Preston Pysh  1:10  

Jesse, the first thing I want to talk to you about is the current market conditions. Last time we were on the show, we hadn’t seen the big December meltdown. Well, I don’t know if I would call it a meltdown, but the December pull down of about 20% off of the high that we saw there in the summertime frame, which is a pretty big drop in the equity market to come down 20%. 

I’m just kind of curious how you’re seeing our positioning in the cycle. I think the last time you were on the show, I remember you saying the key phrase topping process. I’m curious how you see it now after that 20% drop.

Jesse Felder  1:43  

What we’ve seen since October and through the fourth quarter was the beginnings of a new bear market. I look at it through the lens of fundamentals, sentiment and technicals. You just start with fundamentals and we’re still very expensive based on any kind of valuable measures you want to look at, whether it’s the Buffett yardstick, CAPE ratio, or Tobin’s Q. 

We’re all kind of still in the 95th percentile in terms of valuation. Therefore, still very expensive sentiment. When I talk about sentiment, I’m talking about longer term sentiment. So, we see these short term swings where we did see some good fear in December, even though the VIX never really picked up like it should have. We did see some a little bit of panic in December which created the buying opportunity and the rally we’ve seen recently.

However, you look at longer term sentiment measures and stocks are still overloved. I mean, you look at the percentage of equities in household financial assets. They are still very high. Things like margin debt are just completely off the charts. That tells me that stocks are still overvalued and overloved.

The difference between now and the last time we talked is stocks are clearly in a downtrend. This is the worst possible environment for investors. A very expensive overloved market in a downtrend is the worst possible environment. Like I said, I think this is the beginning of a new bear market. 

Really what I think people aren’t talking enough about is what you hear people say, “Well, there’s no recession on the horizon. No signs of economic weakness.” I think people are discounting too much what we call reflexivity, which is George Soros who really was the one to popularize this idea. 

[Soros] explained it as reflexivity is in effect a two-way feedback mechanism in which reality helps shape the participant’s thinking and the participant’s thinking helps shape reality in an unending process in which thinking a reality may come to approach each other, but can never become identical. 

You see here somebody like Robert Shiller. Say there’s a lot of talk in the air about recession being overdue as a quote or recession coming. To some extent, this talk itself can be a self-fulfilling prophecy. It wouldn’t surprise me at all if we slipped into recession real soon. 

A guy like Brad DeLong has written about recently that three out of the last four recessions are created by market pullbacks and by financial assets going down affecting people’s confidence in the economy and changing their behaviors. Those become self-fulfilling prophecies. 

I think what people don’t appreciate enough is that the markets can create a recession on their own. It doesn’t have to necessarily come from the fundamentals.

Stig Brodersen  4:09  

If you look at the price analogs, Jesse, the recent drop you’re seeing here with 20%, it looks very similar to what you saw in 2007-2008. I’m curious to hear your thoughts on whether or not we’ll see a similar pattern and how we should react as investors.

Jesse Felder  4:25  

I’ve been watching very closely. I do a price overlay, a price analog of that timeframe. It was kind of eerie how closely those traded and it was essentially that late 2007 and early 2008 time period coincided almost perfectly from a price standpoint to what we’ve seen over the last three or four months in this topping process. That’s something. 

I think it’s really interesting to look at those price analogs. A lot of times they’re made fun of, but Paul Tudor Jones, one of the most famous trades of all times when he shorted the 1987 stock market crash and made, I think, a billion dollars in a day. He used it in 1929 price overlay over the 1987 crash to literally guide his trading through that time. It was so close in terms of…

So yes, these patterns echo throughout history and sometimes they work for a while and sometimes they stop working. But absolutely, I think it’s really interesting and you’re right if you look back at that period for the first few months, it was about a two or three-month kind of testing period which would put us in that SPX. 

What is it? 2350 to 2600 kind of a trading range for a couple of months before testing the lows again. I think roughly April timeframe. I think it’s really fascinating to look at those things because they do tend to repeat themselves. 

Preston Pysh  5:43  

I guess when I’m thinking about it, I look at it as mechanics right? So if the equity market pulls down at 20% abruptly, there are people who are trying to reposition themselves for what they think that means. 

They reposition themselves in the commodity market, reposition themselves in the bond market and obviously in the equity market. That takes time for all of that repositioning to kind of shake itself out. It’s not something that’s going to happen in a couple days. 

In that last example, we saw things go horizontal out, a few months and then the equity market went up, kissed the 200-day moving average. As soon as it did, that’s when the selling reinitiated.

I’m curious, are you looking at the 200-day moving average? Is it kind of like one of those key benchmarks if a person is agreeing with your narrative that this is a bear market?

Jesse Felder  6:32  

There are two parts of that question. I said that the markets are clearly in a downtrend. There are a few different ways to define that. Paul Tudor Jones, whom I mentioned a minute ago, basically just uses the 200-day. Say price is below the 200-day, it’s a downtrend. A guy like Jerry Parker defines it a little differently. He uses the 50 and the 200-day or something very similar. If the 50-day is below the 200-day, that’s a downtrend. 

The other one is you could just simply draw a trendline on a logarithmic scale, from the 2009 low and connect those lows that we’ve seen back in 2015-2016. We’ve broken that uptrend line so that’s why I said by those three different definitions. It looks to me like it’s a new downtrend. 

In terms of when to get aggressive on the short side, right now, technically just from a textbook type of thing, you’d look at where it is basically testing the underside of former support, which should now be resistance, which would be technically kind of a textbook bearish setup. 

You look at the great traders of all time, and they’re looking for some type of price confirmation before they get aggressive. So you’d want to see prices start to turn down again to confirm your thesis, and especially a break of those December lows would go a long way for that type of confirmation. 

Now, the thing that I’m thinking about is I’m long-short. I long some things. I short some things. I’m more heavily shorter and have been for a while. We could go down and test that low or even break it briefly and get kind of another rally. If we break it convincingly with momentum, then you could get a strong leg down. 

For me, that’s going to be the next really interesting period. I think there’s probably going to be a test of those December lows. If I was bullish, that’s what I would hope for is a test and then holding those. Then another rally higher, depending on how that plays out really should guide your trading.

Preston Pysh  8:17  

 It was interesting. So we had a conversation with Howard Marks. Howard made the comment, “I don’t expect this credit cycle to kind of go down the way that the last one did.” He said, “I expect it to grind on and for it to be a lot slower.” 

Then I’m listening to this interview with Ray Dalio on Bloomberg. Dalio said the exact same thing. He said, “I think this thing’s going to grind on. I think it’s going to be kind of this long drawn out kind of thing.” 

I guess I’m just kind of curious if you have a similar opinion. If you do, why do you have that opinion?

Jesse Felder  8:51  

If you look at the past two bear markets, we had the 2007-2008, and that was more of a crash. Basically all the losses were just condensed into that one 2008 year. If you look back to the one before that, with the bursting of dot-com mania, it was more of a drawn out process. 

To me, I see a lot of parallels to both a lot of the stuff in the credit markets… Corporate credit markets right now are reminiscent of what we saw during the housing bubble and kind of what happened there. 

Stuff with leveraged loans right now and the amount of leverage and the lack of due diligence, all these things in corporate credit are reminiscent of what led up to the financial crisis. 

Then again, in terms of what we’ve seen in the equity markets, it feels more to me like dot-com mania where you just had momentum and a classic misconception about the markets driving prices ever higher. That unwinds a little more slowly, because there’s not the type of financial distress that precipitates a real crash. 

I think it’s impossible to predict how it plays out. Chris Cole’s another guy I admire and he’s kind of proposed the idea of 10 years of just sideways volatile markets. That’s another possibility where we don’t necessarily get something that looked like the last two bears, but it’s just kind of a go nowhere volatile market for a long period of time.

Stig Brodersen  10:09  

Having said that, Jesse, I’m sure our audience is curious to hear how you position yourself. Is this a time to be long at all?

Jesse Felder  10:16  

I’m still very bullish on gold and some of the miners… I actually think all three of the major miners that I follow… Actually today, Newmont announced they’re going to buy my favorite gold play, which is Goldcorp. 

Goldcorp is just so extremely cheap and had such a good growth profile ahead of it that it looked like a slam dunk. When they first announced this deal today, I thought, “Wow, they’re stealing this company.” But when you look at Newmont, Newmont is extremely cheap itself. 

I approached valuation of individual stocks from a couple different angles. One is I look at the historical valuation of that company. Newmont typically traded about four times sales. I’m talking about enterprise value to revenues. It trades 2.8 times today. It’s also interesting to me that Agnico Eagle and Barrick both trade close to four times sales today.

If Newmont were to just trade in line with its peers and in line with its historical valuation, the stock would probably have to go up about 50%. So it’s really cheap too, even before you consider the fact that there’s a bull case for gold. I’m holding my Goldcorp shares, and I am going to convert them to Newmont Goldcorp shares when that deal goes through. I think that’s a really exciting transaction. 

I think Newmont gets the growth profile that they need going forward and Goldcorp gets the technical expertise and the financial wherewithal to really execute on their growth pipeline. 

I’m still bullish on gold. We can talk about the bull case for gold again, but it’s funny actually, we were on for, I think a Mastermind session. Maybe it was almost two years ago.

Stig’s idea was Bed, Bath and Beyond. I direct-messaged him on Twitter late last year and I said, “Guess what? I’m buying it. This thing is finally cheap enough to buy it and it’s finally hated enough to buy it.”

I bought it in the December panic selling and stocks up 50% over the last three weeks or something when they came out and announced they’re going to earn two bucks a share this year. You realize it’s a $15 stock that’s 7.5 times earnings for the stock trades right now. It’s extremely cheap. They’re starting to turn around the same store sales decline. 

The other thing that I think people don’t realize, which is just crazy man, I think I have never seen before. They have still over a billion dollar buyback authorization, if I’m not wrong. This is a $2 billion market cap company. They have a billion dollars in cash on the balance sheet. 

Right now, today, they could buy back half of the company if not more from the public markets. That is just a massive potential backstop for the share price. Also, I think they only bought back $8 million of stock last quarter, which is crazy. This is what drives me nuts about public companies is they bought back a ton of stock at much higher prices. 

Then last quarter, when it’s $10-11 a share, they bought back $8 million with the stock. It’s nothing and this is when they should be buying it back, but I understand how they want to be conservative with the balance sheet. That’s smart, especially if we’re going to head into a period of credit distress. So, that’s a stock I own. I own some of it. For me, I like to own some of these things that I think are extremely cheap and then hedge it against the broad market or some individual short ideas.

Stig Brodersen  13:15  

Yeah, I remember that. Thank you for messaging me. I remember you were really bearish on the stock at that point in time. You couldn’t see the price being justified and lucky me. My timing was definitely wrong at the time and thanks to you, I didn’t buy into it. When did you start buying Bed, Bath and Beyond stock?

Jesse Felder  13:35  

I started buying it just a few months ago. I think the September-October time frame when it first got down into the mid to low teens. I bought a little bit and then I did some buying in that round at Christmas time. 

Bed, Bath and Beyond was one of the stocks that I bought a slug of. I think it’s worth significantly more than $15 a share, especially if they are smart and start buying back stock at these low prices.

Preston Pysh  13:58  

Yeah. It has come down a ton. I remember talking about that one on our forum,  probably like 2011. I remember the price was near $100. So for it to be down in the teens, it’s just crazy. Interesting. 

Let’s talk a little bit more and I think the gold conversation is going to come up a little bit more here when we talk about this Ray Dalio clip that we will play a little later. Let’s go to the next question here. 

So on Twitter, I got a message from a person that said they were interested in hearing your thoughts on the impact for baby boomers. More specifically, what’s happening with the long term impact of this low interest rate environment?

Jesse Felder  14:34  

The question, I guess as I kind of read it is what’s the impact of the low rates we’ve had over the last 10 years or maybe implying that we’re going to have low rates for a long time to come, which is a premise that I don’t necessarily buy into. 

In fact, I think 2016 was probably the end of the bond bull market that began in the early 80s in the 10-Year bottomed out at 1.3% or 1.4% or something like that, and it’s doubled since then. 

We are in the process of transitioning from a secular disinflation to a secular inflationary environment. I then don’t think low interest rates are going to last for another 10 years. We go through long term inflationary and disinflationary cycles. There’s a lot of science that ended that, but to get back to the question, how does that affect [the low interest rate environment]? 

Let’s just imagine if interest rates stayed low for the next 10 years. You look at the underfunding of pensions and things already, and they’re assuming an 8% rate of return. They’re already massively underfunded. 

If they only get to 3% over the next 10 years, there are going to be big, big problems for them. It’s only going to be a certain another four or five years maybe before these things come to a head and big problems come out of that. 

The other thing though, if you look about what’s the effect of the low interest rates over the past 10 years, we’ve seen a massive misallocation of capital. We’ve seen corporate debt just get completely out of control and those things go hand in hand. 

So there’s been a lot of sovereign debt taken on that’s been enabled by artificially low interest rates and artificial demand for bonds, just kind of what I call quantitative easing as artificial demand. That’s going to have to work itself out at some point.

In terms of what are the ramifications? Well, this massive misallocation of capital that’s been debt-fueled is going to have some type of be rectified sometime over the next several years, probably. 

There are a lot of different ways to go with this but none of them are good unless we can find a way to really create some good fundamental growth and grow our way out of this stuff. Though that is a long shot by most people’s measures.

Stig Brodersen  16:36  

Wow. That’s very interesting. I just want to be completely sure you’re saying that back in 2016, we saw the bottom and now yield is expected to go higher for bonds?

Jesse Felder  16:47  

Absolutely, and if you look at what were the disinflationary forces since the early 80s, and what were the baby boomers coming into the job market… It’s a huge supply of labor.

At the same time, the trends to offshoring and globalization took off, which was also a huge new supply of labor in the form of China, India and overseas. That’s really what that influx or supply shock to labor has allowed inflation to stay very low and for corporate profit margins to go to the moon. 

I mean, labour’s share of corporate profits is the lowest in history and that’s just a function of all this competition. Not competition for labor, but so much supply of labor that’s come in. 

Now look around the world. These nationalistfForces are essentially deglobalization forces. “Let’s bring jobs home.” 

Donald Trump is talking about making iPhones in the United States. That is probably a great example of how these trends are inflationary. Apple said that if we want to make iPhones in the States, we’re going to double the price of $1,000. iPhones are already extremely expensive. 

People talk about how demographics are potentially deflationary. Well, I think it was the Bank for International Settlements that put out a report maybe six or nine months ago. They showed in the United States demographics are poised to be very, very inflationary. 

You think about how you have this aging society and fewer people to take care of those people. Healthcare is a really good example of where healthcare margins are going down because we don’t have enough nurses. They’re going to have to pay them more. That’s why we’re seeing wage inflation right now. Part of it is cyclical forces but I think also part of it is demographic forces and secular forces. 

There’s a lot to this, the assumption that we’re gonna have low interest rates for a long period of time is probably… I hate to say optimistic because it will make all these pension funds go bust. It was not optimistic, but I think we’re probably seeing a turn in the inflation cycle on a long term goal. This isn’t something that happens this year, next year, even though we are seeing cyclical forces of inflation. These are trends that are… I’m talking 5-10 years out. 

I know your listeners are fans of Warren Buffett and there was an article recently too that I think Warren is on the same page here normally towards the end of a cycle, when he builds up a lot of cash like he has done now. 

He’s got over $100 billion in cash, I think at Berkshire, still. He will anticipate the end of the cycle and start buying zero coupon bonds with that cash. When interest rates go down, zero coupon bonds go to the moon faster than the normal bonds. 

I haven’t read anything in the earnings reports or anything that he’s been buying zero coupon bonds, but he did with Berkshire Hathaway finance recently taking a bunch of  billions and billions of dollars of floating rate debt and refinanced that to fixed rate debt. 

Warren is not going to do that, if he thinks interest rates are going to stay low or are going to go lower. He’s only going to do that if he thinks “I might not be able to refinance this stuff three or five years later at interest rates that are as good as they are today.” There’s a lot to this idea. 

If you are buying bonds today, I don’t think you should buy anything that you can’t hold to maturity. Really, there’s not a lot of incentive to two to five year bonds. The longest are yielding almost as much as 10 and 30-year bonds. You get very, very little.

Stig Brodersen  19:57  

What about the scenario where you’re a young couple and you’re looking to buy your first house? Does that mean that you would have to put very little down and take on fixed steps?

Jesse Felder  20:06  

We’re starting to see some weakness in the housing market, when this is one of these feedback loops of reflexivity in the markets. I think that’s just because affordability has gotten so poor that interest rates tick up a little bit. That makes for lower housing prices. 

The one thing with housing that we saw during the bust is you saw a lot of people really stretching to buy a house that they couldn’t necessarily afford. They were using the income from both partners in the deal. You really want to be conservative. 

Imagine going through several cycles: what if my wife loses her job or whatever, are we still gonna be able to pay the mortgage? I think affordability is an issue right now and I don’t think it’s smart to think of a house as an investment. I think it’s smart to look at it like okay what’s going to cost me more, renting or buying over 10 years? Can I be here that long? 

If you’re buying something you can afford and you can lock in the interest rate today in 4.5% or something, you’re doing pretty good. 

However, if you believe in the investment thesis for real assets today, then yes, it absolutely makes sense to borrow as much money as you can, to buy as much real assets as you can because the debt is going to stay priced at the same. However, the real assets are going to inflate a lot higher, potentially. 

Preston Pysh  21:13  

A few episodes ago, we played a clip from Ray Dalio where he suggested that the US dollar was going to potentially devalue by 30% during the coming systematic event. So what I’m going to do is I’m going to play this audio clip, and then after we’re done listening to this, let’s just have a little chat about it.

Ray Dalio  21:30  

Oh, I don’t think that it’s going to be as sharp and severe like that. I think it’s more going to grind on. All of these obligations will be a problem to be funded. I think it’ll be more back there or a $1 crisis than it would be a debt crisis. I think it’ll be more of a political and social crisis with an update. We have to sell a lot of treasury bonds. We as Americans will not be able to buy all of those treasury bonds. 

If interest rates rise too much, the way it usually works is that constricts credit. We borrow less and that creates a weakness in the economy. So instead, because we’ll sell to foreigners, from a foreign perspective, when they look at it, they care not about inflation, they care about currency depreciation when they look at the interest rate.

If a currency goes down, the bonds become cheaper. I think the Federal Reserve at that point will have to print more money to make up for the deficit. They have to monetize more and that will cause a depreciation in the value of the dollar. 

We have the privileged position of being able to borrow in our own currency because we have the world’s leading reserve currency. I think we are risking that by our finances. In other words, borrowing too much. You can get to the point where you own a bond and a US bond or in any particular currency, you’re getting a pile of that currency

Interviewer  23:01  

By how much could the dollar go down?

Ray Dalio  23:04  

We easily could have a 30% depreciation in the dollar through that period of time. It depends how long. 30%, I would say.

Preston Pysh  23:14  

Jesse, I’m curious to hear your thoughts on that clip.

Jesse Felder  23:17  

I’ve been bearish on the dollar for a couple of years that the dollar peaked in… Was that late 2016? 2017 was a sharp down year for the dollar. We saw a rally last year. I think the rally last year was really a bear market rally. 

It was caused by the divergence in monetary policy because our economy is more stronger than a lot of overseas economies. It was also the repatriation of overseas cash corporations. That’s a bunch of money coming from other currencies into the dollar. 

[Dalio] explains it very well. We have to sell a lot of treasuries. Jeff Gundlach, in Barron’s over the weekend, was talking about this too, in that the debt is growing right now at about 6% of GDP per year, over like $1.2-$1.3 trillion a year. 

Now the fiscal deficit is not quite that wide but there’s other spending and things that don’t factor into the budget. People are up in arms about a 2.2% of GDP deficit in Italy. This is a crisis in Europe.

Our debt is growing at 6% of GDP so that means we’re having to sell that many more treasury bonds every year. Where does the demand come from to buy all those bonds? 

This is one of the reasons why quantitative tightening is bad for risk assets because we have to sell these bonds. In order to attract investors, interest rates have to go up. So you have risk free securities, essentially, treasuries that are now competing with risk assets.

Traditionally, a lot of the buying of these things has come from China and other countries with a trade surplus, but that’s also been changing. We’ve seen Russia sell off all of its treasuries. There’s also a big move towards de-dollarization that we’ve already been seeing recently. This is a really bad combination. 

Europe is talking about ways to get out of the dollar system. They want to do business with Iran and they want to get around the US sanctions. Well, they can’t do that as long as they’re trading in dollars. 

You have Europe talking about trading outside of the dollar system. You have Russia and China also book looking at ways to essentially de-dollarize. You have these massive fiscal deficits all at the same time. 

It’s pointing to a potential sovereign crisis. So you have even Fitch… It was interesting when Fitch came out recently and said, “We will potentially downgrade the US due to the government shutdown.” But when you actually read what they’re saying, they’re not talking about the government shutdown. They’re talking about this fiscal situation and it’s rapidly deteriorating.

Stig Brodersen  25:50  

You said something very interesting there about the expected return on risk free assets, or what you can also refer to as US Federal bonds. How do you see that in relationship to what you can get in the stock market right now and how those two play together?

Jesse Felder  26:06  

Warren Buffett wrote about this way back, I think this is 20-30 years ago in one of his letters. I’ll just quote it here I have it: “Though the value equation has usually shown equities to be cheaper than bonds. That result is not inevitable when bonds are calculated to be the more attractive investment, they should be bought.” That’s the 1992 Berkshire Hathaway chairman’s letter. 

So one indicator that I created was let’s take the Warren Buffett yardstick. One of the things that’s really interesting about his yardstick, essentially market cap to gross national product is it’s very highly correlated with future 10-year returns in the stock market. It will essentially tell you what you’re going to make per year over the next 10 years. 

You can take that forecast that his measure essentially implies and compare that to the yield on a risk-free 10-year bond. You could pay a 10-year return to a 10-year return and so right now, the Warren Buffett yardstick forecasts a return of just about zero percent for stocks. That’s including dividends over the next 10 years. 

Back in October, it was a minus 2%, close to minus 3% forecast. You compare that to 2.7%, or something on the 10-Year Treasury, and you have 2.5% percent in favor of voting bonds. 

According to Warren Buffett’s own methodology, bonds should be bought over stocks. Now, you could also talk about if we do see an inflationary if the dollar goes down 30%, we’re going to see inflation and you’re not gonna want to own bonds. That’s potentially problematic, and stocks might do better at keeping up with inflation. 

This isn’t a hard and fast rule, but if you just look at it from the metrics, bonds are technically more attractive than stocks today.

Preston Pysh  27:51  

I think you understand why Buffett holds $100 billion of cash, right? If you take that 10-year yield and you do account for inflation and you do look at the returns that you’re expecting out of the equity market, you can understand why a guy might hold on to $100 billion of cash instead of doing other things with it, I guess.

Jesse Felder  28:12  

Not to mention the optionality of holding that cash and he can put that all into two to five year treasuries and have zero risk. He could get 2.5% percent risk free, and then have the ability to put it to work when opportunities arise.

Preston Pysh  28:26  

What I think is going to be fascinating is when his 10K comes out and you kind of see what he has been doing with this downturn, that we saw, this aggressive downturn that we saw in December where the market had pulled off 20% from its high. 

I sent out a tweet a couple weeks ago. I said, ‘Isn’t it interesting that Warren Buffett is sitting here after a 20% downturn with $100 billion in cash?” 

I had a ton of people that commented saying, “Well, he’s probably not sitting in cash anymore,” implying that he was buying at those levels. 

I think what’s going to be really fascinating is looking at his year-end financial filings because it’s going to show you whether he is buying some of these dips, or he’s continuing to value that optionality in the cash. 

I’m curious what your thoughts are, Jesse. Do you think that that’s going to be the case? Or do you think he’s on a buying spree right now?

Jesse Felder  29:18  

I think he probably did some buying in December. To think that he put a huge dent in that cash, I think is probably optimistic. If you’re bullish, probably, he’s looking at a lot of these things… Different stocks that he owns and other opportunities and seeing yes, maybe they came in 20% or 15% or so.

When you look across sectors, it’s interesting to me that to see there’s a number of sectors that are still trading at their highest valuations in history, things like utilities and consumer staples and things. These defensive sectors are still trading at their highest valuations in history. So to think that some of this stuff has gotten cheap is just wishful thinking.

Stig Brodersen  29:58  

Jesse, now that we talked about inflation, the economy, the US dollar, I would like to bring oil into the mix. We have really seen the price of oil coming down. How do you see that as a position to go long in? What is the relationship between oil and all those factors?

Jesse Felder  30:16  

It looks to me like you look back in that $40 to $43 price levels is a good support level, that’s kind of right-reversed. If you’re bearish on the dollar, you probably have to be bullish on the oil price. 

Look at when oil crashed in 2014 and a lot of that was the fact that the shale companies just started pumping a massive amount of new oil supply. However, a lot of that was just a huge surge in the dollar too. 

The oil price is kind of the inverse of the dollar. So if you think the dollar is going lower, you got to think that oil prices are going higher. It’s one of the ways why we’ve seen this oil price come down so much and it’s affected CPI. It essentially enabled the Fed to say, “We don’t need to *inaudible* as quickly as we thought we were going to have to.” 

The oil companies are a different story. I’ve been waiting for ever since the price in the oil crash,  for a little over four years ago, I have been waiting for a real true kind of blood in the streets type of moment. We just haven’t had that in this sector. 

I think what a lot of people mess with the companies is they look at price to earnings ratios. Price to earnings ratio does not factor in the amount of debt that these companies have taken on in recent years. 

You look at a company like when you look at enterprise value, which is the equity plus the net debt, the valuations of these companies are still extreme. I mean, right before this oil dump last year, a lot of these stocks were trading at their highest valuations in history too. People think how’s that possible with the oil crash? 

Well, you look at a company like ExxonMobil and it recently traded its highest valuation history. It still trades at very high valuation and it’s in every single dividend ETF on the planet. So, all the money that’s flown into dividend ETFs has flown into ExxonMobil shares. 

It’s one of the biggest names in the US. I think there’s 130 ETFs that count ExxonMobil among its top 15 holdings. All that is passive flows going to ExxonMobil and it has nothing to do with its fundamentals. 

I think it’s very hard to find cheap stocks in the sector just because they’ve taken on so much debt in recent years. There are also the longer term implications about the shale stuff variant perception. 

I saw some interesting work on this. My friend Jonathan Tepper’s firm where they’ve shown that yes, shale has enabled this huge surge in supply and made us energy independent and all this stuff. 

However, a lot of research that shows the life of these wells may not be anywhere near what they’re expecting. It looks like a lot of more running out a lot quicker than they would have guessed which would be bullish for the commodity but not bullish for the companies. 

Another thing that I like to see in oil is that the speculators and we haven’t seen a commitment of a futures report since the government shutdown, which is tough, but the last report showed that speculators were really bailing out of this thing. They were so heavily long and this is one of the reasons why oil I think got hit so hard. Speculators were so heavily long and they had to unload those positions. 

We’re seeing commercials now really build back up or rein in their shorts and kind of get more closer to a net long position. They’re still way away from a net long position, but commercials are getting really bullish and speculators are getting really bearish, which is a very good contrarian sign. 

Stig Brodersen  33:21  

Jesse, please allow me to shift gears a bit. We know we have a lot of listeners out there who are really not investing that much before. Perhaps they’re not even invested at all. With your years and years of experience, what is the number one piece of advice you would like to pass on?

Jesse Felder  33:37  

Don’t try and be the next Warren Buffett. Don’t try and be the next Stan Druckenmiller. You need to find what really revs you up and really gets you passionate about investing, trading, whatever it is. That’s really what you’re going to be good at. You have to have that real passion for it, not just wanting to try to emulate somebody else’s system. 

Now that said, it really does help to study a ton of different great investors and traders. So I always recommend reading the Market Wizards books because every guy that Jack Schwager profiles in these books has a completely different way of making money in the markets. 

Exposing yourself to all those different methods is very valuable because you’ll find ones and you’ll say, “Okay, well, this sounds awesome. Okay, well, this one doesn’t. I don’t know how that guy could ever pull that off because this does not make sense to me.” 

I think everybody, just like in art, a lot of artists and musicians you kind of take from other people. Guitar player, I play music. You take licks from your favorite guitar players, and you use them to create something that’s uniquely your own. I think that in investing that’s really important, too.

Preston Pysh  34:42  

Let me flip this question on its head. What one piece of advice do you have for an experienced investor who’s been around for a few decades and seen a few cycles? What would you tell them?

Jesse Felder  34:53  

Don’t get overconfident? I think that’s the most dangerous thing. It’s really, really healthy to be paranoid and worried that you’re wrong. That’s the right mindset where you’re going to make money. 

As soon as you start feeling like I figured this out or getting too aggressive and doing things that are outside your circle of competence, and you see it all the time. There are just stories all the time of professionals. I saw it with my partner at the hedge fund. People going outside of their own abilities getting extremely aggressive and it might work for a time. 

I think it’s actually one of the things that’s driving the markets right now is this extreme overconfidence built by one of the greatest bull markets in history that also has had one of the lowest volatility readings in history. It has essentially made everybody feel like a genius until last year, whether it’s selling naked put options or using VOL targeting strategy. 

What we saw with optionsellers.com last year and natural gas. We saw it selling the short VIX ETFs earlier in the year. A lot of these trades work for a time, but they’re guaranteed to blow up at some point. 

I see a lot of smart people with a lot of experience in the markets, just feeling like it’s their right to be gifted these great returns every year and these extremely risky strategies. 

Preston Pysh  36:08  

Alright, so this is my last question for you. What’s the worst narrative and the best narrative that you’ve heard lately?

Jesse Felder  36:16  

The worst narrative that I’ve heard recently, this is easy. Many people are talking about how the stock market valuation is now below average. Stocks are now fairly priced. They’re always using forward price earnings ratios, only looking at the last 20 years of history in that measure. 

Think about that. We’re only going to look back at 20 years of market history. That takes us back to January of 1999, right in the middle of the greatest speculative mania in the equity market of all time. So we’re going to use that as our benchmark for determining whether stocks are cheap or not. It’s insane. 

I mean, forward price to earnings ratios first of all, are nothing but a marketing gimmick that Wall Street uses to get you to buy stocks. They have literally zero value in trying to figure out what stocks are going to do in the future over any reasonable time period. 

The best narrative that I’ve probably heard recently, my friend Ben Hunt is brilliant. He wrote a piece about the most dangerous thing to your portfolio are these massive regime shifts. I talked about one about switching from disinflation to inflation. If you’re not paying attention to that, you’re going to get run over. 

The other things that kind of go along with that are this trend toward populism and nationalism. These types of things and it’s Dalio talking about a potential… and Jeff Gundlach, a dead spiral. 

These guys are paying attention to this, because these are risks that are now more apparent or more real than they’ve been in a long time. I think that a very important narrative is to pay attention to these things that…. or don’t extrapolate from the recent past, from the last 5 to 10 years because things change. They change in a hurry. You have to pay attention to them. 

Appreciate those types of narratives because they’re not something you hear from traditional Wall Street or mainstream media.

Stig Brodersen  38:08  

Thank you, Jesse. As you know, there is nothing better for Preston and me than when we have a sit-down with you, and we can just talk about the financial markets. You have a great podcast, you have a great blog. Where can the audience learn more about you?

Jesse Felder  38:21  

Yeah. My website is the FelderReport.com. I try to put up a blog post there once a week or something. The podcast is called Super Investors and The Art of Worldly Wisdom. It’s basically just my effort to scratch my own itch. Things I’m curious about. I just approach people, who I think are brilliant people and really kind of dig into their investment philosophy or a specific thesis that they have.

Preston Pysh  38:42  

We’ll have links to all of that in the show notes, if you guys want to check that out. We highly encourage that you guys subscribe to Jesse’s show and then obviously check out his blog. So Jess, thanks so much for coming on the show.

Jesse Felder  38:54  

Thanks for having me. It’s my pleasure. 

Stig Brodersen  38:56  

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  39:02  

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