March 27, 2025 • 52 mins
In this episode, I sit down with Porter Stansberry, founder of Stansberry Research, a leading financial publishing company. Porter is known for his bold predictions on economic collapse, market manipulation, and the hidden risks in traditional investments. We discuss why he believes the corporate bond market outperforms stocks, how inflation is being used to erode capitalism, and his controversial “End of America” thesis, which predicted the rise of political unrest, gambling, addiction, and financial instability following the 2008 bailouts. If you're looking for uncensored insights on the future of money, markets, and society, this is a conversation you can’t afford to miss!
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Episode Transcript
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Speaker 1 (00:00):
If you knew what I knew about the corporate bond market,
you would never buy a stock again. I don't know
anybody that can make thirty percent a year in stocks.
They're making more than thirty percent a year in bonds,
and they virtually never lose money. I'd encourage everybody who
really wants to become more educated about finance to study
the corporate bond market.
Speaker 2 (00:18):
What Lenin told Keynes was that the best way to
destroy capitalism was to debouch the currency, and through a
series of inflation, they would lose all relation to money,
and the best way to get rised would be gambling
and death.
Speaker 1 (00:28):
I had a thesis called the End of America that
talks about how the decision to bail out all the
banks in two thousand and eight by printing money was
going to have radical ramifications not just for our economy
but for our society. And I was predicting a collapse
in social norms. In particular, I said, you're going to
see a huge increase in political violence, You're going to
see a huge increase in prostitution, You're going to see
(00:50):
a huge increase in gambling, and you see a huge
increase in drug and alcohol addiction, and I wrote that,
of course in twenty ten. So I stand by all
those predictions. I think they've been exactly correct. But the
best prediction of that end of America thesis, by the way,
was that as everyone goes to contribute to their four
to one k's every month, forty percent or more of
those savings are being dumped into the same five stocks.
(01:12):
When that does break, there will be a tremendous loss
and equity value for investors who haven't been paying attention.
If you're buying companies with a trillion dollars in market
cap that are trading for fifty times earnings, you are
not going to have a good outcome.
Speaker 2 (01:27):
Porter You've spent decades warning investors about financial risks, making
some really bold predictions, some of which probably were ridiculed
at first, but they were proven. Right now, if someone's
serious about growing and protecting their wealth over the next decade,
why is right now the most important time to listen
to this conversation and what's coming that most people aren't
(01:48):
prepared for.
Speaker 1 (01:50):
That's a great question, mark, fantastic question. So there have
been a few periods in my career, most notably the
late nineteen nineties, and then of course at the peak
of the market before COVID in late twenty nineteen, and
then again today where there has been so much concentration
(02:10):
of wealth and so few firms that the process of
indexing has been broken.
Speaker 3 (02:18):
And as a result, as.
Speaker 1 (02:19):
Everyone goes to contribute to their four to one case
every month, forty percent or more of those savings are
being dumped into the same five stocks, and the handicapping
process of the market has been broken by this automatic
feedbar style investing where the biggest stocks receive the most inflows.
(02:40):
And when that does break, and of course it eventually
will break, eventually the active managers will be the big
winners and the indexers will be the big losers. There
will be a tremendous loss and equity value for investors
who haven't been paying attention. And it's it's it's unfortunate
because index investing does work over time. But the risk
(03:01):
to it and the downside to it is these periods
of extreme overvaluation at the end of a long bull run.
And so as you probably know from history, there's not
a lot of times where you see the S and
P five hundred go up more than twenty percent two
years in a row. And the last time we had
a run like this was the late nineteen nineties, and
(03:21):
at the peak, the valuations were very similar to where
they are today, where there was enormous aggregation of wealth
and a very small number of stocks and extreme overvaluation
in the market compared to the earnings. And the result
in two thousand was an eight year bear market that
saw the indexes lose sixty percent of their value. And
(03:42):
I don't know exactly how long or how bad the
bear market will be, and of course I don't know
exactly when it will start, but I do know that
if you're buying companies with a trillion dollars in market
cap that are trading for fifty times earnings, you are
not going to have a good outcome. And when those
stocks make up such a huge percent of the index,
the index results themselves will be skewed for a very
(04:03):
long time. So now is a really important time if
you are an equity investor to pay attention to the
levels of valuation and your holdings, and I think most
importantly to raise some cash. You want to have cash
to buffer against the volatility that is likely to emerge
over the next twelve to thirty six months. And you
want to have cash so that you can of course
(04:25):
buystocks when they become much cheaper. So those are two
simple things that I would encourage everybody to do.
Speaker 2 (04:31):
And so what's coming that most people aren't prepared for
is because the indexes have gotten so concentrated by just
a couple so seven mag seven and the S and
P five hundred. I just actually recorded a video earlier.
Today's joined the Nasdaq has only reached this level of concentration.
It's the highest ever, right but since two thousand and
(04:51):
two thousand and eight. Because of the over concentration, if
a couple of those companies stumble, it drags the whole
index down. And that's what most people aren't prepared for.
Speaker 1 (05:03):
Yeah, you know, and take a company like Apple. Look,
Apple's a great business. I'm using their products right now
during this video recording. There's nothing wrong fundamentally with the business.
But it's an enormous company and it hasn't grown its
sales or its earnings in like five years. So it
should not be trading at a gross stock multiple. It
shouldn't be trading at twenty six times earnings. It's not
(05:26):
worth that much. Even though it's a great business, it's
a very expensive stock. Now, if Apple was trading at
fourteen times earnings or fifteen times earnings, I'd be telling
you is probably a goodbye because it is a great business.
But that difference in valuation can make an enormous impact
on people's wealth. And because of the size of Apple
in the index, it's going to have an outsize effect
on the index itself as well. So the thing that
(05:48):
people aren't paying attention to, and the reason why they
should listen to this call, is because there's going to
be a sea change and the relative success of the
index investors to the value investors over the next decade.
And listen, it's a simple thing to do. You can
do something as simple as to switch out of the
S and P five hundred index into an equal weight index,
(06:10):
and you can avoid a lot of the carnage that's
likely to come. So it doesn't it doesn't have to
be any kind of radical change that you make, but
it is time to make that kind of change.
Speaker 2 (06:19):
Yeah. Now, you mentioned sort of this sector rotation, going
from growth stocks back to potentially value stocks, which is
sort of the Warren buffet model, And I know you're
a big fan of Warren Buffet. I learned a lot
about buffets investing style from you and from your newsletters
and sort of his mode. I'm looking for capital efficient
(06:40):
business is the way that you've broken that down. Obviously,
we've seen that not work so well over the last
decade or two, a couple decades probably, and so you
often wonder, you know, you have these businesses you mentioned
growing at a growth multiple who don't have profits, right,
and they're certainly not efficient with that for sure. Recently
wrote up a long thread on Google showing how inefficient
(07:02):
it was with its capital. So I guess the question
is what you're saying is that you think there's going
to be a rotation back to that people have been
saying that for a long time. Doesn't appear to be
the case. Do you think it's possible that maybe we don't?
And part of the reason why would because what Lenin
told Keynes was that the best way to debout or
destroy capitalism was to debouch the currency, and through a
(07:25):
series of inflation, they would lose all relation to money,
and the best way to get rich would be gambling
and theft. And at the end of every society of
high inflation, you see gambling sort of takeover. We see
that with the meme stocks today, meme tokens and whatnot.
I mean, obviously eventually everything comes around.
Speaker 3 (07:43):
But like.
Speaker 2 (07:45):
I guess, do you think the value investing transition is near?
Speaker 1 (07:50):
Yeah, So there's a couple different questions in there. Let
me start with what you wrote about canes and the
idea of money as being a barometer of the health
that's a society. I agree with this absolutely completely, and
as I'm sure you're aware, I've been writing.
Speaker 3 (08:05):
About this topic for almost two decades.
Speaker 1 (08:08):
I had a thesis called the End of America that
talked about how the decision to bail out all the
banks in two thousand and eight by printing money was
going to have radical ramifications not just for our economy
but for our society. And I was predicting a collapse
in social norms. In particular, I said, you're going to
see a huge increase in political violence, You're going to
see a huge increase in prostitution, You're going to see
(08:30):
a huge increase in gambling, and you see a huge
increase in drug and alcohol addiction. And I wrote that,
of course in twenty ten, so I stand by all
those predictions. I think they've been exactly correct. I also said,
unfortunately they have. Yes, yeah, I also predicted a course
of America would lose its triple A credit rating, and
you know, a lot of other specific things along the way,
including I predicted Obama's third term and talk about being
(08:52):
laughed at in twenty twelve, they were mocking me on
national news shows, Ladies and gentlemen, I present you Obama's
third term otherwise known as president by So you know,
I think I was right about a lot more things
than I was wrong about. But the single best prediction
of that end of America thesis, by the way, was
that a great way to hedge from these risks would
be to buy the Permian oil basin, in particular Texas
(09:14):
specific land, which I recommended at about twenty five dollars
a share and lately has been close to two thousand.
So you know, I'm not saying I get everything right,
but there's a couple of really good ideas and that
whole thesis. The second question that you asked was whether
or not this inflation would cause people to rotate out
(09:35):
of high growth stocks and into value stocks, and.
Speaker 2 (09:39):
Well, specifically and more specifically, would it keep them in
the gambling mode and not have them rotate into growth.
Speaker 3 (09:46):
Yeah, I actually don't think so.
Speaker 1 (09:48):
I think let me explain why the gambling really came
in stocks. At least, the gambling came from the fact
that we had ridiculously artificially low interest rates for so long.
When long term bond yields during COVID went down to
one percent, there is a direct correlation between the stock
(10:12):
market multiple, that is, the multiple of earnings growth and
the ten year treasure yield. And so if you've got
one percent treasure yield, you know, it's the same thing
as saying that stocks can trade out one hundred times earnings.
And obviously that is not going to last for long.
So what I think you're going to see is as
(10:33):
that treasury yield marches higher to compensate bond investors for inflation,
the market multiple is going to move lower. Right now,
the SMP is trading, it's something like twenty five times
earnings on average, And you know that if you have
a if you have a five percent treasury yield, which
is about where it's at, that can get you to
(10:55):
twenty times earnings on stocks. If we go to seven
percent long term interest rates, seven percent yield on treasury,
you know you're going to see stocks trading at twelve
or fourteen times earnings. That is just that is that's
a gravity. It is because investors have a choice. I
can go get a risk free treasure yield or I
can go get an equity earnings yield. And the earnings
(11:17):
yield has to be higher than the treasure yield, and
right now it's not, and that is not going to
bode well for expensive stocks. But let me just say
something else that there really isn't a difference between value
investing and growth investing.
Speaker 3 (11:29):
There's really not.
Speaker 1 (11:30):
There are stocks that are worth more because they are
able to grow faster and produce higher free cash flow
yields over time, and then there are stocks that grow
slower and therefore we're not going to produce very much
free cash flow yield over time. And there's relative differences
in price, and of course investing is the game of
arbitraging those differences. Here's what I can tell you. If
you looked up Coca Cola's earnings this week, you saw
(11:53):
a business that only had a one percent growth and
its case volume. In other words, they only sold one
percent more soda this year than they did last year,
but their earnings increase twenty percent because they are able
to raise prices. So what you will really see as
the inflation comes and as the market multiple declines, is
(12:18):
you will see the success of businesses that have pricing
power relative to the success of businesses that do not
have pricing power. And I believe that one reason why
Google stock has been so troubled lately is because there
is very little moat around web services. There is going
to be very little moat around AI services. So all
(12:39):
of this capital spinning you're seeing these big tech stocks do,
they're going to have very low returns on invested capital
from those investments. I don't care whether I use AI
from Twitter or AI from Google, or AI from Apple
or AI from Ali Baba, and I don't I think
that's going to be a big problem for them. But
I definitely care who's soda I'm drinking. I definitely care
(13:01):
who's chocolate I'm eating. I definitely care about which hotels
I stay in. So the companies that have the moat
and they have the pricing power will be the companies
that fare best during an inflation and if I could
just give you one more idea about this, The companies
that will do the best during an inflation are the
firms that are able to get the money up front.
(13:23):
You know, one reason why subscription newsletter businesses are such
good businesses is we get the capital upfront. And as
you probably know and an inflation, having the money first
matters because then you're able to invest it and you're
able to usually to get a higher rate of return
than the inflation. So then you get the carry and
(13:43):
so businesses, particularly like property and casualty insurance companies are
going to have outstanding results during the next four or
six years because they're yield and their carry over inflation
will be very significant, and it'll be you know, think
about it, and you know an insurance company that has
twenty billion dollars in bonds, Well, during COVID, they're making
(14:06):
nothing on all those bonds. Now you know, you can
get money good corporate bonds for seven and nine percent,
So the earnings of these insurance.
Speaker 3 (14:15):
Companies are going to come up a lot.
Speaker 1 (14:16):
So certain kinds of finance businesses will do very well
during this inflation too.
Speaker 2 (14:21):
Man, you dropped a lot of knowledge there. Some things
that I definitely want to come back to. I want
to get into some of your frameworks and you're investing
playbooks that you've used because you've had a really long
career and to the point that you made you made
a lot of really good calls and I remember all
those specifically, I remember the Obama's third term and the
oil patch. So I definitely want to get into that.
But you mentioned the financial publishing business being a good business,
(14:45):
partly because you bring the money sort of upfront. I
know you've been partnered with Bill Bonner, maybe he's the
head pioneer, but to me, you've sort of pioneered this
space of financial information, financial publishing, if you want to
call it that, finn pub I think they as it's called,
you know, for me, I obviously, through my YouTube, we
(15:06):
reached you know, almost one hundred million people now at
this point, and I get asked quite often like.
Speaker 1 (15:11):
That's incredible, Mark, that is amazing. Yeah, And that is
not easy to do. I've seen a lot of people
try to build audiences on YouTube.
Speaker 3 (15:18):
It's very difficult.
Speaker 2 (15:19):
So I get asked quite often, Mark, what what investing
books should I read? And I always tell them like none,
like the books are old, right. I get sure you
can go read Value Investor, but like most of the
books are old, and I tell them I really learned
everything from from financial newsletters because it was like the
play by play, So it was getting getting explained to
me on a weekly or monthly basis and watching it
(15:40):
over a long period of time. That really helped me
understand that. So I want to talk about that business
in a sense for a minute. I'm not a fan
of the traditional education system at all. It's more of
like a just in time learning for me, and so
that's why it was really helpful for me. So I
want to learn some of the maybe controversies and challenges
that you had trying to build this like so for example,
(16:02):
bringing this information trying to help people. I was saying earlier,
I think on your newsletter you'd write every week like, hey,
this will probably lose me subscribers. Why don't I to
tell you what I think you should know, what I'd
want to know. But at the same time, you've been
attacked for that. I know there was an SEC case
brought against you at one point for maybe misleading people
(16:23):
or something like that. Tell me about how hard it's
been to pioneer this case of really trying to bring
education and highlight and help people with their financial literacy.
Speaker 1 (16:34):
When I got into the financial newsletter business in the
mid nineteen nineties, the whole industry was populated by stock promoters.
Speaker 3 (16:41):
So the idea wasn't.
Speaker 1 (16:42):
That you're going to make any money in subscriptions. The
idea was that you were going to promote stocks that
you held an interest in or that you were being
paid to promote. And I'll never forget one of the
most successful quote unquote publishers at the time, when he
learned about what Steve Sugary and I wanted to do,
which was to provide you know, high, high quality and
(17:02):
objective good advice, he laughed at us and he said,
well that'll never work.
Speaker 3 (17:06):
Forell us.
Speaker 1 (17:07):
And you know, I'm not interested in I'm not interested
in a fair game. And I just had the idea
that there was no reason for otherwise very intelligent, successful
people like small business owners, doctors, lawyers, accountants. I've always
had a lot of airline pilots, people who are willing
(17:27):
to think and read. There's no reason for these people
to spend a percentage of their entire asset base every
year to get reasonable investment advice. So I always thought,
you know what, if we're charging a reasonable price one
hundred dollars, five hundred dollars, even one thousand dollars, and
we're providing really good advice that makes people a lot
(17:47):
of money, surely they'll renew and surely we can build
a business around that.
Speaker 3 (17:52):
And we did.
Speaker 1 (17:52):
Of course, we were extremely successful with that model, where
we never owned the stocks that we wrote about, where
we hired really smart, truly offish people in the spaces
to do the analysis, and where we kept honest track records,
I mean, simple, simple business one oh one. But at
the time, in the late nineties, it was unheard of
in the newsletter space. And we, you know, we we
(18:14):
ruffled a lot of feathers because we put a whole
lot of brokers out of business. And when you had,
you know, the most important account call you and say
I'm not going to be with you anymore. I'm going
with Stansbury research. That brought us a lot of attention
and a lot of you know a lot of people
in the in the in the financial industry trying to
shut us down. The most notorious example of that was
(18:35):
now it's called law fair, you know. Back then it
was just called you're irritating rich people were going to
come get you. And so the SEC actually sued me
for recommending a security called USEK that was spun out
of the government itself. It was a former Department of
Energy program. And what was going on was that there
(18:56):
were members of the government who were manipulating the stock
by with holding certain approvals until they had time to
stock up on the business. And just to give you
an idea, when I recommended the stock, it was trading
at half of book value, and it was paying an
eight percent dividend, and it was selling uranium fuel to
power plants around the world, Like this is basically a
bond is not a speculative investment to make. And they
(19:20):
had a pricing agreement that was going to allow them
to cut their primary cost of sales by more than
fifty percent, and they needed government approval to implement this
pricing change, and the government had been withholding that approval
for three years while the stock got manipulated by these insiders.
And I wrote up the whole story and wrote it
honestly and never owned the stock of course, and told
the truth about the whole thing. I learned a very
(19:41):
valuable lesson when you accuse the government of fraud and
you're not named Elon Musk get ready. So I spent
the next ten years fighting them in court. I of
course never conceded that I had done anything wrong, and
of course I lost, because you cannot fight the government
and a government court. Interestingly, during the period that we
(20:03):
fought the government, we found the exact same documents from
Bank of America, which was their banker, that said the
exact same thing that my report said. So the financiers
and all the people on the inside knew everything that
I knew. I had just done something the government didn't
want me to do, which is tell the public about it.
So I had to pay a million dollar fine. And
and you know, JP Morgan has spent forty billion dollars
(20:26):
in fines with the SEC over the last twenty years.
I've got I've paid a million dollar fine for telling
the truth about a stock and one last thing. By
the time that the case finally was adjudicated, it had
gone up three hundred percent. So I think I'm the
only only quote unquote, you know bankster whoever, whoever got
sued from making his his clients.
Speaker 3 (20:46):
A whole lot of money. So that's that. Yeah, that's
that story.
Speaker 1 (20:51):
But you but since I have stopped writing about government
corruption now now I only write about corporate corruption. So
I went after ge for their fraudulent accounting for a
decade before that company collapsed because of fraudulent accounting. I
went after General Motors for, you know, for just the
lunacy of its entire business model, and objected vehemently to
(21:12):
the quote unquote bankruptcy of General Motors. You might note
that the government spent fifty billion dollars on bailing Now
General Motors unions and the company today, fifteen years after
the bailout, it's still not worth fifty billion dollars.
Speaker 3 (21:27):
I mean, just this kind of.
Speaker 1 (21:28):
Lunacy is the stuff that you know, newsletter gold is
made out of people.
Speaker 2 (21:33):
The kind of stuff that the do the Dodge office
is is pulling up all this waste and fraud that's
in there.
Speaker 1 (21:40):
So so those are those are all been good stories
and fun things to write about.
Speaker 3 (21:44):
Over the years.
Speaker 2 (21:46):
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sort of like these Wall Street fund managers sort of
making an outsize return. Right if you look at like
your traditional mutual fund for one k over the life
of that fund, in most cases, it seems like the
fund managers will make maybe up to two thirds of
(22:52):
the returns of that versus the individual investors. And so
it's almost like these things are over complicated in a
sense where it's like, oh, it's too much, just give
it to somebody else and let them keep it for
forty years, and you're trying to take the other side
of that, which is like, hey, look like you spent
all this time learning how to make the money, Just
spend a little bit more time on how to manage
your money.
Speaker 1 (23:13):
Yeah, And there, of course, there are a lot of
really good options that people are never introduced to. I
think the biggest thing maybe I've done for investors in
my career is teach so many people about the opportunities
in the corporate bond market. I say this very sincerely.
If you knew what I knew about the corporate bond market,
you would never buy a stock again. And just to
give you some proof around that, the team that I
(23:35):
set up at Stansbury Research to cover corporate bonds for
our subscribers. The product is called Credit Opportunities, and it's
been published, you know, consistently for a decade now, and
they just publish their track record this week and they
have a I think it's a ninety three percent win
(23:55):
rate and a thirty three percent annualized return and their
record mandations. Wow, I don't know anybody that can make
thirty percent a year in stocks. They're making more than
thirty percent a year in bonds and they virtually never
lose money.
Speaker 2 (24:09):
Only Stanley trug Miller. Oh he's the only one.
Speaker 1 (24:11):
Right, Yeah, I mean the results are really, really outrageously good,
and so I'd encourage everybody who who really wants to
become more educated about finance to study the corporate bond market.
And of course most people again don't realize that the
bond market is way larger than the stock market. And
there's a reason why you see stocks advertised every day
(24:32):
on CNBC, but you never see a bond ever ever
even mentioned, And that's because the rich people don't want
you to buy them.
Speaker 2 (24:41):
And if the bond is worthless, then the stock is worthless.
Speaker 3 (24:45):
You got that right.
Speaker 1 (24:46):
And what's pretty funny is that if you if you
try to trade distress bonds, the broker will usually tell
you that you're not allowed to buy them, but they'll
sell you the stock of the same company no problem.
Speaker 2 (25:00):
So going going back to Stansbury Research, I mean, really pioneering.
And the reason why I really like this story is,
I mean, again, what you said on your Newslatyers, and
I've tried to now follow is like trying to help
other people telling them what I wish I would have
known earlier in my career. I got into a lot
of trouble in two thousand and eight, which is why
I got interested in learning what this whole market was about.
(25:20):
That was my interest. So in nineteen ninety nine and
you started, what were some of the big things that
really pushed Stansbury forward? I mean, was there some big
things along the way or was it really that end
of America thesis that you put out? What we was
sort of the turning points there?
Speaker 1 (25:34):
Yeah, well, just a point of fact, I actually got
started writing newslatters in nineteen ninety six, and I got
started working for a small business to business research company
in Soft, Florida that was called Welt Research. Okay, and
that business ended up getting bought by Bill Bonner, who
as a major newsletter publisher. We got all moved to
(25:55):
a Gore moved to Bill's company, Agora in Baltimore. And
I'm not sure sure if you know what happens when
companies get acquired or merged. Usually everyone gets ended up
getting fired. So I was on the team. I was
on the team that got acquired. So I was on
the you can't work here anymore team, And so I
walked out of that business with like thirty thousand dollars
in savings and a laptop computer and I started my
(26:17):
own company, literally from my kitchen table, called Stansbury Research,
and we started by covering tech stocks, because that, of course,
is what people most wanted information on. And as a kid,
I had dabbled in computer programming. I'd gone to the
you know, the programming summer camps, and I knew enough
to be dangerous with programming computer and so I knew
a little bit about how the Internet was going to
(26:38):
really change the world. And I was excited about those ideas,
and we recommended some outrageously good investments. I'm talking about
Amazon and Broadcom and JGS, Unifas and Texas Instruments. We
had some outrageous great investments and it brought a lot
of investors to my door. And then of course there
was the tech complete blowout bear market, and you know,
(26:58):
to survive, I got good at figuring out how to
make other kinds of safe investments too, and I brought
another analyst, and we grew the business and by two
thousand and four, so this is just five years after
we started, we were a gore as big as biggest
and best business by far, and then so bringing in
Steve sugar Roode, bringing in Dan Ferris, bringing in David Lashmett,
(27:21):
bringing in David Eifrig, bringing in some really excellent people.
I mean Ifrig was a prop trator for Goldman for
twenty years and there's not many people who know more
about the options markets than he does. So those are
just the kind of talent we brought in that really helped.
And then just you know, just putting one foot in
front of the other, just building. My whole goal every
(27:42):
year was to increase our renewal income, and so I
wasn't worried about the top line. I was just worried
about satisfying the customers and doing a great job because
I figured if you could keep people, then over time,
you know that that return on marketing spend would just
grow enormously. And by the time I retired from Stansbury
Research Mark we had we had an average lifetime value
(28:03):
and excess of three thousand dollars per customer.
Speaker 3 (28:05):
Wow.
Speaker 1 (28:06):
So by focusing on delivering value to the subscribers, we
built an amazingly good.
Speaker 2 (28:10):
Business lifetime value of three thousand Is that what you said?
Speaker 3 (28:15):
Yeah, could have.
Speaker 2 (28:17):
Just sold the more expensive products.
Speaker 1 (28:20):
Well, we definitely upgraded people as they stayed with us.
Speaker 3 (28:24):
I'm joking by that, Yeah, yeah, but I.
Speaker 1 (28:26):
Mean we But you don't you know, as you know,
you don't sell. You don't go from selling somebody one
hundred dollar newsletter to selling them a ten thousand dollars
newsletter unless you've done something right for them.
Speaker 2 (28:34):
Right, Yeah, for sure, you have to prove that. I
was recently telling some youngsters about starting my first business
in the mid nineties or late nineties actually, and that
was like pre internet days, and so I was explaining
to him. I was like, I mean, I was just
twenty years old in my early twenties, and I got
this office and I'm trying to build this high tech
medical equipment company. But that was like pre Internet, So like,
(28:57):
how did I even learn about business? How do I
even reach out to customers? Right? It was like this
crazy world. And so you built this sort of like
pre internet as well, So like how do you scale
a business like that without being able to advertise on
Facebook or run ads or anything like that?
Speaker 3 (29:14):
Can I tell you the truth? Yeah, I'd love to
you rip off a lot of printers.
Speaker 1 (29:18):
Okay, what does that mean, yeah, I mean you had
to print everything. So we would we would we would
send out books in the mail. So I would write
a book about something like the New Railroad across America,
which was all about the Internet, and we would publish
a book and we would put it in a number
ten envelope, and we would send it to as many
people as we thought would would be interested in it,
(29:40):
and the book would be free, and then you know,
there'd be a reply device in the back of the book,
a coupon basically that they had to send back to
us with a check, and they could also facts in orders.
I remember when I started, I'd go down to the
fax machine every morning and see what see what the
night had brought. But the only way you could make
that work, because printing was very expensive and so is
(30:03):
mailing things. The only way you can make that work
is if you got like, you know, six month terms
from your printer, so they they'd have to they'd have
to print everything for free for you and depend on
you to pay them back once you got the subscriptions.
Speaker 3 (30:16):
To come in.
Speaker 1 (30:17):
Got it, And today oftentimes the subscriptions didn't come in,
in which case he said, I'm really sorry to the
to the poor printer.
Speaker 2 (30:26):
Yeah, oh, that's that's how you get to that. And
now nowadays in the online world, they have like these
book funnels, right, so that's like a common thing now, right,
So now you give the book away for free plus
shipping and then you get them into your funnel. I'm
sure you're probably well aware of that. It's and then
and then now we have print on demand, right, So
I try to tell these kids, like you have no
idea how easy it doesn't make money these days. Pre
(30:47):
internet it was hard, I mean trying to make those
deals like that.
Speaker 1 (30:51):
You know, I'm not so sure about that mark. I.
I think it was actually easier when I got started
because there I didn't have any competition. It was there
was such a big capital hurdle to advertising that the
advertising channel was a lot quieter. Today it is so
noisy out there. Everyone can be a publisher, everyone can advertise.
(31:14):
It's very very hard to break to get your message
to break through the noise.
Speaker 2 (31:20):
What do you think about in regards to that and
the change? So you mentioned a couple names frig or
whatever that were like Goldman prop traders, but like nobody
knows who they are.
Speaker 3 (31:33):
Like it.
Speaker 2 (31:33):
We're Goldman cool with thousands of other people, right Whereas today,
you know, you have all these TikTokers and Instagrammers and
YouTubers like me that build up brands and are able
to sell that more off of like a name, like
a brand name, as opposed to like trying to push
like even though somebody maybe has this storied career decades
(31:55):
in the trenches of some of the most prestigious financial institutions,
but nobody really knows them, how is that chat affected you?
We're trying to deal with that.
Speaker 1 (32:02):
I think in my space, your resume matters a great deal.
I mean, Eifrid was one of the story people that
was on this legendary Goldman options team that included.
Speaker 3 (32:16):
Robert Rubin and a lot of other really.
Speaker 1 (32:18):
Successful smart folks that pioneered a lot of the quantitative
trading that now dominates the markets.
Speaker 3 (32:25):
So in the financial world he was very.
Speaker 1 (32:28):
Well known and for example, like the guy who does
all my corporate distress bond investing at my new firm,
Portero and Company. His name is Martin Fritzen, and he
literally created the high yield research business for fixed income
on Wall Street. He started at Solomon brothers in the
nineteen seventies. He's in his late seventies, and there isn't
(32:50):
anybody in the entire corporate fixed income world that doesn't
know who he is and hasn't read his books. He's
iconic in fixed income, and so I think having those
people is really important if you're gonna if you're gonna
be a first class financial publisher, you have to have
absolutely first rate analysts and you have produced work that
(33:10):
is demonstratably better than the competition. And that's I just
had an instinct for that. I had an instinct that
the best guy in the world at distressed corporate bonds
is probably worth about ten thousand times more, you know,
than the fourth best guy in the world of that
that that that genius and experience in those markets is
(33:33):
worth an enormous premium. And so that's the way I
always But I went about trying to build our teams,
which was you know, just gent honally, just offering to
pay more money than other people and hoping that we
could drive gross margin with that talent.
Speaker 2 (33:48):
But now you're trying to get you have to give
that story to retail because probably most mom and pops
who have somebody managing their money for them through their
you know, four on and K mutual fund, et cetera.
Maybe aren't aware of that. Then you sort of have
to kind of use that resume market that resume out
to him.
Speaker 3 (34:05):
I think that you just you just have to explain it.
Speaker 2 (34:08):
Yeah.
Speaker 1 (34:09):
Once once they once they see who this person is
and they see that he has worked at every important
fixed income desk in the world, and once they see
his track record, the light bulb turns on. It's kind
of like this. You know, if you're if you're going
to go, if you're going to go get prostate surgery,
do you do you want to go to the Mayo
(34:30):
clinic And do you want to have the guy who's
seventy years old and has done fifty thousand of these
operations or do you want the twenty four year old
who just got out of med school at your you know,
at your local clinic.
Speaker 2 (34:42):
Definitely want the resume, you definitely do it.
Speaker 1 (34:44):
And so I think when I think when it comes
to people's harder and savings, they're willing to pay up
for quality, and they you know, and as long as
you're as from where I sit as a business person,
as long as I deliver on that than what I
have found is that you can. It's just a way better, Bui.
I mean, our first class business is way better than not.
Speaker 2 (35:05):
I want to get into the future, because you've done
really well with some of these really big calls in
your career, as we've already discussed. I want to talk
about the future, upcoming trends, and so maybe we get
some more porter predictions from you. But before we do that,
I want to establish a baseline and more of like
a framework, and so I can understand sort of, you know,
the playbooks and the frameworks that you use to invest
(35:26):
off of. So, for example, like acid allocation seems to
be a big framework of yours. What are some of
like the lenses that you view the world through. Give me,
give me some of your core frameworks that you would
build build your portfoliof of.
Speaker 1 (35:42):
I say, the biggest one is that I figured out
that after two thousand and eight that there was no
there was no intrinsic value and fixed income, that you
weren't safer in bonds than you were in stocks. And
you know, and I say that because I saw that
the governments were printing money and using that printed money
(36:04):
to buy bonds to force down the interest rates. Now, listen,
if you're a bond trader, that's great news. It's going
to force up the price of bonds, and you're going
to make money in the short term. But I thought
that over time that the resulting inflation will be far
worse than the gains that you were going to make
in the bonds, and that that would lead to trouble.
And I would point to Bank of America's very serious
(36:27):
problem right now as being one of the really one
of the biggest unaddressed problems in the financial markets. Bank
of America bought seven hundred billion, maybe a little bit
more of these bonds in the summer of twenty twenty,
and the value of those bonds is now fallen by
seventy five eighty percent, and so they're sitting on huge losses.
(36:48):
I mean, I'm just estimating, because I don't know exactly
how they've hedged. I don't, I can't, you know, I'm
not privy to all that. But they have said publicly
that the losses are an excess of one hundred billion dollars.
I mean, that's a really bad outcome for their shareholders.
And that's a bad outcome for anybody who's been in bonds,
and I'd point out to you that there's some you know,
there's some really good hedge funds. For example, Bridgewaters All
(37:09):
Weather Fund is about forty percent allocated to bonds, and
their performance since twenty twenty has been really poor. And
I think you're just going to see a lot of
that that the folks who are relying on the sixty
forty asset allocation stocks and bonds, the bond allocation is
going to really hurt them over the next decade. And
so the first thing is, I think you have to
get out of court of you have to get out
(37:31):
of government bonds, and corporate bonds are a little bit
different than government bonds. And you know, short duration is
different than long duration. The bond market is complicated. I'm
speaking particularly about long dated mortgages and government bonds. So
stuff that's ten years and longer in duration is just
simply uninvestable in my view. And I and so the
(37:52):
money that used to be in there for safety is
going to fleet a bitcoin, it's going to flee to gold,
It's going to flee at a very high quality equity.
If you get a company like Coca Cola or Hershey,
and they're able to increase their dividends every year, they
can protect you from inflation. And those are the kind
of businesses that I see replacing bonds as and the
(38:13):
asset allocations of major funds. So that's the first lens,
which is that bonds are no longer safe and we've
got to find some other way of managing volatility. And
the way that I would suggest that you do it
is by hedging with gold, hedging with bitcoin, hedging with cash,
hedging with property casualty insurance companies which own a lot
of bonds but own them, and actively managed portfolios where
(38:35):
they can hedge against the interest rate risk, and of
course owning very low beta, low volatility corporate equity as
a way of hedging the portfolio in lieu of holding bonds.
Speaker 2 (38:47):
Do you also see those things? I mean, the way
I was supposed to work in the past is like
I mean, the rayd aalio is fund that's not working anymore.
To your point, I think they have had like seventy
billion dollars in redemptions in the last couple of years,
but you know, some assets going down and other assets
sort of making up for that. Whereas now you're talking
about moving into lower volatility assets, but they're not really
(39:09):
working opposite. Everything's still working in unison. It's just some
stuff doesn't go down as far as others.
Speaker 1 (39:16):
Well, I think that the losses you've had in long
term government bonds in the last five years are historic.
I don't think that bonds have ever seen the kind
of carnage that we've experienced, and you know, people don't
talk about that in the nightly news. I'm not sure why,
but those are very, very big and important losses, and
most of those losses are held inside our banking system,
(39:39):
and the view is that they'll just eventually get papered
over one way or another, and I think that's going
to be very inflationary. Likewise, I think that it's a
it's a pipe dream to believe that we can pay
for our government by taxing our foreign trading partners.
Speaker 3 (39:56):
I wish Trump all.
Speaker 1 (39:58):
The best in the world to lower tariffs around the world,
to expand markets for American products. I think that's great,
and I hope he's able to accomplish that. But I
don't think that anybody in our country should be cheering
the creation of yet another government revenue center, whether it's
external revenue or internal revenue. What we badly need in
our country for economy to grow is simply less government
(40:20):
overhead in total and lower taxes. And until you see that,
I don't think you're going to see any material change
in the rate of inflation or the risk to inflation.
Speaker 2 (40:30):
I want to come back to that. That's a big topic.
But going back to the Barbels or not the Barbell
but but acid allocation strategy, So sixty forty dead out
of bonds, hedging with other assets low volatility. Specifically, you
also said bitcoin and gold. I'm a big bitcoin guy.
That's sort of my main domain. Most people would say
(40:51):
that bitcoin is too volatile. Bitcoin is a big time
risk on asset. I think it sniffs out almost inflation
before any other assets. It's so sensitive to that. I
wouldn't typically think about people hedging their portfolio with that.
I mean I do, but I'm just curious that is
not like mainstream financial advice that typically you would use it,
(41:12):
maybe to I guess, increase the volatility to the upside.
Speaker 1 (41:17):
Well, I think that. I think that both gold and
bitcoin have become risk on assets and this latest market
cycle since since the COVID bottom in twenty twenty. That's
interesting because gold used to be completely a counter position.
(41:37):
It used to do the opposite of what the markets
would do, the stock market would do, And so.
Speaker 3 (41:43):
It may You may be very right. It could.
Speaker 1 (41:45):
It could be that right now that gold and bitcoin
no longer provide much of a hedge against a collapse
and stock prices. But I think that the bigger risk
is a collapse in the personal power of the dollar.
We our entire treasury system is completely out of control,
and I'm very hopeful and optimistic that Elon and his
(42:07):
efforts will be successful and they'll get an uncontrol. But currently,
right now, this year, in twenty twenty five, we've already
racked up an eight hundred and fifty billion dollars primary
deficit in government spending, which puts us on track for
you know, something between three and four trillion in deficit.
Speaker 3 (42:25):
Spending this year.
Speaker 1 (42:27):
And you know, Mark, I would love to be wrong,
but you fucking call me when government spending actually declines,
and I'll come rub your feet or something.
Speaker 3 (42:38):
I mean, I just I just don't.
Speaker 1 (42:40):
I will believe it when I see it, and until
I see it. The idea that we're running something between
eight and ten percent of GDP and deficit spending with
full employment, that is a recipe for outrageous levels of inflation.
I mean, I people, this is an absolutely out of
consensus call, like many of my calls that and over time,
(43:01):
but I think you'll see at least a fifty percent
devaluation of the dollar over the next six to eight years.
And I don't even think that's an aggressive call. I
think that's absolutely inevitable and so and so. Yeah, I
think you've got to hedge against the decline of the
dollar in both bitcoin and gold.
Speaker 2 (43:22):
I'm one hundred percent with you on that. I would
say it's in five years, not six eight years, right,
I mean, we've seen it already drop fifty percent, and
it obviously depends on what you're measuring it against. Certainly
to bitcoin is dropped more than that. But you know,
media and US real estate and most of the big
staples has dropped fifty percent in five years. And at
the rate of the government debasement, I mean, the FED
balance sheet is expanding by sixteen percent a year over
(43:45):
the last four years.
Speaker 3 (43:47):
So yeah, like I said, I don't think my call
is even that aggressive.
Speaker 1 (43:51):
Looking at the I think I think it's it's but listen,
it's scary though it is. And folks, look, that's why
you've got to have cash as well as bitcoin and gold.
Speaker 2 (44:02):
Why if it's going to lose fifty percent, why would
you want to have a lot of cash.
Speaker 1 (44:06):
Well, because you just can't know exactly how it's going
to unfold. But I can tell you this, I would
not be surprised to see CPI with a double digit
run rate inside at some point in the next four
years during Trump's term, if we have a real trade war,
if he's not able to get the government spend under control,
(44:27):
there's going to be huge repercussion repercussions and it'll be
very inflationary. If you get a double digit CPI number,
you're going to have the ten year treasury at twelve
or fourteen percent and stocks will fall by fifty percent
in that case. And I think if you've got a
plummeting stock market, you've got soaring inflation. I don't believe
(44:48):
that bitcoin and gold are going to do that well.
I think they're going to do better than the stock market,
but I don't think their nominal price is going to
increase I think. I think it will be risk off
and people are just going to be afraid, and when
they get a free they're going to go into treasury bills,
they're going to go into thirty day paper that's going
to be yielding fifteen percent, and they're just going to hide.
And so I think that's why you have to have
(45:09):
cash now, because there could be a very large nominal
price correction to both stocks, gold and bitcoin. Well that's
not my base case, by the way, I'm just saying
that that that outlook cannot be dismissed. That's say a
thirty percent probability in the next four years, and it
used to be that was a zero zero probability outcome.
So that as that continues to increase, you have to
(45:32):
be hedged, and an important hedge is cash.
Speaker 2 (45:36):
So the going from the crash up or melt up thesis,
which was your big time base case, it's now diminishing
a little bit to the potential of maybe having some crash,
is what you're saying.
Speaker 1 (45:49):
Yeah, my my base case is that you're going to
see inflation at six to eight percent for the next
five years, and that you'll see you'll see treasury bonds
at you know, bouncing around between five and seven percent,
and that you'll see stocks trading, you know, depending upon
growth rates at at eighteen to twenty times, and that
you'll see gold and bitcoin continue to appreciate. I don't
(46:11):
think you're going to see gold appreciate at forty percent
a year every year, but yeah, I you know, I
think that there is a very very substantial risk of
a big correction and equity priceis but that correction does
not need to come in a nineteen eighty seven twenty
two percent one day move. It could easily come as
(46:32):
it did in the nineteen seventies, primarily through the impact
of inflation. So you could have a decade where the
stock market goes up and down, doesn't really go anywhere nominally,
but loses fifty percent of its value because of inflation.
And that's why I think the most important thing is
I'm recommending that you have at least twenty five percent
of your portfolio in gold and bitcoin, and at least
(46:55):
twenty five percent of your portfolio in cash.
Speaker 3 (46:57):
And let me recommend let me explain what I mean
by cash. Cash is just.
Speaker 1 (47:01):
Very short duration treasury bills, so that can be thirty
day paper It could be sixty day paper, could be
ninety day paper. If you need a little more yield,
you can even go out to like three year paper.
You'll probably be okay. But you want to have short
duration fixed income to be liquid in the event that
there is a sharp correction.
Speaker 2 (47:21):
When you say sharp, I mean you referenced a couple
time periods. I think about a sharp correction probably more
taking the shape of like a twenty twenty V shape.
Speaker 3 (47:31):
Right.
Speaker 2 (47:32):
You mentioned where everything's sort of changed in two thousand
and eight, and that's sort of I kind of look
at the market that way as well, and it showed
like a difference in appetite for letting the market's crash,
but also because of the system that's so leveraged up,
it just can't get de leveraged. And so you know,
in twenty twenty, we saw the FED buy up all
types of things, set up all types of SVPs to
(47:52):
buy up all types of things, and obviously we saw
a really really quick recovery of V shape recovery. Now
there's a big difference in nominal prices and per in power,
and so I love that you make that distinction, and
I think that's a super important distinction everyone has to understand.
But so when you say sharp correction, like sharp question
like twenty twenty, or sharp crashing down with a long
(48:13):
time coming.
Speaker 1 (48:13):
Back, you know, I asked my wife to check this morning,
and apparently both my balls are not crystal.
Speaker 2 (48:20):
We're talking hypothetical, so it's hard to say.
Speaker 1 (48:22):
It's hard to say, I just I can't. I don't
want to pretend that I can. I don't have any
idea what might happen. Somebody wants to ask me if
I if I was if I had predicted the breakout
of COVID from Wuhan, China, and I said no, I
didn't even know they eat bats in China. You know
there there are Let me put to you this way.
(48:43):
I think this is a better way of thinking of it.
So many people say, what caused the eighty seven crash
was this financial innovation of doing dynamic hedging where you
would buy more put options as stocks fell, and that's
said in this loop that crashed the market, and that's
technically what did happen. A lot of people say what
(49:06):
caused the correction and text doocs was the increase was
the rapidly increasing depreciation schedule of telecom equipment because of innovation,
And that's true. That debt made a huge difference in
the balance sheets of the largest telecom companies and cost
investors a lot of money, which led to selling and
(49:26):
then a route. People say, oh, it was all the
fraud and the in the ninja mortgages that led to
the collapse in eight which is true. That's all those
things are all true. But I look at it very differently.
What caused the eighty seven crash was the enormous growth
(49:47):
and leverage and in financial innovation that created very high
multiples of stock prices and the face of relatively high
interest rates. What caused the crash in two thousand wasn't
the depreciations sc the telecom equipment. It was the fact
that stocks are trading in fifty times earnings. What caused
the mortgage bubble wasn't just the fraud. It was the
(50:08):
fact that there was ten trillion dollars in mortgage debt
that that had never existed before five years earlier, and
that couldn't possibly have ever been paid off or maintained.
So when I see the S and P five hundred
trading at twenty five times earnings, and I see ten
year yield at five percent that does not compute. And
(50:31):
when it doesn't compute, it will eventually correct. I just
can't tell you how. Yeah, but the problem won't be
the technical thing that causes the route. The problem will
be the grosser evaluation in the first place.
Speaker 2 (50:44):
Yeah, well said, Well said, well, Port, We've grabb We've
covered a lot of ground here. I really appreciate you
taking the time to break all that down for us.
As I said earlier, you know, I learned so much
just from reading your your weekly, not your digest, and
obviously subscribing to your newsletters. I know you're still writing
(51:04):
a daily journal, right, a Porter's Daily Journal dot com.
I believe that's right.
Speaker 1 (51:09):
Yeah, Porter's Daily Journal is free, and I'd love to
get to know you. If you're in the market for
investment research, certainly we would love to serve you. I'm
in my fifties now. I think I've gotten better at
it over time, and I think that the next decade
is going to be fascinating from a financial standpoint. There's
going to be lots and lots of opportunities. People like
(51:29):
to say that their crisis I might know. Oh, come on,
that's just another way of spell opportunity. So if you've
got liquidity and your conservative this is a this is
a very interesting time because all of these things are
not going to last, and you will be richly rewarded
if you're prepared.
Speaker 2 (51:50):
Well, that's a great place to end it. Porter again,
thanks so much. I agree, it's also exciting. Just be prepared.
Speaker 3 (51:58):
Well. Thanks very much for having me.
Speaker 1 (52:00):
I'd love to come back and talk about all these
things in another year when we'll have some idea of
how it's all going to unfold.
Speaker 2 (52:08):
All right, we'll do that. Thanks for you
If you knew what I knew about the corporate bond market,
you would never buy a stock again. I don't know
anybody that can make thirty percent a year in stocks.
They're making more than thirty percent a year in bonds,
and they virtually never lose money. I'd encourage everybody who
really wants to become more educated about finance to study
the corporate bond market.
Speaker 2 (00:18):
What Lenin told Keynes was that the best way to
destroy capitalism was to debouch the currency, and through a
series of inflation, they would lose all relation to money,
and the best way to get rised would be gambling
and death.
Speaker 1 (00:28):
I had a thesis called the End of America that
talks about how the decision to bail out all the
banks in two thousand and eight by printing money was
going to have radical ramifications not just for our economy
but for our society. And I was predicting a collapse
in social norms. In particular, I said, you're going to
see a huge increase in political violence, You're going to
see a huge increase in prostitution, You're going to see
(00:50):
a huge increase in gambling, and you see a huge
increase in drug and alcohol addiction, and I wrote that,
of course in twenty ten. So I stand by all
those predictions. I think they've been exactly correct. But the
best prediction of that end of America thesis, by the way,
was that as everyone goes to contribute to their four
to one k's every month, forty percent or more of
those savings are being dumped into the same five stocks.
(01:12):
When that does break, there will be a tremendous loss
and equity value for investors who haven't been paying attention.
If you're buying companies with a trillion dollars in market
cap that are trading for fifty times earnings, you are
not going to have a good outcome.
Speaker 2 (01:27):
Porter You've spent decades warning investors about financial risks, making
some really bold predictions, some of which probably were ridiculed
at first, but they were proven. Right now, if someone's
serious about growing and protecting their wealth over the next decade,
why is right now the most important time to listen
to this conversation and what's coming that most people aren't
(01:48):
prepared for.
Speaker 1 (01:50):
That's a great question, mark, fantastic question. So there have
been a few periods in my career, most notably the
late nineteen nineties, and then of course at the peak
of the market before COVID in late twenty nineteen, and
then again today where there has been so much concentration
(02:10):
of wealth and so few firms that the process of
indexing has been broken.
Speaker 3 (02:18):
And as a result, as.
Speaker 1 (02:19):
Everyone goes to contribute to their four to one case
every month, forty percent or more of those savings are
being dumped into the same five stocks, and the handicapping
process of the market has been broken by this automatic
feedbar style investing where the biggest stocks receive the most inflows.
(02:40):
And when that does break, and of course it eventually
will break, eventually the active managers will be the big
winners and the indexers will be the big losers. There
will be a tremendous loss and equity value for investors
who haven't been paying attention. And it's it's it's unfortunate
because index investing does work over time. But the risk
(03:01):
to it and the downside to it is these periods
of extreme overvaluation at the end of a long bull run.
And so as you probably know from history, there's not
a lot of times where you see the S and
P five hundred go up more than twenty percent two
years in a row. And the last time we had
a run like this was the late nineteen nineties, and
(03:21):
at the peak, the valuations were very similar to where
they are today, where there was enormous aggregation of wealth
and a very small number of stocks and extreme overvaluation
in the market compared to the earnings. And the result
in two thousand was an eight year bear market that
saw the indexes lose sixty percent of their value. And
(03:42):
I don't know exactly how long or how bad the
bear market will be, and of course I don't know
exactly when it will start, but I do know that
if you're buying companies with a trillion dollars in market
cap that are trading for fifty times earnings, you are
not going to have a good outcome. And when those
stocks make up such a huge percent of the index,
the index results themselves will be skewed for a very
(04:03):
long time. So now is a really important time if
you are an equity investor to pay attention to the
levels of valuation and your holdings, and I think most
importantly to raise some cash. You want to have cash
to buffer against the volatility that is likely to emerge
over the next twelve to thirty six months. And you
want to have cash so that you can of course
(04:25):
buystocks when they become much cheaper. So those are two
simple things that I would encourage everybody to do.
Speaker 2 (04:31):
And so what's coming that most people aren't prepared for
is because the indexes have gotten so concentrated by just
a couple so seven mag seven and the S and
P five hundred. I just actually recorded a video earlier.
Today's joined the Nasdaq has only reached this level of concentration.
It's the highest ever, right but since two thousand and
(04:51):
two thousand and eight. Because of the over concentration, if
a couple of those companies stumble, it drags the whole
index down. And that's what most people aren't prepared for.
Speaker 1 (05:03):
Yeah, you know, and take a company like Apple. Look,
Apple's a great business. I'm using their products right now
during this video recording. There's nothing wrong fundamentally with the business.
But it's an enormous company and it hasn't grown its
sales or its earnings in like five years. So it
should not be trading at a gross stock multiple. It
shouldn't be trading at twenty six times earnings. It's not
(05:26):
worth that much. Even though it's a great business, it's
a very expensive stock. Now, if Apple was trading at
fourteen times earnings or fifteen times earnings, I'd be telling
you is probably a goodbye because it is a great business.
But that difference in valuation can make an enormous impact
on people's wealth. And because of the size of Apple
in the index, it's going to have an outsize effect
on the index itself as well. So the thing that
(05:48):
people aren't paying attention to, and the reason why they
should listen to this call, is because there's going to
be a sea change and the relative success of the
index investors to the value investors over the next decade.
And listen, it's a simple thing to do. You can
do something as simple as to switch out of the
S and P five hundred index into an equal weight index,
(06:10):
and you can avoid a lot of the carnage that's
likely to come. So it doesn't it doesn't have to
be any kind of radical change that you make, but
it is time to make that kind of change.
Speaker 2 (06:19):
Yeah. Now, you mentioned sort of this sector rotation, going
from growth stocks back to potentially value stocks, which is
sort of the Warren buffet model, And I know you're
a big fan of Warren Buffet. I learned a lot
about buffets investing style from you and from your newsletters
and sort of his mode. I'm looking for capital efficient
(06:40):
business is the way that you've broken that down. Obviously,
we've seen that not work so well over the last
decade or two, a couple decades probably, and so you
often wonder, you know, you have these businesses you mentioned
growing at a growth multiple who don't have profits, right,
and they're certainly not efficient with that for sure. Recently
wrote up a long thread on Google showing how inefficient
(07:02):
it was with its capital. So I guess the question
is what you're saying is that you think there's going
to be a rotation back to that people have been
saying that for a long time. Doesn't appear to be
the case. Do you think it's possible that maybe we don't?
And part of the reason why would because what Lenin
told Keynes was that the best way to debout or
destroy capitalism was to debouch the currency, and through a
(07:25):
series of inflation, they would lose all relation to money,
and the best way to get rich would be gambling
and theft. And at the end of every society of
high inflation, you see gambling sort of takeover. We see
that with the meme stocks today, meme tokens and whatnot.
I mean, obviously eventually everything comes around.
Speaker 3 (07:43):
But like.
Speaker 2 (07:45):
I guess, do you think the value investing transition is near?
Speaker 1 (07:50):
Yeah, So there's a couple different questions in there. Let
me start with what you wrote about canes and the
idea of money as being a barometer of the health
that's a society. I agree with this absolutely completely, and
as I'm sure you're aware, I've been writing.
Speaker 3 (08:05):
About this topic for almost two decades.
Speaker 1 (08:08):
I had a thesis called the End of America that
talked about how the decision to bail out all the
banks in two thousand and eight by printing money was
going to have radical ramifications not just for our economy
but for our society. And I was predicting a collapse
in social norms. In particular, I said, you're going to
see a huge increase in political violence, You're going to
see a huge increase in prostitution, You're going to see
(08:30):
a huge increase in gambling, and you see a huge
increase in drug and alcohol addiction. And I wrote that,
of course in twenty ten, so I stand by all
those predictions. I think they've been exactly correct. I also said,
unfortunately they have. Yes, yeah, I also predicted a course
of America would lose its triple A credit rating, and
you know, a lot of other specific things along the way,
including I predicted Obama's third term and talk about being
(08:52):
laughed at in twenty twelve, they were mocking me on
national news shows, Ladies and gentlemen, I present you Obama's
third term otherwise known as president by So you know,
I think I was right about a lot more things
than I was wrong about. But the single best prediction
of that end of America thesis, by the way, was
that a great way to hedge from these risks would
be to buy the Permian oil basin, in particular Texas
(09:14):
specific land, which I recommended at about twenty five dollars
a share and lately has been close to two thousand.
So you know, I'm not saying I get everything right,
but there's a couple of really good ideas and that
whole thesis. The second question that you asked was whether
or not this inflation would cause people to rotate out
(09:35):
of high growth stocks and into value stocks, and.
Speaker 2 (09:39):
Well, specifically and more specifically, would it keep them in
the gambling mode and not have them rotate into growth.
Speaker 3 (09:46):
Yeah, I actually don't think so.
Speaker 1 (09:48):
I think let me explain why the gambling really came
in stocks. At least, the gambling came from the fact
that we had ridiculously artificially low interest rates for so long.
When long term bond yields during COVID went down to
one percent, there is a direct correlation between the stock
(10:12):
market multiple, that is, the multiple of earnings growth and
the ten year treasure yield. And so if you've got
one percent treasure yield, you know, it's the same thing
as saying that stocks can trade out one hundred times earnings.
And obviously that is not going to last for long.
So what I think you're going to see is as
(10:33):
that treasury yield marches higher to compensate bond investors for inflation,
the market multiple is going to move lower. Right now,
the SMP is trading, it's something like twenty five times
earnings on average, And you know that if you have
a if you have a five percent treasury yield, which
is about where it's at, that can get you to
(10:55):
twenty times earnings on stocks. If we go to seven
percent long term interest rates, seven percent yield on treasury,
you know you're going to see stocks trading at twelve
or fourteen times earnings. That is just that is that's
a gravity. It is because investors have a choice. I
can go get a risk free treasure yield or I
can go get an equity earnings yield. And the earnings
(11:17):
yield has to be higher than the treasure yield, and
right now it's not, and that is not going to
bode well for expensive stocks. But let me just say
something else that there really isn't a difference between value
investing and growth investing.
Speaker 3 (11:29):
There's really not.
Speaker 1 (11:30):
There are stocks that are worth more because they are
able to grow faster and produce higher free cash flow
yields over time, and then there are stocks that grow
slower and therefore we're not going to produce very much
free cash flow yield over time. And there's relative differences
in price, and of course investing is the game of
arbitraging those differences. Here's what I can tell you. If
you looked up Coca Cola's earnings this week, you saw
(11:53):
a business that only had a one percent growth and
its case volume. In other words, they only sold one
percent more soda this year than they did last year,
but their earnings increase twenty percent because they are able
to raise prices. So what you will really see as
the inflation comes and as the market multiple declines, is
(12:18):
you will see the success of businesses that have pricing
power relative to the success of businesses that do not
have pricing power. And I believe that one reason why
Google stock has been so troubled lately is because there
is very little moat around web services. There is going
to be very little moat around AI services. So all
(12:39):
of this capital spinning you're seeing these big tech stocks do,
they're going to have very low returns on invested capital
from those investments. I don't care whether I use AI
from Twitter or AI from Google, or AI from Apple
or AI from Ali Baba, and I don't I think
that's going to be a big problem for them. But
I definitely care who's soda I'm drinking. I definitely care
(13:01):
who's chocolate I'm eating. I definitely care about which hotels
I stay in. So the companies that have the moat
and they have the pricing power will be the companies
that fare best during an inflation and if I could
just give you one more idea about this, The companies
that will do the best during an inflation are the
firms that are able to get the money up front.
(13:23):
You know, one reason why subscription newsletter businesses are such
good businesses is we get the capital upfront. And as
you probably know and an inflation, having the money first
matters because then you're able to invest it and you're
able to usually to get a higher rate of return
than the inflation. So then you get the carry and
(13:43):
so businesses, particularly like property and casualty insurance companies are
going to have outstanding results during the next four or
six years because they're yield and their carry over inflation
will be very significant, and it'll be you know, think
about it, and you know an insurance company that has
twenty billion dollars in bonds, Well, during COVID, they're making
(14:06):
nothing on all those bonds. Now you know, you can
get money good corporate bonds for seven and nine percent,
So the earnings of these insurance.
Speaker 3 (14:15):
Companies are going to come up a lot.
Speaker 1 (14:16):
So certain kinds of finance businesses will do very well
during this inflation too.
Speaker 2 (14:21):
Man, you dropped a lot of knowledge there. Some things
that I definitely want to come back to. I want
to get into some of your frameworks and you're investing
playbooks that you've used because you've had a really long
career and to the point that you made you made
a lot of really good calls and I remember all
those specifically, I remember the Obama's third term and the
oil patch. So I definitely want to get into that.
But you mentioned the financial publishing business being a good business,
(14:45):
partly because you bring the money sort of upfront. I
know you've been partnered with Bill Bonner, maybe he's the
head pioneer, but to me, you've sort of pioneered this
space of financial information, financial publishing, if you want to
call it that, finn pub I think they as it's called,
you know, for me, I obviously, through my YouTube, we
(15:06):
reached you know, almost one hundred million people now at
this point, and I get asked quite often like.
Speaker 1 (15:11):
That's incredible, Mark, that is amazing. Yeah, And that is
not easy to do. I've seen a lot of people
try to build audiences on YouTube.
Speaker 3 (15:18):
It's very difficult.
Speaker 2 (15:19):
So I get asked quite often, Mark, what what investing
books should I read? And I always tell them like none,
like the books are old, right. I get sure you
can go read Value Investor, but like most of the
books are old, and I tell them I really learned
everything from from financial newsletters because it was like the
play by play, So it was getting getting explained to
me on a weekly or monthly basis and watching it
(15:40):
over a long period of time. That really helped me
understand that. So I want to talk about that business
in a sense for a minute. I'm not a fan
of the traditional education system at all. It's more of
like a just in time learning for me, and so
that's why it was really helpful for me. So I
want to learn some of the maybe controversies and challenges
that you had trying to build this like so for example,
(16:02):
bringing this information trying to help people. I was saying earlier,
I think on your newsletter you'd write every week like, hey,
this will probably lose me subscribers. Why don't I to
tell you what I think you should know, what I'd
want to know. But at the same time, you've been
attacked for that. I know there was an SEC case
brought against you at one point for maybe misleading people
(16:23):
or something like that. Tell me about how hard it's
been to pioneer this case of really trying to bring
education and highlight and help people with their financial literacy.
Speaker 1 (16:34):
When I got into the financial newsletter business in the
mid nineteen nineties, the whole industry was populated by stock promoters.
Speaker 3 (16:41):
So the idea wasn't.
Speaker 1 (16:42):
That you're going to make any money in subscriptions. The
idea was that you were going to promote stocks that
you held an interest in or that you were being
paid to promote. And I'll never forget one of the
most successful quote unquote publishers at the time, when he
learned about what Steve Sugary and I wanted to do,
which was to provide you know, high, high quality and
(17:02):
objective good advice, he laughed at us and he said,
well that'll never work.
Speaker 3 (17:06):
Forell us.
Speaker 1 (17:07):
And you know, I'm not interested in I'm not interested
in a fair game. And I just had the idea
that there was no reason for otherwise very intelligent, successful
people like small business owners, doctors, lawyers, accountants. I've always
had a lot of airline pilots, people who are willing
(17:27):
to think and read. There's no reason for these people
to spend a percentage of their entire asset base every
year to get reasonable investment advice. So I always thought,
you know what, if we're charging a reasonable price one
hundred dollars, five hundred dollars, even one thousand dollars, and
we're providing really good advice that makes people a lot
(17:47):
of money, surely they'll renew and surely we can build
a business around that.
Speaker 3 (17:52):
And we did.
Speaker 1 (17:52):
Of course, we were extremely successful with that model, where
we never owned the stocks that we wrote about, where
we hired really smart, truly offish people in the spaces
to do the analysis, and where we kept honest track records,
I mean, simple, simple business one oh one. But at
the time, in the late nineties, it was unheard of
in the newsletter space. And we, you know, we we
(18:14):
ruffled a lot of feathers because we put a whole
lot of brokers out of business. And when you had,
you know, the most important account call you and say
I'm not going to be with you anymore. I'm going
with Stansbury research. That brought us a lot of attention
and a lot of you know a lot of people
in the in the in the financial industry trying to
shut us down. The most notorious example of that was
(18:35):
now it's called law fair, you know. Back then it
was just called you're irritating rich people were going to
come get you. And so the SEC actually sued me
for recommending a security called USEK that was spun out
of the government itself. It was a former Department of
Energy program. And what was going on was that there
(18:56):
were members of the government who were manipulating the stock
by with holding certain approvals until they had time to
stock up on the business. And just to give you
an idea, when I recommended the stock, it was trading
at half of book value, and it was paying an
eight percent dividend, and it was selling uranium fuel to
power plants around the world, Like this is basically a
bond is not a speculative investment to make. And they
(19:20):
had a pricing agreement that was going to allow them
to cut their primary cost of sales by more than
fifty percent, and they needed government approval to implement this
pricing change, and the government had been withholding that approval
for three years while the stock got manipulated by these insiders.
And I wrote up the whole story and wrote it
honestly and never owned the stock of course, and told
the truth about the whole thing. I learned a very
(19:41):
valuable lesson when you accuse the government of fraud and
you're not named Elon Musk get ready. So I spent
the next ten years fighting them in court. I of
course never conceded that I had done anything wrong, and
of course I lost, because you cannot fight the government
and a government court. Interestingly, during the period that we
(20:03):
fought the government, we found the exact same documents from
Bank of America, which was their banker, that said the
exact same thing that my report said. So the financiers
and all the people on the inside knew everything that
I knew. I had just done something the government didn't
want me to do, which is tell the public about it.
So I had to pay a million dollar fine. And
and you know, JP Morgan has spent forty billion dollars
(20:26):
in fines with the SEC over the last twenty years.
I've got I've paid a million dollar fine for telling
the truth about a stock and one last thing. By
the time that the case finally was adjudicated, it had
gone up three hundred percent. So I think I'm the
only only quote unquote, you know bankster whoever, whoever got
sued from making his his clients.
Speaker 3 (20:46):
A whole lot of money. So that's that. Yeah, that's
that story.
Speaker 1 (20:51):
But you but since I have stopped writing about government
corruption now now I only write about corporate corruption. So
I went after ge for their fraudulent accounting for a
decade before that company collapsed because of fraudulent accounting. I
went after General Motors for, you know, for just the
lunacy of its entire business model, and objected vehemently to
(21:12):
the quote unquote bankruptcy of General Motors. You might note
that the government spent fifty billion dollars on bailing Now
General Motors unions and the company today, fifteen years after
the bailout, it's still not worth fifty billion dollars.
Speaker 3 (21:27):
I mean, just this kind of.
Speaker 1 (21:28):
Lunacy is the stuff that you know, newsletter gold is
made out of people.
Speaker 2 (21:33):
The kind of stuff that the do the Dodge office
is is pulling up all this waste and fraud that's
in there.
Speaker 1 (21:40):
So so those are those are all been good stories
and fun things to write about.
Speaker 3 (21:44):
Over the years.
Speaker 2 (21:46):
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that's Justworks dot com slash podcasts. I think you mentioned
sort of like these Wall Street fund managers sort of
making an outsize return. Right if you look at like
your traditional mutual fund for one k over the life
of that fund, in most cases, it seems like the
fund managers will make maybe up to two thirds of
(22:52):
the returns of that versus the individual investors. And so
it's almost like these things are over complicated in a
sense where it's like, oh, it's too much, just give
it to somebody else and let them keep it for
forty years, and you're trying to take the other side
of that, which is like, hey, look like you spent
all this time learning how to make the money, Just
spend a little bit more time on how to manage
your money.
Speaker 1 (23:13):
Yeah, And there, of course, there are a lot of
really good options that people are never introduced to. I
think the biggest thing maybe I've done for investors in
my career is teach so many people about the opportunities
in the corporate bond market. I say this very sincerely.
If you knew what I knew about the corporate bond market,
you would never buy a stock again. And just to
give you some proof around that, the team that I
(23:35):
set up at Stansbury Research to cover corporate bonds for
our subscribers. The product is called Credit Opportunities, and it's
been published, you know, consistently for a decade now, and
they just publish their track record this week and they
have a I think it's a ninety three percent win
(23:55):
rate and a thirty three percent annualized return and their
record mandations. Wow, I don't know anybody that can make
thirty percent a year in stocks. They're making more than
thirty percent a year in bonds and they virtually never
lose money.
Speaker 2 (24:09):
Only Stanley trug Miller. Oh he's the only one.
Speaker 1 (24:11):
Right, Yeah, I mean the results are really, really outrageously good,
and so I'd encourage everybody who who really wants to
become more educated about finance to study the corporate bond market.
And of course most people again don't realize that the
bond market is way larger than the stock market. And
there's a reason why you see stocks advertised every day
(24:32):
on CNBC, but you never see a bond ever ever
even mentioned, And that's because the rich people don't want
you to buy them.
Speaker 2 (24:41):
And if the bond is worthless, then the stock is worthless.
Speaker 3 (24:45):
You got that right.
Speaker 1 (24:46):
And what's pretty funny is that if you if you
try to trade distress bonds, the broker will usually tell
you that you're not allowed to buy them, but they'll
sell you the stock of the same company no problem.
Speaker 2 (25:00):
So going going back to Stansbury Research, I mean, really pioneering.
And the reason why I really like this story is,
I mean, again, what you said on your Newslatyers, and
I've tried to now follow is like trying to help
other people telling them what I wish I would have
known earlier in my career. I got into a lot
of trouble in two thousand and eight, which is why
I got interested in learning what this whole market was about.
(25:20):
That was my interest. So in nineteen ninety nine and
you started, what were some of the big things that
really pushed Stansbury forward? I mean, was there some big
things along the way or was it really that end
of America thesis that you put out? What we was
sort of the turning points there?
Speaker 1 (25:34):
Yeah, well, just a point of fact, I actually got
started writing newslatters in nineteen ninety six, and I got
started working for a small business to business research company
in Soft, Florida that was called Welt Research. Okay, and
that business ended up getting bought by Bill Bonner, who
as a major newsletter publisher. We got all moved to
(25:55):
a Gore moved to Bill's company, Agora in Baltimore. And
I'm not sure sure if you know what happens when
companies get acquired or merged. Usually everyone gets ended up
getting fired. So I was on the team. I was
on the team that got acquired. So I was on
the you can't work here anymore team, And so I
walked out of that business with like thirty thousand dollars
in savings and a laptop computer and I started my
(26:17):
own company, literally from my kitchen table, called Stansbury Research,
and we started by covering tech stocks, because that, of course,
is what people most wanted information on. And as a kid,
I had dabbled in computer programming. I'd gone to the
you know, the programming summer camps, and I knew enough
to be dangerous with programming computer and so I knew
a little bit about how the Internet was going to
(26:38):
really change the world. And I was excited about those ideas,
and we recommended some outrageously good investments. I'm talking about
Amazon and Broadcom and JGS, Unifas and Texas Instruments. We
had some outrageous great investments and it brought a lot
of investors to my door. And then of course there
was the tech complete blowout bear market, and you know,
(26:58):
to survive, I got good at figuring out how to
make other kinds of safe investments too, and I brought
another analyst, and we grew the business and by two
thousand and four, so this is just five years after
we started, we were a gore as big as biggest
and best business by far, and then so bringing in
Steve sugar Roode, bringing in Dan Ferris, bringing in David Lashmett,
(27:21):
bringing in David Eifrig, bringing in some really excellent people.
I mean Ifrig was a prop trator for Goldman for
twenty years and there's not many people who know more
about the options markets than he does. So those are
just the kind of talent we brought in that really helped.
And then just you know, just putting one foot in
front of the other, just building. My whole goal every
(27:42):
year was to increase our renewal income, and so I
wasn't worried about the top line. I was just worried
about satisfying the customers and doing a great job because
I figured if you could keep people, then over time,
you know that that return on marketing spend would just
grow enormously. And by the time I retired from Stansbury
Research Mark we had we had an average lifetime value
(28:03):
and excess of three thousand dollars per customer.
Speaker 3 (28:05):
Wow.
Speaker 1 (28:06):
So by focusing on delivering value to the subscribers, we
built an amazingly good.
Speaker 2 (28:10):
Business lifetime value of three thousand Is that what you said?
Speaker 3 (28:15):
Yeah, could have.
Speaker 2 (28:17):
Just sold the more expensive products.
Speaker 1 (28:20):
Well, we definitely upgraded people as they stayed with us.
Speaker 3 (28:24):
I'm joking by that, Yeah, yeah, but I.
Speaker 1 (28:26):
Mean we But you don't you know, as you know,
you don't sell. You don't go from selling somebody one
hundred dollar newsletter to selling them a ten thousand dollars
newsletter unless you've done something right for them.
Speaker 2 (28:34):
Right, Yeah, for sure, you have to prove that. I
was recently telling some youngsters about starting my first business
in the mid nineties or late nineties actually, and that
was like pre internet days, and so I was explaining
to him. I was like, I mean, I was just
twenty years old in my early twenties, and I got
this office and I'm trying to build this high tech
medical equipment company. But that was like pre Internet, So like,
(28:57):
how did I even learn about business? How do I
even reach out to customers? Right? It was like this
crazy world. And so you built this sort of like
pre internet as well, So like how do you scale
a business like that without being able to advertise on
Facebook or run ads or anything like that?
Speaker 3 (29:14):
Can I tell you the truth? Yeah, I'd love to
you rip off a lot of printers.
Speaker 1 (29:18):
Okay, what does that mean, yeah, I mean you had
to print everything. So we would we would we would
send out books in the mail. So I would write
a book about something like the New Railroad across America,
which was all about the Internet, and we would publish
a book and we would put it in a number
ten envelope, and we would send it to as many
people as we thought would would be interested in it,
(29:40):
and the book would be free, and then you know,
there'd be a reply device in the back of the book,
a coupon basically that they had to send back to
us with a check, and they could also facts in orders.
I remember when I started, I'd go down to the
fax machine every morning and see what see what the
night had brought. But the only way you could make
that work, because printing was very expensive and so is
(30:03):
mailing things. The only way you can make that work
is if you got like, you know, six month terms
from your printer, so they they'd have to they'd have
to print everything for free for you and depend on
you to pay them back once you got the subscriptions.
Speaker 3 (30:16):
To come in.
Speaker 1 (30:17):
Got it, And today oftentimes the subscriptions didn't come in,
in which case he said, I'm really sorry to the
to the poor printer.
Speaker 2 (30:26):
Yeah, oh, that's that's how you get to that. And
now nowadays in the online world, they have like these
book funnels, right, so that's like a common thing now, right,
So now you give the book away for free plus
shipping and then you get them into your funnel. I'm
sure you're probably well aware of that. It's and then
and then now we have print on demand, right, So
I try to tell these kids, like you have no
idea how easy it doesn't make money these days. Pre
(30:47):
internet it was hard, I mean trying to make those
deals like that.
Speaker 1 (30:51):
You know, I'm not so sure about that mark. I.
I think it was actually easier when I got started
because there I didn't have any competition. It was there
was such a big capital hurdle to advertising that the
advertising channel was a lot quieter. Today it is so
noisy out there. Everyone can be a publisher, everyone can advertise.
(31:14):
It's very very hard to break to get your message
to break through the noise.
Speaker 2 (31:20):
What do you think about in regards to that and
the change? So you mentioned a couple names frig or
whatever that were like Goldman prop traders, but like nobody
knows who they are.
Speaker 3 (31:33):
Like it.
Speaker 2 (31:33):
We're Goldman cool with thousands of other people, right Whereas today,
you know, you have all these TikTokers and Instagrammers and
YouTubers like me that build up brands and are able
to sell that more off of like a name, like
a brand name, as opposed to like trying to push
like even though somebody maybe has this storied career decades
(31:55):
in the trenches of some of the most prestigious financial institutions,
but nobody really knows them, how is that chat affected you?
We're trying to deal with that.
Speaker 1 (32:02):
I think in my space, your resume matters a great deal.
I mean, Eifrid was one of the story people that
was on this legendary Goldman options team that included.
Speaker 3 (32:16):
Robert Rubin and a lot of other really.
Speaker 1 (32:18):
Successful smart folks that pioneered a lot of the quantitative
trading that now dominates the markets.
Speaker 3 (32:25):
So in the financial world he was very.
Speaker 1 (32:28):
Well known and for example, like the guy who does
all my corporate distress bond investing at my new firm,
Portero and Company. His name is Martin Fritzen, and he
literally created the high yield research business for fixed income
on Wall Street. He started at Solomon brothers in the
nineteen seventies. He's in his late seventies, and there isn't
(32:50):
anybody in the entire corporate fixed income world that doesn't
know who he is and hasn't read his books. He's
iconic in fixed income, and so I think having those
people is really important if you're gonna if you're gonna
be a first class financial publisher, you have to have
absolutely first rate analysts and you have produced work that
(33:10):
is demonstratably better than the competition. And that's I just
had an instinct for that. I had an instinct that
the best guy in the world at distressed corporate bonds
is probably worth about ten thousand times more, you know,
than the fourth best guy in the world of that
that that that genius and experience in those markets is
(33:33):
worth an enormous premium. And so that's the way I
always But I went about trying to build our teams,
which was you know, just gent honally, just offering to
pay more money than other people and hoping that we
could drive gross margin with that talent.
Speaker 2 (33:48):
But now you're trying to get you have to give
that story to retail because probably most mom and pops
who have somebody managing their money for them through their
you know, four on and K mutual fund, et cetera.
Maybe aren't aware of that. Then you sort of have
to kind of use that resume market that resume out
to him.
Speaker 3 (34:05):
I think that you just you just have to explain it.
Speaker 2 (34:08):
Yeah.
Speaker 1 (34:09):
Once once they once they see who this person is
and they see that he has worked at every important
fixed income desk in the world, and once they see
his track record, the light bulb turns on. It's kind
of like this. You know, if you're if you're going
to go, if you're going to go get prostate surgery,
do you do you want to go to the Mayo
(34:30):
clinic And do you want to have the guy who's
seventy years old and has done fifty thousand of these
operations or do you want the twenty four year old
who just got out of med school at your you know,
at your local clinic.
Speaker 2 (34:42):
Definitely want the resume, you definitely do it.
Speaker 1 (34:44):
And so I think when I think when it comes
to people's harder and savings, they're willing to pay up
for quality, and they you know, and as long as
you're as from where I sit as a business person,
as long as I deliver on that than what I
have found is that you can. It's just a way better, Bui.
I mean, our first class business is way better than not.
Speaker 2 (35:05):
I want to get into the future, because you've done
really well with some of these really big calls in
your career, as we've already discussed. I want to talk
about the future, upcoming trends, and so maybe we get
some more porter predictions from you. But before we do that,
I want to establish a baseline and more of like
a framework, and so I can understand sort of, you know,
the playbooks and the frameworks that you use to invest
(35:26):
off of. So, for example, like acid allocation seems to
be a big framework of yours. What are some of
like the lenses that you view the world through. Give me,
give me some of your core frameworks that you would
build build your portfoliof of.
Speaker 1 (35:42):
I say, the biggest one is that I figured out
that after two thousand and eight that there was no
there was no intrinsic value and fixed income, that you
weren't safer in bonds than you were in stocks. And
you know, and I say that because I saw that
the governments were printing money and using that printed money
(36:04):
to buy bonds to force down the interest rates. Now, listen,
if you're a bond trader, that's great news. It's going
to force up the price of bonds, and you're going
to make money in the short term. But I thought
that over time that the resulting inflation will be far
worse than the gains that you were going to make
in the bonds, and that that would lead to trouble.
And I would point to Bank of America's very serious
(36:27):
problem right now as being one of the really one
of the biggest unaddressed problems in the financial markets. Bank
of America bought seven hundred billion, maybe a little bit
more of these bonds in the summer of twenty twenty,
and the value of those bonds is now fallen by
seventy five eighty percent, and so they're sitting on huge losses.
(36:48):
I mean, I'm just estimating, because I don't know exactly
how they've hedged. I don't, I can't, you know, I'm
not privy to all that. But they have said publicly
that the losses are an excess of one hundred billion dollars.
I mean, that's a really bad outcome for their shareholders.
And that's a bad outcome for anybody who's been in bonds,
and I'd point out to you that there's some you know,
there's some really good hedge funds. For example, Bridgewaters All
(37:09):
Weather Fund is about forty percent allocated to bonds, and
their performance since twenty twenty has been really poor. And
I think you're just going to see a lot of
that that the folks who are relying on the sixty
forty asset allocation stocks and bonds, the bond allocation is
going to really hurt them over the next decade. And
so the first thing is, I think you have to
get out of court of you have to get out
(37:31):
of government bonds, and corporate bonds are a little bit
different than government bonds. And you know, short duration is
different than long duration. The bond market is complicated. I'm
speaking particularly about long dated mortgages and government bonds. So
stuff that's ten years and longer in duration is just
simply uninvestable in my view. And I and so the
(37:52):
money that used to be in there for safety is
going to fleet a bitcoin, it's going to flee to gold,
It's going to flee at a very high quality equity.
If you get a company like Coca Cola or Hershey,
and they're able to increase their dividends every year, they
can protect you from inflation. And those are the kind
of businesses that I see replacing bonds as and the
(38:13):
asset allocations of major funds. So that's the first lens,
which is that bonds are no longer safe and we've
got to find some other way of managing volatility. And
the way that I would suggest that you do it
is by hedging with gold, hedging with bitcoin, hedging with cash,
hedging with property casualty insurance companies which own a lot
of bonds but own them, and actively managed portfolios where
(38:35):
they can hedge against the interest rate risk, and of
course owning very low beta, low volatility corporate equity as
a way of hedging the portfolio in lieu of holding bonds.
Speaker 2 (38:47):
Do you also see those things? I mean, the way
I was supposed to work in the past is like
I mean, the rayd aalio is fund that's not working anymore.
To your point, I think they have had like seventy
billion dollars in redemptions in the last couple of years,
but you know, some assets going down and other assets
sort of making up for that. Whereas now you're talking
about moving into lower volatility assets, but they're not really
(39:09):
working opposite. Everything's still working in unison. It's just some
stuff doesn't go down as far as others.
Speaker 1 (39:16):
Well, I think that the losses you've had in long
term government bonds in the last five years are historic.
I don't think that bonds have ever seen the kind
of carnage that we've experienced, and you know, people don't
talk about that in the nightly news. I'm not sure why,
but those are very, very big and important losses, and
most of those losses are held inside our banking system,
(39:39):
and the view is that they'll just eventually get papered
over one way or another, and I think that's going
to be very inflationary. Likewise, I think that it's a
it's a pipe dream to believe that we can pay
for our government by taxing our foreign trading partners.
Speaker 3 (39:56):
I wish Trump all.
Speaker 1 (39:58):
The best in the world to lower tariffs around the world,
to expand markets for American products. I think that's great,
and I hope he's able to accomplish that. But I
don't think that anybody in our country should be cheering
the creation of yet another government revenue center, whether it's
external revenue or internal revenue. What we badly need in
our country for economy to grow is simply less government
(40:20):
overhead in total and lower taxes. And until you see that,
I don't think you're going to see any material change
in the rate of inflation or the risk to inflation.
Speaker 2 (40:30):
I want to come back to that. That's a big topic.
But going back to the Barbels or not the Barbell
but but acid allocation strategy, So sixty forty dead out
of bonds, hedging with other assets low volatility. Specifically, you
also said bitcoin and gold. I'm a big bitcoin guy.
That's sort of my main domain. Most people would say
(40:51):
that bitcoin is too volatile. Bitcoin is a big time
risk on asset. I think it sniffs out almost inflation
before any other assets. It's so sensitive to that. I
wouldn't typically think about people hedging their portfolio with that.
I mean I do, but I'm just curious that is
not like mainstream financial advice that typically you would use it,
(41:12):
maybe to I guess, increase the volatility to the upside.
Speaker 1 (41:17):
Well, I think that. I think that both gold and
bitcoin have become risk on assets and this latest market
cycle since since the COVID bottom in twenty twenty. That's
interesting because gold used to be completely a counter position.
(41:37):
It used to do the opposite of what the markets
would do, the stock market would do, And so.
Speaker 3 (41:43):
It may You may be very right. It could.
Speaker 1 (41:45):
It could be that right now that gold and bitcoin
no longer provide much of a hedge against a collapse
and stock prices. But I think that the bigger risk
is a collapse in the personal power of the dollar.
We our entire treasury system is completely out of control,
and I'm very hopeful and optimistic that Elon and his
(42:07):
efforts will be successful and they'll get an uncontrol. But currently,
right now, this year, in twenty twenty five, we've already
racked up an eight hundred and fifty billion dollars primary
deficit in government spending, which puts us on track for
you know, something between three and four trillion in deficit.
Speaker 3 (42:25):
Spending this year.
Speaker 1 (42:27):
And you know, Mark, I would love to be wrong,
but you fucking call me when government spending actually declines,
and I'll come rub your feet or something.
Speaker 3 (42:38):
I mean, I just I just don't.
Speaker 1 (42:40):
I will believe it when I see it, and until
I see it. The idea that we're running something between
eight and ten percent of GDP and deficit spending with
full employment, that is a recipe for outrageous levels of inflation.
I mean, I people, this is an absolutely out of
consensus call, like many of my calls that and over time,
(43:01):
but I think you'll see at least a fifty percent
devaluation of the dollar over the next six to eight years.
And I don't even think that's an aggressive call. I
think that's absolutely inevitable and so and so. Yeah, I
think you've got to hedge against the decline of the
dollar in both bitcoin and gold.
Speaker 2 (43:22):
I'm one hundred percent with you on that. I would
say it's in five years, not six eight years, right,
I mean, we've seen it already drop fifty percent, and
it obviously depends on what you're measuring it against. Certainly
to bitcoin is dropped more than that. But you know,
media and US real estate and most of the big
staples has dropped fifty percent in five years. And at
the rate of the government debasement, I mean, the FED
balance sheet is expanding by sixteen percent a year over
(43:45):
the last four years.
Speaker 3 (43:47):
So yeah, like I said, I don't think my call
is even that aggressive.
Speaker 1 (43:51):
Looking at the I think I think it's it's but listen,
it's scary though it is. And folks, look, that's why
you've got to have cash as well as bitcoin and gold.
Speaker 2 (44:02):
Why if it's going to lose fifty percent, why would
you want to have a lot of cash.
Speaker 1 (44:06):
Well, because you just can't know exactly how it's going
to unfold. But I can tell you this, I would
not be surprised to see CPI with a double digit
run rate inside at some point in the next four
years during Trump's term, if we have a real trade war,
if he's not able to get the government spend under control,
(44:27):
there's going to be huge repercussion repercussions and it'll be
very inflationary. If you get a double digit CPI number,
you're going to have the ten year treasury at twelve
or fourteen percent and stocks will fall by fifty percent
in that case. And I think if you've got a
plummeting stock market, you've got soaring inflation. I don't believe
(44:48):
that bitcoin and gold are going to do that well.
I think they're going to do better than the stock market,
but I don't think their nominal price is going to
increase I think. I think it will be risk off
and people are just going to be afraid, and when
they get a free they're going to go into treasury bills,
they're going to go into thirty day paper that's going
to be yielding fifteen percent, and they're just going to hide.
And so I think that's why you have to have
(45:09):
cash now, because there could be a very large nominal
price correction to both stocks, gold and bitcoin. Well that's
not my base case, by the way, I'm just saying
that that that outlook cannot be dismissed. That's say a
thirty percent probability in the next four years, and it
used to be that was a zero zero probability outcome.
So that as that continues to increase, you have to
(45:32):
be hedged, and an important hedge is cash.
Speaker 2 (45:36):
So the going from the crash up or melt up thesis,
which was your big time base case, it's now diminishing
a little bit to the potential of maybe having some crash,
is what you're saying.
Speaker 1 (45:49):
Yeah, my my base case is that you're going to
see inflation at six to eight percent for the next
five years, and that you'll see you'll see treasury bonds
at you know, bouncing around between five and seven percent,
and that you'll see stocks trading, you know, depending upon
growth rates at at eighteen to twenty times, and that
you'll see gold and bitcoin continue to appreciate. I don't
(46:11):
think you're going to see gold appreciate at forty percent
a year every year, but yeah, I you know, I
think that there is a very very substantial risk of
a big correction and equity priceis but that correction does
not need to come in a nineteen eighty seven twenty
two percent one day move. It could easily come as
(46:32):
it did in the nineteen seventies, primarily through the impact
of inflation. So you could have a decade where the
stock market goes up and down, doesn't really go anywhere nominally,
but loses fifty percent of its value because of inflation.
And that's why I think the most important thing is
I'm recommending that you have at least twenty five percent
of your portfolio in gold and bitcoin, and at least
(46:55):
twenty five percent of your portfolio in cash.
Speaker 3 (46:57):
And let me recommend let me explain what I mean
by cash. Cash is just.
Speaker 1 (47:01):
Very short duration treasury bills, so that can be thirty
day paper It could be sixty day paper, could be
ninety day paper. If you need a little more yield,
you can even go out to like three year paper.
You'll probably be okay. But you want to have short
duration fixed income to be liquid in the event that
there is a sharp correction.
Speaker 2 (47:21):
When you say sharp, I mean you referenced a couple
time periods. I think about a sharp correction probably more
taking the shape of like a twenty twenty V shape.
Speaker 3 (47:31):
Right.
Speaker 2 (47:32):
You mentioned where everything's sort of changed in two thousand
and eight, and that's sort of I kind of look
at the market that way as well, and it showed
like a difference in appetite for letting the market's crash,
but also because of the system that's so leveraged up,
it just can't get de leveraged. And so you know,
in twenty twenty, we saw the FED buy up all
types of things, set up all types of SVPs to
(47:52):
buy up all types of things, and obviously we saw
a really really quick recovery of V shape recovery. Now
there's a big difference in nominal prices and per in power,
and so I love that you make that distinction, and
I think that's a super important distinction everyone has to understand.
But so when you say sharp correction, like sharp question
like twenty twenty, or sharp crashing down with a long
(48:13):
time coming.
Speaker 1 (48:13):
Back, you know, I asked my wife to check this morning,
and apparently both my balls are not crystal.
Speaker 2 (48:20):
We're talking hypothetical, so it's hard to say.
Speaker 1 (48:22):
It's hard to say, I just I can't. I don't
want to pretend that I can. I don't have any
idea what might happen. Somebody wants to ask me if
I if I was if I had predicted the breakout
of COVID from Wuhan, China, and I said no, I
didn't even know they eat bats in China. You know
there there are Let me put to you this way.
(48:43):
I think this is a better way of thinking of it.
So many people say, what caused the eighty seven crash
was this financial innovation of doing dynamic hedging where you
would buy more put options as stocks fell, and that's
said in this loop that crashed the market, and that's
technically what did happen. A lot of people say what
(49:06):
caused the correction and text doocs was the increase was
the rapidly increasing depreciation schedule of telecom equipment because of innovation,
And that's true. That debt made a huge difference in
the balance sheets of the largest telecom companies and cost
investors a lot of money, which led to selling and
(49:26):
then a route. People say, oh, it was all the
fraud and the in the ninja mortgages that led to
the collapse in eight which is true. That's all those
things are all true. But I look at it very differently.
What caused the eighty seven crash was the enormous growth
(49:47):
and leverage and in financial innovation that created very high
multiples of stock prices and the face of relatively high
interest rates. What caused the crash in two thousand wasn't
the depreciations sc the telecom equipment. It was the fact
that stocks are trading in fifty times earnings. What caused
the mortgage bubble wasn't just the fraud. It was the
(50:08):
fact that there was ten trillion dollars in mortgage debt
that that had never existed before five years earlier, and
that couldn't possibly have ever been paid off or maintained.
So when I see the S and P five hundred
trading at twenty five times earnings, and I see ten
year yield at five percent that does not compute. And
(50:31):
when it doesn't compute, it will eventually correct. I just
can't tell you how. Yeah, but the problem won't be
the technical thing that causes the route. The problem will
be the grosser evaluation in the first place.
Speaker 2 (50:44):
Yeah, well said, Well said, well, Port, We've grabb We've
covered a lot of ground here. I really appreciate you
taking the time to break all that down for us.
As I said earlier, you know, I learned so much
just from reading your your weekly, not your digest, and
obviously subscribing to your newsletters. I know you're still writing
(51:04):
a daily journal, right, a Porter's Daily Journal dot com.
I believe that's right.
Speaker 1 (51:09):
Yeah, Porter's Daily Journal is free, and I'd love to
get to know you. If you're in the market for
investment research, certainly we would love to serve you. I'm
in my fifties now. I think I've gotten better at
it over time, and I think that the next decade
is going to be fascinating from a financial standpoint. There's
going to be lots and lots of opportunities. People like
(51:29):
to say that their crisis I might know. Oh, come on,
that's just another way of spell opportunity. So if you've
got liquidity and your conservative this is a this is
a very interesting time because all of these things are
not going to last, and you will be richly rewarded
if you're prepared.
Speaker 2 (51:50):
Well, that's a great place to end it. Porter again,
thanks so much. I agree, it's also exciting. Just be prepared.
Speaker 3 (51:58):
Well. Thanks very much for having me.
Speaker 1 (52:00):
I'd love to come back and talk about all these
things in another year when we'll have some idea of
how it's all going to unfold.
Speaker 2 (52:08):
All right, we'll do that. Thanks for you
Host
Mark Moss
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