate and how there was a real estate bubble back in 2005-2006. So then again, you were front running this, you saw it coming, you knew what was happening. People have heard your comments today and so that leads me to the last question that I have, which is, when you look at the global landscape, and even here just domestically in the United States…

Jesse Felder  39:37

I think that for the global economy, and for the credit markets and the banks, so much of it will revolve around what happens in China. Will they devalue the currency to a large degree? I think they probably will be forced to eventually and then I think the Bank of Japan might be number two. I think they’re kind of the cart in the coal mine for central banks. They are leading the way in terms of getting creative in buying up stocks, buying up bonds, negative interest rates. I think we’re seeing with the currency market kind of rebelling against the Bank of Japan recently. I think they’re kind of leading the way and showing us what’s happening with the central bank bubble. And then number three, I think I mentioned it earlier, you know, Stan Druckenmiller talking about what’s happened in our corporate credit market here in the US. It’s a global credit phenomenon. But I think with the oil patch, potentially, just in the early innings of a credit bust right now, and it’s showing signs of expanding far outside of just the energy sector.

Stig Brodersen  40:46

Jesse, this might just be a bad joke, but if Preston ever calls in sick, I hope I can call you again because it seems like I’m speaking to Preston right now. You’re just as gloomy about the macroeconomics. I love it. I love it.

Jesse Felder  41:00

I love… as I said, John Hussman is a friend of mine. And he recently wrote that in order to think this way, you have to be the ultimate optimist that things… We’re not going to be offered zero percent returns in every asset class forever. There will be opportunities.  I think it’s optimistic to say we’re going to get a great opportunity in the stock market to have good valuation sometime over maybe the next two, three years. We’ll have better I mean… Think if you’re a homebuyer in the United States, and you know, prices are crazy. Aa lot of markets, I can’t afford it as a first-time homebuyer. You have to be optimistic to believe I’m going to get an opportunity to have a better chance to buy than I do today. So I don’t look at it as gloomy. I look at it as, “Hey, I’m an optimist. I’m going to have better opportunities.”

Preston Pysh  41:46

Oh my god, Stig. You nailed it, man, because that would have been the same response I would have said. In fact, I used that same line just in the last couple of weeks I’ve talked to people and they’re like, “Man, you’re I’m going to go back and have a shot of whiskey after talking to you. You’re so gloomy.”

Stig Brodersen  42:03

I’m just curious, Jesse, do you think it was a compliment when I said it’s just like speaking to Pres?

Jesse Felder  42:11

From what I’ve heard him saying in this podcast, absolutely.

Stig Brodersen  42:16

I love it. So my final question, Jesse, as a person that is very accomplished and well-read in micro and macroeconomics, what would be the top two books that you would recommend to our audience that covers these two fields of study?

Jesse Felder  42:29

I don’t know if I can limit it to two but I’ll try. First, one of the books I recommend most to people who are trying to figure out investing in the markets is Market Wizards. I love the whole series, but the first Market Wizards gives you such a great perspective of a variety of different methods, from just quantitative, computer-driven stuff, that people were doing back 20 years ago, to macro traders to fundamental to just technical trend traders. So I love Market Wizards.

And then just how to think about the markets, I love Howard Marks’ “The Most Important Thing.” I think he has a wonderful way of thinking about markets. And it’s more from a fundamental, but it’s perspective, but it’s incorporating sentiment and these things, and it’s just a compilation of his memos. And you know, Warren Buffett is a huge fan of Marks’ work and so it’s hard to find a better endorsement than that.

Preston Pysh  43:26

The thing I like about Howard Marks that I think a lot of value investors miss is Howard is like one of the first value investors who started talking about the “where you’re at in the credit cycle,” and that there are better times to kind of be in stocks and equities versus bonds and kind of, I think he does a good job of talking about that, where a lot of value investors missed the mark and are saying, “Hey, just ignore all macro, just ignore it completely. And just look at the value.” Where Marks doesn’t necessarily say that. I think that that’s a breath of fresh air and I think a lot of value investors need to take a closer look at his work as well.

We have an executive summary on his book if people want to kind of, we’ll put it in the show notes so people can kind of quickly skim through it if they want to see if they want to read the whole thing or not. But yeah, we agree with you. We like that book as well.

Jesse Felder  44:14

Can I make two more, quick?

Preston Pysh  44:16

Absolutely. Yes, sir.

Jesse Felder  44:17

So for fundamental people who are interested in value investing, I love Toby Carlisle’s “Deep Value.” “Deep Value” was a wonderful read. He sent me a copy before it was published and I thought this is fantastic. It goes against what a lot of people believe in terms of what works in value investing. And he has just as wonderful research in there.

And then for traders, people who are just pure traders and don’t care too much about fundamentals. What is it? The Jesse Livermore book that Paul Tudor Jones hands to every employee that comes to work for him? The fictionalized biography of Jesse Livermore is just wonderful, and there are so many little nuggets of trading wisdom in there.

Preston Pysh  44:58

So Jesse, if you do come to the Berkshire meeting with us next year, Toby has already told me, Toby Carlisle, has already told me that he is coming. He is going to be there. And he’s going to be on the pub crawl with us. So there’s another reason to maybe come out.

Jesse Felder  45:14

Cool. That sounds like a great time and I’ll definitely have to see if I can make it work because that sounds like the best way to do it.

Preston Pysh  45:22

Yes, sir. It is. It is not taking anything too seriously. And just going out there and having a good time with the people from the audience and other value investors and really, it’s a great networking event because by the second or third bar, I mean, you’re like best friends with everybody.

Jesse Felder  45:40

Kind of sounds like my kind of trip.

Preston Pysh  45:43

All right, so Jesse, we like to give you this opportunity to give people a handoff to your site where they can read this amazing content that you have out there. Feel free to tell the audience where they can learn more about you and anything that you’ve written, or anything that you just want to highlight to our audience. Go ahead.

Jesse Felder  46:00

Yeah, you know, at the FelderReport.com. I write about these things that have been talking about and I keep them updated on a regular basis. Every time margin debt comes out, I write a post about the updated margin debt numbers every quarter. You know, when the Fed releases their data on the PE ratio and market cap to GDP, I update all that kind of stuff so that’s where people ask me, “Hey Jesse, where can I find these updated numbers and its updated research?” I blog about it every time it’s new. So FelderReport.com.

Preston Pysh  46:29

Fantastic. So Jesse, thank you so much for coming on the show. I know our audience is going to get a kick out of this, specially Stig’s comment.

Stig Brodersen  46:41

It was a compliment. I just want to say that it was a compliment.

Preston Pysh  46:44

I don’t know about that. But seriously, thank you so much, Jesse. I hope a lot of the people from the audience start coming into your site and looking through it because there’s so much value for them to be had reading some of the posts that you have there. So thank you for taking the time.

Jesse Felder  46:57

Yeah, thanks for having me. This was my pleasure. Had a great time and thanks for inviting me on.

Preston Pysh  47:02

All right. We’ll see you guys next week.

Outro  47:05

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest’s appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of The Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.


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