25 August 2018

On today’s show, we bring back our good friend, Jesse Felder. Jesse is a former multi-billion dollar hedge fund manager out of Santa Monica California. Jesse is regularly featured on the Wall Street Journal, Barron’s, and many other national level business outlets. We start off the discussion talking about gold and what lies ahead. As the show progresses we talk about the tariffs and the impact on the US Dollar. We talk Fang, we talk Elon Musk, and much more.

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  • Why the price of gold has dropped recently and why now might be the time to take a position.
  • Why a long time horizon is not a guarantee for good results in the stock market.
  • How macro is important but never should be the reason not to take a stock pick.
  • How to find investing opportunities in owner-operated companies that are systematically ignored by the indexes.


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.

Preston Pysh  0:02  

On today’s show, we are bringing back our good friend Jesse Felder. Jesse is a former multibillion-dollar hedge fund manager. He is also regularly featured on Wall Street Journal, Barron’s, and many other national level business outlets. 

For anyone who has listened to our show in the past, they will quickly attest to Jesse’s incredible insights and depth of knowledge. Any time we can get access to Jesse and have a chat with him, Stig and I are always just so excited. 

Today, we’re going to start off the discussion talking about gold and what might lie ahead, as the show progresses. We will also talk a little bit more about the trade tariffs and what that might mean for the dollar. We will also discuss FAANG and Elon Musk. There is a whole range of topics here so just sit back, relax, and enjoy our latest discussion with the brilliant Jesse Felder.

Intro  0:52  

You are listening to The Investor’s Podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh  1:11  

All right, we are so excited to have our good friend Jesse Felder back on the show. He runs an incredible blog called the Felder Report. We will put links to that in our show notes. 

Jesse, welcome back to the show. Stig and I are just thrilled to have you here.

Jesse Felder  1:28  

I’m excited to be here again. Always a pleasure to be with you guys.

Preston Pysh  1:31  

Jesse, I want to start off with a conversation that you and I had three or four months ago. I was looking at gold at that point in time and I felt we were getting ready to see it break through a barrier that it had been experiencing for almost three years now. 

You shared the sentiment with me then. You thought it was going to have this breakout move. Now, we’re only looking at the last four months but since those four months, we have been dead wrong. 

I’m kind of curious how you’re seeing things and why we are seeing gold take the direction that it has taken because I’m sure people listening to this are curious themselves.

Jesse Felder  2:14  

You are absolutely right. It was not a great call to people who have liked gold. However, I have been bullish on gold since late 2015. It was in mid-2015 when it went to its ultimate low. 

I have a longer-term timeframe. Looking at this thing, it’s been really interesting to me because the fundamental backdrop for gold is bullish and it has only gotten more bullish. 

By that, I mean you should look at the widening fiscal deficit. It is usually bearish for the dollar and bullish for gold over the long term. 

However, more specifically, I think a shorter-term indicator is inflation. [Inflation] has been rising and yields have not. [Therefore,] real yields have actually been falling which is usually bullish for gold. There are then a couple of divergences right now that I’m paying close attention to in gold.

One of those is real yields that are falling but which is usually bullish. Tips have been rallying for that reason and usually golden tips are highly correlated. That correlation has now broken down. 

What’s going on is gold has stopped paying attention to these things that it normally pays attention to. It’s been just following the Chinese yuan and the yuan has been in freefall lately versus the dollar. The gold price has been going one-for-one with the yuan lately. 

We can speculate on why that is. I really don’t have much of an idea and I don’t like to jump to those kinds of conclusions. However, we see gold because it doesn’t have any kind of a traditional fundamental foundation that it goes back and forth. Maybe you have been following the Japanese yen or what have you. It’s really narrative-driven. 

Right now, the narrative is the yuan is falling and taking gold with it.

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Preston Pysh  4:10  

When the price dropped around 5%, from when we were talking about it, I took a position in it, but only to find that it went down another 3% or 4%.

I said, “You know what? I’m just going to take this little bit of a loss and I’m just going to wait until I feel we’re starting to see a correction. Then I’m going to reinitiate the position.” 

I agree with you. It was pretty painful to experience and I think what’s even more painful was my pride, considering I talked about it on the last Mastermind. Then it has just done terrible. 

I definitely plan on trying to reinitiate the position. I don’t think that we are there right now. Just for people hearing this, this is the 13th of August, but I feel we’re getting close because you had mentioned that it trades within a certain range. We’ve seen a very dramatic move on it. 

Let me caveat this though, I am no expert in gold trading, but I’m trying to learn a little bit more about it because I definitely think that there are going to be some interesting things with currencies. I’m assuming you share that opinion with respect to currencies moving forward. Is that true?

Jesse Felder  5:19  

Yes, I do think that we’re supposed to have more than a trillion-dollar fiscal deficit next year and that’s going to yank the dollar down. That’s just typically how that works over long periods of time. 

However, back to the gold price, you look at futures positioning. There are two things that I have been looking at lately and that’s futures positioning. We have a record in no-net-short position by large speculators. The managed money positions [and] the lowest-net longer are basically zeroed out than it has ever been. 

Positioning then is ripe for a massive short squeeze in gold. If gold were to play catch up to where the real yield is on the long bond, it’s 20-30% higher than the current price today. [Therefore], we are still looking forward to that explosive rally and that breakout above 13 to 50. Sometimes you have to wash out the week-longs first. I think that is what is going on.

Stig Brodersen  6:22  

Jesse, what would be your catalyst or the point in time where you’re thinking, “Yes, I’m not just only bull, but I will also really act on it and act on it now”?

Jesse Felder  6:33  

I look for the extremes in sentiment. I’m a huge fan of Jim Rogers. When I read “Market Wizards” for the first time, it was really his chapter and *inaudible* that made me say, “Wow.”

One of the things he said in that chapter was that he looks for these opportunities that are so compelling that you [have to] take advantage of them. In a way, to do nothing until something becomes so compelling. I think that’s where we are right now with gold positioning. 

The positioning is more extreme than it was in late 2015. To me, that’s the set-up that you need to get an explosive reversal. We’re seeing the exact opposite in the dollar. 

I think, right now, the consensus trade is bullish the dollar and you’re seeing traders get super confident in betting against the yen, the euro, etc. That trade is pretty far-stretched as well.

Preston Pysh  7:26  

It’s funny. I was talking with Jim about gold and I said, “So Jim, when is it that you want to own it? 

He said, “I want to own it when absolutely everybody and I mean, everybody hates it.” 

I said to Jim, “I was expecting like a little bit more analysis to how you’re taking position.” 

Then he laughed and said, “No, there really isn’t. There’s not much more analysis other than I just wait until everybody really hates it, then that’s when I want to buy it.” 

It kind of goes to what you are saying that you are seeing people with unprecedented amounts of shorts on gold at this point. Based on what you’re saying, Jesse, I get the feeling that you’re saying maybe right now is a decent time to start taking a small position and then building into it. 

Would that be a fair assessment?

Jesse Felder  8:12  

Yes, I do think so. It depends on your own trading strategy though. However, for me right now, this sell-off is a gift to people who are longer term bullish on the gold price. If you have a 3 or 5-year timeframe, this sell-off is a gift. 

Though I think for people who want to be a little more conservative, you can pay attention to the technicals. Similar to what you were saying, Preston, of maybe wait for a clear trend change, when the price gets back above the 200-day moving average, or the 50 crosses back above the 200. Something like that. That’s kind of an all clear technical signal to tell you, “Okay, it’s safe to get back in the water again.”

Preston Pysh  8:51  


Well, we’ll see here. Maybe what I’ll do is just slowly start stepping back into the position after talking with you. We’ll see what happens. I’m learning. Let’s just put it that way. I’m definitely learning on this one. It’s been a little bit painful.

Let’s talk about current market conditions here, Jesse. We’ve had the Fed tightening. They are conducting QT. 

The ECB is slowing things down. Japan is slowing things down. I know you’re not a bull in the market and you haven’t been for quite a bit of time now, but the US market just keeps on holding its highs. It keeps on tugging along. 

It looked a little scary there, with the prices coming down below the 200-day moving average, but it bounced right off of. Now, it kind of came back. 

What’s happening? What’s your read on this? I hate being the guy who is continually bearish on the market. With that said, you don’t want to be the guy who becomes a bull whenever the tides are changing, especially with the way that the central banks are acting in today’s market. 

Let’s hear what you got.

Jesse Felder  10:01  

We’re very clearly in a topping process. It’s a famous adage on Wall Street. Bottoms are point in time and tops are a process. The 2009 bottom was a day the market reversed and went straight up almost from that March 2009 bottom. 

You look back at how the market has topped in 2000-2007. It’s a process and I think we’re in that process right now. It’s similar to me when you look back at 2000 when the Dow peaked in December 1999. Then the NASDAQ peaked in March of 2000. Then the NYSC hit its final high in September of 2000. You then had this clear dispersion between the indexes.

We’re seeing that right now where most of the indexes peaked in January. Then the NASDAQ made a new high recently. The Dow and the NYSC composite are still well off their highs. 

You then get these kinds of rolling highs between different indexes during a topping process and that basically is the best representation of the dispersion that’s going on underneath the surface. 

There are other indicators we can look at. One of them that I like to use, and I wrote about late last year on the blog, was the number of Hindenburg Omen that are triggered across both exchange NYC and the NASDAQ. 

The Hindenburg Omen is essentially triggered when the market is within 1-2% of a new high, but you have 2% of the components or some standard that is hitting both new highs. 2% must also be hitting new lows. You have a bunch of stocks hitting new lows as the market is hitting new highs. It’s just a sign of that kind of dispersion. 

The way that I explained this recently was I was a fan of model rockets when I was a kid. If you got into it, you would end up wanting to get not just a one stage rocket. You would want to get three or four-stage rockets.

The thing would then go off and one stage would fall away, [followed by] the next stage that would take over. You’d go higher and then the stages would fall away over time so you’re left with the final capsule, which would fall back to Earth. I think of the market that way. 

We have the beginning of a bull market where we are in the middle of the thrust, or the most momentum. [This is where] all the stocks, or majority of stocks participating, are pushing the index higher. As you move on later in the bull market, fewer and fewer stocks, more stocks fall away and enter their own bear markets. 

Just the number of Hindenburg Omens can mean a signal of the number of the amount of dispersion that is going on in the market. Over the last six months, we saw across both indexes 20 Hindenburg Omens over a period of six months, which is the only time that’s ever happened in decades. It’s right at the 2007 top. 

Back in the 2000 top, we had about 18 Hindenburg Omens that were triggered right around six months around March of 2000. 

People make fun of the syndicator because one Hindenburg Omen doesn’t mean much, and they say, “Oh, my God! Sell because [of] one signal.” 

No. I agree that it is not very valuable but when you get a ton of them across both indexes, that’s a sign that this market is running out of gas. We’ve been seeing that and it’s the type of action you only see before at least 20% type of drawdown.

Preston Pysh  13:30  

I haven’t seen this chart that you’re talking about. Is this on your blog, the Hindenburg Omen chart that you’ve made?

Jesse Felder  13:37  

Yes. I think if you just search for “flames” on my website, [you will see it.] The way I made the chart was I basically turned the Hindenburg Omens to look like flames on the bottom of the chart.

Preston Pysh  13:46  

I will have a link to that in our show notes for people so they can check this out. That’s really fascinating.

Stig Brodersen  13:52  

Jesse, when we look at all key metrics, whether it’s the dead limits, cyclical recovery or any other fundamentals, it seems like you can draw a lot of parallels to the market top in 1937. This has been the narrative of Ray Dalio for some time. Also, following your blog, I’ve seen that you also have been following up on that. 

I know that you look into the price action for the last four years and the correlation for those years leading up to 1937, that is 94%. Now, what is the implication of this? Can you talk to us more about the relationship between causality and correlation? Do we actually see causality here?

Jesse Felder  14:34  

Yes, that’s a good question. You have to be really careful with analogs or price analogs, just comparing the current market pattern to patterns in the past. 

Most of the time a lot of these things are overhyped and sensationalized. For me, they’re more valuable when you have a fundamental correlation as well that mirrors it.

This is then what’s fascinating to me. Ray first put this out in 2015. I think it was like spring of 2015 when the Feds first started hinting about reversing its extreme policies. 

Ray drew the parallel between today and 1937. Basically, you have a huge bubble that bursts and leads to a bust in the markets and a recession. That was 1929 and the stock market had a huge crash. 

Ray made a parallel to the 2007 and 2008 Financial Crisis where interest rates hit zero. Mid-depression, the Fed lowered rates to zero and started money printing in 1933, just like they did in 1929. They basically created a rally that created a wealth effect and a cyclical recovery. 

Then the central bank started tightening, in our case it was 2016 to 2017. In the case of 1937, that resulted in a self-reinforcing downturn. 

This is interesting to me because the Fed has consciously created this wealth effect to try and raise the prices of risk assets. [This is to] make people feel wealthy so that they go spend more. 

When you think about if QE was responsible for creating this market wealth effect, the reversal of this can potentially create a reversal in that wealth effect. 

That’s what Dalio was talking about. With a self-reinforcing downturn where prices go down, people’s mentality becomes, “Wait, now I’m not making as much money in the markets. Maybe I should start saving more.” That creates even more economic pain. 

Ever since 2015, I’ve had this in the back of my mind and referring back to it. One thing that I do is I pull up price analogs using *inaudible* research website, which is fantastic. 

One that came up recently was this 1937 price analog. You look at the market from 2015 to 2018, it’s very highly correlated to that 1934 to 1937 price top. To me, the price action kind of confirms and potentially says, “Yes, Ray, you’re right, but now is finally the time that this could potentially make sense.” 

For those that say price analogs are not worthwhile or not worth anything, another terrific investor that I admire greatly is Paul Tudor Jones. He famously profited from the 1987 stock market crash. How did he do that? 

[Paul Tudor Jones] used the 1929 price analog. Essentially back then, he didn’t use computers to do it like what I’m doing. He basically printed out a chart of the 1927 to 1929 stock market and overlaid over a chart of the 1987 market.

He then found this very high correlation. Not only that, the speculation that was going on in 1929 was very similar to 1987. There is then a fundamental component of that, too. I do think price analogs can be interesting, especially when there’s a fundamental component like this behind it.

Preston Pysh  18:16  

The thing that I took away from the 2015 period of time was we were seeing a lot of the same things that we’re seeing right now back in 2015, through Christmas. 

What happened was the market started contracting in a fairly significant way and central bankers came out and said, “We will print money and we will not stop.”

What’s preventing them from coming out and using a similar language and a similar approach, and basically trying to revive this thing even further than where we are at right now? Do you think that they’re posturing differently than they were back then? Or do you think that they wouldn’t? I guess what’s the difference, between now and then, from preventing them from doing what they did last time?

Jesse Felder  19:02  

I’m glad you asked that because I think a lot of people have that exact mindset, which is as soon as the markets roll over, central banks are going to come to the rescue and start printing money again. Since I started my podcast a year ago, I interviewed a couple different people. 

Two people that were on the polar opposites in terms of career in finance… Bill Fleckenstein, successful short seller and ran money for some of the most successful and wealthy people on the planet. I think highly of him and his ability but he’s naturally skeptical in all these things. 

I also interviewed Bill White, who was the Chief Economist at the Bank for International Settlements. He’s now Chief Economist for the OECD. He’s a brilliant guy. He worked for the Bank of Canada.

When I asked them about this, they both said the same thing at some point. The way Bill [Fleckenstein] phrased it was the bond markets are going to take the printing press away. The way that Bill White phrased it was at some point, inflation is going to rise to a point where the central bank can’t afford to print money anymore.  

I personally think we’re at that point right now where inflation is already… The Fed funds rate is still negative in real terms. Inflation is running hotter and so people think the Fed is tightening. 

Policy is still accommodative because the Fed funds rate is negative. If the Fed then were to actually start fighting inflation and raise interest rates up enough to where they start trying to rein in inflation, they still have a long way to go. 

If the market then rolls over now and inflation continues higher, and a lot of this is what’s going on in the fiscal side, too. We have tax cuts. We have trade wars. We have these things that are exacerbating the already cyclical inflationary forces. There’s also secular inflationary forces that I have been paying attention to for a long time. 

I think that this might be the biggest mistake investors are making right now is the strike price of the Fed put might be a lot lower than people think it is or might actually be expired already.

Stig Brodersen  21:07  

You hear a lot of people talking about this overheated economy. Do you see a lot of those factors right now in the numbers that you’re looking at?

Jesse Felder  21:16  

Yes. I think we’re already seen the cyclical natural cyclical forces of inflation, right? Unemployment is 4%. The job market is extremely tight and we’re seeing prices go up in a lot of different areas, just from those natural cyclical forces. Then you add a massive tax cut during the expansion, which is something we really haven’t seen before, which throws some fiscal heat onto that inflationary fire. 

Now we have these tariffs and stuff that are going to kick in, which is another inflationary force. The central bank can do what it wants to do, so long as the fiscal authorities know the administration and Congress plays along and doesn’t get in their way. 

However, as soon as the fiscal authorities start getting aggressive like they have with tax cuts and the trade war, that puts the Fed in the backseat. It’s then a battle between fiscal and monetary dominance. 

For the first time in 30 plus years, the fiscal authorities are taking over and the monetary authorities are being forced to take a backseat and say, “Okay, we can’t do these policies anymore because now we have to turn our attention to inflation.” 

I think that’s a big risk with the next market sell off that comes during this inflationary surge right now. It’s going to be really tough for the Fed to back off their tightening policy right now.

Preston Pysh  22:43  

These are some amazing insights. That was really interesting stuff that you’re talking about there. I think it leads perfectly into this next question because when I got my start in investing, it was all about looking at the micro pieces and implementing this Warren Buffett style approach. This approach is where you’re looking at an individual company, you’re trying to estimate what those future cash flows will look like, and then comparing it back to a 10-Year Treasury. 

I think for somebody that’s just implementing that approach and completely disregarding the macro factors, could they get themselves in trouble moving forward? Because at the end of the day, these are businesses that we’re looking at. 

Talk to us how you think through that. Are you considering the macro factors? Are they preventing you from going into individual stock picks because of your concern of what could happen from a macro standpoint?

Jesse Felder  23:38  

Yeah, that is a great question. The way I look at it is that I have been the same way. I started out micro and I didn’t even care about macro. 

However, what we’ve been forced to do as investors is to recognize that this is a macro-driven market and when central banks have come in with unprecedented policies like this, if you’re not paying attention to macro risks, then you are putting yourself in danger. 

What I will do in this situation is I will never let macro concerns get in the way of taking advantage of a micro opportunity. If I find a really good micro opportunity, I’m going to commit capital there. 

What I found is whenever I let macro get in the way of my micro, it’s always an error of omission, like Buffett says. [Therefore,] I don’t let that get in the way.

However, macro concerns do inform my overall hedging strategy. Today, based on my macro concerns, I have these micro ideas that I love. At the same time, I want to be fully hedged against macro risks. 

I do think that one mistake that investors are making in this regard is just in terms of thinking… This is really what is going on right now with the markets. We’ve had all of these new strategies coming up like passive investing and all these things that are essentially non-thinking strategies. 

It’s really even affected a lot of value investors who don’t think about their circle of competence anymore. They say, “Do I actually understand this business?”

When it comes down to it, I think people, when they’re analyzing businesses, are not thinking about, “Is this business model sustainable?” 

If Buffett teaches us anything, it’s [that] you can’t put money into something for 10 years and don’t think about it for 10 minutes. The only way you can be confident with that is by being confident that the business model is sustainable. I see a lot of value investors who are investing in companies…

For me, right before Facebook came out with their earnings, I saw value investors pouring into Facebook shares and I just thought to myself, “Have they even considered if this business model is sustainable over the next 5 or 10 years?” Because I do think that it is a hugely open question. That’s one thing I’m thinking about on a micro level when I look at these companies: is the business sustainable? 

Then on a macro level, people aren’t thinking about, “Are profit margins today sustainable?” Because even if you think, “Okay, I’m okay paying 20 to 24 times earnings for the broad stock market,” people don’t realize what’s embedded in that assumption. That earnings are only 24 times, if profit margins can stay at record highs today. You should then think about if profit margins are sustainable.

In 1999 or 2000, Buffett wrote an article saying that you have to be crazy to think profit margins can stay above 6% of GDP-corporate profits for any length of time because that would require the working class literally giving up their slice of the pie so that shareholders and business people can take their slice. 

Therefore, I think what we’re seeing, and as plain as day to me right now, is that there’s a huge push back to wages. Real wages have been flat for 40 plus years. We’re starting to see people in Silicon Valley become interested in forming unions again. I then think you’re starting to see this backlash against this big rise in corporate profits. 

Even if you are an active investor buying the broad stock market and trying to think about these things, you got to think about profit margins, because if profit margins mean revert, it turns out the stock market is not 24 times today. It is 35 times or it is 40 times earnings today. That’s something that I don’t think many people are actually considering.

Stig Brodersen  27:49  

I’m really happy you bring this up because it’s really a nice segue to the next question we are going to ask. This is really my favorite question here for this interview because, as an avid reader of your blog, I love how you coined new financial terms. You have this thing that you call the “buy and hold cult.” 

Could you please tell us what do you mean by that? What is it that the “buy and hold cult” doesn’t want retail investors like us to know?

Jesse Felder  28:18  

That was the choice of words that I meant… I really think that we are in a speculative mania currently and a bubble. One of the ways that George Soros defines a bubble is there’s some narrative that supports the bubble that is patently false. 

1929 and 2000 were very similar because we’re entering a new era where growth was going to be above historical trends and valuations wouldn’t matter. All these brick and mortar companies were dead and eyeballs were all that mattered. 

This idea of a new era was going to save us and was going to make anybody who committed any capital at any price a millionaire. That narrative was proven drastically wrong in the years to follow. 

I think today the narrative that is clearly wrong is that people say, “I can invest passively, because so long as I have a long enough timeframe, I will always be made whole. I don’t care about what the next bear market holds for me. I don’t care if it’s a 50% drawdown. I’ll make my money back.”

That’s what the markets have taught them over the last 20 years, but markets have a habit of teaching you something and then just in time to teach you the opposite lesson. I fear that today there is the narrative that is going to be proven false, and that is people believe that so long as I can hold on for 20 years, they will be made whole. 

If you were to say that to Japanese investors, they would laugh you out of the room. Today, the Nikkei peaked at 1990 and it’s still below its peak price from 1990. I don’t see why that’s not possible here. 

In fact, when you look at the valuation, look at the Buffet yardstick, right? You look at market cap to GDP. Today our market is more expensive on this Buffett yardstick than the Japanese market was in 1990. To me, that’s a real possibility. 

I talked about this “buy and hold cult” because I think there is this mindset of people who think, “As long as I can hold on for 10 or 20 years, I don’t need to worry.”

Preston Pysh  30:41  

When you were saying your narrative on this “buy and hold cult,” I was immediately thinking about what if people go back to Japan and look at the market in 1990, and look what has happened since 1990. You’ll get a taste of what Jesse’s suggesting of what might be in store for us today, if he proves to be correct. 

I really enjoyed that, Jesse. Those are some interesting comments. 

In the previous Mastermind… I can’t remember when we recorded this, but we were talking about FAANG and your concern for FAANG stocks. More recently, you’ve come up with four companies and you call it MCBM that have outperformed. These are boring blue chips that have even outperformed FAANG. Tell us what these companies are and what you’re thinking about this.

Jesse Felder  31:35  

It was just amazing to me that everybody was focused on FAANG last year and rightfully so. I mean, the stocks have done amazingly well, especially Amazon and Netflix.

However, there were four stocks in the Dow that did better from over the two years, 2016 to 2017, than the FAANG stocks. Those were McDonald’s, Caterpillar, Boeing, and 3M. These are just boring blue chips that just soared even faster than the FAANG stocks. 

One of the things I like to do when I look at a company is look at their evaluation history or their valuation today and compare it to the past. This is because you can compare them to their peers and compare them to the market, but you can see a lot of stocks trade in a valuation range over the course of their life. You can see when they’re expensive and when they’re cheap. 

I then looked at these four stocks and I found every single one of them was far more expensive than they’ve ever been in their history, which is saying something because the FAANG stocks only have a short history. Facebook became public in 2012 or something. These MCBM stocks have been around for a long time.

The fact to me that these companies are valued today at the most expensive they’ve ever been in history… Just to put that in perspective, from over the last 20 years, they basically traded in the range of 1.5 to 2.5 times sales. I like to use a price-to-sales measure a lot of times or enterprise-value-to-revenues because it takes out this profit margin component, which is usually pretty cyclical. 

Anyway, they traded 1.5 to 2.5 times in January. They’re trading 4.5 times sales. If 2.5 was expensive in the past, today they’re 4.5… At the same time, their average revenue growth was over this time period. It ranges between 5% and 10%, based on cyclical factors. 

Well, over the last five years, their average revenue growth is negative 1% today. Revenues are going negative. Price to revenues are soaring to new highs. 

To me, this is just a rubber presentative of what happens in a speculative mania. People aren’t paying a higher price-to-sales measure for faster sales growth. They are paying higher valuation for actually a negative, the worst growth in these companies’ history. 

I think it’s just people chasing dividends. The Fed lowers rates to zero for 10 years and people say, “Okay, well, I’m not going to get my interest. I’m not going to generate my income via bonds or savings account. I have to go out the risk curve exactly as the Fed intended me to do and go buy these dividend-focused stocks.” 

If you think inflation is heating up and interest rates are going higher, not only should you be bearish on bonds, you should also be really bearish on these kinds of dividend-focused stocks because they’re probably more interest rate-sensitive than bonds.

Stig Brodersen  34:53  

Is this a question of the excess liquidity, Jesse? Is it because interest rates are hitting rock bottom? Is that what really has explained the soaring stock prices? What is really the answer here?

Jesse Felder  35:06  

Absolutely. I think what’s happening is people are just pouring money into these dividend-focused ETFs. That’s what I looked at. ETF databases are awesome. 

You can see McDonald’s is in the top 10 holdings in 32 ETFs. Even though it’s only the top, it’s not even the top holdings in indexes. People are pouring money in ETFs, but how many of these people who are putting the money in ETF actually realize that these stocks trade at their highest valuations in history? 

They’re not doing the single stock research like we do. They’re just looking at, “Oh this ETF pays this dividend so I’m going to buy this ETF.” However, when you actually look at what’s underlying, it is pretty frightening. I mean, 83 ETFs overweight Boeing, currently. You then put money in almost any equity-focused ETF and you’re going to have a greater than market exposure to Boeing. 

It’s pretty ironic too from the fact that a lot of these investors who are buying ETFs think they’re investing passively, but when you overweight Boeing in an ETF, you’re actually an active investor. You’re actively choosing to overweight a stock that’s the most overvalued in history.

Preston Pysh  36:17  

Let me ask you this, if there was a trade that you are most excited about right now in August 2018, what would that be?

Jesse Felder  36:27  

Oh, man. I know we talked about gold earlier. I really do think that right now is a terrific opportunity in gold just because, for example, Jim Rogers said, “I want to buy it when it’s hated.” 

I’m seeing so much hate out there. It’s not quite as much hate as I saw in the 2015 low, but it’s the closest thing to it that I’ve seen. That’s pretty exciting to me. 

Generally, however, on another note, where I’ve found the most exciting opportunities lately is from adopting a philosophy that is the exact opposite of passive investing. What I think a lot of people don’t realize is that passive is not just market cap-weighted. 

When you go buy SPY, SPY is not market cap-weighted. It’s float-adjusted market cap-weighted. You’re systematically underweighting owner-operated businesses, because when an owner owns a lot of shares, let’s say a CEO owns 30% of the shares outstanding, that reduces the float such that the index has to underweight it.

The example that I use to illustrate this point to people was when Andy Grove owned Intel shares and operated the company from the mid-80s until 2000. The stock price went up like a hundredfold. The index would have systematically been underweighting Intel during that time because he owned so much in 2000. Andy Grove sold every share he had to diversify into other things. Then at that point, the index said, “Okay, great. Now we’re going to market weight this stock.”

Where’s Intel today? It is still below its 2000 price. I then think there’s a huge opportunity today in owner-operated companies that have low float and that are systematically ignored by the indexes.

Preston Pysh  38:19  

Very interesting point. If you had to pick a trade that you think people were about ready to lose their shirt on, what would that be? 

Jesse Felder  38:28  

Number one? What I’ve seen in the last few days or maybe the last week or so is the dollar bulls have been celebrating like no other. To me, it’s amazing because it’s only been a 50% retracement of the dollar decline that we’ve seen over the last 18 months. 

It is not like the dollar is breaking out to new highs or anything, not even close. I really think there’s this bullish dollar narrative, or however people choose to express it. I think that is really misinformed and is destined to be very painful.

Preston Pysh  39:12  

Alright, let’s have a little fun before we wrap things up. I’m going to say a person’s name and I want to hear your response. Elon Musk

Jesse Felder  39:24  

I feel so bad for this guy. I really do think he’s brilliant, but in this day and age of social media, I think it’s probably never been harder to be a genius. I honestly don’t know if he’s a genius, but he’s just on Twitter and he really needs to cut the stuff out and just focus on business. 

It’s almost like kids, right? When you have kids, they all go through different phases of bullying. The kids who just let it roll off like water off a duck’s back don’t get bullied anymore, but it’s the kids… When you can get a rise out of them, the bullies just latch on to that. That’s what is going on with Elon.

The short sellers are getting a rise out of him and he’s feeding into that. Short sellers feed off that too because when somebody… The lady doth protest too much. When you have to start contradicting the short sellers and you say, “Oh no!” It is not a good sign and that is what Elon is doing right now. 

To me, I have not shorted Tesla because it is probably the most crowded trade on the planet. I really do think they’re probably headed for bankruptcy. I don’t think there’s any way out of it, but a guy like Elon has been able to just pull things out of his sleeve. This idea then of taking the company private, who knows? Maybe he can and I don’t want to try and step in front of that.

The other side of it too is I love Howard Marks and the idea of second level thinking. You have to have a non-consensus view to make money in the markets. You have to be right. 

People ask me, “Tesla’s numbers were horrible. How did the stock rally?” 

I tell them, “It’s consensus that the company is going bankrupt. Everybody knows.” 

[Therefore,] every time a number comes out or something happens, where it is not bankruptcy, that’s a positive surprise. The stock will then rally. To me, the consensus is the company is going to go bankrupt. Maybe that’s already being priced in as well as it can be into the markets, so I don’t see that as a non-consensus view.

Stig Brodersen  41:40  

Jessie, thank you so much, not just on behalf of Preston and me, but really on behalf of the entire TIP community for coming on our show again to talk about the current market conditions. We would love to bring you on again, but until then, where can the audience learn more about you?

Jesse Felder  41:57  

Yeah, speaking of Twitter, I do tweet a lot. I pretty much share a lot of stuff that I’m reading and that I find of interest. I don’t express a lot of opinion and stuff on Twitter, just for that reason. Elon is a good example of why you shouldn’t probably do that. I do express opinion on the blog, which is the FelderReport.com. I try and write up one post a week. Something like that. They’re on the site.

Preston Pysh  42:20  

Alright, we’ll have a link to that in our show notes. We’ll also have a link to Jesse’s handle on Twitter, if you guys want to follow him. I highly recommend that you follow him. He posts some incredible charts and some incredible blog articles. 

Jesse Felder, thanks so much for joining us on The Investor’s Podcast.

Jesse Felder  42:36  

Thanks for having me. I love what you guys do. It’s always a pleasure.

Stig Brodersen  42:39  

All right, guys. That was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro  42:46  

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.


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