Episode #525: Grant Williams & Peter Atwater: The Market is ‘Long Abstraction, Short Reality’ – Meb Faber Research – Stock Market and Investing Blog

Transcript:

Meb:

Peter and Grant, welcome to the show.

Peter:

Thanks Meb.

Grant:

Hey, Meb. Peter, good to see you mate.

Peter:

Likewise.

Meb:

Listeners, we got two of my favorite writers on the show for reasons I’ll detail here momentarily, but Peter, I was thinking of you last night because I was rereading your book and I think once you read your book, it’s like one of these books that’s hard to look at the world through the same lens. It keeps popping up in your head when you think of these things, thinking about confidence, we talk a lot about sentiment on the show, but there’s two comments and then I’ll let you take this. The first being, when people think of confidence, they often think of self-esteem, but often it comes down to vulnerability. I think my wife would like that word more than I do, when it comes to actual actions in financial markets. Did I mess that up? Does that sound about right? Give us a little overview of what I’m talking about,-

Peter:

Yeah, I think you nailed it. Yeah. We think of confidence as being inward, how do I feel about my own abilities and everything else, and it has everything to do with the outside world. If Covid showed us anything, it’s that self-esteem doesn’t matter when there’s a pandemic, but what I had to figure out was, so if confidence is all about having certainty and control, what’s the opposite? And ultimately I settled on vulnerability, that when we’re vulnerable we have neither certainty nor control. We feel powerless, things feel weird. And market behavior to me is driven much more by those feelings of vulnerability than they are necessarily confidence. Although we can look at the markets today and there are lots of places where overconfidence is playing out, but vulnerability becomes a really useful tool, particularly when people start to freak out because you can really begin to see what they’re doing as a reflection of the vulnerability that they’re feeling.

Meb:

There’s a lot going on in markets currently with sentiment and I don’t know if vulnerability is the emotion I would think of when I look today on some of the things going straight to the moon with Bitcoin and others. We’re recording this one day before leap year, the end of February. And by the way, I skipped over how do you two know each other or have you guys met in the real world? Is there a support group for people that don’t own Tesla?

Grant:

No, Peter and I met eight, nine years ago probably, I guess.

Peter:

Yeah, way back in your Real Vision days.

Grant:

That’s right. A long time ago. I think Steph Pomboy was a mutual acquaintance and we had a couple of others as well.

Peter:

Yeah, I discovered that Grant is the Kevin Bacon of this whole finance social media world. He knows everybody.

Grant:

Not Footloose Kevin Bacon. Sadly.

Meb:

Grant’s definitely got the most luxurious voice on podcasts.

Grant:

Listen, not while Jesse Felder still lives and breathes and walks among us. No way. I’m not having that.

Meb:

But I very distinctly remember a presentation you gave. The name of something was like The Land of Animation. No.

Grant:

World of Pure Imagination.

Meb:

Thank you. Let me see if we can find a show note link, but a great presenter as well. But the beauty of Grant is you get things like you read his newsletter, you learn things like this is the first time I’ve ever seen a reference to the act for the more easy recovery of debts in his Majesty’s plantations and colonies in America, British Parliament 1732. How do you even come across such a thing?

Grant:

I don’t know. I’m a voracious reader and I’m a curious guy and so I think whenever I’m trying to put one of these pieces together, I’ll start with an idea of what I’m going to write about, whether it’s Elon or whether it’s commercial real estate, or Japan, or whatever it is. I just started digging into what’s going on now and historical parallels are really helpful to people and Peter’s written about this as well. If we understand history, we can actually make sense and contextualize the present sometimes. So I often try to use that as a way to show people, look, this stuff has happened before. It’s not the same, but it’s happened before. There’s nothing new under the sun and this is how it kind of played out last time. Here’s how it’s different and it’s always different, but as we all know, the echoes are so similar every time.

And Peter’s work for me has been, to your point earlier, Meb has been absolutely invaluable and once you do listen to Peter and read Peter and look at the world through his lens, it does completely change. I think Peter and Ben Hunt, both of them, the four quadrant map that Peter’s got and Ben Hunt’s line about why am I reading this now? Those two simple things, if you embrace them and you take a beat when you read that all caps headline, if you just take a beat and you ask yourself those two questions, is this about confidence or vulnerability and why am I reading this now? I’ve felt that it’s improved my own process dramatically. Both of those things.

Meb:

Where do you guys want to jump in right now? I have about seven topics that I would like to talk about. I mean, we got Bitcoin ripping and roaring. We got Elon today talking about a car that can go zero to 60 in sub one second, and that’s the least interesting thing about the car, which might be the most interesting tweet I’ve seen all year. What’s burning on you all’s brains? Where do you want to dig in?

Peter:

You sowed the seed with Grant on Elon, so I think we need his take.

Grant:

I wrote a piece recently about Elon and I’ve covered Elon for a long time now, and again this probably comes back to, and Peter and I have talked about this at length over the years. People think I’m an Elon hater, but I just think there is so much wrapped up in his ascent and what I suspect will be his eventual demise because he encapsulates FOMO, and technology, and green, and hubris, and celebrity power. Every single little kind of facet of our age is wrapped up in some way shape and form with Elon. And as we’ve seen him become this moonshot in terms of his public visibility and the adoration he’s had from everybody and the way his style was in the ascendancy, it’s been really interesting to watch as that started to turn.

And it hinged I guess around Twitter and his pivot to the right, but you can now see that the bloom is off the rose for a lot of people who are again taking a step back and not just taking him at his word, and this was the thrust of my most recent piece about him and are starting to question. And when you start to question some of the things that Elon has said over the years, you start to get a very different perspective and that again plays into this idea that we just read the headlines, we’re too busy to read the article. Now we see the headlines, Elon Musk says sub one second Roadster. No one sits back and thinks, well, okay, let’s think for a second if that is actually possible in a road street legal car because as soon as you take that one second, you think there’s no way that’s going to be street legal. The same way some of the other things that he’s talked about, the specifications for the Tesla Semi, the mileage is impossible with the kind of weight of the battery pack it would take, for example.

I think Elon is worth focusing on because I think he is going to be the kind of tent peg in this circus that we’re watching wrap all around us and when the tent peg falls, the whole tent is going to come down. So I’m not fixated on him. I find him a fascinating case study. I don’t believe the hype, but more importantly to me, he is a beacon of the upward trajectory and I suspect when he peeks, a lot of things peek. And Peter, please jump in because I know that you and I have spoken about this and you’re far more erudite about it than I am.

Peter:

Yeah, I mean he is at the center of the Venn diagram of everything that’s cool in this cycle, as you said, add crypto and space and all of these things. And I think he is a master of illusion. When you talk about somebody who is extraordinary with a narrative of possibility and we fall all over ourselves for that when confidence is really high and embrace it and exaggerate it. You can see echoes of it in AI today, but to me there’s another element of this and this is going to rub people the wrong way and I say this not to move into politics, but throughout his existence he has been referred to as the Donald Trump of Silicon Valley in the same way that Trump was referred to as the Elon Musk of Washington. Those are other people’s words, not mine. But I think that those connections are so critical as we think about what’s ahead because culturally their careers mirror each other really well. And so I expect that the ebb and flow for both of them is likely to move in parallel.

Meb:

Peter, you talk a lot about using some tools for sentiment checks like Google search. You talk a lot about Nat gas, so I would love to hear a little bit about why you’re so fixated on this particular energy commodity, but also why and then how you kind of work in some of these sentiment checks and analytics that you use.

Peter:

Yeah, so 2021 meant to me was all about abstraction, futuristic, fanciful. It was this wild world of possibility and that to me is always an indicator of froth because that’s what we embrace. We get as far away from reality as we can. What we’ve started to see is a retreat. What distinguishes 2024 to me from 2021 is that in 2021, everybody was betting on unborn folds, the Lordstown Motors, these SPACs, these things that didn’t exist yet, but if you look at 2024, it’s all about the thoroughbreds. It’s the biggest, most proven horses in the stable, Microsoft, Apple, Google. And interestingly to me that’s a less confident investor than in 2021, even though the cap-weighted indices have gone to new highs and even within crypto, where’s the excitement? It’s in Bitcoin. It’s not in any of the (beep) coins that we were talking about endlessly in 2021.

Meb:

You had a great quote, “Peaks are a process in which confidence is tested over and over before investors ultimately concede that they were suffering from hopeful delusion.” Do you see any of that today? Because you wrote this piece on NVIDIA and Nat gas and I think NVIDIA and Nat gas have continued to go even further opposite.

Peter:

Yeah, it’s a pair trade from hell. If you were short NVIDIA and long on natural gas, you’d go out on a stretcher. But NVIDIA to me is all about abstraction, possibility that’s geared to the future. But look at the commodity space. Nobody wants the real stuff, corn, wheat, Nat gas. The only thing that’s exciting is cocoa, but that’s for all sorts of other reasons. I see in that trade the underlying aspects of investor sentiment, that nobody is worried about abundance in the real world at a time that they’re focused on extraordinary abstraction in this netherworld of AI. And I think there’s a reconciliation that looms.

Meb:

You both have kind of talked about and alluded to as we talk about this abstraction in the real world, a little bit of two different experiences people are having. So whether it’s Peter, you talk about doing Google searches for food banks near me, meaning there’s people despite all the boom and despite all that’s going on are having a big ramp up in food insecurity and costs of, Wendy’s was big in the news this week, but cost of food. And Grant, you’ve written about this too where you have these different experiences based on where you sit in the socioeconomic ladder, less about maybe class and more about how much money you have. How does that begin to change?

Peter:

I think we’ve had two very divergent experiences coming out of the Covid experience. Those at the top have been saved and then some. The market’s gone on to new highs. Those at the bottom continue to fall way behind. And I think when we start to talk about inflation, what we’re really talking about is vulnerability. It’s the psychology of inflation that matters, not the economics of it. It’s the stories, it’s the feelings. And so the fact that people feel as bad as they do about food prices, Paul Krugman’s writing about it, there’s a big Washington Post thing that Heather Long wrote today.

People are pissed and if you think they’re pissed in the US, imagine the concerns if you happen to have a collapsing currency, that all of these dollar denominated commodities are paying a real toll. I’m worried about Nigeria, I’m worried about Turkey, I’m worried about Argentina. It’s the places where inputs are denominated in somebody else’s money that I think we’ll see the compounding consequences of inflation hit first. Right now, America’s saved largely because energy prices at the pump have gone down. But if you start to see prices at the pump go up, it’ll move beyond (beep) and moaning.

Grant:

One of the cycles that we see just not just in markets but in society is trust. And this kind of cycle of trust is so fundamental to functioning society, functioning markets, functioning politics, and it’s all based on trust and knowing more so than money, and I’m sure we’ll get into that at some point in this conversation. But this cycle of trust, you can see it everywhere, that the trust that people have placed has been broken everywhere you look, whether it’s in inflation. And the trust component of this inflation scare is that you’ve been telling me for years that inflation was only 2% and suddenly I don’t believe you anymore because you’re still telling me it’s three, but I know it’s 10 in my world or 20 if I look at my health insurance or my school fees.

And so that trust is now gone. The Trump years caused a rip in the trust. The Biden years have widened it further, but this plays out over and over again over time. And unfortunately for that trust to be rebuilt, A, it takes an awfully long time and B, it generally takes the complete breakdown of trust and Neil Howe has written at length about this in his terrific book, The Fourth Turning Is Here. And so these are just things that happened. In the 90s, you were perfectly free to trust because everything was great. We had balanced budgets, if you remember what those were, Google them if you’re too young to remember. We had markets that were going up, we had a low debt. There were plenty of reasons to trust that everything was good. Post 2000, the trust moved more away from reality and trust was placed in people, regulators, politicians, the Elons of the world. People place their trust in them and we’re now starting to see that that trust has also been misplaced.

So I think it’s important to understand the nature of trust and what it does to a functioning society and functioning markets and what happens when it starts to fray. And I think we’re seeing that now and I think Bitcoin is a great representation of that loss of trust as is the gold price, as is the Central Bank purchasing of gold, that’s all about trust in America, not to weaponize the dollar. So everywhere you look, you are seeing signs that trust is breaking down and that’s a real problem for markets. But more importantly, I think for the kind of societies that we’ve all learned to live in over the last 30, 40, 50 years.

Meb:

One of the things though, as we think about trust, you have this weird situation where gold is near all-time highs, in all-time highs in some currencies, ditto for Bitcoin, but at the same time the US dollar is kind of hanging in there. Now to us on most of the quantitative measures, it looks overvalued by quite a bit versus certain currencies like Japan in particular was just over there on a purchasing power parity basis, but it’s been hanging in there. What do you guys think about that? Grant, I know you’ve talked at length about gold in particular and also Bitcoin. Are those things to think about in this environment to be bullish? In general, what’s your perspective?

Grant:

It’s interesting you use the term bullish. That adjective to me is wholly dependent upon the problem we’re trying to solve or whether you’re speculating on these things. Bullish is such a speculative term to me. Let’s start with gold first because we’ve all seen the Central Bank buying numbers, and that goes back to what the Treasury did in terms of freezing the Russian Central Bank assets when they invaded Ukraine. And they basically said to every Central Bank in the world, if you hold your reserves in dollars, this could happen to you. And whether your friend or foe right now, you need to have a plan as to what might happen if we cross a line or we don’t sign up to an invasion or we refuse to sanction somebody, we need a plan B. And that plan B needs to be a neutral reserve asset and gold offers that.

So on this one hand, it is the solution to a problem of how to hold your reserves. And I think for a lot of people, me included in terms of personal finances, that’s what gold provides. It provides a means of storing your wealth in a way that is protected from confiscation by debasement, and the price will do what the price will do. And over time it should allow you to purchase the same amount of stuff as you can now. And that’s really a good way to store your wealth. This was one of the narratives around Bitcoin, and it’s funny. I had a long conversation about Bitcoin recently, and I don’t do that because it’s just not my thing. And apologies to any Bitcoin people. I don’t hate you, I wish you all the luck in the world. It’s just not my thing.

But I posted a chart and in the conversation I talked about gold at length with Natalie, and if you listen to the conversation, what I said was that there’s this chart that shows from 2001, which is when I started buying gold because of what the response to 2000 was. It was clear that the debasement of the currency was going to be the solution to problems going forwards. So going back there, and here’s why I chose this period of time, and I understand that people can accuse me of cherry-picking the period of time. This is my own personal window, but if you go back to 2000, 2001, gold has outperformed the S&P on a total return basis by 50%, 600% to 400% give or take. And it was just fascinating to me to see that chart get posted in isolation without the context of the conversation.

And of course everybody piles in. You’re cherry-picking here, you’re picking the note. I went to great lengths to say here’s why I’m choosing this window, and you could absolutely accuse me of that, but here’s the reasoning behind it. And I think we’re in this place now where Bitcoin offers tremendous speculative returns. The store of value argument for the time being is kind of coming back, but it’s not really a store of value if it can go from 64 to 13 to 64 again. That’s not a store of value, but we’re starting to see the FOMO froth up again.

And so this idea of protecting your purchasing power through Bitcoin has been left in the dust and it’s now a number going up again, which is interesting because again, Peter, I’d love to hear your thoughts on this. It feels like, again, that feels peaky to me, that that’s the reason again, it feels peaky. It’s a long-winded, roundabout rambling. Frankly, I’m not even sure if it answers your question, but I just think it’s important for people to think about if they’re interested in gold or Bitcoin, what do you want from it? If you want price appreciation, then right now all the risks it entails, Bitcoin is probably going to perform much better if you are a pure speculator. If you’re looking to store value and retain purchasing power, I would argue in my experience, gold is a much less risky way to do that.

Peter:

We’ve ETF’ed Bitcoin, which now makes it even easier to speculate in it. You have new chips to play with at the casino, which you’re seeing now. It’s again that retail enthusiasm hitting, which it inevitably does near peaks and sentiment. I mean, and it’s again, it’s abstract. It’s all about possibility. To me, it’s the perfect currency complement to AI. In the work that I do, I don’t take fundamental views. I’m agnostic to everything, much to the frustration of many of the people around me.

Meb:

It feels like such a much more pleasurable way to go about life than what we do.

Peter:

I wonder, particularly with the dollar, if I look at the clear correlations that exist between stocks and bonds today, they both peaked in terms of sentiment within moments of each other. Trillions of negative yielding bonds at the same time you had that euphoria in 2021. I just think of the dollar as being the tail that goes with that very large two-headed dog because stocks and bonds feel like conjoined twins to me at the moment. They’re moving as one and from a diversification standpoint, that’s a terrifying thought, but at the same time, it leaves the dollar as playing this offsetting part to what they’re doing.

Meb:

As someone who thinks about sentiment Peter and kind of ways about that, what are you thinking about today? This doesn’t have to be about bonds. You mentioned NVIDIA, Nat gas, what else is on your brain? What else have you been writing about recently that you think is particularly of note?

Peter:

The world of luxury broadly. There’s a huge Venn diagram of luxury, celebrity, sports that I think is all one trade when it comes to mood. And what fascinates me about luxury is the reflexivity of it. The buyers of the stock are the buyers of the product. It’s this very incestuous financial turducken of owners and clients. And I think it’s a wonderful proxy, LVMH of how those at the very top feel. And we’ve created this, to borrow Nelson Schwartz’s term, this velvet rope economy that feels just completely uncoupled from the reality of the world around it. And I struggle to see its future given just how conjoined the mood is between owners of sports, owners of money management, owners of luxury and what happens to that in a time when reality sets in and nobody can afford Taylor Swift tickets at $2,500 a pop or Super Bowl tickets. It’s lost its connection to the mainstream.

Meb:

What do you think the kind of in-game situation and trend is?

Peter:

I think the overcapacity, I mean, the over-serving. If you go into New York City and you look at the amount of real estate dedicated to luxury, if you look at just the debt levels, I mean, it’s stunning to me. If you go back to the bottom of the financial crisis, J.P. Morgan had about three times the private banking loans in credit cards. So it was like a three-to-one ratio. Today, J.P. Morgan, I think now has more private banking loans outstanding than it does credit card debt. Those at the top, to me, have been over-served in everything. And I don’t think people are focused on the debt element that has fueled that.

Grant:

I think Peter, when you talk about luxury, luxury was always about scarcity and luxury has become anything but scarcity. Well, everyone feels entitled to their Balenciaga handbag, et cetera, et cetera. And I think if you go back to the, I guess it would be the late 90s, early 2000s, and the story of Burberry is really illustrative of this. Burberry was a very exclusive brand in the UK, had that distinctive brown tartan check stuff, and it suddenly became kind of affordable luxury. People couldn’t afford the raincoats because they were too expensive, but they would buy anything with a little brown tartan pattern on it. And Burberry decided to retool and make Burberry luxury available to as many people as possible. And they pumped out a whole bunch of stuff and suddenly everybody was wearing Burberry. And there’s a famous photograph of a girl who was an actress in a British soap, kind of a Days of Their Lives type soap, pushing her Burberry pram with a Burberry baseball cap and a Burberry raincoat and Burberry leggings and a baby wearing a Burberry outfit.

And that was it. Gone. Just poof. And everything about that luxury brand jumped the shark and it had become a laughing stock and it became a sign of naffness, as we call it in the UK. It’s not a luxury anymore. “Oh, my God, you’re wearing Burberry. Oh, God.” And so it’s fascinating to watch Peter, what you talk about, this idea that luxury is deserved by everybody and we all deserve luxury. And when you start to see signs of that tipping of everybody buying the Tiffany blue box stuff, right, when you start seeing that become every day, it’s no longer scarce. It’s no longer luxurious.

Something I’ve been looking at really closely with this in the UK particularly just because I noticed it when I was growing up, there are luxury cars. When I was growing up in the UK, if you saw a Mercedes drive past, it was like, oh, Mercedes. Wow, look at that. The same way today it’s Lamborghini’s, it was Mercedes back then. You go back to the UK now and every second car is an Audi, BMW, Mercedes. And if you look at what’s happened to auto financing rates and then you do a bit of digging, you’ll see that the percentage of new automobiles financed in the UK fluctuates between the mid 80% and the low 90%. And so this idea that I’m going to drive a luxury car because I can afford the monthly payments, and I’m just using the UK as an example because it was so noticeable to me there. It’s the same in the US, and can be the same everywhere.

Meb:

Same in the US. It’s just the big trucks.

Grant:

Yeah, yeah, exactly right. And at some point, the sales of BMW and Mercedes and Audi are going to, I suspect, do what Burberry did and people are not going to be able to afford a BMW anymore. They’re not going to afford a new car every three years because the payments don’t work out. And so this idea that Peter talks about, about luxury, is why it’s so important to pay attention to these little things that Peter is so great at noticing because they are absolutely canaries in the coal mine.

Peter:

I mean, the fact that the head of LVMH was the wealthiest man in the world recently, that’s a sign you just can’t ignore.

Grant:

Right. The 1%. By definition, he’s catering to the 1%, right? How do you get to be that rich?

Peter:

Yeah.

Meb:

Speaking of the UK Grant, what’s the boots on the ground review? This has been an equity market for as long as time, has kind of been neck and neck with the US. There’s been quite a divergence in the force over the past cycle. I remember visiting during Brexit and everyone seemed very dour even in the pubs. But recently our good quant buddy Robert Knott was saying UK stocks might be the trade of the decade. So saying there’s some opportunity there, some shoots perhaps. Any general thoughts on what’s going on on the other side of the pond?

Grant:

I don’t follow it too closely, so I won’t talk about anything specific because I don’t have the knowledge to back it up. But from a boots on the ground perspective, the UK has gone through an awful lot of political and social upheaval. Brexit was a perfect example, and when you went to the UK and everybody was so dour, I suspect you were in London the entire time. And it’s funny because the feeling if you go to certain parts of the UK is anything but that. People are just delighted to have their country back again. So again, this idea that Brexit was a dumb idea, that’s to be debated and time will tell whether that’s the case or not. And we had a little period of time where the people who voted for it were gloating because the UK was doing better. We’ve had a period of time where the UK is not doing so well and the people saying we should never leave the EU, but that’s going to carry on and Europe is in flux as well.

So we’re going to have to wait and see to get the full scorecard on that. There are some phenomenal companies in the UK. No doubt about it. And as you said, it’s an equity market that’s been there forever. So given the fact that it has fallen so far behind, there is definitely opportunity in the UK. But I think the important thing to understand here is this comes back to another trend that I’ve been looking at, and again Peter, I’d love your thoughts on this. The idea of having to do less to be more successful, i.e, we talked about the Bitcoin ETF. It would be easy from this part of our conversation to be able to say, oh, the UK’s cheap. I’m going to buy the UK. And that is kind of where we’ve come to. We buy these abstract ideas. We buy countries. We used to buy companies, we used to buy a share in a business and now we buy stocks.

And the difference in mindset for that is extraordinary because if you’re buying a stock, you just own a number and you’re buying it because it’s going to go up. You haven’t done the work to understand the business. You haven’t gone into it feeling like an owner of a series of cash flows, which is what this used to be all about. And it changes your mindset. You’re not a long-term holder. We’ve seen that the average holding time data, we’ve all seen that and how that’s created in the last 20 years. Again, this is a real change in mindset that I suspect is going to start to go back the other way. I.e, if you do want to make money in UK stocks, you will be able to make some terrific money in UK stocks. But the trade-off is you’re going to have to go back to work again.

You’re going to have to sit there and start to find individual companies instead of buying the UK ETF if you want to outperform. And I think that’s a great thing, to be honest with you. I think it will bring back the talents of these extraordinary managers who’ve been marginalized by ETFs and the Vanguards or the BlackRocks of the world, and the idea that you make money by working hard. I mean, what a great idea that is. Right. What a great idea. And again, to Peter’s point about luxury, it’s the antithesis of that. It’s not that we deserve to make money in the stock market, it’s that we’re going to have to work to earn money in the stock market. And that to me is where this will always go back to over time when the froth and the entitlement dissipates.

Peter:

I’m going to dogpile this because if you invest in a UK ETF and you look at what makes it up, you’re not betting on the UK. You’re betting on companies that happen to be headquartered in the UK, but it’s not a UK bet. The same way the France ETFs. I mean, to me that’s in essence a luxury ETF in drag.

Grant:

Very high couture drag though, Peter.

Peter:

Yes. High couture drag. Yes.

Meb:

An area that I think is interesting with cash flows, I think it’ll be interesting to hear both of you guys talk about this because in my mind you’re starting to see both a shift in the underlying attractiveness of the businesses, and see if you can guess what I’m talking about, a shift in the governance of this country on how the CEOs approach their companies and stock. You’re interesting enough to me to see cultural relevance again. I mean just last night I watched Shogun, which has a 100% rating on Rotten Tomatoes. You have the new Godzilla movie, which was like 97% on Rotten Tomatoes, but I haven’t seen that one yet in Japanese. Tokyo Vice is coming out. All of these relevant Japanese cultural all of a sudden start to emerge again when this stock market has been nothing but a burger for 30 years. Grant, I know you’ve written about this. Peter, I’d be curious to hear your thoughts on Japan as a market that’s coming back to relevance quite a bit lately.

Grant:

I started my career in Japan, so I’m biased and nostalgic about Japan because as I say it was where I began my career a long, long time ago.

Meb:

Did you catch any of the euphoric 80s or were you after the fact?

Grant:

No, no, no. I started my career in the mid 1980s.

Meb:

Good. So you got the fun part too, not just the after.

Grant:

I had all the fun. I got all the fun I could handle for 20 odd years. Let me tell you, it was wild. And I was living in Tokyo at the very peak and working out there, so I saw it up close. And it’s funny because you say it’s been nothing burger for all this time and you’re absolutely right except it’s very quietly finally surpassed its 1989 peak. And you’re right, I hadn’t thought about this, but I just downloaded Shogun. I haven’t watched it yet. So you have to tell them if it’s worth doing because I read the reviews too, but I hadn’t thought about the place of Japan in popular culture again. But you’re absolutely right. I now see that. But the change in Japan has been very real in terms of what they’ve done over this period when no one’s really been looking at the country.

Corporate governance has improved dramatically. Balance sheets are in tremendous shape. That companies have had to get lean to survive and they have been largely ignored. And it’s been a place where the story has been all about the Bank of Japan and the JGB markets and the Yen. Have really paid attention in Japan and there’s been this kind of quiet revolution in the stock market and again, coming back to researching companies as opposed to buying stocks. There are so many companies in Japan now that are trading at book value or below or trading on single-digit PEs. I mean, if you are a stock picker, Japan is a great place to go. Now this has been true for the last couple of years. Now it’s passed all time highs and it’s sucking all this attention in. You’re going to see a lot of kind of late money coming in.

So I would caution anyone piling in right now, but it is a place where you can actually go and practice the art of investing. I mean, who would’ve thought? You can go and you can screen companies, you can find businesses that are world-class businesses that are cheap. I mean, not just cheap in price but cheap in valuation. And that’s a really good thing. Warren Buffett went to Japan a couple of years ago and bought all the big five trading companies. He’s done tremendously well with those.

A lot of other investors have been kind of nibbling away at Japan in the last couple of years. And I’ve had some terrific conversations with people in recent years because I realized that I’d been writing about Japan a lot. It wasn’t something that I even noticed I was paying much more attention to. But when I realized, wow, I’ve written about Japan a lot in the last couple of years, that’s telling me something. And so you start digging in further and it is, it’s a really interesting place for people to go. But again, I would caution buying the WisdomTree. Japan Hedge ETF is probably not the smart thing to do. It’s to do some work and find those terrific companies.

Peter:

Yeah. And if I can just add, we got Mark Zuckerberg making swords over there. So your point about it falling into the culture is absolutely right. What I think is interesting is the renewed respect for Toyota, this notion that the tortoise versus the hare. People are really appreciating this sense of certainty and control, to use my favorite two words, that Toyota is bringing discipline. In different conditions, it would be thought of as plotting, and late, and slow, but I think it speaks to how the bloom is off the rose in the EV space and their prudence is now being rewarded and recognized and praised versus the, “Hey, look over there. I’ve got a new thing in the EV space.”

Meb:

I think the fun part of this show when we have two people is you guys get to ask each other a question.

Grant:

I’ve always got questions for Peter. How do you get sick of them?

Meb:

Yeah. As you sit down for a brew or coffee, what would you ask the other guy right now? Say, I got something for you, or just, it could be a topic in general, but what do you guys want to talk about?

Peter:

I’ve got one for Grant because you’re such a good interviewer. The question is today, who’s the person that you’d love to have seated on the couch across from you that you could pepper with questions?

Grant:

Oh boy, how do I narrow that down? There’s so many Peter. There are so many people I would love to sit and talk with. One of them would be my friend Tony Deden again. Every time I spend time talking to him, I come away with so much wisdom and so much more to think about. And so I never turn down a chance.

Meb:

Can you tell the audience who that is?

Grant:

Well, no one will know who Tony is because that’s how Tony wants it. He has an investment practice. I’ll choose my words carefully as he does because he deserves that. He has an investment practice based in Zurich. Well, he’s based in Zurich and the companies headquartered in Jersey I believe. And Tony is a very private man. He’ll hate me talking about him, but I’m going to because he deserves all the plaudits. And about six years ago now, I’ve convinced him to do an interview with me for Real Vision in January of 2018. And we sat down, we spent a number of hours sitting and talking, and we ended up with a two and a half hour interview, which was groundbreaking at the time as we weren’t putting anything out for more than an hour at most.

And we put this video out in full. I had a big fight to release it in full because everyone said, this is too long. No one’s going to watch for two and a half hours. I won that fight and we put it out at its full length and the response was just tremendous. And it’s still up on YouTube and if anybody listening to this hasn’t seen it, just Google my name and Tony Deden, D-E-D-E-N. It’s up there. I think it’s had two and a half million views now. But the extraordinary thing, and this really is the extraordinary thing about this conversation, you guys both know what a cesspit the comment section of a YouTube video is. It’s no more than four or five comments in before it’s turned into either a white supremacy march or a slanging match against pronouns. Who knows these days? It’s just crazy. But you could scroll for a week in the comments of that conversation and not find a negative comment about what people listen to.

And that’s the beauty about talking to thoughtful people. Tony’s always one of the people at the top of my list, but I have to say after listening to Bill Ackman, I’m really curious to spend some time talking to Bill because I’ve listened to him talk about stocks before, but never have I seen him given a platform that was so broad and allowed him to really dig in. And I think that’s really the key, Peter, is to give people time and space to talk about whatever it is they want to talk about. This is what I do. If you give people time and space, talk about what’s important to them versus what you want to ask them, you will often find some extraordinary things buried in there.

Meb:

Now you have to turn the mic around.

Grant:

I’ve got two for you, Peter, because it’s just my nature I’m afraid. And let me ask you both so I don’t forget the other one when I get engrossed in your answer. The first one is about Trump and Biden, and that is what the fact that we have two 80 octogenarian candidates for president, what does it tell us about the cycle of trust and confidence and all that kind of stuff? And the second thing coming back to your point in Toyota, which I wanted to ask you as you were talking about it is Toyota has very quietly just got on with its business, while all the attention has been on Elon and all the brick pats have come at them for being yesterday’s news and yesterday’s media. They’ve just carried on being a car company, having auto sales margins and doing all the things that car companies do. So what does their kind of resurgence in the court of public opinion mean for excessive valuations for things like Tesla?

Peter:

So to your first question, I think the fact that we have two octogenarians speaks to dramatic change ahead, that there is a generational shift that is about to happen across leadership. And I think that’s one of the things that people overlook when we go back and look at the 60s and the early 70s, which is where, and certainly in Biden’s case, his career was born. And he was the young buck to a group of octogenarians at that point. So I think that this is indicative of dramatic social change where the baton is going to be passed, or taken, or blown up. But there’s a cycle change here. I would also put out that I’m not convinced that one, maybe both of them will not be on the ballot come November.

Pay attention to how we think about age. It wouldn’t take much in terms of a tipping point to push people to a collective belief that old is feeble, unstable. When confidence is high, old is well-worn, battle tested. We have a whole different series of adjectives that we use to describe the elders. When confidence is low, they’re old and feeble and that’s both of their risks. And then the question is, who fills the vacuums? And I’ll give that to others to decide.

On the Toyota front, I think this is a really significant change in viewpoint and could have lasting implications. To me, it’s a similar thing that we’re seeing in AI where there is a preference for bigger, more established enterprises because we see them as having greater capability. The threat is that they don’t. That they are as prone to wildness and excesses as the startups that surround them. But I think that as it relates to Tesla, this is a real changing environment and we see that so often where the incumbent comes in, overplayed their hand and the quiet older organization ends up gaining big benefit. And I think we forget that the greatest traction is made, not at the highs, but in the lows. That’s when field advantage moves dramatically. It’s who picks up the pieces.

Meb:

Peter, you mentioned somewhere one of the better election indicators is how the broad economy and the perspective of people coming into the election, and we talk about the stock market too, it’s like the three to six months coming into the election tends to have a pretty outsized impact. At what point does the incumbent party start to need to start pumping this thing up? Is it like June? What sort of lag time do we need to get everyone feeling warm and cozy?

Peter:

I think the Biden administration overplayed their hand early with the announcement of Bidenomics. You only say that, you only draw people to your connection to the economy when you think the economy is humming. And that to me was one of the early warning signs of economic trouble ahead is when you hug it intensely as president. And so I think they’re going to struggle and I think that with energy prices at the pump being probably the best real-time sentiment indicator for Main Street, if you start to see gas prices move up, the incumbents have a big problem on his hands.

Meb:

All right, you’re in a group with your professional peers, so the three of us are down in Cayman having a rum drink, or a coffee, a meal, and we’re with about 10 other money managers or just pros in our kind of sphere. What’s a belief you hold that if you said this out loud, most of the table is going to shake their head at you guys and be like, I don’t agree with you whatsoever?

Peter:

Your opinion doesn’t matter, your view doesn’t matter. Ultimately, your price is a function of what the crowd believes, wants, hates, loves. And rather than focusing all of your tension on what you think is right, spend much more of your attention on what do they want, what is the group around you choosing to be excited about and to run away from? Because ultimately my belief, Meb, is that’s what’s going to make you successful or bite you in the butt at the end of the day, is what the crowd decides to do.

Meb:

All right, Grant what you got?

Grant:

Yeah, A week ago, my outlying opinion would’ve been that Fulham were going to beat Manchester United at Old Trafford. No one would’ve believed me then, but they sure have to believe me now. And this is something I’ve talked about periodically over the years, but I sense a real point in time here where these things are so unloved and they’ve disappointed so many people for so long that I just get laughed out of the table and that’s always a really good sign and that is gold miners. I think gold mining equities have become, I mean they’re so beaten down. They are such a tiny part of the investment spectrum and if you bring them up, people will laugh at you. But we’ve seen some pretty serious and pretty sophisticated and pretty experienced investors start dipping their toes into the gold mining space in recent weeks and months. And whilst they will break your heart again, they are approaching a point, I think where you can buy gold mining stocks with money you can afford to lose with your eyes closed and just put them away somewhere.

Because if we do end up with the kind of problems that we’ve been setting ourselves up for a long time in both the financial system and with the kind of finances of the US and other Western democracies, gold is going to play a role again in the leverage in the mining companies, particularly from where they’re going to start. That particular cycle is just crazy. There’s no fever like gold fever as they say. And like I said, while they will still break your heart between now and then, I suspect if you’re smart about it and you pick the right ones, whilst I would get laughed away from that table, I think I may get a couple of phone calls later from people who away from the crowd might say, “Let’s have a chat about this.”

Meb:

Peter, as we look out the horizon, so 2024, anything in particular you’re writing about? Anything in particular your students or just people, followers in general are confused, excited about, what’s keeping you up at night? What’s on your brain as we look out to the horizon?

Peter:

I’m really focused on the real world and what’s happening to real people, real goods in real time. I think that there is an enormous disconnect between what people are paying attention to in the investment space and what’s happening in the world around them. I think far too much attention is being paid left versus right rather than up and down. And I think that the opportunity to coalesce across party lines is staggering if you reconfigure this as an up versus down issue, not a left versus right issue.

Meb:

Grant, give us a preview of the next issue. What are you working on? The next 50-pager? Any candidate so far?

Grant:

I think I’m going to be writing about private credit. I think this is something that I’ve been kind of looking at for a while now and it’s just interesting. I looked at commercial real estate a couple of months ago and it’s been fascinating to watch that situation accelerate. Now coming back to your point about the bonds, Meb, we talk about trust and trying to wrap the bond market into what Peter does. And it’s pretty clear that the reason that people weren’t panicking out of those bonds was because we all knew that the narrative was it doesn’t matter if their money is good or we won’t have to market them to the market. So you don’t have to panic.

And this is of course the narrative around private credit. This is the feature, not the bug, is that you don’t have to mark these things to market. You can rely on the marks and of course that works really, really well in a bubbly, confident market. But once the confidence goes and people start to feel vulnerable, suddenly the questions are all around, well, are the marks any good? And that 75 mark is actually the midpoint of the 58, 82 market price. So I think I’m interested to dig into private credit for the next couple of weeks and look at that because I think it’s a real confidence sentiment indicator.

Meb:

One more question, gents. One of my favorite questions we ask people, what’s been their most memorable investment? So it doesn’t have to be good, it’s just the one that’s seared into your brain. Who’s got an idea what they want to talk about first?

Peter:

So I’ll embarrass myself. My most memorable is a loss. It’s short financials in March of 09, and if I attribute what I do today to anything, it’s trying to understand how everybody thought the end of the world was coming, including me, markets can go up and we learn more from our losses than our gains. I’m proof of that. No question.

Meb:

The funny thing is, that concept is even for a quantitative investor and trend follower like myself, when you’re in a position and it’s working, so you’re long in video right now, your short things when they’re going down, you don’t really want the party to end. Things are going in your favor. And I remember one of the challenges so many people in the world of trend falling, for example, that try to transition from discretionary to rules-based and have a really hard time with it, they get signals.

I mean, I remember originally like REITs, it would’ve been in 2007 because REITs was one of the early ones that started to roll over. And I remember thinking, I was like, “Man, it doesn’t seem to time yet. It seems like we got plenty of time for this to happen. Maybe I’ll just wait a month. Maybe I will wait for the next signal.” These thoughts and doubts that come into your head and the same thing on the opposite side. Even when you start to see some of the signals and changes, you’re like, “Well, it doesn’t seem like it could finish.” The turning point when you have a winning position is always tough. So hopefully you were short then for a while, then got face ripped. Hopefully you didn’t just put on the short in March.

Peter:

It was good for a long time.

Grant:

And then it was very bad.

Peter:

And then it was very bad.

Grant:

Very bad. What you just said, Meb, that’s what Peter talks about in a nutshell. That’s the book, right Peter? You’re confident and you’ve got no confidence and that’s why you ignore the signals in each direction. It’s crazy. We all do it every time.

Meb:

That was like a hard right box. The bottom left is just like a straight teleportation.

Grant:

Every time. I think for me again, it’s pretty easy and that would be my investment in Real Vision when we started that. I’ve just learned so much over the course of that journey for those four or five years I did that. I got to meet so many cool people and just learned an incredible amount. It was just like, I hate using the drinking from a fire hose and analogy, but it’s perfectly apropos in this case. So for me, in terms of investing in my own education and my own improvement, what I do and how I understand the world around me, nothing even comes close to that for me.

Meb:

Whatever you do, listeners, go subscribe. And if you do, whatever you do, do not look up the interview with me because on Real Vision, I had been jogging in the Caymans before I did the interview and for the life of me could not cool down and sweated like you’ve never seen anyone sweat. I mean, talking about emerging markets is not something that usually makes me sweat, but it’s kind of a foul video. So if you listen to it, cut off the video, listen,-

Grant:

Now hey, nothing says, trust me like a guy talking about finance who’s sweating profusely.

Meb:

Gentlemen, man, I’m going to take a breath. I didn’t even get to my notes. Where do we find out, keep up with what you guys are doing, best places? Grant, you first.

Grant:

Easy. Grant-williams.com. And on Twitter @TTMYGH, which is the acronym for Things That Make You Go Hmmm.

Peter:

Peter Atwater at PeterAtwater.com. And they can find me at @peter_atwater on Twitter.

Meb:

Gentlemen, it’s been a whirlwind. It’s been a blast catching up with you guys. Thanks so much for joining us today.

Peter:

Thank you.

Grant:

Meb, thank you. Really enjoyed it. Peter, great to see you bud.