Chris Macintosh and Lyn Alden are both macro experts who provide research, information, and tools to help you build wealth and achieve personal freedom.
In this interview, we talk about the current market status, mania's, social unrest, Covid-19's second wave, and how to survive and thrive during this tough time.
We also talk about the official launch of The Rebel Capitalist Pro, an exclusive community with Q&A for investors, that provides you with not only the information you need to grow your portfolio, and access to the researchers and their resources so you can virtually guarantee your success.
If you want to take your investing beyond where it is today, without having to spend countless hours sifting through more financial newsletters in your inbox, then Rebel Capitalist Pro might be exactly what you need.
It's also outperforming over the past 1-year, 3-year, and 5-year periods. pic.twitter.com/k3nhCxmv3X
The Markets Status: Destruction Across The Entire Value Chain
George: All right guys. It gives me a great deal of pleasure to bring two people back to the Rebel Capitalist Show, that of course I really enjoy talking to. I know they are two of your favorites as well.
I'm sure all you guys have checked it out, but we want to do a couple of things here.
First and foremost, we want to go into an interview, get the thoughts from the experts, and the pros as to what's going on right now in the markets.
It is just insane. The market is down today 1,800 points.
Do we have another wave of the Cerveza Sickness?
Do we have a big blow-off top, because all these millennials are taking their unemployment checks and buying bankrupt companies like Hertz?
We're going to get into all that, but we really want to also announce the launch of Rebel Capitalist Pro. I've teamed up with both Chris and Lyn in this project.
We're super excited about it, so after the interview, we're going to dive into that, we're going to explain it a little further, and see how you might be able to participate in Rebel Capitalist Pro.
Before we get there, Chris, let's start with you buddy.
What are your thoughts on what's going on in the market right now?
Well, we're down in the major industries, at least within the US, but I have to say that I've never seen a larger disconnect between Main Street and Wall Street at any point in time.
You've had the COVID virus, the lockdown, which decimated both supply and demand.
If this would have lasted for a three, four week period of time we could have looked at that in a somewhat similar light to some sort of holiday.
Although on holidays obviously people spend a lot of money at restaurants and bars and such, so we had a fairly significant drawdown there.
That was likely to hit global GDP probably at least a couple of basis points, but that's now almost a sideline.
It's certainly within the US and even to a lesser extent now in Europe, with Black Lives Matter protests and rioting that's just sweeping through city after city.
The amount of destruction that you're getting just in the physical destruction of property and things like that is significant.
I speak to a number of CEOs from clients around the world, and it'll be extraordinarily difficult to find a CEO today that was bullish on the future, and secondly, had an intention to up CAPEX.
The CAPEX side of things is going to disappoint massively. I can't see how it won't, additionally to that just the sentiment that exists in the market.
There's a significant disconnect and I guess the reason behind that is, when we look at what the Fed, ECB, and all the central banks are doing.
Then one can make a justification for that, but that's a separate question. I don't know…
What are you thinking Lyn?
What are you seeing there?
Lyn Alden: Definitely similar.
We've had the whole pandemic shutdown crash, and then we had the largest ever stimulus, both monetary stimulus and physical stimulus come in. It definitely seems, in the past couple of weeks, that the market took that too far.
All that stimulus helped to bandaid over the problem, reflate things a little bit, and stop the bleeding, but then the market started to price in that these things are fine now.
We had what people took as slightly better than expected jobs report, even though the jobs report was still awful and it had errors in it.
But the market took that and ran with it, so we had this large run-up. Then we had all the retail trading activity come in. It's unprecedented levels, not seen in 20 years at least.
In the past week, we had one of the highest put to call ratio on record, so we had a lot of enthusiasm on the bullish side, especially this speculative side in terms of options.
George: Lyn, can you explain that a little bit? For the person who's not familiar with options.
Lyn Alden: Basically it means a lot more people are buying call options, which is a bullish speculation on the market, than they are buying put options, which act as hedges.
Generally, this is a very strong contrarian indicator, whenever there's a lot of people buying call options it generally tends to be near market peaks, It doesn't need to be a major peak, but a local peak.
Whenever you have this kind of capitulation, everyone's buying hedges, it's because the market already went down a lot and that's when you should think about maybe going long.
We've had that kind of record put-call ratio, so we had a ton of call option activity relative to puts.
A lot of that was driven by small accounts, so we had this kind of fervor happen, but then this week we had the Federal Reserve press release.
Even though they were a little bit more dovish than people thought, they also gave their forecast for the next couple of years.
They're anticipating that this is going to take years to recover from, and I think the market was forgetting that. They were pricing that out and thinking that we're going to go into a V-shaped recovery right away, and I think the Federal Reserve threw water on that thesis.
George: I don't want to click off this tab, because I'm sure I'm going to screw it up, but I really want to go over an article I saw today and I actually used it in my whiteboard video.
Just get you guys' feedback on this. It's from CNBC, it says many Americans use part of their coronavirus stimulus check to trade stocks. That's shocking. Okay, but it gets a lot more shocking when you read the bullet points.
Trading stocks were among the most common uses for government stimulus checks in nearly every income bracket.
The income bracket between 35,000 and 75,000 traded stocks 90% more than they did the week prior to receiving the stimulus check.
I know that you've got to focus on facts and data, but I think from a psychological point you really have to start considering these factors.
Looking at it from the opposite side, if this is the start of a bull market, that means that all these people that are taking their unemployment checks and buying bankrupt companies are going to be proven right in the long run.
Fast forward 50 years, you've got a history book of this crazy bubble or these crazy times of COVID-19 and 2020.
In the history books, it says that's the time when all the high school students opened up Robinhood accounts and just used pure emotion to get rich.
What are the probabilities of us reading that in history books, in 50 years?
Chris MacIntosh: I think actually it's fascinating, because Lyn, you mentioned the put-call ratio and then the fact that you had this bullish sentiment.
One of the things that I've noticed with running a website, where we've got everything from institutional people, through to students and parents.
We have people querying us, saying, “Hey, I'm interested in this service,” or whatever the case might be, we always tell them this is what it's for and this is who it's for.
There have been quite a few potential clients who've come through and then said, “Look, I've got $1,000 to spend. What do I do?” It's fairly clear to me that you've basically got two things.
One is people have been locked indoors and their income stream has been impacted. It's either collapsed to zero or it's been negatively impacted to some extent.
You're trying to make that gap and you're saying how do I fix that? So you go ” I'm in front of my computer, I'm going to try and do something.
Who's making money in this world in a digital space? Do I sell something online through Amazon, or do I get on eBay and create some business?”
There's a whole lot of that happening right now and that's just the capitalist market mechanism trying to solve the problem. Human beings are incredibly resilient and we will find a way to solve our problems. One of the things I think that's happening at a broad scale, and this is not just US-centric, It's literally globally.
Is that there are a lot of people looking at the financial markets and saying there's something where I know people make money and I don't know anything, but I'm going to get involved.
This is why the amount of Robinhood accounts that are being opened is insane, and that is all retail. For us on this call, you'd realize why we wouldn't use a Robinhood account. Your fees.
Anyway, it's just a bad idea. I think that's taking place for sure. If you take any of the commodity markets, whether it's softs or metals, anything like that, we always pay a lot of attention to your commercials versus the rest of the market.
The commercials are almost always right. Those are the guys that are actually in the business, whether you've got a copper mine or whether you're trading orange juice, or whatever the case might be.
Those are your actual suppliers of the produce, they'll know what their inventory looks like. They'll know what the crops are likely to be, and they'll hedge their sales and their production.
All that kind of fun stuff, they position accordingly in the market and over 80% of the time they're correct. You can actually often see that, so I think this is a similar type of setup.
As Lyn pointed out, we've got this put-call ratio thing. I haven't looked at it, but I suspect, Lyn, that it's not the ‘commercials'. It's more the retail that is heavy on that side of the trade.
George: Chris… Were you in the business back in the dot-com bubble?
Chris MacIntosh: The dot-com bubble was when I cut my teeth in investment banking, in London. I came into it in '97, and I was telling Lyn this the other day.
Young, entered into a world where I was a junior nothing, we were getting chauffeured around in limousines and first-class business tickets.
I was like this is just cool, this is normal, until a few years later, I realized holy shit, this is not normal at all.
How does this compare to then? As far as the mania, the retail investors.
Chris MacIntosh: Look, it's very different. That was a mania that was very greed-driven.
What I think we're seeing now, to a certain extent isn't so much greed. It's more fear.
It‘s “how do I protect myself and how do I earn an income? I've been impacted. I don't really understand what's going on and I need to solve these problems”.This is one conduit where human beings are linear.
If you go back and you just look at the last 15, 20 years, you would say, well, stocks always go up.
It's like Druckenmiller says, liquidity drives markets, and he's correct.
A: We do have a serious amount of liquidity available, and B: you have this linear thinking where individuals will say, what has transpired in the last 10,15 years?
How do I participate and how do I get involved in it?
I might be wrong and you guys might have a different view, but I don't feel like I'm seeing that incredible greed.
I think it's more just trying to solve a problem, in wake of so much demand and supply destruction across every other space. It's like your opportunities have been narrowed significantly.
If you're in retail you have serious difficulties, certainly if it's high street retail. If you're in hospitality you have significant problems. Then of course if you're in real estate, which is your background, George.
If your real estate is synthetically tied to any of those, so if you had apartments or something of that nature, in a little town that basically catered to tourism.
Coffee bars and restaurants and things of that nature, that side of real estate is impacted. Also, the insurance companies that are insuring those properties and the accountants that do the accounting.
It just flows through the whole ecosystem, I don't think this has yet been quantified by most markets but there's a lot of destruction across that entire value chain, and then you say what is left?
Chris MacIntosh: The markets are up, but if you look at what is actually up, it's literally the top five. It's Google, Facebook, Amazon, and it's not a surprise.
It's not surprising to me that Zuckerberg and Bezos are championing the Black Lives Matter type thing, because it destroys retail. Who benefits? You have to buy your stuff through Amazon.
That's basically what you'll end up doing. If your Sears go away and if your J. C. Penney go away, and all those. That's great for you if you're an online retailer.
George: Every single shop in your neighborhood gets destroyed by looters and rioters, then where are you going to go? You're going to go to Amazon.
I also don't think most people realize how long it takes those businesses to come back, even if they do have insurance to pay for damages. They don't just come back immediately.
You're not going to see those same businesses selling stuff in two or three weeks, and then consumer behavior changes.
If everything in your neighborhood gets wiped out you're going to go to the next neighborhood, or you're going to go to Amazon and you might not go back when those shops open back up.
Lyn, what is your take on that whole side of it? The demand-supply side.
Lyn Alden: Well, definitely this train of thought happened when you asked him to compare it to the 2000 bubble.
One thing we've seen this time is that it's more broad-based, rather than tied to one sector, so for example, rather than people just speculating on tech stocks they've speculated on even bankrupt companies, as you've pointed out.
Chris MacIntosh: Airlines.
Lyn Alden: Yeah, airlines, bankrupt companies, some of the shale producers. All sorts of things, and some of the tech stocks.
We've had this broad-based enthusiasm and it came at a time when people are at home, but receiving paychecks. They can't go to casinos.
There are no sports to bet on, so we had sports betters come over, we had gamblers come over. We had people open up accounts.
Not just Robinhood, but also at some of the other major brokerages, we saw an uptake in trading activities starting in 2018, 2019, when they started to do freak missions.
We had already an uptick, but this year this absolutely exploded. It went up fivefold, the number of trades. Just if you look at charts, it’s just huge and as it pertains to the economy, definitely.
So we have this demand destruction and it's definitely top-down. Many of the large corporations, the ones he listed are just partially immune to it, or even benefit from it.
Also, even among the companies that are impacted by it, larger corporations have more ways to get capital and liquidity, and to stay in business.
They received faster aid, they received bigger aid, whereas smaller businesses had fewer options to get any sort of liquidity to stay in business. They've been hit by a double whammy now.
They had the whole forced shutdown, delay in liquidity, and now they have more uncertainty especially in urban centers, because of the rioting and looting.
Any businesses that were impacted by that, are going to take a while to fully come back, and we don't know that this is over yet.
We could have more waves of rioting and looting, especially as we get closer to an election or potentially after the election, depending on how it goes. That's a whole other tail risk to keep in mind.
George: Yes, especially when you consider the only tools the Fed has at their disposal will exacerbate wealth inequality.
That's another thing that I think about, that you just touched on Lyn, is I just don't see how the social unrest can just go away.
In my opinion, hopefully, they'll take breaks, but it's just going to get worse if the Fed is continuing to exacerbate that wealth gap by quantitative easing and just printing money.
Chris MacIntosh: I think there are two things though, George. You've got, and Lyn you touched on the wealth gap, Small SMEs basically didn't get those stimulus checks and all that kind of fun stuff.
The Small Businesses: Difficulty To Access Credits Prevents Them From Getting Back Up
George: Chris, if I could insert one thing, just so the viewers are following along.
Correct me if I'm wrong, but I think the reason was because the small businesses and midsize businesses actually had to go through their bank to access the funds. They'd have to go through Wells Fargo.
There's an intermediary, where all these corporations could go almost directly to the Fed.
Chris MacIntosh: There's literally just been a massive wealth transfer and it's interesting because what it's done is it's widened their wealth gap.
The big players will survive, because they have access to credit. For starters, they had access to credit that small businesses didn’t while going into this, okay?
Secondly, they were being given additional help and support, and they had access to that in a much more timely fashion.
If you've already got those credit lines you could probably last for months without dying, whereas your small, little fish and chips shop or something like that, they were literally on a much, much tighter budget.
Their margins are much slimmer, they were impacted more negatively. They didn't have the ability to get that capital injection as much or as quickly as they should.
A lot of them have gone bankrupt, which again has just created an asymmetry with respect to creating more market share for the bigger player. This has all been brought on by the Fed as well.
I've got one client who's over in Upstate New York, and he's got a couple of restaurant businesses as well as some other things, so he'll be all right.
But, on the restaurant side of things he's literally just closing stuff down and he wasn't going to after the COVID.
He was basically looking and waiting for things to open up, now, a lot of his stuff is in cities that are experiencing rioting. To his point, a lot of things have not even been on the mainstream media.
They're suggesting that it's fairly peaceful protests and he's like, “My stores are fucking looted. There's nothing left.”
Chris MacIntosh: Then he's looked at it and he's said: “Do I spend CAPEX? Do I go back in?” He's answered that in the negative.
I think we're going to see a lot of demand destruction that people are not confined as yet, and he's not going to be spending money.
He's not going to go back and that's more unemployment because the people that he employed are not going to be going back.
So, that negative sentiment, that inability to spend Capex, and capital formation it’s just so important.
Capital Formation: The Inability To Enforce Rule Of Law Destroys It
If you think about how an economy works and functions, you need to have rule of law, you need to have an ability to enforce that rule of law and a legal court system. If you don't have that there's no incentive for capital formation.
That's one of the major problems that you have in many third world countries, is that the rule of law is not very good.
For example, the ability to own your own assets and real wealth, property ownership, and things of that nature is a bit shaky, so you don't have the same incentive to form capital.
You look for something shorter term. Just buy something and sell it, and try and make some money.
This is why in a lot of African cities you'll find people with their little shopping type carts and they're selling baked beans or whatever they can sell on the side of the road.
Because setting up an actual business takes capital formation, and they're not sure if they can actually own that property and if they can own the proceeds, and so on and so forth.
I hate to say it, but I think we're seeing a lot of that underlying problems coming through in the US.
If you were in Seattle right now, what would you think we be thinking about capital formation? If you and I had a retail business in Downtown Seattle.
George: Yeah, that's what I was going to say, going back to your buddy, can you blame him?
Would you take that 500,000, that million dollars of your life savings to go back in and build things up when there are all these unknowns? Who knows what the taxes are going to be?
Let's just say that you build things back up and the riots subside, everything's ‘back to normal' to a certain extent, but then your tax rates increase. It's just there's a lot of downsides, not much upside.
Chris MacIntosh: That's if you had the capital to go and spend. Many don't.
In these businesses. They've got mortgages on them, they basically run out of capital, they have a solvency issue as well as this uncertainty of demand going forward, and an uncertainty of rule of law.
Unemployment Vs Supply Shock: The Race To Push Consumer Prices
George: Lyn, what Chris is talking about is, you have this business shutting their doors. On the one hand that creates more unemployment, but on the other hand, it creates fewer goods and services.
Looking at inflation versus deflation, who wins the race?
Does unemployment win the race or does the supply shock win the race to push prices up or down? Consumer prices specifically.
Especially because the supply chains are so specialized. A lot of supply chains are optimized just to get food to institutional places like restaurants.
Then, other parts of the supply chain are optimized to get food to grocery stores. Those supply chains don't just switch overnight.
That's why I've heard stories about farmers destroying their crops because they are optimized to get it to a more restaurant-focused environment.
I think the way that they package things, the supply chains they have set up, the people that they ship it to, they don't just change overnight and then ship all of their products to supermarkets.
We are seeing some inflationary pressures in some of the more central goods, while we're also seeing deflationary in some of the more discretionary goods.
Going back to the point about the wealth inequality that we're seeing both from central bank activity and elsewhere.
One of the things I've been warning about is that the US is in some ways uniquely troubled by this. This actually goes back all the way to the 1970s. We've had a rising wealth inequality.
QE came on the scene in 2008 and has been off and on with us ever since pretty much.
But, if you go back even further all the different tools, monetary policy, and fiscal policy. We've had this rising wealth concentration and it's larger than most other developed countries.
That's what makes the US fragile in this state where we have a shutdown, double-digit employment, the bottom 30% to 50% of the population is very economically fragile, and then you have small businesses closing.
The US is particularly fragile to this, especially when you add the fact that due to the strong dollar, the global dollar reserve status, we're more reliant on services and less on manufacturing than other countries.
We're tied with France in terms of how focused we are in services, and the pandemic and then the shutdown disproportionately impacted services.
It impacted both, because ultimately there's not a lot of demand for some of the manufactured goods either, but so far it impacted services more and the US is more reliant on services as a percentage of the GDP.
George: Yeah, and the lower-income groups are most likely going to work in the service industry. and therefore, it just makes it even worse.
Covid-19's Second Wave And The Possible Fiscal Response
George: All right, so we understand that. That's what's going on right now and maybe the next month or two.
What do you think the Fed's response is going to be if the market continues to go down like we saw today?
Whether it’s concerned about a second wave or more riots, what do you think the Fed's response is going to be?
It seems like they've done almost everything they can. Are we going to see more fiscal response?
At this point, I think the Fed has used up a lot of their tools. They have rates at zero, they said they're not even thinking about raising rates, they're mainly into asset purchases at this point and all sorts of different lending facilities.
I think the emphasis to look at is going to be more on the fiscal side.
The dates to look out for is that by the end of June these small business loans that turn into grants if you keep your employees on staff, they mature.
So, the companies can start letting those workers go if they don't have enough demand to keep them around anymore.
They no longer have that kind of artificial incentive to keep some of their employees on the payroll, so they might start trimming.
At the current time, we have over 20 million continued unemployment claims ongoing, so initial claims are still coming in.
Some people are going back to work while other people are still getting laid off.
We're officially down over 20 million jobs, but then millions of people are only in the workforce, because of these loans that are keeping them tied to their employer.
It's another kind of backdoor unemployment support system because they're still getting essentially unemployment checks through their employer, because they're being kept on when they might otherwise be let go.
That comes to an end at the end of June, so starting in the July timeframe we have to see how that impacts the initial claims and the unemployment rate.
Then at the end of July, we have those extra $600 a week in federal unemployment benefits expire.
We start to see this potentially higher unemployment rate to the extent that it's not offset by people going back to work.
Then we see the people that are employed, they could get a haircut in with income that they're getting while unemployed, unless we see more fiscal action from Congress and the president.
They're already talking about that, but we don't know what shape that's going to take. We don't know what the sizes are going to be.
We don't know if the two parties are going to go head to head on who gets the money and what they want to put in that bill. Definitely through the July and August timeframe. I think that's the key to watch, is more the fiscal side.
George: Especially when we get closer to the election as well.
Politicians are just the bottom of the barrel, as we all know, so they'll probably do this where the democrats might just pull some tricks.
I'm not saying that they're bad and republicans are good.
I dislike both parties equally, but you could see it to where the Democrats would say, “Well, we want to hold off on this next stimulus package, because if it goes through then that's going to be better for the other side of the aisle.”
From A Fed Put Intervention To A Fiscal Put
George: I also want to point out for everyone watching this that the Fed put could be expired.
Whenever I'm on Twitter, the rebuttal you always get for stocks going down is that'll never happen, because the Fed will just come in and buy everything.
They'll just do more quantitative easing, so the stock market will never go down again. We'll never have a bear market, because the Fed can just print up all the money and buy stuff, but that's not exactly true.
If we go back and remember what happened in March, remember the Fed met that Sunday prior to the Wednesday meeting?
They had that emergency 100 basis point cut and the market still tanked.
I think the futures tanked the next day, the bottom fell out of it, and the market really didn't start to ‘recover', until the government came in and started this fiscal plan.
I'd love to get you guys' opinion on this…
We've gone from a Fed put that's expired to now a government or a fiscal put.
That's the only game in town, which would be far more inflationary than a Fed put, because you're comparing bank reserves to money that's actually being spent directly in the economy.
Chris MacIntosh: You make a really good point, I think we know what the Fed's tools are and they don't really have any others.
So, if the market goes down, you can figure out what tools do they have, what are they likely going to do. I think it's a fair call to say that they will do whatever it takes.
They've promised us that, there is some credence to that. But the reality is, on Main Street, that doesn't solve that particular problem.
Again, we've got this disconnect between Wall Street and Main Street, and between the stock market and how it's valued in the real market.
That's really where the rubber meets the road, because that is partly why you're seeing civil unrest.
The vast majority of people don't have a stock portfolio, so finally, if you're sitting at home, you've lost your job, and your stock portfolio's going through the roof, you might be okay with that.
On the other hand, if you don't have a stock portfolio or you have one that's not significant enough, then it is a massive issue.
I think the fiscal side of things, as Lyn pointed out, I think that has to happen. There's another interesting dynamic there because this isn't just a US-centric issue.
This is across the world, and if we look at Europe for example, they're looking at doing the same thing.
The difference in Europe is that in order for them to implement any particular policies, it needs to go through hundreds of pointy shoes that will all have their own bloody ideas about what wants to be made.
The point is I think they'll get there, but they're just going to take a much longer period of time. In the US, on the other hand, it's much easier to implement various policies.
I think the next step is going to need to be something like UBI, which to a certain extent you already have. Because if you think about fiscal, it normally used to be things like rebuild JFK Airport or something of that nature.
You could have a politician who, like a dog peeing on a tree, could go, “This is mine and I can put my name up on it, and I built this,” that's what they do.
To actually get this into place and get all the various bureaucracies to agree, I think might be trumped by literally just giving people capital, instead of going and building, rebuilding infrastructure.
When you think about fiscal, it can also just be UBI, universal basic income. That is a form of fiscal, and then if you think about that, is that inflationary or deflationary?
Dollars are just a unit of productivity, right? Well, if you add a unit of productivity without any commensurate productivity, then I find it difficult to see how that would be deflationary.
The question is where does that capital get spent? That's where I don't think it's really an inflation, deflation debate.
It's we've had inflation for the last 20 odd years in financial assets, we've had it in healthcare.
We've had it in all of basically the things that you couldn't outsource, and we've had deflation as a consequence of globalization in technology goods, in the crap that we're wearing.
Chris MacIntosh: All the things that essentially we could pull in this massive labor pool from emerging markets.
So there will likely be both, because consumption and spending habits are going to decline, for sure. There's just going to be less money available to go out, to have that restaurant dinner, but there will be a corrective measure.
Like my friend and client who has restaurants. He's closing restaurants, so that's demand destruction as well as a supply destruction, but certainly you're adding more productive units.
It's almost like Maslow's hierarchy of needs to a certain extent. It's back to Lord of the Flies. What do you need?
George: How ironic would it be if the government comes out with official UBI?
Let's say, that's even more extensive than what they're doing now with the increased unemployment benefits, and everyone just takes the UBI and buys stock with it, so it becomes a fiscal quantitative easing.
You can't get away from QE. That's all people do with the money that the Fed is printing or the government is spending, is it is driving it right back into the stock market.
Make the bubble bigger, and bigger Who knows? Crazier things have happened nothing's off the table right now in a world that's as insane as it is.
Tips To Thrive In This World Of Economic Insanity
George: This morning I was pulling my hair out, I had to tweet that gif of Will Ferrell in Zoolander, where he says, “I feel like I'm taking crazy pills,”
I said that tweet was whenever I look at the news or the stock market, this is exactly how I feel. I think that sums it up perfectly.
So, we know the problems….
What can people do to protect themselves?
What can they do to continue to hopefully not only survive, but thrive in this world of economic insanity?
Chris MacIntosh: Listen to you, George.
Bitcoin, I think both of you are bullish there, but as far as just the uncertainty that we have in the stock market, what on earth can people do?
Are there sectors that you think are still cheap?
Do you think people might be able to find some value and not have to chase after something that's they're trying to buy to high price and sell it to a greater fool at even a higher price?
What do you think? When you guys end, I'll give my spin on it and what I suggest people do.
Chris MacIntosh: Ladies first.
Lyn Alden: I've generally found a little bit more value in some of the more cyclical companies.
Not all of them though, because some of them have been hit a lot harder, whereas many of the non-cyclical companies have been bid up to extraordinarily high evaluations.
Part of my research going through individual companies and find ones that have say the strongest balance sheets in their industries.
The ones that have high returns on invested capital and a good track record of getting through recessions without major equity dilution or another kind of permanent capital destruction.
I've found some opportunities using that more value-oriented sector, but by sticking to the more conservative side of that value sector, rather than for example people speculating on the most leveraged oil company or airline.
That's the kind of speculation that I'm avoiding. Some of the stronger areas of the cyclical sectors, in addition to the precious metals and potentially the bitcoin for people against the market volatility.
I'm also using treasuries as somewhat of a countercyclical approach.
Even though I don't particularly like real treasury return potential over the next five or 10 years, I do like short-term treasuries as a hedge when we start to get this overbought condition of the market.
When we went into this crisis I had a certain amount of treasuries in my portfolios, in March we took a little bit of treasuries out of the portfolio and put in a little bit of equity exposure.
Then earlier this week, we dialed it back. We took a little bit of equity stakeout, put a little more treasuries, even though I don't particularly like treasuries as an asset class.
Lyn Alden: It's a volatility shock absorber, so that's a good way to get dry powder on the side, so that you can redeploy it when we get an oversold condition.
Whatever volatility does at any given time, I try to be a little bit on the opposite side of that, and then look for opportunities either to take some chips off the table, or to make a little bit more aggressive bets on some of the companies that I've vetted pretty well.
What maturity do you usually use, Lyn?
Lyn Alden: I have a couple different sets, one is less than a year and then the other one is the one to three-year timeframe.
The longer end can make for a little bit stronger hedge, but I prefer to stay out of the longer and stay in the shorter end.
George: I always tell people that if you're going to have dry powder, you want to be super safe and you're very skeptical of the bank as a counterparty risk, just go into three-month T-Bills.
Just keep rolling them over, so you get a little bit.
You might have some upside with some capital appreciation, but you can always get your money back, then just continue to roll it over or take it out and buy something that's cheap.
How To Determine If A Commodity Price Is Cheap Or Expensive?
George: One thing I wanted to ask you Lyn before we move on to Chris…
How do you determine if something is cheap or if it's expensive?
Lyn Alden: Partially it comes down to discounted cash flows, so I make a model for what I think that they're likely to do over the next five or 10 years.
Then, I also look back and see what has their evaluation been over the past five, 10, 20 years? To see how it compares.
If my thesis is playing out, I take a conservative version of what I think is going to happen and then say “what would the returns be if I buy it at this evaluation?”
In somewhat a more bearish scenario, then I can sell it at this evaluation in five or 10 years.
What does that look like in terms of returns, and how does that compare to what I think I can get from the S&P 500?
How does that compare to holding in T-Bills that whole time? How does that compare to how much precious metal exposure I want to have?
I take a very fundamental view to buy, I generally focus on companies that have high returns in invested capital, fairly low valuations relative to their history and that have preferably some type of growth in there.
Even though the amount of growth I look for depends on the evaluation I'm willing to accept, so if I'm looking at a higher growth company I pay up a higher evaluation.
For that kind of company I use the PEG ratio, price divided by earnings divided by growth, that's the Peter Lynch famous metric.
So, a couple of different kinds of valuation approaches depending on the type of company it is.
How do you layer macro over that?
Lyn Alden: Mainly for asset allocation, so when it comes to how much overall equity exposure I want to have.
If I'm expecting a more deflationary crunch in asset prices like we're seeing today, or if I'm expecting a more reflationary move. That is my overall asset allocation.
In addition, I look at individual countries, their currency situations, their overall debt levels, the different areas of opportunity, or areas of excessive risk.
So, if I’m going to pick a bank stock or a beer stock, I might go into certain countries more than others depending on their macro situation.
George: Understood, for all the viewers, just so you know, Lyn posts her personal portfolio along with her research, and we're going to include all of that in Rebel Capitalist Pro.
We'll get into the pitch in just a moment here. Chris, the same types of questions.
How do you measure value and how do you determine whether or not something is cheap or expensive?
Also, one thing I forgot to ask you Lyn, but I think it's very important people understand your timing and your timeframe for your investment decisions.
I interviewed Juliette Declercq the other day and she says, “I'm bullish on this, I'm bullish on that,” but then people layer over their own timeframe and think that she's referring to that.
— Juliette Declercq (@JulietteJDI) July 29, 2020
So, if their timeframe is 10 years and she's saying she's bullish, they think she's talking about 10 years when she could be talking about the next 10 days or something like that.
Your timeframe is extremely important, So if you guys could expand on that as well, please.
For me, my base timeframe for an individual stock is about five years, so it's possible that I would sell it before then, it's possible I would hold it for longer than them.
That's my base assumption when I'm looking at how long I want to hold an investment. Layering onto that some of the macro stuff, like how much asset allocation I want.
That partially depends on overall sentiment in the market, how overbought or oversold we are at any given time.
Some of my asset allocation decisions can be more based on months, whereas my individual company level selections are more multiyear based, but then how much exposure I want to have to that set of companies is more multi-month based.
George: Got it. Chris, what do you think? How do you determine if something is cheap or expensive?
Chris MacIntosh: Well, firstly, the timeframe is pretty much the same as Lyn. I think we have a bizarre world and it just got increasingly bad ever since I've been in the business and that's over 20 years now.
Where your holding timeframes have just become vanishing, most people are really just markets.
Part of its algo driven, then there's just a lot of retail players, and none of them have any real ability to hold anything for longer than, I think the current holding period's under four months.
When you go back to the '60s it was over 10 years, so we basically go the other way.
The reality is that in most instances a company's fortunes don't change within a four-month timeframe. That's just silly.
It's really just noise, whatever you get within a four-month timeframe, so 100% onboard with what Lyn was saying there.
In terms of determining what is value, I take a similar approach. We look at the various metrics, but I think, trying to look at major cycles and how capital flows through any system.
Capital move into venture capital for example, and then it'll start moving through into the retail space in large sectors, I think I've explained this before.
Alt energy was one of the big things in '04, '05, then started flowing through into the more liquid stock markets and you had a listing of ETFs and synthetic products created by the investment bank.
All this fun stuff, so you have these big shifts of both technology and capital, all moving in one go. If you can get behind those trends, basically you can be lazy to a certain extent.
It's a little bit like, again, I mentioned when I started my career in the dot-coms.
If you had seen some of that capital formation that was taking place well back in the early '90s, got behind that trend, and realized that it was just a trend and there was a whole lot of insanity going on.
You could have done really well. What we tend to look at doing,because we're very conservative is try find, in terms of deep value, sectors that have been absolutely decimated, and then ask why is it that they've been decimated?
Chris MacIntosh: Are there any fundamental reasons why that would continue? Is there a change in the dynamic and is this not being priced by the market?
Then it's a matter of saying okay, if that's the sector that you are comfortable with, and that's where you got the macro overlay saying why is that sector the way it is?
Is there some macro play involved that's caused that to take place?
Then we look at that sector and try to be really conservative, because we know that timing is the most difficult of all. So, we'll try to find companies that are just going to make it through.
We're looking for un-levered balance sheets and strong earnings. Just very strong profitability and typically in the last three, four, five years, that has led us towards ironically all the things that we were talking about at the start.
Where you were saying you get a stimulus check. What are you going to spend it on? I was saying it's like Maslow's hierarchy of needs.
If you look at the sectors that have been decimated, that are really cheap, many of them are in that space were on a relative basis, you can just pull up and it will create a chance.
With respect to the valuation of these sectors relative to the S&P, the Russell and the NASDAQ. So, we can see where capital has flowed into and where it hasn't.
In most instances, we're buying the other side of it and hence our timeframe being longer because it can last for longer. Does the Fed come in and just start buying all the NASDAQ stocks? It's possible.
They can do whatever the hell they want, so that's how we go about constructing a portfolio.
George: As far as commodities…
When you guys try to figure out if they're expensive or cheap, is it a different way of looking at it, because there's not really cash flows, it's not really a business?
The same question for gold or bitcoin, or do you have the same approach? How does that work?
Chris MacIntosh: Well, I guess you've got the commodity and then you've got the commodity companies, and that’s usually confusing.
Just on the commodity side of things you just say okay, well, what's the cost of production? Can they produce this thing at a loss? then you take above-ground inventories.
It's a little bit like FX reserves. When I was cutting my teeth I used to do Forex trading, so you'll look at countries, especially dollar paired countries.
I had a mate who was at Deutsche, years back and he used to run an arbitrage setup on currencies, then he had basically his tail end stuff, which he had about 2% and was always PEGs and things that were semi PEGged.
That was just his asymmetric kind of playoff, but in that respect, he was always just looking and saying “what is the underlying commodity? “
Because it's often commodity countries that are PEGging the currency. Not always, but quite often. Then he'd ask “what's the cost of production of oil?
Right now, Oman's a good example, they are pretty fucked to me, they can't pay their bills and they're dollar PEGged. So you take a country like that and say what's the cost of production?
What is their overall cost? You've taken social spending, all that kind of stuff and say the cost of production for them is about $20, if the price of oil is nine you'd then ask what's the FX reserves look like? How long can they hold the PEG?
You just bull all these macro models on it. I tend to use a similar kind of modeling with respect to commodities, and you say what is the cost of production?
- How much is it that we know of above-ground inventory?
- What does demand look like?
- What is the actual commodity?
Then, if you can get comfortable with that commodity, then you say if you want to leverage behind it then you can buy the equities.
We were looking and saying who's going to survive? That's the main thing.
If you're going to ride that massive trend, you don't want to be right about a sector and then cock it up because you built the wrong company.
So, we'll buy a bunch of different companies, but we're always trying to find those that will first and foremost survive.
You might go and take a half a percent position on something that's more levied and it's got potential, but for the most part that's not how we go about it.
George: For the viewers who don't know, I think Chris and his team have a very similar mindset to me, where they think that commodities are very cheap right now.
I was talking to someone the other day, that pointed out a chart that shows the stock market compared to the commodities.
The gap between them is at an all-time high, so stocks are expensive compared to commodities or vice versa, and that gap has never been as extreme as it is today, so Lyn, how do you look at commodities?
Lyn Alden: For the monetary commodities, gold, some extent silver and bitcoin.
I do a lot of ratio comparisons to the money supply, because the whole thesis of monetary metal, gold is the primary example, is that it retains its value over the longterm.
It has these volatile periods, but essentially it maintains purchasing power from decade to decade, whereas let's call it dollars. Let's focus on the US, but it would apply to any country.
As the number of dollars, especially dollars per capita, keeps expanding dramatically, but gold remains relatively fixed per capita because the production trade is roughly the same as population growth.
I do a lot of ratio work to compare what is gold worth compared to how it was in the '90s or how it was in the 1970s, or even further back, compared to how many dollars have been created since then, especially on a per capita basis.
So I do that ratio work. I also look at things like gold to Dow ratio or gold to S&P 500 ratio, to see how does the money supply compare to gold?
How does the stock market compare to gold? How does the overall credit market compare to gold?
I'm sure you've heard of Exter's Pyramid, right? Which is the inverse pyramid that shows, if you start from the bottom you have gold and then you have cash.
As you go up you get into these larger and larger sections of the financial system, you get into credit and into equities.
Towards the end of a longterm debt cycle like we're at now, the pyramid is very wide, but it's inverted, which means when it's wide it's more unstable.
So when that longterm debt cycle unwinds and they do a large currency devaluation, it really narrows the pyramid, which means a lot of money printed compared to the amount of gold in the system, and even compared to the amount of credit in the system.
When you're comparing money supply to gold, are you using broad money or base money?
Lyn Alden: I do a couple of different methods, but primarily I use broad money. I find that the more accurate depicter.
George: Okay, and jut for definition guys, that would be the M2 money supply. All right. Well, we've almost at an hour, so we'll go ahead and wrap it up right there. I don't want to keep you guys too long.
I appreciate your time. For any of the viewers who would like more of this type of content, this is what we're going to be doing on a weekly basis.
Myself, Lyn, and Chris, plus you're going to get their incredible research and we've got an amazing online forum just for the members.
If you want to find out more about that, and we've got a special introductory price as well, you can go ahead and click and follow the link below, and you'll see some more videos.
Talking head of me telling you all about the product, so I can't wait to see each and every one of you back over on the other side in Rebel Capitalist Pro.