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Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …

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Yes. >> And we’re live. This is Value After Hours. I’m Tobias Carile joined as always by my co-host Jake Taylor. Our special guest today, he’s returning. He’s back. >> He’s back. >> Unemployed Value DJ Steve. How are you? Good to see you again. >> Oh, I’m very well and thank you for having me, Toby. It’s It’s a real pleasure. >> Pleasure. We had a we had some great feedback from the last one. So, tell us uh what’s happening in small value land. Well, um, after after years of, uh, of being kicked around, I it’s toward last fall, it it started to feel, you know, cautiously optimistic like there maybe was some kind of rotation going on. And it’s been continuing now through January. And if you look at the uh the morning star style box going out 3 months, I think that bottom lefthand corner small value is something like up 15% and the upper right hand corner for large growth is down 5%. I I could have my numbers off, but it was something like 20 points of outperformance of small value over large growth and it uh >> I send that to Toby about three times a day. [laughter] Well, I mean, we we’ve earned it after these last few years of everybody who bought Nvidia just uh you know, having being high on life and uh us uh value guys getting uh saying it’s going to work eventually. It’s going to work eventually. It’s going to work eventually. And uh it’s finally working. >> Is there truth that uh all the the SAS bros are now unemployed value deans? Is are all those have those fallen down into your SAS deans? >> Yeah. [laughter] Well, there is a narrative that AI is going to eat all software. And I think the narrative is overdone. I I think we’re going to hit the limits of what AI can do. You know, I I don’t think that the um the technologist uh religion is uh is accurate that they’re going to make these, you know, super gods that are going to destroy all scarcity. I think we’re going to hit a limit to what AI can do in however many years. And um and also I think there’s more to a software company than just the the software. You know, there’s business relationships, there’s switching costs, there’s ancillary services. So I I my original thesis was that it would be easier for existing businesses to adopt AI than it would be for AI startups to come in and eat those businesses. >> And I think there’s going to be, you know, there’s going to be some value opportunities in software, >> but the knife is still falling. So, I’m not trying to catch it today because that knife is gonna because I mean I saw a company that was down 60% and it’s still trading at eight times price to sales. Yeah. And it’s down 60%. And it’s still eight times price to sales. And I >> used to be expensive. That’s a big discount now. That’s a 20% discount. >> Yeah. And um so I’m I’m still finding value in other places. I’m still finding things that I think are going to have huge tailwinds and they’re trading at, you know, 0.3 times price to sales. So there’s there’s still out things out there other than software to buy, but maybe this time next year I’ll be buying software. >> We’ll uh we’ll pursue what you think is interesting to buy in a moment. But you and I got tagged in an interesting uh chart today that showed >> it >> wasn’t Epstein related, was it? [laughter] >> The uh just completely der. [laughter] This was um this was looking at ISM um which is the purchasing managers manufacturing index. When that’s above 50 uh that’s good for small value. When that’s below 50 that’s bad for small value. It spent 3 years below 50 which sort of indicates retrenchment in that uh manufacturing in the states and above 50 indicates uh growth. And so that was kind of an interesting chart. Is that is that a fair characterization of it do you think? >> Yeah. And but I I think I need to emphasize the magnitude. Three years this is I think the longest stretch ever that manufacturing has been in a recession for for three years. it’s been a just a hard manufacturing recession cuz Jerome Powell’s interest rates um it was too much you know that that I understand wanting to get the inflation down but a huge chunk of that inflation was driven by the the lockdowns you know telling lumberm mills you know if one person tests positive on these PCR tests which by the way now we’re finding out had like a 90% false positive rate and the whole thing was a giant crapshoot you know you’re shutting down lumber mills you’re shutting down meat packing plants. A lot of the inflation was supply side driven and these interest rates cranking them up so high um really had a a huge impact on manufacturing all the capital intensive industries. And then while interest rates were extra high, they were also rolling off the mortgage back securities from the Fed’s balance sheet which were illegal to buy and the Fed never should have bought them. But if you’re going to roll them off, you know, why are you doing it when interest rates are at record highs and widening the the mortgage spread? And and why are you making all of the pain of monetary tightening fall on the middle class? You know, Jerome Powell, he’s he’s treated he’s lionized in the media, and I think he’s uh I take the opposite view. I think he’s a a pretty big scoundrel. Um but yeah, the manufacturing has been frozen for three years. The housing market’s been fro frozen for three years. And now from some of the earnings calls, so I I this time of year is a great time to listen to earnings calls because they’ll talk about the past quarter and sometimes they’ll give you a little hint because the earning call will be like one month into the next quarter and they’ll say, “But guys, things are really good right now.” And um two companies I follow, they said like in October it was like a a light switch was flipped. So the interest rate cuts we’ve already had >> have already unfrozen both the housing market and manufacturing but people don’t know it yet. And then ISM expecting 48 and then getting 52 is a huge deal. So I I think the housing market is already in the process of unfreezing. Manufacturing is unfreezing. And the big thing is and I I was wrong. I thought this would have a big impact in 2025, but Trump’s budget had 100% accelerated depreciation on equipment. And this is very seldom talked about, but this is a huge, huge deal for any equipment heavy industry that you can get the full purchase price of your equipment back in the first year on your taxes. And I thought it would have an impact in 2025, but the tariff uncertainty was so much more powerful. But coming into 2026, interest rates are low enough, the tariffs are certain enough, and you get 100% accelerated depreciation on equipment. I think this economy is about to rip everybody’s faces off in in these capital intensive industries and the reshoring industries. And uh and and half of the things I read online are still bearish and people think that we’re about to enter a recession. It’s completely insane. >> It’s hard to read because it’s there’s there was no talk of the recession that we went to through for the last three years. I documented it in 22. I had this like long Twitter thread of all of these companies saying that how how tough everything was. And I the the data series that I like to track at the moment is leading economic indicators against coincident economic indicators which um as a ratio seems pretty good at picking tops and bottoms in well expansion of of the business cycle. And so it’s as low now as it was in 1982 and 2009. It hasn’t turned yet, but I imagine that with the next print or so, we’re going to see that, which is very positive for small value, little industrials and those kind of businesses. >> Yeah, industrials and materials are catching some love right now. And uh, you know, energy could follow suit. Although, I’m I’m a little suspicious about energy. I feel like Charlie Brown about to kick the football again. But maybe maybe this is the time. Um and uh the thing I’ve been trying to shout from the rooftops about and I might still be early on it is consumer discretionary because you’ve got um the interest rates even if the 10-year Treasury stays where it is with the overnight rate coming down that there are aspects of the consumer economy that the overnight rate affects like home equity loans. And um I I think you’re going to see and now we’ve got 150 billion extra consumption coming in from these jumbo tax refunds. So, you’ve got uh no tax on tips and no tax on overtime for 2025 shows up in this year’s tax return. >> And for 2026, it’s in the it’s not being withheld. So, as we flip into January, those bluecollar people have higher take-home pay and they’re about to get a huge fat tax refund. So I think you the one of the one of the themes that has been you know so consensus might start breaking down and that’s the K-shaped economy and you might see a return of the bluecollar wages had been suppressed with tens of millions of illegal immigrants and uh and so consumption was only on the high end and now that you have you know 2 million self-deportations a year um you know and also the the data center buildout demand on blueco collar wages you’ve got electricians in Texas making $200,000 a year now working in data centers. So, a rise in bluecollar wages and white collar wages being suppressed by the AI revolution. I think the K-shaped economy like I I want to start buying a bunch of consumer discretionary stocks that are, you know, exposed to the the Yeehaw economy instead of the K-shaped economy. >> Yeah. What falls under that? Is it uh Apple? >> Yeah. Right. No, >> the iPhone. I was going to say Justin uh Boots, but that you know, Birkshire already owns them. Yeah, there there’s um there’s a lot of brand conglomerates that are beaten down that I think have room to be a a foragger from here. Um one in particular, I’ve been stocking this company for two years thinking they’re about to return to growth and I’ve been I’ve been early on it, but it’s uh Newual Brands. They had a new management team came in. And when the management team came in, I I follow insider buying as a as a signal and the chief financial officer took three million bucks out of his own checking account and bought in at I think around $14, $12 and $10 a share. And now the stock is like $4.50. So I go to imagine this guy around the dinner table. >> So he doesn’t know what he’s doing then obviously. [laughter] >> No, he’s he’s a very seasoned professional. I think the management team has made all the right steps, but the market has not appreciated their their turnaround story. So, I think you’re going to see just a return to a return to cyclical growth and um and is going to rerate back up to a you know $15$20 stock. Um but I just the the chief financial officer who’s put $3 million in the company and now the stock price has been fallen 65% from where he felt, you know, bought in. Um and he’s watched his personal account go from 3 million to a million. I just I my heart goes out to the guy sitting around the dinner table with his wife. I can’t even imagine what the conversation’s about. >> What What does Newell Brand say? >> New Brand. So, they have um a lot of things for um back to school. They’ve got Sharpie and Expo and Elmer’s Glue. >> They’ve got um some of the >> It’s a fragrance company. [laughter] >> No. Well, if you’re out there sniffing markers >> Yeah. That’s glue drug delivery. the glue. >> They also have some things that were hurt by the Bed Bath and Beyond uh bankruptcy. They got Yankee Candle. Um and they’ve got a lot of stuff for outdoor camping. They’ve got Coleman brands for camping. >> They’ve got it’s a big brand conglomerate. They’ve got some baby stuff like Graco uh strollers and things like that. So, it’s just a very broad uh consumer brand conglomerate. I I normally like to go more small cap and more niche, but when I see a chief financial officer spend $3 million on insider buying, I just say, you know, oh, captain, my captain, let’s just jump in and and and play along. And also, I, you know, I’ve done my due diligence and I like the company. Their their turnaround strategy was firing all of their less profitable SKs. So, they they they cut like 60% of their product lines and they dramatically improve profitability. But what the mark, you know, when the market sees falling revenue, they don’t like it. And part of that was 2025 was a bad consumer year. Part of it was that they cut a bunch of unprofitable SKs. And uh and now I think it’s a return to growth and back to the races. >> There’s a comment from Austin uh 8635. He says uh super interested in NWL, but they have a lot of exposure to Chinese manufacturing. Is that a problem? >> So when they cut 60% of their SKUs, um they freed up a lot of manufacturing capacity in the US. So they are reshoring. they’re, you know, it’s only going to take them about a year or so, but they are reshorting a significant chunk of that. Um, and it, you know, all this stuff takes time, but, you know, whatever tariff impact they get this year, next year will be half and and so on and so on. So, it’s in process. I’m I’m not turned off by that. >> I mean, that might create the entry point. >> Yeah. And I think >> pushes it down. >> It bottomed out in November around three bucks a share and it’s it’s 50% off the lows already to I think around 450. I might have the price off for today, but um but I I think the bottom is in as of last November. I think this is off to the races. And I I could be wrong about charts, but um I think it’s a great great setup. >> I like those Greco car seats. I put three kids through those Greco car seats. They worked. >> They made it. >> They’re filthy. They smell, but they made [laughter] it. >> They made it the distance. >> Yeah, I got I got two of those right now. Um but I’m hoping for a third. We’ll see if I can convince the wife. >> Good luck. >> Thank you. Thank you. >> Um, what what other stocks have you got out there, Steve, that are interesting? >> Well, um, my number one thing, and for anybody watching, I’ve got my background with my my mascot, Dancing with the Baby Boomers, is um, the Baby Boomers have something like the number keeps going up because the stock market goes higher, but they’ve got something like $75 trillion of assets. And the, um, you know, the first level narrative is like, oh wow, you know, millennials are going to inherit all this wealth. And and my take on that is maybe not so fast. I was a financial adviser at Meil Lynch and one thing that really shocked me in the culture of the baby boomers is about half of them don’t believe in inheritance. You know, half of them are in the you know, Warren Buffett giving pledge mentality and uh and you know, think that the the kids are better off without the inheritance. They should spend it on themselves. And so I’ve been looking for companies that are going to, you know, help the baby boomers monetize their assets. And um my number one pick that I’ve been banging the table on so much, it’s my largest position right now personally. It’s called Abacus Global Management. The symbol is ABX. And what they do is um uh it the formal term for it is called life settlements. But for people that aren’t aware of this, you know, there’s two kinds of life insurance, term life and whole life. and whole life, you know, it’s this policy that says, you know, when you die, you’re going to your estate is going to receive x amount of dollars to your to your descendants, but you’re going to pay monthly for this policy for the rest of your life. Where, you know, term life, it’s okay, maybe for the next 20 years, but whole life is is for your whole life. There was a Supreme Court case in 1911 that established that in the US that life insurance policy is property and as property you can assign it, you can sell it and it has a value. So for people that need cash now, they can go ahead and sell that life insurance policy. you have to be a little bit close to the finish line because of, you know, compound discounting. But if you’re if you’re within 15 years of the finish line, suppose you’re 70 years old, uh there’s a company that’ll buy that that life insurance policy from you. And um what’s so amazing about this market is life insurance in the US is a $13 trillion asset class. And that’s bigger than the stock markets of Japan and Germany and I think South Korea combined. This is a a massive asset class and it’s there’s not a lot of players that industry. So Abacus is has about 30% market share of a $13 trillion asset class which is you know absolutely insane but it’s very underpenetrated. So 90% of life insurance policies expire worthless. What happens is, you know, you buy the life insurance policy when you’re 30 thinking if I die, I want my kids to go to college and the house to be paid off. So, you say, I I want this million-doll life insurance policy that I take out when I’m 30 years old. When you’re 65 years old and you start retirement, now your income is lower. You leave your career, your income is lower. You have this monthly bill for the life insurance policy and its purpose is no longer there. Right? you your kids have graduated college and your mortgage is paid off. So what the heck is the purpose of this life insurance policy and why should you pay this bill now that your income is lower? So 90% of life insurance policies it just laps. Last year $450 billion of life insurance policies lapsed. 150 billion of those that people were old enough to have some residual value. They could have sold it but they just let it lapse. There was a lot of money left on the table and the entire life settlement industry only bought about $5 billion worth of policies out of $150 billion that were eligible. So this whole industry could grow 30 times like a 30x and the market would still be you know relatively uh not not even penetrated. And Abacus Global Management has 30% market share of buying these life insurance policies. And um and what’s so amazing about it is they buy these policies and then they turn around and sell them uh to private credit funds because for one thing it’s an uncorrelated investment because the when people passing away is completely unrelated to how the stock market is doing. So, private credit funds are super hungry for these things because if you sell somebody um and also just at the current market clearing rate, Abacus is buying these policies for around a 14% internal rate of return and then they sell them to private credit for about an 11 or 12%. So, what private credit fund isn’t going to want an 11 and a half% uncorrelated fixed income instrument? I mean, that’s one of the sexiest things you could possibly be selling to the private credit market. So, Abacus Global Management, they can sell everything they can acquire. Their current their current fight is just to educate everyone and penetrate the market and not have 150 billion worth of policies expire worthless, but actually capture that market, turn around and sell it to private credit, which has an and pretty much an unlimited appetite. You we’re talking about a multi-t trillion dollar marketplace in private credit. They could absorb a hundred billion dollars of life settlements a year if they’re getting 11 11 and a half% uncorrelated return. So, it’s just educating people buying these policies and flipping them. I think in 2023, they turned over their inventory four times. So, um they did a a debt raise to have more cash just so they could hold these policies on the balance sheet longer because then the longer you hold them on the balance sheet, you there’s a chance you might uh have a payout. Although, it’s a little >> get your 14. >> Yeah. A little a little ghouish to think about how these policies pay out. But, you know, if you hold it on the balance sheet longer, there’s there’s a chance you you get the payout. And they’re kind of like an option with a positive theta because every year you hold them, they become more valuable. A policy for a 76 year old is more valuable than a policy for a 75y old. So, >> um this uh this is my my number one thing. I’m pounding the table on it so hard. And the stock price is down. There was a really negative uh short report and I wrote a rebuttal to that short report on my Substack. And then um the management team did three or four acquisitions which I think were very strategic but you know the market gets a little suspicious about empire building with these acquisitions but I don’t know how long you want to get into this this niche company because I’ve I’ve got six writeups about it on my Substack but um if you’re talking about the $75 trillion of wealth the baby boomers have and another aspect of this is um managed care when you start getting into the the senior care facilities there’s such a huge quality of life difference between the the Medicare Medicare Medicaid only facilities and the ones that you have to pay 7 to 12,000 a month to stay in. And I have a I have an aunt who had a stroke recently and she’s, you know, she’s not of means, but she’s has a physical therapy. Um, but uh the the quality difference, you know, it’s it’s a very sad story, but the quality difference in these facilities is enormous. So there’s a lot of people out there that are going to be delighted if they can take their parents’ life insurance policy cashed in and have that fund three years in the posh, you know, senior care facility. So it’s not all going to be uh partying on the Conga line and Norwegian cruise lines. A lot of it is going to be going into into health care costs as they accelerate because these um uh these managed care facilities are they’re pretty pricey and you if you want to have you know a full staff on the weekends and not have to worry about if the nurses are calling in sick and you know if the food is good and things like that you’re talking about 7 8 n 10 $12,000 a month for these facilities. >> What what was the short report? What was the focus of the short report? So, um, I’ve I’ve had about five companies I’ve followed that had a short report come out, the common thread is to try and find some claim to, you know, illegal activity or fraud. That’s the number one thing of every short report. Um, in a recent one against a mining company, Ramico Resources, it was because the CEO’s brother in the 1980s was convicted of fraud. like it’s just whatever kind of attachment to fraud you can possibly put on the company even if it’s 35 years ago and the sibling of somebody that’s that’s the number one thing and the three founders of Abacus Global Management um and I I think what the story is here is when when life settlements was a young industry I think the life insurance companies were trying to use the regulators to destroy the industry while it was nent because you have >> that’s their margin right >> yeah I mean obviously the life insurance companies want 90% of these policies to to never pay out. >> But um if you look at all of the large players in the life settlement space, there’s only there only two, but if you look at both of them, there’s there’s um regulatory actions by the regulator against both of them. And it you you go back and you read into the details, okay, what was this regul regulatory action? Why was this there? And ask yourself, you know, are these guys a bunch of scoundrels? Is the entire industry a bunch of scoundrels? or were the life insurance companies trying to destroy competition? And the way I read into it is I I think the regulators are trying to destroy competition. And somewhere over the last 25 years, I think it’s become a a consumer advocacy thing where if if you actually care about the little guy and 90% of the policies never pay out, wouldn’t you rather have them get something rather than nothing? So, I think the regulators have shifted gears and they look more favorably on life settlements now. that that was the big thing of any short report is oh these founders are a bunch of scumbags and they’re a bunch of swindlers and they’re all they’re all awful people and um I didn’t find the abacus short report to really be all that compelling in that regard. There was other points too, you know, I’ve got a long point by-point rebuttal. The the biggest claim is so Abacus Global Management pays more than their competitors. So, if you’ve got uh a million dollar face value policy and you’re 70 years old and one company offers you 150,000 and Abacus offers you 210,000, it’s it’s a pretty big difference. Um I think um on average, Abacus pays about seven times the life insurance company’s surrender value. So, if the life insurance company offers you 30,000 bucks, Abacus is offering you 210,000 bucks. and um their closest competitor it’s you know down from seven times to I think something like 5.8 times. So it’s a it’s a pretty big difference in payouts and a big part of >> the scale that they’re able to do that they can pay more and then >> no it’s just margins their competitors keep even fatter margins. Okay. So their their competitor they they both companies sell these policies the private credit but you know do you want a 20% markup or a 30% markup. So um that’s just a abacus is accepting thinner margins but trying to have greater scale >> volume. Yeah. >> And over the last 10 years they’ve gone from 20% market share to 30%. So it’s it’s working you know accept a thinner margin and have higher volumes. But the a big part of the short report was if they’re paying so much for these policies then they’re going to go bust because they’re they’re going to lose money on them. And that that criticism from the short report is laughable on its face because they don’t hold the stuff on their inventory. They sell it immediately as soon as they get it. right? There’s there’s no there’s no longer any risk there because if you predict somebody’s going to pass away when they’re 85 years old and they live to be 95, well, that was not a great policy for you. If you predict they’re going to pass away when they’re 85 and they pass away when they’re, you know, 81, then you’ve you’ve made more money than they thought they would. So, the short report says, well, they’re systematically underestimating how long people are going to live. And it’s all a moot point because they sell the policies. It’s it’s not on Abacus Global Management’s balance >> private credits problem. >> Yeah. Yeah, that’s that’s that’s private credit’s problem and they’re big boys with trillions of dollars. They can handle that problem. So, you know, shalom, God bless. That’s that’s on them now. >> So, one obvious question, why not just hold it on the balance sheet or or stick it into a vehicle that you can control and get some fees on it? >> So, that is one of the directions they’re pivoting to. The current CEO has a very very bold vision of having 70% of the revenue from for the company become recurring revenue from management fees. And I think currently it’s like 10%. Um, one of the acquisitions they did is they bought a mutual fund company and they’re creating these gated mutual funds saying instead of having private credit get 11 and a half% uncorrelated, then individual retail investors in a gated mutual fund have a chance to get 11 a.5% uncorrelated. You know, and again, the big danger here is if uh biotech companies make a longevity pill and everybody starts living to be 120. >> Yeah. >> So that mutual fund would have much worse returns if we crack the longevity problem. But for Abacus, they’ve already sold the policy. But yeah, so by keeping it in their own mutual funds, they can start getting this recurring revenue management fees coming off of it. So I think over time they want to shift away from private credit and into these gated mutual funds. And then as a as a side benefit, there’s kind of two main channels how they they they are able to acquire policies. One is by, you know, direct television advertising or Facebook advertising and the other is through the financial advisors through the RAIA channel. And most financial advisors don’t even know this is a thing. Now, you’ve got this 75year-old who has this certain financial situation and they’re either they know about it and they’re reluctant to do it. um or they just don’t even know it exists that hey they could sell their life insurance policy you know and and there’s a lot of people get to be in their 70s they don’t even have kids you know what do you have a life insurance policy for so there’s a lot of education to go on so now that they have this mutual fund company the CEO is going to every RAA conference teaching everybody about these gated mutual funds oh and by the way as a financial adviser you can also you know talk to your clients about whether or not they want to sell their life insurance policy so that’s trying to grow the the RAA channel uh so So it kind of gets uh you know all of the conference fees for presenting. It’s also an important part of the marketing story. >> So they do the sourcing and that’s why the private credit wouldn’t go direct. They they need someone who’s out there doing the advertising and running all of these sort of programs. >> Yeah. And it’s not easy. So Goldman Sachs tried to enter this industry about 15 years ago and they gave it a try and they gave up. They said it was too hard. So it’s it’s not an easy business and the longer you’re in it, the more accurate data you have. So, they get to have their their giant proprietary data set for being in this industry for 20 years. So, you you do have um it’s not >> it’s not an impenetrable moat, but if you’ve got a 20-year proprietary data set and Goldman Sachs tries and gives up, um it’s a it’s a pretty good sign that they’re, you know, in a in an enviable position. >> This might be a nice natural hedge if you were long GLP1s. >> Yeah. and and well um like for their business itself um again they they don’t keep this stuff on the books longer than a year usually so it’s uh they don’t have the huge risk if there is some huge health care shock and we start living to be 150 now that that gated mutual fund will have the risk you have to ask yourself do I do I think we’re going to all become immortal or do I want 11 and a half% uncorrelated fixed income um you know that’s that’s something an investor can take on but Abacus Global Management Again, they’ve already sold the policies, so it just doesn’t affect them. >> So then you don’t have to root for another pandemic either then. It’s good. >> Yeah. But but during the pandemic, they made a lot of money them and they’re both Yeah. >> You probably want to slowplay your uh selling off those ones in that time period, huh? >> Yeah. Well, they they did have an um so they have about I think 15% of their book is policies they’ve held longer than a year. And the average age of those people is over 85 years old. So there is about 15% of their book that they’re trying to to play the long game on. Um and there’s >> Can they do any can they do any taunching of that in like AAA rated uh you know health versus you know just one look at the guy and you know like okay this guy’s never going to make it to 100. >> So so this is pretty amazing. They just sold last fall their first assetbacked security that they they got a ratings agency to, you know, they they stacked it and layered it and tunched it and they created a $50 million face value asset back security and regional banks and insurance companies bought the thing. The press release said that it was um >> bond. No, no. At at the at the interest rate they paid that it was uh what is it called? Medium single digits. So, it was uh I I was trying to back out what interest rate that could be and just by legal terms and using terms that the industry uses them, the highest interest rate it could have been would have been 6.9%. So, you have a company now that’s acquiring policies with an internal rate of return of 14%. And they just sold them with an internal rate of return of 6.9%. And I >> 100% markup. >> Yeah. Yeah. And and I don’t think what’s amazing to me is how few people have the financial experience to understand how big that markup is because um this was just the trial balloon. They’re going to start doing one or two of these a year for much larger face value. And a company that has traditionally had a 20% markup, you know, just announced to the world that were capable of generating a 100% markup. And this and also in the last trailing 12 months, it grew revenue by 90% and it’s trading at about a price to earnings of 10. So, it’s uh I I think it’s grossly undervalued for a company that has just uh you know pulled off that sort of a a rabbit out of the hat to take a 20% markup and turn it into a 100% markup. >> That’s fascinating, Steve. Thanks for sharing that one with us. Let me give a quick shout out. Uh and then we’ll do some veggies with with JT Breenriidge Snomish. Uh go Seahawks. Bangalore India Orlando Florida. Tombell Texas. Valpare what’s up. Mac set you seron London in the UK uh not London Texas Belleview Hifa Israel Lawrence Kansas Cincinnati Lusan Switzerland Tyrron Iran uh there’s an Aussie in Sochi in Russia on a VPN love it uh good stuff JT hit us with the uh veggies >> all right So, uh, top of the hour, folks, Mark. >> All right. The today’s veggies are trying to square two recent pieces that I I quite enjoyed actually. Uh, one was GMO’s collab with Jeremy Grantham and Ed Chancellor that was making the rounds. That’s called valuing AI, extreme bubble, new golden era, or both. And then the second one was from Mark Andre, who’s a bit of a futurist venture guy. This was the techno optimism manifesto. Uh, so F. Scott Fitzgerald put this really nicely at one point. The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function. So that’s what we’re going to try to do today. Uh not pick a side but hold two ideas in tension even if it feels you know uh a bit inelectable. Um so is artificial intelligence the biggest bubble of our lifetime or the foundation of a new economic era? And the uncomfortable answer that we’re going to try to explore is that it might be both. And and history suggests that, you know, dangerous mistakes don’t come from believing in the future necessarily. They come from believing in the future will arrive cleanly, smoothly, on schedule. Uh like some train that’s never late, never crowded, never on fire. uh and it occurred to me that we might be able to gain some insights by filtering these two very different views through Stuart Brand’s pace layering mental model which we’ve detailed before in a previous veggie segment. So, as a quick reminder of that, uh, the pace layering thing, the fast layers up at the top or the outside are like fashion and commerce. You know, I thrash around, they overshoot, they’re always changing. Uh, and then below that, you have the slower layers which are like infrastructure, government, governance, and culture, and they absorb what’s survives on these higher layers and kind of help to like set this uh um, you know, a very stable base that the slower the faster layers can move around on. So most people are I think are arguing lately about the fast layers of AI. Uh so let’s start there. So Grantham you know has obviously spent decades studying bubbles not casually but with quite a bit of grim statistical focus. Uh and his view of a bubble is when the price gets far above a long-term trend like usually I think two standard deviations is is his uh his definition. And they’ve looked back at, you know, they’ve studied 300 plus two sigma bubbles at this point, uh, all over the world. Uh, and and of course, every time, you know, it breaks and it the prices come back down to that that old trend line. And that move doesn’t happen politely. Typically, it it tends to snap back and then hard. And that’s what makes these bubbles so tricky is that, you know, they’re they’re often usually attached to something very real. Railroads were real, electricity was real, the internet was real, AI seems real. Uh the error isn’t so much in believing about this technology, it’s in believing that financial markets can price that future rationally. Uh while it’s still in an, you know, forming and and while the product is still changing week to week, the economics are still very embionic and and the winners aren’t clear yet. So and when the the markets hit these extremes, they don’t usually, you know, glim back to fair value. It tends to be violent. And you know, pick kind of your favorite peroxism here of do or housing or whatever Japan. Uh, but what makes this cycle unusual so far, and I’m sure I’m gonna give Toby a little bit of PS uh PTSD talking about this, but but it was an unwind that kind of never quite finished. In 2022, the script looked very familiar. If you guys remember, like rates went up, gross stocks collapsed, speculative names imploded, the party was over, and it felt like the release valve might have been finally opened. Uh, don’t cry, Toby. Uh then ChachiPT was launched and suddenly this bare market just stopped behaving like a bear completely. A new story took over. Capital rushed back in. Valuations reexpanded. A narrow set of AI linked firms started carrying the index to fresh glories. And and Grantham’s warning is that bubbles extend themselves not by disproving skepticism necessarily, but more postponing it with something dazzling like it has to feel like uh feels like it’s something brand new here and shiny. So, >> did [clears throat] he say did he say that before before the AI reflation? >> Uh, I don’t know. He talked about it in his most recent one. I don’t remember him saying it. >> Sorry, I didn’t mean to derail you. I’ll come back to that. >> That’s okay. Uh, and so in part two of that piece, this is Ed Chancellor writing now, he’s he’s pushing the argument further and he he lays out the the anatomy of a technology mania and he’s leans on uh Alistair N’s rubric that in the book engines that Move Markets and if you’ve been with us for a while on the show, we did a segment about that book a few years back. It was season 6 episode one in case you were wondering. And we looked at the early history of the automobile industry and broke it down through this. So it’s it proves a useful mirror, you know, even if it is a bit uh discomfitting. But so AI fits this temple temporary template quite well. First, a revolutionary technology arrives with claims they’re extravagant, but just pro plausible enough for you to believe. Uh you know, it’s it’s going to boost productivity. It’s going to cure diseases, solve climate change, replace labor, uh maybe threaten human extension. Who who knows? Uh there’s no real middle ground in here at this point, right? It’s it’s all it’s a it’s quite a black or white debate. So second, then money and and momentum amplify this belief, right? Something going up is proof that it’s real. That can be enough to keep the party going. Third, promotion then explodes. Past mania’s had pamphlets and like glossy magazines about them. This one has podcast and social media. Uh and now AI itself is generating a lot of the content that reinforces the narrative, which is quite funny. It’s like very autoc catalytic in that way. Fourth, you get capital formation gets gets frictionless. Like venture floods in, private valuations get stretched. Deals get done on vibes and urgency. There’s no time for due diligence. You got to write the check. Uh debt quietly has been joining the party as well. Um you know, we got to finance all these data centers and infrastructure even though we don’t really know what the unit economics are going to turn out to look like. Um but you know, we could throw some sanguin intuions in there and just just plow ahead. And then fifth, the overbuild eventually comes. It’s almost guaranteed, right? Hyperscalers spend as if losing the race would be fatal. Uh this classic prisoners dilemma. Everyone invests because everyone else is investing. The result is inevitably going to be excess capacity at some point, which of course is a killer of returns. Uh and then of course you always have the uh you know what what uh JK Galbreth called the bezel and that’s wealth that only exists because nobody’s admitted the losses yet. Uh and it’s it’s not always quite outright fraud at first. Often it can start off as very optimistic accounting, you know, circular financing, conflicts of interest, adjusted everything. Uh, you know, this rot usually tends to be quite pernitious until it it collapses under its own weight. Uh, and they they argue that the bezel isn’t just this illegal fraud, right? It sounds it includes legal but but dubious accounting. Um, and [clears throat] then comes the shakeout inevitably, right? earnings contracting along with valuations. Bankruptcies rising. Feedback loop between investment and profits runs in reverse. Now valuations, you know, get killed, funding freezes, the weak firms disappear. And and even, you know, the eventual winners, you know, uh, Grantham’s referenced Amazon multiple times, you know, falling 92%. But, you know, they can fall almost to where you couldn’t even imagine before they eventually recover. And sometimes it takes years, sometimes it’s decade plus to to recover. Uh, and markets can be quite brutally unscentimental when it comes to that kind of thing. So, that’s the GMO bear case that we’re in an AI bubble. And I think, you know, if your natural proclivities are are like us, you know, that it’s pretty compelling uh with how much it rhymes with history. But if we stop there, we we might be missing something. So, let’s look at the slower layer case. You know, what of the capabilities of AI are are real and a transformative. And so Andre looked at the same same moment today and sees something very different than than Grantham or Chancellor. Not not a market cycle but actually more like a civil civilizational one. And his starting point isn’t valuations, it’s stagnation. And for all the talk about rapid progress, uh measured productivity growth over the last several decades has been weak per per Mark. Uh and at the same time, the developed world is running into demographic headwinds. Fewer workers, aging populations, fiscal strains. Uh it’s all quite legubrious arithmetic to be honest. Uh so Mark Mark argues that AI isn’t arriving into abundance. It’s arriving into into constraint actually. And from that perspective, AI isn’t simply replacing workers. It’s it’s substituting for workers who in many places don’t exist in the growing numbers like we need someone to come do this job and we don’t have people behind the ones who are doing it now. So the other problem too is that this fear of mass unemployment can be confused confuse jobs with tasks. So tasks disappear all the time. Uh jobs recombine with new tasks and and there’s jobs that you know we don’t even know about probably. So there’s this historical pattern where even if the transition is messy and dislocating the people still end up with things to do and they tend to work on more highv value and interesting problems over time. Uh he also points out this idea of like superpowered individuals now. And so it’s the idea is that AI may not flatten skill differences, it might actually amplify them. So good people get better, great people become frighteningly effective. Uh and the bottleneck then shifts really from access to knowledge or to something instead more like agency. And you know the ability to divine a problem, learn quickly and act without permission. and and that shift then is when you’re building things uh and if you’re is is great but it’s bad if your job is one that’s sort of protected by friction. So we’re seeing this in small ways already. You know, supposedly the 100x coder uh you know, prototyping everything faster, learning faster. Um I think my own personal experience has been there’s been incredible amount of productivity unlocked from this uh for me. Um so even if the market crashes like all these capabilities that people are building right now don’t disappear. The tools spread, workflows adapt, uh norms change, the baseline ratchets upward. And that’s how general purpose technologies tend to work. They don’t arrive with like some tip ticker tape parade. Like they sort of seep in like water, you know, quiet until they’re pretty much ubiquitous in the system. So, wrapping things up here, uh, AI can be a speculative bubble and a historical breakthrough at the same time. Markets because they’re a reflection of humans are prone to overpricing the short term and maybe underpricing the long term. Investors can lose crazy amounts of money even as society becomes more capable. Railroads transformed economies while while also bankrupting their shareholders. Internet rewired civilization while totally nuking capital. Progress is actually often orthogonal to returns. And the danger is confusing sort of one layer scoreboard the the faster layers for the whole game which might include the slower ones. So the [clears throat] lessons should be that um you know demand a margin of safety, assume commoditization, expect draw downs, respect competition. uh people probably worry too much about this infinite demand of AI and maybe not enough about the inevitable ROIC killing prospects of a supply gut at some point. Uh and and then of course don’t confuse important with investable at any price. Uh for builders and workers the lesson might almost be the opposite. Uh like learn aggressively, you know, combine skills of things that you’re good at, use the tools, um redistribute the tasks that can be painful, uh but that might turn into like even better jobs eventually. Um and then of course like for policy makers the challenge is to let experimentation happen without fr financial fragility kind of poisoning the whole deeper layers that carry the future. Easy to say, hard to do and and usually contingent upon on politics behaving like adults. Uh which so good luck there. But so is AI an extreme bubble? Very possibly. Is it also a new golden era for human leverage? Also possible. Uh, I think the mistake is thinking that we can only hold one of these thoughts in our heads at a time. >> Huge consumer surplus potentially >> could be huge consumer surplus. Hopefully, >> do you feel that uh there’s been a little reversal with the with the stock price going the other direction? Stock prices going the other direction. Uh well, to use Buffett’s analogy that he’s used before about um you know, when when you knew the car was coming, the idea wasn’t to figure out how to be long the car. It was to figure out how to get short the horse. And it looks like there’s a lot of horses that are have been getting uh getting taken to the glue factory. [laughter] >> It’s been it’s been it’s been interesting to watch. I don’t think the initial reaction is is the right one, but it’s been interesting to watch. Um, there’s some there’s some good questions in here. I’ve lost it. Sorry team. Oh, someone said, “Why do I get the feeling JT times these veggies for after silver and gold got slaughtered?” >> I don’t see the connection, honestly. What do you got, JT? >> I don’t follow either. Sorry. Yeah, I I’ve been following the metals market. Um, you know, I rotated from the gold miners to copper miners and now copper is getting hot. So, I I wrote a bunch of pieces on nickel. Um, there was a a huge amount of speculation. Uh, and a lot of it’s coming from Korea. Those guys are absolutely insane. And mainland China, too. You can find a recent uh news article about uh an interview with a Chinese housewife that yoloed 150,000 bucks into gold futures and got completely wiped out. Um but there was uh you you do have this uh you know um I think it is a a Granthm quote or I don’t remember who it is but um you know the a mania uh doesn’t uh happen on a bad investment. A mania happens on a a good investment >> idea. Yeah. >> On a good idea. And um so gold uh as we go from the unipolar world to the multipolar world um there’s this old book by uh um uh it’s on the on the origins of money by um Carl Manger and he he kind of is the first one to pinpoint that money is a network good with that self-reinforcing feedback loop that one money is going to win. So, uh, when bricks were talking about, we’d use a basket of goods. What that means is, well, the the best thing in the basket is going to be the base currency. So, the bricks basket currency just means gold is the new global currency. And so, central banks have been buying gold and the price of gold has doubled. And then on that very sound thesis, then the mania comes in. And we had this this massive mania that then crashed. But if you’re following it today, you know, the sharpness of the V-shaped recovery is pretty encouraging. So, um I’m I’m not banging the table for $15,000 an ounce gold, but if you’re making, you know, a $2,000 an ounce profit, a lot of these miners, I think, have years and years. And I I I wrote a post on uh Twitter the other day, and a bunch of people called me an idiot. And I said, you know, if you’re if you’re um if you’re a junior minor and you don’t lock in callers on 50% of your production for the next two years, you need a good kick in the nutsack. And um you know, I had a bunch of people in the comments saying, “But I want, you know, pure exposure to commodities.” And I’m like, look, these are businesses. They have bills to pay. You know, they’re funding the build out of a new mine. Uh, it would it’s a perfect time to take to lock in some collars. And I think I >> got really stupid M&A to do in front of us. [laughter] >> Yeah. Got to incinerate some capital. Oh jeez, what a sector. But yeah, um, you know, and silver is a little bit different. I don’t think silver is as, you know, silver is historically a monetary metal, but I think the world’s so wealthy now it’s it’s not really anymore. Well, it’s got some industrial uses too, right, that make it a little bit less perfect as a >> M. But, uh, in, you know, they’ve they’ve had these huge swings, but at least in in the past, it was sort of, uh, poor man’s gold. And I think, you know, with gold, it, you know, almost tripled the price of platinum. I think there’s a good chance platinum is going to be the new poor man’s gold, and that’s going to have some some pretty wild swings. So, I got my platinum miner. But um yeah, [clears throat] it’s it’s still a sound fundamental thesis and silver has this solar panel demand. And um uh I at first I brushed off the idea because Elon Musk says a lot of things, but he wants to build a 100 gawatts a year of data centers in space. And um uh and he’s been talking about solar solar electricity a lot, but you have the problem with well what if it’s cloudy? What about nighttime? And solar panels in space kind of bypass all those problems. and solar electricity would be kind of interesting. So that’s going to require an enormous amount of silver unless there are there are companies working on the technology to switch to copper in which case it’s going to take a lot of copper. >> I heard something interesting that’s actually difficult to cool something in space even though you think like oh >> it’s you know freezing out there, right? But the problem is is that there aren’t molecules next to whatever it is to vibrate and absorb the energy and then move it away from it. >> Yeah. A vacuum is a very good insulator. the space is very insulated. >> Better said than what I was saying. >> Yeah. So um you know I that that’s why I was skeptical about it at first but uh but Elon Musk keeps pushing it and so I I don’t want to I don’t want to bet against him his on his engineering bonafides but um I I played around with AI a little bit to try and find out which critical minerals you know if if Elon Musk really does start building 100 100 gatt hours uh of capacity a year of solar panels in space what what critical min minerals are going to be needed for that and two that popped to the top of the list is gallium in Germanmanium which are prevalent in that company I mentioned earlier Ramico Resources. So I’ve got a um and I haven’t updated the write up to mention that yet. I just have a they also had a short report come out against them and I have a short report rebuttal and uh I interviewed the CEO and I have all those write-ups in my Substack. But yeah, if Elon Musk is is serious about this orbital data center idea on solar panels and he he also just built a lithium refining facility that was pretty state-of-the-art cutting edge. So he does he takes the supply chain into account of having a a US-based domestic uh supply and if that’s going to happen then I think this Ramaco resources with their gallium and germanmanium deposit is going to be critical. So um >> what’s the what’s the story on Ramico? >> So Ramaco they they have a coin coal mine in Appalachia that kind of anchors the business and then the the CEO he actually has a finance background. He doesn’t have a geology background which is fantastic because um with the coke and coal mine he he staged the capex in such a way that the cash flow was always growing. He didn’t use capex to you know make the cash flow volatile or make the cash flow shrink. So his is kind of perfectly done which sometimes it’s fantastic to have a CEO that has some some financial background to not tank their own stock price. Um they have a a deposit that they’ve uh you know they’ve drilled and and proven out the the mineral resource. The base of it is a thermal coal deposit in Wyoming, but there’s these thin layers above and below each layer of thermal coal which is very rich in critical minerals. And um and this was part of the short report was like, oh, the parts per million is low and this and that. And if you if you really get deep into rare earth, sometimes they’ll have really high parts per million, but not all of them are the expensive critical minerals because there’s like 10 or 11 of these rare earth elements in the in the rare earth element list. And it’s only the heavy magnetic ones that are really fetching high prices. And um if you look at the the makeup the composition of the critical minerals for that Ramico resources has, there’s a pretty good mix of the heavy magnetic ones and then three others which is gallium, germanmanium, and scandium. and gallium and germanmanium again that’s you know China has it on their you know prohibited exports or limited exports to the US I think it was one in the very first batch of things that they limited for export because it is required in high-tech manufacturing and there are other ways to get it so you can get some as a byproduct from nickel smelters but then you know if you’re this is kind of a common theme all over the the as manufacturing gets more high-tech they need more niche stuff so there’s another company ASP isotopes that you know for years and years and years, all of these rare isotopes we could get as byproducts. You know, you scrape it out of the uh um you you scrape it out of the scrubbers of coal electricity plants or something like that, you get all these rare byproducts. But as high-tech manufacturing gets higher volume, you’re actually going to need a virgin source of like carbon 14 or silicon 28 or all these, you know, uturbium whatever. Um and so they’re actually going to have to make these from scratch from a virgin source. So ASP isotopes is one of those and then the whole the whole rare earth’s complex but gallium and germanmanium are would be critical for doing satellite data centers in outer space and scandium is an interesting one because um if you guys are familiar with malibdinum malibdinum makes >> tight with meum >> yeah so malibdum makes steel stronger and lighter weight scandium makes aluminum stronger and lighter weight so this right now scandium’s fetching kind of a low price on the market, but Boeing could reduce the weight of all their aircraft 25%. So, you know, if Ramico Resource is able to get some long-term offtake agreement with a company like Boeing, then their um their their deposit in Wyoming would get built out because that would anchor the value of the whole thing. So, it’s kind of just waiting to see, you know, is is Boeing going to bite the hook and commit to make all of their aircraft 25% lighter and buy scandium at $3.5 million a ton. Uh but if we’re in this world of modern like drone warfare of having really you know lightweight drones for payloads and humanoid robotics and the need to have lighter weight aluminum I think is there. So I it’s kind of a niche thing but between the gallium the geranium the scandium and the heavy magnets I think there’s a really good chance that Ramico is successful in building out this uh this brook mine. >> How big is the how big is the mine? How big is the deposit? How like how many years of supply do they think they’ve got there? Oh, like a hundred. It’s it’s it’s enormous. And it’s also not been it’s not been fully drilled everywhere to prove the whole thing out because, you know, they >> all of these miners just drill a little bit at the time is they have more cash flow because they don’t want to just throw a bunch of money into the ground on drill holes. So that the part that’s been delineated so far is like a 100. Although they did just update their mine plan to mine it twice as fast. So if they’re going to mine it twice as fast, it’s like a 50-year life. Um, what about something like oil, Steve? You follow energy? >> Yeah. Yeah, I’ve been uh I’ve been in an abusive relationship with energy stocks for the last couple of years. >> Um, and I uh >> No means no. >> Yeah. One of the problems with energy is it’s hard to find things that are, you know, if you can’t get the timing right, some of the shale stuff has s such a short life on it. I haven’t found a lot of energy extractors that I like because you don’t have the the sort of long lived assets at a cheap price. So, I’ve been a lot in energy services trying to get the picks and shovels. Um, you know, I’ve got my I’ve got my offshore drillers. That’s you know, you can there’s that’s been a popular theme in uh you know, the value DJ space for a long time. um and that they’re all they’re all good companies that whatever differences there were between them um since I started writing about them they’ve all been worked out. So for example um Trans Ocean has a large anchoring shareholder his name is uh Frederick Moan and he’s does some insider buys once in a while but um since that time you know the shipping magnet John Frederickson bought 10% of Valeris so they have a large anchoring shareholder and then the Noble is is 10% owned by the Marisk family. So, uh, whatever differences there were between them, they’re they’re they’re pretty much all good companies. I am. >> So, the significance of having a big anchoring shareholder is that it makes them a little bit more sensible when it comes to capital allocation and things like that. >> Yeah. I think it takes away a lot of the risk of the CEO doing a bad acquisition, you know, just incinerating capital and really doing something stupid. If you’ve got a 10% owner of the company who sits on the board and he’s going to cause a big stink and and, you know, uh, piss in the punch bowl about it, then I think there’s a a much lesser chance they’ll do a bad acquisition. So that’s um you know in that regard they’re all about the same. Trans Ocean has more financial leverage. They’re the only company that didn’t go bankrupt. So Valeris and Noble are both post bankruptcy all their debt wiped away. Trans Ocean still has the debt attached. But Trans Ocean also has the the best technology. They have the most cutting edge equipment. They have two eighthg drill ships and they have the you know Norway capable um uh semi-submersible drill ship. So that’s you know you’ve got some some quality differences. They do mean a little bit. So, while the seventh gen ships are fetching about 400,000 a day, the eighth gen ships are fetching about 600,000 a day. But, you know, I I think they’re all good. You know, they’re they’re all good dogs. >> Uh what about the price itself? Do you use any of those like gold oil, anything like that to sort of like this the spikes in that gold oil ratio are as high as I’ve ever seen them? And a lot of that’s to do with gold having a very good run. But the bottoms in that gold oil ratio are uh they’re all like significant turning points and we’re close to the lowest ever now. >> Yeah. Yeah. No. Um so I think they’re all interesting. I always want to know what the causality is between them and you know like the the copper gold ratio. Gold gold comes out as a byproduct of copper mines. So you know you kind of have a and also gold is a safe haven when the market crashes. So there’s there’s reasons why most of this stuff works. just a lot of these different relationships. I don’t always know the reason. What’s very strange about energy and I I own a lot of energy. You know, I’ve I’ve been, you know, unhappy with it for the last couple of years. I really feel like Charlie Brown about to kick the football again, but um you know, I haven’t sold any of my energy positions. I just have a sinking suspicion that, you know, the commodity prices are a 2027 story. And I could very easily be wrong here. But if you look at um you know for example um even though ISM just flipped above 50 freight is still way down in the US. Now freight rates are higher because much capacity has come offline but freight is down. And if you look at how much more efficient engines have gotten. So US gasoline consumption is down because the engines are so much more efficient. So, I think we might have to get pretty far into this boom with, you know, um, and precious metals kind of led the metals boom, but gold is too small to really affect energy consumption. But if you start getting iron and aluminum prices high for a sustained period, and the big base metals mining, ramping up production, then you could start seeing enough diesel consumption being used. You start seeing freight volumes going up. I think you could actually have a I don’t think the demand side of the equation is there yet for a huge energy spike yet, but I think it’s it’s inevitable, right? It’s a cyclical. It’s going to happen someday. I just don’t think it’s a 2026 story. But let me let me hedge my bet a little bit because um the stock bond correlation was negative pretty much from Allen Greenspan until um Jerome Powell raised interest rates. And it was the negative stock bond correlation that made the 6040 portfolio work. If the Federal Reserve is chasing inflation, that means they can’t cut interest rates when the stock market crashes by as much as they used to, which means the stock bond correlation would be positive, right? Stocks fall and bonds fall at the same time. And if the stock bond correlation stays positive and the 60/40 doesn’t give you that sort of reduced volatility, then that would drive a a decade long increase in portfolio allocations to energy and gold because energy and gold are the two things aside from bonds that have the ability to give that negative correlation. And I think Morgan Stanley already said this is the age of the 60 2020. 60 stocks, 20 bonds, 20 commodities. I think that takes a decade. By the time that trickles all the way down from Morgan Stanley to, you know, Edward Jones advisers in the strip mall, I think that’s a 10 or 15 year process. But if if energy stocks rise even while the energy commodity is flat or struggling, I think it’s because portfolio managers are being told by their research departments to start increasing portfolio weights to to gold and energy. And that’s going to be a a tailwind. That’ll that’ll cover a whole decade, right? that’s going to be a massive tailwind for those sectors for a long time. So, I’m I’m happy owning energy, but don’t don’t quote me on the timing of it. >> Uh that’s that’s good timing. Um we’re coming up on time, Steve. So, what’s the uh best way to follow along with what you’re doing or get in contact with you? >> Yeah, I’m I’m on Substack. I’ve got the unemployed value DGEN Substack and uh it’s it’s just been such such an amazing and fantastic community. You know, I think everybody in the entire community is nice except for maybe one or two people. And out of those two, >> you can name them if you want. >> Yeah. One of them I just kept being nice to them over time and eventually they just gave up being mean to me and started being nice. So there’s only been one person in the entire community who’s just decided to stay with being a jerk and I I won’t name them, but uh you know, good riddens. But no, it’s it’s just been a fantastic uh website. And now um Michael Bur from the big short fame moved to you know created a substack brought in a huge new volume of people and it’s it’s a fantastic network. Hopefully some people trickle down into you know the 20th bestselling and 30th bestselling and find me and start subscribing to that as well. >> Well congrats and you you got a good Twitter account too. >> Yeah. [snorts] >> Yeah. Thank you very much. >> Unemployed value DJ. It’s S. Farington. Steven Farington. >> Yep. Yep. Steve Farington. Yeah. I wasn’t smart enough to go anonymous. So if people want to hate on me, they can track me down. >> Uh JT, any final words? >> No. >> Check out Journalytic, folks. Um Steve, great job again. We’ll have you on again in the future, folks. It’s uh good seeing everybody.

Pitch Summary:
Sintana Energy provides a unique investment opportunity by offering concentrated exposure to the burgeoning oil exploration activities in Namibia and Uruguay. The company’s strategic interests in multiple blocks, including a carried interest in the significant Mopane discovery, position it well for future growth. The recent merger with Challenger Energy expands Sintana’s portfolio to include Uruguayan blocks, enhancing its exploration potential. The company’s carried interests mean it incurs minimal costs until production, reducing financial risk. With major operators like TotalEnergies and Chevron involved, the prospects for successful development are strong. The potential for significant resource discoveries in both Namibia and Uruguay could lead to substantial upside for Sintana’s stock.

BSD Analysis:
Sintana’s business model is particularly appealing due to its carried interest structure, which allows the company to benefit from large-scale discoveries without bearing the high costs of exploration and development. The recent transaction involving Galp and TotalEnergies underscores the value of the assets in which Sintana holds interests, with third-party valuations suggesting significant upside potential. The strategic merger with Challenger Energy not only diversifies Sintana’s asset base but also aligns with geological theories suggesting similar resource potential in Uruguay as seen in Namibia. The involvement of major oil companies in adjacent blocks further validates the exploration potential and could accelerate development timelines. While there are inherent risks associated with exploratory drilling, the asymmetric risk-reward profile makes Sintana an attractive option for investors seeking exposure to high-impact oil exploration plays.

Pitch Summary:
Trainline operates a dominant platform for rail and bus ticket sales, with 27 million users across the UK and Europe. Despite recent stock price pressure due to regulatory changes in the UK, Trainline is well-positioned to benefit from increased competition in European rail markets. The company’s B2B segment, ‘Trainline Solutions,’ is growing rapidly, contributing significantly to EBITDA. With a low valuation of EV/EBIT ~8 and EV/FCF ~9, Trainline’s stock offers an attractive opportunity for investors.

BSD Analysis:
Trainline’s strategic focus on expanding its B2B services and leveraging its platform as a service model is crucial for future growth. The company’s ability to adapt to regulatory changes and capitalize on market opportunities in Europe positions it well for long-term success. While the stock has faced headwinds, the underlying business fundamentals remain strong. Trainline’s aggressive share buyback program further underscores management’s confidence in the company’s prospects. Investors should consider the potential for regulatory impacts but also the opportunity for growth in a competitive market.

Pitch Summary:
Angi Inc. is in the midst of an operational turnaround, aiming to boost revenue and achieve profitability. Despite a turbulent past with significant stock price declines, the company is poised for one of its most profitable years. The market has yet to recognize this potential, as reflected in the stock’s low valuation. If Angi successfully executes its growth strategy, it could attract renewed investor interest and drive stock appreciation.

BSD Analysis:
Angi’s strategic focus on revitalizing its revenue growth and operational efficiency is key to its turnaround success. The company’s extensive platform for home services positions it well to capitalize on increasing demand in the sector. While past challenges have weighed on its stock performance, the current valuation presents an attractive entry point for investors. As Angi continues to implement its turnaround strategy, there is potential for significant upside. Investors should consider the risks associated with turnaround efforts but also the opportunity for substantial gains.

Pitch Summary:
Ipsos is navigating a digital transformation, shifting focus from traditional project-based work to digital and self-service offerings. Despite minimal organic growth, the market has undervalued Ipsos, with an EV/EBIT of 4.5 and EV/FCF of 6.5. The company’s ability to adapt to technological changes and capitalize on digital growth opportunities presents a compelling investment case. As Ipsos continues to execute its transformation strategy, there is potential for stock revaluation.

BSD Analysis:
Ipsos’s strategic pivot towards digital offerings is critical in maintaining its competitive edge in the evolving market research industry. The company’s low valuation metrics suggest that the market has not fully appreciated its transformation potential. As Ipsos continues to integrate AI and digital solutions, it could unlock new revenue streams and improve operational efficiency. The company’s resilience in adapting to industry changes positions it well for future growth. Investors should monitor Ipsos’s progress in executing its digital strategy and the impact on its financial performance.

Pitch Summary:
InPost has revolutionized the Polish parcel delivery market with its extensive network of parcel lockers, achieving nearly 50% EBITDA margins domestically. The company is expanding its successful model to other European markets, including the UK, France, and Benelux. Despite recent stock price pressure due to slower-than-expected profitability improvements outside Poland, InPost’s strategy of leveraging its software and infrastructure to enhance margins remains promising. Analysts project an EV/EBIT of 12 with a 19% revenue growth, indicating potential for significant stock appreciation.

BSD Analysis:
InPost’s strategic expansion into new European markets presents both challenges and opportunities. The company’s ability to replicate its high-margin Polish model in these regions is crucial for future growth. While the market has been skeptical about the pace of profitability improvements, InPost’s focus on cost-effective delivery solutions and infrastructure development positions it well for long-term success. The stock’s current valuation reflects market concerns, but the underlying growth potential and strategic execution could lead to a revaluation. Investors should consider the risks of international expansion but also the potential for market disruption.

Pitch Summary:
IP Group holds a diversified portfolio of around 80 investments in promising sectors, yet the market currently values it at a significant discount. A major catalyst is its patent for a new weight-loss drug, recently acquired by Pfizer for ~$10 billion. If successful, this could lead to substantial licensing revenues for IP Group, potentially triggering a revaluation of the stock. The company’s conservative balance sheet management further enhances its investment appeal.

BSD Analysis:
IP Group’s strategy of investing in university spin-outs provides exposure to cutting-edge innovations with high potential returns. The company’s conservative valuation approach means its portfolio is likely undervalued, offering hidden value to investors. The recent Pfizer acquisition highlights the potential for significant upside from its patent holdings. As the market recognizes the value of its intellectual property and the potential for lucrative licensing deals, IP Group’s stock could see a substantial re-rating. Investors should consider the inherent risks of early-stage investments but also the asymmetric upside potential.

Pitch Summary:
Yougov has seen a significant decline in its stock price over the past four years, now valued at approximately €350 million and trading below its revenue. The company’s growth had stalled, but with the return of the former CEO, there is a renewed focus on improving revenue growth and margins. The stock is currently undervalued with a forecasted EV/EBIT of 6 and EV/FCF of 9, along with a 4% dividend yield. The potential for a turnaround in growth makes it an attractive investment opportunity.

BSD Analysis:
Yougov’s strategic focus on enhancing its revenue and margin profiles under the leadership of its returning CEO could catalyze a positive shift in its stock performance. The company’s acquisition of the German GFK’s consumer panel adds a competitive moat, potentially driving future growth. Despite past setbacks, the market’s current valuation appears overly pessimistic given the company’s potential to rebound. The low valuation metrics suggest significant upside potential if the company can successfully execute its growth strategy. Investors should monitor the company’s progress in revitalizing its growth trajectory.

Description:
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …

Transcript:
And we’re live. We’re running a little bit late. Sorry folks. This is Value After Hours. I’m Tobias Carile joined as always by my co-host Jake Taylor. Our special guest today is Jay Hatfield from Infraap. He’s going to tell us a little bit about How are you, Jay? >> I’m doing well. Thanks for having me on, Tobias and Jake. >> Pleasure. Tell us a little bit about Infra. >> We are a $3.5 billion money management company. We have six ETFs all focused on monthly income, three on the fixed income side, three on the equity income side. We also have a hedge fund and so uh we are um committed to providing great total return but also good income for investors who want to sleep at night and know that they have good stable income coming from their portfolios. What’s the um attraction to income oriented strategies? Well, it’s primarily helpful for people who I would recommend having it even when you’re young, having some, but for older individuals who are looking forward to retirement in retirement. It can give you a good base load for your portfolio whereby you know a good percentage of your expenses are being covered by the income coming from your portfolio. And then [clears throat] you could have more growthy and risk growthier or riskier investments in the remainder of your portfolio because what you don’t want is like during we haven’t had one since 22 but during major drawdowns you don’t want to have to be selling securities and taking losses and so nor do you want to be worried about that even if it doesn’t happen [clears throat] and so it can provide a lot of solace um if you have fixed income that can be a lot less volatile than the rest of your portfolio. So you can also use it for rebalancing. This is what major pension funds do. So every quarter they say, “Oh, well my fixed income, you know, because the equities are down a lot, it rose from 40 to 45. So we’ll sell 5% fixed income and buy 5% equities.” So it can be a great way to buy at the bottom and sell at the top. force yourself to do that by um setting an allocation of fixed income and then rebalancing. Usually equity income is pretty correlated with the market so it doesn’t help you that much on that but fixed true fixed income would. >> What what are your sources of income? >> So on the on the um fixed income side it’s preferred stocks and high yield bonds. The great thing about both of those asset classes is they’re higher risk fixed income. So [clears throat] unlike so unlike like our biggest or high not biggest but our high yield fund is BNDS. There’s a fund B&D that’s just investment grade bonds and we’re high yield bonds. So their fund yields four are fund yields eight. So in the long run, you’ll get a lot higher returns from these higher risk bonds. And our preferred fund yields nine same um situation where you get higher income. And what’s great about that is it’s really almost like a hybrid security. So it’s much lower risk than equities, but has equity like returns because eight or nine is pretty close to equities or 10 or 11. And so we think that’s a attractive addition to almost all portfolios is BNDS or PFFA [clears throat] or similar funds where you get really good income. You have some correlation stock market um but low much lower volatility and really good income. >> Uh what about on the equity side? Sorry JT. >> That’s okay. >> Oh on the equity side. So we have three equity income funds. ICAP is a large cap dividend fund. SAP’s are small cap dividend fund and AMCA’s are pipeline dividend fund. With all those funds, we do add income by writing cover calls. But importantly, there’s two things that are different than our fund from our funds relative to others, which is we write very short-term calls, which is to do that yourself, I’d recommend shorter term, like one, two, three weeks, four max. [clears throat] And we get a lot of the dividends. So the those funds yield 8, nine, 10. We get a lot of the income from actual dividends from highpaying dividend paying stocks. shouldn’t try to generate too much of your income from writing calls because like 10 11 12 what ends up happening is that in up markets your returns get capped because you’re writing too many calls and particularly if you’re writing them farther out. So the ideal strategy is to write very short-term calls on just a portion of your portfolio. And we can do that because we are investing in real dividend stocks that pay substantial dividends. So we don’t need to write the whole portfolio to generate, you know, high singledigit um income flows. I was going to ask I’ve read a lot about um the perhaps loosening of you know covenants in a lot of debt these days. Have you noticed that or how’s that uh factor into the underwriting and when you’re looking at the you know how how confident you can feel about the cash flow coming in? Well, one thing that it’s great about the securities that we invest in versus private credit or a lot of high yield bonds that are in the indices is that we’re dealing with public companies and they typically have pretty high target credit ratings. So, [clears throat] they’re not looking to take money out and distribute it to their uh private equity holders or investors rather. And so the covenants become a little bit less critical. We also have higher quality credits that also don’t really need those covenants as much. And so that’s the way we deal with that problem is focus on large public companies and then they’re less likely to uh have this big incentive to take cash out of the business and distribute it to their LPs. How do you uh define good income versus bad income? What what I mean like what’s sustainable yield versus a yield trap in the dividend companies? >> Well, first of all, it’s important for all ETFs disclose something called SEC yield. And so that’s the cash flow coming into the fund. And so with our fixed income funds, the cash flow yield is essentially the distribution yield. So we’re not returning [clears throat] capital. We might from a tax perspective return some capital but that’s good because you don’t want to pay tax but the cash coming in is very close to the cash going out and you can that’s published every month and it’s very strict set of guidelines published by the SEC hence 30-day SEC yield being the name and then but you can also look that up for our equity income funds and then [clears throat] the reason that’s valuable is you can see like the distribution yield the SEC yields usually like six or seven or eight. So that means we’re only getting two or 3% from ball writing. So having a substantial amount of real income is critical. The other um issue some people we have a European ETF and that I’m told that Europeans get really really suspicious about any dividend yields much above three or four and that’s a reasonable concern for common stock but not preferred. Preferred get paid first. That’s why it’s called preferred and the yields are usually seven eight nine sometimes six. So that’s not a sign of distress. That’s just an indication that it’s more like debt and less like common uh dividends. But so if like a a common stock has a dividend that starts approaching 10, a lot of time the management team will say, “Well, we’re not getting credit for the dividend and just cut it.” So I would be concerned about trying to get super high yields from just common equities, but it’s [clears throat] perfectly reasonable to get, you know, close to double digit yields from bonds and preferred because that’s kind of their inherent return or or yield rather. And it does it’s not a sign of necessarily distress. And also [clears throat] management teams of course with bonds they would they have to pay them or else go bankrupt. And then with preferreds they’re loathed to not pay them and particularly what all the ones that we invest in are public companies. So public companies want to have good credit. This is why they don’t need covenants as much because their shareholders want them to have good credit. Their um board wants them to have good credit but most importantly their counterparties. of their their um the companies they do business with. You know, pipelines being a good example, if you’re transporting oil or natural gas, you know, there’s credit risk on both sides. So, it’s important for these companies to have good credit. So [clears throat] um with with better credits um you don’t have to worry as much about defaults and um the sustainability of the dividend is quite high because the companies don’t want to suspend the dividends because then they’re the rating agencies will downgrade them. their counterparties will get concerned about their credit. So, well, why are your dividends suspended on your mo most of the time it’s cumulative, so you owe the dividends back if you start paying common dividends again. So, um I would say [clears throat] that’s a distinction to draw. Common stocks that pay super high dividends should be concerned about that preferred certain high yield bonds generally not. Do you use leverage or how do you think about leverage as a tool? >> Um with some of our funds we use um really the lowest leverage you’ll find in the market. So closing funds use 40 to 45 in PFA [clears throat] we use 20. BNDS we don’t use any leverage. Um and then IP SAP and um AMCA we run 15 to 20. So super low leverage, just a little bit of enhancement of income. Typically, we have preferred stocks, so they’re not very volatile, just to add a little bit of income. And we do mon constantly monitor the risk of the portfolio. So like if the market becomes more risky, like during the pandemic or during the tariff tantrum, we’ll take that leverage down so we don’t just sit around with leverage without looking at the market. So, we think that’s one technique to add a little bit of alpha. Um, as long as you actively management, we think that’s a great strategy and keep it very low. You know, there’s obviously, so leverage has kind of gotten a bad name because there’s triple levered funds and, you know, nonsense like that and high yield, I’m sorry, um, closing funds use what we think is too much leverage, like 40 45% leverage. So we keep it really really low and monitor it depending on market conditions. >> So ever any concern about um you know with an ETF structure you have liquidity of coming in and out but if the underlying securities are not as liquid um you know you can run into market dislocations then on the ETF wrapper versus what’s under inside of it. How do you think about that? Well, we only um trade in securities that are listed. So, there’s more liquidity on the listed securities. >> Sure. >> Um, of course, with the equity funds, they’re kind of infinitely liquid. So, they could be liquidated intra hour really, [clears throat] you know, particularly well really all the equity funds. And on the preferred side, we keep um well, first of all, we have inline redemptions and which we barely have, but let’s say there was a market dislocation, we’re getting redemptions, we only we just deliver the securities. So, we don’t have to go sell any of our our securities to meet redemptions. So it’s the only issue is just if we wanted to take leverage down and we have um hyperlquid securities that are intraday type liquidation securities like intra hour even. So we can get our leverage intraday down below uh one or you know to zero and start raising cash in extremely short order. The real key to understand is that if we [clears throat] did have a lot of redemptions, we would just deliver all of our underlying securities to them. So we don’t, it’s not like we’d have to, you know, find $20 million. We deliver. So in kind um creations and redemptions also lowers trading costs with PFA. It’s a $2.2 billion fund. So we really only have inflows. It’s a has great returns, but that lowers our trading cost because we don’t get a whole whole bunch of cash and then have to deploy it and pay the bid as spread. We just get it. So that’s actually great structure is to have these um inind creation redemptions. >> Jay, across your front, this is like a double uh two sides of the same coin, but where do you take risk? How do you generate the alpha? Is it security selection, structure, leverage, volatility, harvesting? How do you think about the way that you’re generating risk and return? >> Well, we do well on the fixed income side, it’s pretty straightforward. It’s like um playing basketball or soccer with no opposing team because you have [clears throat] to manage the um risks inherent in fixed income that don’t exist with equity. So that’s in short call risk, credit risk, interest rate risk. And there’s also opportunities on the new issue side and arbitrageing the index funds particularly preferred because they’re pretty illquid. So that’s pretty straightforward and that’s why we’ve doubled the returns of the index with PFFA and BMDs has be not buying as much but it’s not as inefficient. On the equity side to your point it can be more challenging to generate alpha with equities because for two reasons. Uh passive funds are cap weighted which can be a phenomenal strategy because in effect you’re a momentum trader and by the way that’s a terrible thing to to do with fixed income because it’s callable. So the higher it goes the more you should sell it but they index funds do that. So that counts for why we’re [clears throat] so confident about beating on the um fixed income side. on the equity side, you know, the other there’s two dynamics that give an advantage to index funds. The momentum and also sometimes the dumbest securities go up the most. So, you know, meme stocks or I don’t believe that Tesla should trade at 220 times earnings, but maybe everybody else does. And so, my analysis doesn’t really help. it may hurt even like it’s better just to be like oh silver it’s at 80 it’s probably going to go to 180 and just play the momentum but [clears throat] what’s in our favor is exactly what you mentioned so we are uh I would argue really great at macro you can access to our macro slides are highly proprietary data that you won’t get anywhere else like the global monetary base etc and so we have a macro view and based on that view that drives our stock selection. So for instance [clears throat] about a year and a half ago we’re in Midtown Manhattan so that helps a little bit and I used to be an investment banker. This is an investment banker tie. Um so [snorts] it became obvious when the Trump administration came in that there was this huge pentup demand for M&A. Rates are coming down huge issuance on fixed income side likely to be AI related IPOs. So we got really long all the investment banks and [clears throat] that worked spectacularly well. But it was driven by the macro like rates are coming down a little bit by analyzing the political situation. So you can use your macro skills to pick stocks. We use a GARP uh model. So growth at a reasonable price. So that’s why we hate Tesla because it’s really not growing and it trades at >> unreasonable price. Yes. And [clears throat] which like I said can outsmart yourself. Like I wouldn’t recommend shorting it, but we’re okay missing out on the sort of Tesla opportunities. Well, what you don’t want is to be like it hasn’t happened yet, but it mean at like eight a peg of eight. So the P to growth ratio is like seven or eight times and then if they miss it goes down 60%. So we want to avoid the down 60s. we’ll give up a few GameStops or I mean actually Tesla’s underperformed over the last five years but in the earlier years we might have given that up. Um there might have been times where it was trading at reasonable pegs, but I don’t I would have to go back and look. But so [clears throat] we do think that being disciplined on the valuation side can add alpha. But more importantly, writing very short-term covered calls on individual stocks where you have a gain and where it’s close to your target based on on GARP or PEG type valuation metrics can be a phenomenal approach particularly if diversified portfolio because what you also capture is overvaluation in certain sectors like over the last couple weeks for instance I would argue that consumer Staples got pretty fully valued. So like we’re in Coke and IAP and some of that was getting called away but then they reported and it’s not like getting crushed but it’s off a couple bucks. So what it does is it forces you to rotate out of fully valued sectors like utilities. We’ve sold Southern Company is a 91 but we’ve sold calls at 98 and 100 and have some of that called away. So when you do it on individual stocks, you’re [clears throat] not taking losses, you’re taking gains, and you’re forcing yourself to recycle into better valuations. And you don’t do stupid things. Like during the tariff tantrum, we didn’t write any calls because we didn’t have gains and it wasn’t near our target. [clears throat] And so whereas if you look at most of the call writing funds, they’re just mechanical. like they always have calls written out two or three months and they redo them regardless of fundamentals. So they’ll redo them when there’s a tear tantrum or the market goes down irrationally like it kind of did over the last three or four days. [clears throat] And so then and if it’s an index call and it goes in the money, they’re just taking a loss. It’s not like selling southern at at you know in the high 90s when you have like a 20% gain. So that’s the we think tremendous value added for alpha and then you know opportunistically running a little bit of leverage when the market’s good can get you a little bit better returns. So, uh, short answer is if all we could do was pick stocks, we still could probably beat, but it would be harder. If we can write bespoke short-term covered calls, little, I would argue, heavily stack the deck in our favor. And then a little bit of extra income from little bit of leverage on preferred in most markets, we’ll add alpha. So, we’re kind of stacked. Not super easy, just pure equities, but we stacked the deck in our favor by having these kind of hedge fund light strategies, running a little leverage and writing covered calls. >> What What makes that covered call market inefficient? Like where there is kind of a sounds like a free lunch. >> Well, a lot of times my kids ask me like, who the heck is buying these call options? >> That’s a good way that’s a better way of asking the question perhaps. And to some degree it is what I would argue somewhat irrational retail investors. So [clears throat] like in our hedge fund, we don’t do this in our ETFs, but we’ll write micro naked 10,000 micro strategy calls. And I would argue that’s just pure irrationality on the part of retail investors. But to some degree it’s also just and even when it’s a mechanically just being done by market makers, the volatility of micro strategy might be driven by retail investors even though it may not be be the ones making markets like that. But where I would argue it the alpha is coming from is not us analyzing oh well the volatility is you know 3% above or below where it should be but overlaying fundamentals on what’s mostly a technical market. Um and having a bias towards selling options. Like there are services that tell you, oh, we should, you know, it’s much more lucrative to buy options and you get a higher return, but they failed to recognize that the decay of options makes [clears throat] it like you’re going to casino and the casino’s raking off 10%. [clears throat] And so what we’re doing is the opposite of that. We’re selling risk to the street and sometimes directly to investors, but um the fact that that risk we’re selling decays over time stacks it odds in our favor. And since we layer them one week at a time out, even when it looks like we take a loss, [clears throat] it the stock gets called away and we replace it with other stocks. So we maintain our exposure to the market. So, it’s not so much that there’s just a bunch of idiots out there buying call options. It’s more that we’re just taking advantage of the fact that it’s the probabilities are stacked in your favor by um having theta or decay in your portfolio and then managing your exposure. This is really what the street does on the other side of the trades. managing your exposure to the market because they’re short a bunch of calls and they have to be long other securities. [clears throat] So if you constantly monitor your exposure to market, you’re really not taking that much risk. So like if you love like right now, I guess trying to pick on a good example. So we love KKR think that everybody’s freaked out for no reason. We might write a call. We’re actually not writing a lot of calls on that, but let’s say we did a 120 and it’s at it’s at like 210 right now. I mean 2 220 and said 210. Um [clears throat] then if it ran at 220 we might just buy some stock and then let that get called away over the next week or two. So if you actively manage that selling of calls then it can produce alpha. If you just sit around and go play golf during the day then half the time you would be capped out on big returns and you would have a lower return on your overall portfolio. So you do it requires you to um be a bad golfer. So you have to be looking at your screens all day or else kind of as you’re implying the fact the times when you get capped out on some stock would offset all the decay of the portfolio. So you have to manage your exposure to the market and your exposure to your ideas to make sure they don’t get carried, you know, get called away and then you lose all the upside. >> Jay, I’m just going to give a quick shout out to the folks at home. And Jake’s got some vegetables which is a little lesson for us and we’ll come back and talk about some of your macro views. Uh London, UK, what’s up? Boyisey, Idaho, Philly, London, Toronto, Aras, Sa Saudi Arabia, what’s up? Valareereeso, Tombble, Texas, Yorkshire, Pedatikva, Israel, Utah, Snomish, Tallahassee, Kingwood, Texas, Tmacula, what’s up? Wingong, New South Wales, early stuff for you. Rochester, New York, Jared’s Cross on the main streets, Lousan, Switzerland, Vienna, Austria, Tan, Iran. Really amazing. Good to see you got your internet back. Uh JT, hit us with some veggies. Market folks, it’s uh 15 minutes past the hour. You can come back and find these later. >> All right. So, today we’re going to have to be talking about resolutions. And I’m curious, Toby, did you make any New Year’s resolutions? >> Same one I make every year. a lot of value to just a little bit of value for performance. Let’s go. [laughter] >> All right. Well, actually, uh, we’re not going to be talking about that type of resolution. It’s going to be a little bit different. Uh, so first of all, shout out to friend of the show, Luke Delana, for inspiring today’s veggies. Uh, and this comes from a book of his that’s this hidden little gem. When I asked him privately like, “What’s your best book you ever wrote?” And he said this one. Um, and it’s called The Control Heristic. Uh, it’s it’s uh it’s it’s quite good. So, pick that up if you you have a chance. Anyway, on with [clears throat] the show. Imagine that you’re looking at a photo on your phone like one does. And at normal size, everything looks crisp and normal and clear. Uh, and but if you zoom in far enough, it starts to turn into little squares like pixels and compressed artifacts, weird jagged edges. And the photo didn’t change. We know that. But the amount of detail that you demanded did. And you’re looking at the same thing just at different resolutions. So that’s the kind of resolution we’re talking about today. And and in the brain, we might be able to say that resolution refers to the number of statements that are available to describe a concept. So for instance, let’s compare two statements here. And we’re going to try not to get political with this, but okay. Statement number one, vaccines are safe. Statement number two, most vaccines are safe and nearly all are safer than unvaccinated exposure, but a few of them are dangerous and have extreme side effects for some people. Okay, obviously like a big mouthful. Uh, and we talk about truth in general like that it’s this binary switch like right or wrong, true or false, but that that conflict is is maybe not always what’s actually what we’re worried about. It’s actually more like what resolution are we allowed to speak in. So, you know, as you saw with that example, like low resolution, vaccines are safe, uh, is fast, portable, clear, easy to explain. High resolution is much higher fidelity but a lot more conditional, heavier to carry and transmit. Uh and that that pressure of what’s available at a resolution also happens in political discourse. And it even has a name. So care to give a guess uh as to what the name is of that. >> No, >> you’ll you’ll know the answer when I say it. >> That’s the Overton window. This is the the envelope of ideas that a public figure can say without getting treated as an out outside the mainstream. And I think part of what people miss with that is that this window is also filtering resolution as much as it’s filtering ideology. So too compressed feels like this slogan for idiots. Basically too detailed can feel like you’re overexplaining the story even when you’re just being more accurate. So, this explains, I think, why politicians can often sound dumb and still be quite effective. It’s they’re not they’re not broadcasting the full model all the time. They’re they’re shipping this low resolution packet that’s optimized for broad reach. Less conditions, less exceptions, less ways to mishar what you’re saying. Um, and in mass coordination, what they’re aiming for that that kind of bandwidth beats high fidelity. So a message that’s 60% accurate and repeatable can dominate a message that’s 95% accurate but kind of too heavy to carry around and share. So quick sidebar on Joseph Overton uh was not a pundit. Uh he was actually an electrical engineer and project manager at DAO. Uh he later became a senior executive at the the Meno Center for Public Policy in Michigan. And in the 90s he developed what he called a window of political possibility to describe this constraint that we’ve been talking about. Uh and [clears throat] sadly he died it at 43 in in 2003 in an ultralight airplane crash just a few months after his wedding. But after his death his colleagues popularized this model and it became known as the Overton window. So the the window that of public discourse isn’t it’s not just selecting for truth, it’s also selecting for transmittable truth. Uh and so outside you know nuance feels like you’re kind of this like mealymouth waffler. uh you know you’re overexlaining everything. Uh and in public arguments they collapse often into slogans not because everyone loves slogans but because slogans fit through the Overton window. So simple true or false misses something important. A statement can be correct at one resolution and then feel misleading at another and no one’s actually being dishonest here. Uh so I think an example from finance might also drive this home. Uh, lowresolution statement. Index funds are the best default higher resolution statement. For most long-term no nothing investors, diversified low fee indexing beats most active options after tax and fees. The exceptions are real but narrow and hard to identify in advance. All right, the first isn’t a lie. It’s a simple compression of the truth. The second is probably much closer to kind of the full map, but like who the hell has time to to say all of that in a sound bite, right? So, uh, and we don’t get unlimited bandwidth when we’re talking with each other. There’s time limits, there’s attention limits, character limits, audience limits. Uh, if you’re speaking to a specialist, you can probably stay zoomed in and give the full picture, but if you’re speaking to millions of strangers, you usually can’t. Uh, and my my hunch is that this explains a lot of the the divisions that we feel. Uh, one person is speaking high resolution, the other is here, you know, and the other person then hears the actually guy on the internet. uh one person’s speaking in low resolution and the other person hears this like irresponsible simplicity and they just aren’t sharing the same the same zoom level. So different domains, different error rates of this, you know, engineering and medicine you like precision is super important. Mass politics, public coordination, the job’s really more about alignment. Uh and a perfectly nuanced message that nobody can carry around in their head is functionally useless. So, it’s kind of silly of us to expect political slogans to meet some academic standards or to expect scientific caveats to function as rallying cries. Like they’re calling each other dishonest on both sides of this when when these messengers are just clashing. So, [clears throat] um so maturity I think is not picking one zoom level to live in forever. It’s having an adequate focus, knowing when a simple model is good enough, and knowing when the edge cases are worth the effort of that more granularity. So, next time you’re tempted to say, you know, this guy’s a lying idiot, uh, maybe first ask yourself, what zoom level are they speaking at right now, most likely, and half the time, maybe it’s not dishonesty, it’s it’s just a different resolution. >> Good stuff, JT. I wasn’t lying. I was compressing the truth, your honor. [laughter] >> There you go. I when I wrote Choir is Multiple, I wrote that to a fifth grade reading level and it’s it’s like 10 times the sales of any of my other books which were I I wasn’t aware that there were reading levels before that. So that [snorts] certainly works. Very interesting stuff from Luca, too. >> Hemingway was uh wrote a fifth grade level, didn’t he? >> It’s hard to read though. >> Is it? You think so? >> I just think it’s boring. I just think it’s like getting rabbit punched all the time. Getting jabbed. >> Oh, >> no. No, it doesn’t mix it up enough. Jay, uh, let’s talk about macro a little bit. What are the, uh, what are the risks that people can’t see right now that you think are going to have the most influence over the next one, three, five years? Easy one to start off. >> Yeah. Layup. >> Great. [clears throat] And that was a great dissertation because I’m constantly dealing with that problem. When you go on national television, they ask you these complicated questions. You got to answer it in one sentence. >> So, you’re just as likely to mislead people as give them any insights. So, we I would argue have very unique um macro research on our website. So, this might so we’re not really going to say things you’ve heard all the time. Our biggest concern probably is this ongoing problem with the BLS reporting inflation data. specifically the shelter component is by uh designed six months delayed. So, it’s sort of like we were doing this podcast and then you just wait six months to issue it, which not a good policy obviously, but then they use renewing rents and they also which are, you know, if you’ve ever either rented or been a a um a lessor [clears throat] typically hold back on all the increases so you don’t create turnover. So that delays it further. And then they use terrible ‘7s style data data collection. They call people and do little panels. And so for that reason, you can see this on our website. Uh [clears throat] inflation has been overstated. PC core, if you use modern data collection like the internet, [clears throat] it’s developed since the 1970s. uh Zillow and Apartment List, you’ll see the the target inflation’s already at two. And so our fear is that BLS keeps blowing the reporting of of inflation and we don’t get the three rate cuts we need. And that’s important. Nobody seems to focus on it, but we have a recession going on in residential housing and construction and that’s causing the um labor markets slow and people [clears throat] are confusing that with a whole bunch of other things, tariffs and other things that needs to get fixed to have good economic growth this year. And so that’s our big concern is that the data doesn’t [clears throat] reflect what’s already happened which is inflation’s well-contained and rates are way too high. Um and you can see that by the way the money splice shrinking which is very dangerous. Typically you have a recession when the money splice shrinking. So it’s really all around the Fed. We’re kind of okay with worsh this year even though he’s an ultra hawk because he must have promised the president he was going to cut rates and maybe he understands this issue with the BLS longer term we’re concerned about war but it’s probably not today’s or this year’s business >> one thing I I noticed I I saw a chart that showed the uh health care expenses and premiums and apparently it was derived from some like tautology of profit within healthcare company insurers and not from like actually what the premiums I pay for my employees which were definitely not down 20% over the last 5 years if anything like doubled so what what’s going on there >> well that’s a good example it goes the other direction but there is a lot of complete nonsense that’s put out by the BLS and I agreed that like I our company pays like pays in had a 20% increase in healthcare premiums. So there are these strange methodologies that are used. I mentioned shelter for financial services. So our business if the stock market goes up that’s treated as inflation because people are paying higher fees on because the aum goes up. Health care is the opposite. And maybe we’re fortunate at least if you want lower rates that that doesn’t get properly reported. But I’ll also give that an example as an example of why I fear Worsh because he [clears throat] is probably the biggest proponent of this completely madeup 2% inflation target. So for instance, we could have pretty modest real inflation which comes from the expansion of the money supply but maybe a little tick up because uh Medicare or med medical inflation is surging. And so he overreacts to that and raises rates, you know, dramatically like he did in the mid 2000s which precipitated great financial crisis when if you really think about it, you know, raising rates is not going to lower our insurance premiums. Yeah. Like it’s a true supply shock or it’s just it’s it’s maybe not even a supply shock. It’s just that in the US we have the best health care in the world, worst way of paying for it, but the best actual healthare and [clears throat] so um and it keeps expanding. So we’re probably not picking up the quality factors either. >> But certainly doesn’t >> lots of hydonic adjustments, right? But there who knows what the hell >> directly. But so that’s a example one where it goes the wrong way. like it. I agree with you. When I look at medical inflation and it’s like 0.1 or something, I’m like, I don’t know how you’re calculating that. But most of the other ones overstated. But my real issue with Wars is in we’ve had very strong prosperity since [clears throat] World War II. So outside the 70s and 80s which were damaged by oil price increases when inflation so outside that period inflation averaged 2.7%. So not two but 2.7. So why don’t we care? Why don’t we have a targets 2 to 3%. The push back is that oh inflationary expectations will become unanchored. That’s the most ridiculous theory of inflation ever created. Yet gets repeated constantly. So it’s an urban myth. In our models, inflationary expectations are deflationary because the only real place it gets reflected is in bond prices. So so yields rise, bond prices drop, and that tightens up the mortgage market, which tightens up the housing market. The notion that individuals can have high expectations and get higher wages is ridiculous. If you look back over the last couple years for Democrats, you know, the Michigan survey, they thought inflation was going to expand at 10 and Republicans at 1%. Sort of like asking whether you liked Bad Bunny or not. It’s like, oh, 90% of Democrats do and 90% of Republicans don’t. But believe me, so the notion is, oh, if you have high expectations, you’re going to get high wage increases. The Democrats didn’t get 10% increases, and the Republicans won. Nobody got any increases. There’s no market power left in the US economy. So this whole expectation series is completely bogus. And therefore, it would not be an issue if we loosened up that target. and then we could have certain sectors like medical care rise but not try to precipitate a recession to deal with that. So that’s my fear would war longer term think he’s going to be okay in the short run but this notion that we can precisely calculate inflation is ridiculous. So that’s why we need a band so we don’t have the volatility that we had. So keep in mind that inflation was barely above two, like basically two, and the Fed raised rates 17 meetings in a row. Like we cannot have that. We should all be on the war path to try to educate Congress, the Senate, and eventually the Fed that that is a horrible, horrible target and needs to go away. Joe, what do you think about the idea that the 2-year the yield on the 2-year is a pretty good proxy for the federal funds effective rate and and we should be guiding towards that because I I track those two and I think it’s been a pretty good uh I think it’s like led the federal funds effective rate pretty effectively for you know as far back as I can go on the data. That’s an idea from Tom Mlen Mlullen oscillator. I don’t think I’ve seen it from anybody else. Well, you know, I think, you know, I always use interviews and questions and comments to learn. So, I should look at the tier more, but I’ll give you the real key to trading bonds, is look at the Fed funds terminal rate, which right now, I just looked it up on Bloomberg, it’s 3.17. So, you can be a perfect 10-year bond trader. If you just know that number, then you add 110 basis points, then you’ll know exactly where the 10ear is going to trade. So, I think the two-year obsession is a little bit probably misleading, but to be honest with you, you need to track it a little bit more carefully, but [clears throat] we have a chart on our website, and like I said, you can get tremendous data you won’t get anywhere else in the world. And so, right now, my rule would turn you into a perfect bond trader. And by the way, you know, when the yield curve is not inverted and the Fed’s not tight, it’s not the terminal rate of Fed funds. It’s the actual rate of Fed funds. I mean, they’re the same, but you can see both of those calculations that normally the the 10-year trades 100 over Fed funds. Fed funds trades 75 over the inflation rate. So, it’s normally right around 275. So, um, I’ll study a little bit more, but I would say you’re going to be far have far more clarity if you just focus on those two elements. And like we even trade Fed fund futures like we’re actually making pretty good money. Well, sort of irrelevant amount of money, but we’re long the um December contract and we because people just got way too bearish about cuts. So, um, right now going back to that same screen, like now we’re up to 55 basis points of cut this year cuts this year. We think we’re going to get to 75, um, by the end of the year when Wars was nominated was at 45. But that’s really what’s driving the tenure. So, I wouldn’t focus much on the two-year, but I’ll go and look at those correlations. But I always find like when I go on TV or radio and everybody’s like, “Oh, well, the yield curve’s deepened.” And I go like, “No, it hasn’t. is still 100 over the Fed funds rate. So, it hasn’t steepened. Like I guess the 30-year steepen, but who the 30-year is really irrelevant. Nobody prices anything off the 30-year like mortgage. I I focus the one financial condition that matters is the 30-year mortgage because that drives housing. Housing usually causes recessions. We have that data also on our website. Didn’t this time because it was offset by AI building boom. Not just the technology but also the chip plants and and other infrastructure although investment zero. It’s actually not the two are netting to zero. Uh so it’s not helping growth but it’s not causing recession. But if you watch the money supply housing you’ll call at almost every um market turn. [clears throat] And so if you watch Fed funds in the 10-year, 30-year mortgage priced off the 10-year, you got 90% of the battle. And I think people are just confusing themselves by looking to the 2-year. It’s not what the Fed controls, and it’s not the the most critical element, which is Fed funds. >> What do you think about the inversion? You touched on it very briefly, but we’ve been inverted. We had been inverted for since 22 was the longest and deepest in the limited data that we have and now we’ve been uninverted very kind of chopping around for 6 months there and now we’re at like 53 basis points of two to three to three months. That’s the old Cam Harvey version. Do you have any views on whether >> well you know inversion is simply an indicator that the Fed is way too tight. [clears throat] you know, to to invert the yield curve, they need to severely restrict the growth of the money supply or even right now it’s negative. So, it’s an indicator that the Fed is is has its boot on the throat of the economy and is likely to cause a recession. And I’m sorry to be repetitive. You can also get this data on our website. You can see that there are two sectors of investment that I already mentioned. that are clearly in recession. Like they have negative year-over-year growth almost 1%. So the Fed is choking the economy. It just they got lucky for two reasons. One, we already mentioned tech boom is more physical than it normally is. Like the internet just had software engineers and some laptops. So much more physical. But also the great financial crisis made the housing sector less cyclical. So like when I was a kid in the late 70s, we were building 2.5 million homes, uh there was a big housing speculation boom and in the latest cycle since the great financial crisis, we’ve never gotten over 1.7 million homes. The normal is like 1.5. So when there’s no no boom, there’s less of a bust. So even though we have something that would sort of tongue and cheek we call the Hatfield rule. So when housing starts glo go below 1.1 million you have a recession. Well you might not get one in this case because we never have the boom. So you’re sort of out of the bust. But the Fed is completely out to lunch, completely incompetent and should have cut rates like over a year ago when you know real time inflation went pretty close to their target of 2%. And you can see that we calculate CPI-R and PC-R but it showed on our website. You can replicate it. Just look at Zillow apartment list. So really it’s an indicator of a terrible Fed. That’s ECB is actually great central bank. So that’s Europe’s only advantage over the US. >> Um Jay, we’re we’re coming up on time. If uh folks want to follow along with what you’re doing or get in contact with you, what’s the best way of doing that? >> Um our website’s inforapuns.com and we do have a monthly webinar where we take questions just like we are now about our ETFs. But I really love macros. We do talk a lot about macro, but it is relevant. Like I mentioned in the beginning of the program, if you don’t get the macro right, you’re not going to get the stock picking right. You’re not going to get the asset allocation right. And [clears throat] so it is worthy of of obsession. And even if you don’t agree with us, we give you the data so you can come to your own conclusions. But I would argue our data is highly proprietary, unique, and should stimulate um you know more insights even if you don’t fully agree with our views. >> JT, any final words? >> No, we’re good. >> Check out Janalytic folks. Uh Jay Hatfield Infra, thank you so much for spending time with us. We’ll uh we’ll look forward to seeing you again sometime. Uh >> great questions and great education. You can send me a bill. [laughter] >> We’ll be back next week.