Why they shut down the economy, Capitalism was already dead, Cash Strategies and More
Here’s the first part of the transcript from this week’s Live Q&A chat, featuring discussions on the economy, markets, politics and cash strategies.
Cody:
All right, everybody. Welcome. Thank you for joining. My biggest problem with the markets is I just can’t get my head wrapped around that there’s a lot of potential upside right now. The problem isn’t that I think the markets are about to crash. But, especially in the broader markets, which is a reflection of the corporate earnings of the biggest corporations of the big 500 corporations in the S&P 500 case, I don’t think that we can expect 30% upside in the next 18 months or two years or something, unless, like I said last night, one of two things happens. The Fed prints so much money and it doesn’t crash the market and it somehow inflates assets — which we’ve seen happen repeatedly in my lifetime. They’re going all in on this bet right now, which I’m not too thrilled about, but again, that’s where I feel there’s more risk right now. It’s like the Federal Reserve, the republican democrat regime has gone all in on the near term with the current collapsed economy and with the amount of debt and printing they’re doing. All of this makes me uncomfortable. That said, the market could be up 50% in the next 18 months. You never know. I sleep this stuff, I breathe this stuff. Since I launched the hedge fund, it’s just more ingrained than it was anyway, because risk reward analysis is all I really focus on in the back of my mind. When the risks are high and the potential rewards are not great, well, be cautious. Be defensive. That’s where we are.
Subscriber:
I’ve got a lot of cash, which for me is 25%. I figure the reason the stocks are up is the stocks that we own haven’t really taking an earnings hit, and in many cases, they’re actually getting even better. You can break it down. Intel says they’re doing good. People want PCs all of a sudden. Obviously, you know what’s going on with Amazon and Netflix, some of the social networking stocks are doing a little better after Snap’s earnings report last night. Tech is up, and that’s part of the reason that the stock market is not in the toilet. The companies that are doing real bad like cruise lines and hotels and retail and all that stuff is getting destroyed. They’re at low prices, and that’s why the valuation is where it is. I’m saying, to me, the market is fair value because a lot of what’s holding it up is the stuff that we own and healthcare too is another one that’s hung in there.
Cody:
I’ll push back on your commentary there. In a very short term viewpoint. I agree with you, that that is why we are at the situation and the market’s being valued at the place it is at this moment You gave a pretty good explanation of why the S&P 500 is not at 2,000 right now, instead, it’s at 2,800. That being said, I want to look out six months, nine months, 12 months, 18 months. I don’t think we can confidently say that Apple will sell more or even as many or we even have any idea how many iPhones Apple sells in 2021. Whereas, if you did not have the coronavirus crisis, lockdown, economic impact and all this global dislocation that we have suffered, that the economy has suffered, you’d still be guessing how many phones Apple sells next year. Is the iPhone 5G going to be a hit? Are they going to have new features in it that are actually exciting? You can debate on all those things. That’s where you’re trying, as a long term bull, you just ignore all of that.
But right now, this is different. That’s what I was writing about yesterday with they… You can’t model nothing right now. You can’t figure out what Apple’s going to sell this year, much less next year. Forget about 2022. The economic ramifications of this shutdown are not bullish. I don’t care how many ways I cut it, the global earnings are in trouble for the next year to probably three to four years. I went back and looked at the S&P 500 earnings from 2007… I’m going to mess up these numbers a little bit, but the order of magnitude’s going to be very close. S&P 500 earnings was $108 in 2007. By 2008, it was $18. The next year, $56. The next year, $76. The next… It took til 2013. Five years, six years, depending on how you measure it, before S&P 500 earnings got back to where they were the financial crisis.
It could take at least five years for S&P earnings to get back to where they are. Energy companies aren’t going to make anything for a long time. Utilities are going to be struggling. Consumer oriented companies are going to be in trouble. One of the places to bet, I’d bet on companies that are going to help build factories and bring manufacturing back to the United States over the next five or 10 years. If you can find a technological revolutionary play on that. Then, our usual revolutionary investment themes that I am in, and that we are still in, but I’ve trimmed down on. Let’s take Microsoft as another example. Everyone’s pretty sure that Microsoft is going to do great because of their cloud business and maybe their Windows business too, because people are working at home and buying new PCs like Intel said.
That’s a very short term thing. To grow from these levels steadily, I don’t know. I don’t think a year from now, I like the growth profile of Microsoft. I’m probably going to end up selling my Microsoft. We’ve got small gains on it. It’s a small position, and I’m just not thrilled about the potential upside. Your explanation of where the market is right now is pretty good, but that doesn’t mean it’s going to be valid in six weeks or six months. I think we all know that.
Subscriber:
What percentage cash should we be in now?
Cody:
Probably 17.642% would be appropriate for you. That was sarcasm. Joking. You might be a new subscriber, so I will answer it without being a smart aleck. What percentage cash should we be in right now? Higher than usual is the answer. It’s different for everybody because of your risk reward profile, your tolerance, your income, your income growth, your family situation, all that stuff. I don’t know how much cash you personally should be in, but it should be a probably much higher percentage, at least a higher percentage than it was six months ago or two years ago.
Subscriber:
Cody, everyone I know and respect as good investors are all sounding alarm regarding Great Depression and/or market valuation being crazy. What I don’t understand is that most of them are only in 20 or 30% cash. The setup is not good, isn’t it better to go to say, 80% cash?
Cody:
Again, it depends on your risk reward analysis and how much you would believe in your own long stock picks. If you had 10 stocks that you were feeling really confident, no matter what happened to the markets and the economy were going to go up five or tenfold in the next two years, you should be 100% invested. For most professional money managers 10, 15, 20% is a lot of cash. If I really were bearish, I’d personallly consider going outright short. But then again I am a revolution investor, right? Going short is not my thing, really. I would have to be really confident that the market was about to crash if I was going to go net short. If not, I just get defensive, okay?
Subscriber:
Cody, I am reading many news articles warning that we may have a significant economic slowdown and sporadic shelter in place for the next one to two years. This makes me more optimistic about the stock market because the market is starting to price in this likely reality. Though, there will probably be market turbulence along the way.
Cody:
That’s a pretty good analysis, as there’s a Trading with Cody contrarian aspect to what you’re saying. Even right now, when you keep revealing the questions about, “Cody, should we be in lots of cash?” You can take that as a contrarian indicator somewhat.
The thing about contrarianism and sentiment, just drill on that for a moment, is sentiment is a good near term market indicator. It’s crappy as a long term indicator. Sentiment is meaningless over the long term. People will buy and sell stocks based on earnings over the long run, over five or 10 years. For example, in the the 18 years that I’ve owned Apple, the reason it’s gone from $1 to $270 had nothing to do with sentiment, at all. It had to do with the fact that they were earning nothing when they were at a dollar, and today, they’re earning $20 a share when it’s at $270. Earnings went from two cents to $20 a year. That is why the stock went from a dollar to $270. In the short term though, sentiment is probably the single most important driver of a stock and the market. When everybody’s in a stock, it’s no one left to buy. If everybody loves that stock, it’s because everybody’s in it and there’s no one left to buy.
When you see the sentiment wildly bullish about a market or a stock, or when you see the sentiment wildly bearish about a stock, that’s why it’s a good indicator, is because in the near term, that stuff reverses. Sentiment reverses when it gets extreme. By the way, that’s another thing. Sentiment’s not a very good indicator until it’s extreme, and I don’t think there’s extreme bearishness right now. I don’t think there’s extreme cautiousness right now out there.
So it’s important to look at sentiment when it’s extreme. Even then, it’s only about the near term, but I don’t think at this moment we have extreme sentiment. I don’t know if it’s very helpful. Again, I feel like the market’s set up to just grind away slowly lower for a year or two and just exhaust the bulls, exhaust the bears, and if you’re not picking the right stocks, or if you’re trying to gain the momentum and buying breakouts and shorting… It breaks the line down. I can’t think of what it’s called. Then you’re going to probably lose a lot of money. If you just sit in the S&P 500 for the next year or two, I think you’re probably going to lose some money.
Subscriber:
Leon Cooperman, yesterday said that capitalism is permanently changed. If the government is helping now, then you can believe that there’ll be much more regulation on the upside, and we’ll be much more involved. He also said that the taxes have to go up significantly. How does that change the calculus of the markets?
Cody:
I basically agree with the thrust of what he’s saying today…but this isn’t new. Capitalism changed in 2008 during the financial crisis when Leon Cooperman benefitted from bailouts. It changed when Reagan allowed stock buybacks. It changed when Clinton deregulated, quote, unquote, the banks. Look, man. I used to get in trouble on Fox all the time when I was on there. For 528 episodes, if the term came up, I would call it out. It’s fascism. When you marry government and big business, the definition… The definition of fascism these days has gotten to be that it’s a passionate political viewpoint thing. Real fascism, the definition of it, the economic definition of it, the political definition of it is the marriage of business and big government.
And that’s all I’ve seen in my lifetime, from Carter to Reagan to Clinton to Trump, there has been an endless march towards this fascist, socialist welfare state for the rich and this leave you to the wolves for the poor in this country. We don’t have any semblance of capitalism anymore. I have spent my entire investment career recognizing and then because there is no other choice, at least investing my net worth in it. I will fight for freedom and capitalism and a fair system with my political and social capital, but with my monetary capital, I’m not fighting these trends. You can’t. You’d be bankrupt by now. I mean, it’s already changed. This is just a continuation of the path. Maybe it’s a big step along this new un-capitalist path. Maybe it’s an acceleration on that pathway, but it’s been a nightmarish dystopian concept of capitalism and liberalism and fascism that we live in right now anyway. They’re all complicit. They’re all socialists.
Then, to get to the next part of your question, is what is the market ramification, economic ramifications of this stuff. That’s what I was saying earlier. I don’t know if you heard it, but it feels to me like right now, the government’s gone all in with the Federal Reserve and the republican democrat bailouts and stimulus packages and the $12 trillion of borrowing and printing and screwing our children and screwing people who were responsible and bailing out irresponsibility. I mean, in the end, the trends continue to be that corporations will… Giant corporations will always, under this regime, and I mean republican and democrat regime, not just Trump. Obama too, all of them — under this system, the corporations and billionaires continue to take more power and more wealth, more profits, they get more bailouts, more welfare, more profiteering opportunities, and you, the middle class, anyone who’s not a giant corporation or worth hundreds of millions of dollars is going to pay higher taxes, is going to be punished by this.
I don’t know that they’ll ever try to raise real tax rates on these giant corporations until the system is broken. I don’t think the system’s about to break, but I do think the risks of it breaking are much higher today than they ever were. I hope I answered your question. This is not capitalism.
Subscriber:
Yeah. Clearly deficits don’t mean anything anymore. They’re just going to print money and print money and print money.
Cody:
But they do, because nothing happens in a vacuum, right? This is why I buy puts on the TLT. It looks to me that that is the cheapest place to bet against this system collapsing, because if it does collapse, interest rates on treasuries will probably be spiked when it breaks. Because they will be scrambling trying to save the system and fighting against it, and they’ll lose control of the interest rate trend, and then it becomes a vicious cycle.
Subscriber:
Cody, demand destruction was a known certainty with the shutdown. It seems like Trump didn’t have any economic advisors in the decision process.
Cody:
You got one of two options to really explain the shutdown. The choice of governments around the world to do the shutdown. Either it’s by design, which I don’t think it is. They are risking everything on this, including the entire system, so no. It’s probably not by design. You know Occam’s razor? You always go with the shortest path, easiest explanation, the most simple obvious explanation is usually the right one. In this case, the most simple obvious one is that the the health advisors were like, “Look, you got to shut down everything, because this disease is really bad, and there’re going to be millions of people that die if you don’t.” Then, the economic advisors’ like, “No, you can’t do that. That’s insane.” Then, the political advisor is like, “All right, well, let’s walk through what your risk reward on shutting down the economy are, or not. The risk reward is well, if you shut it down and the economy goes to shit, but millions of people don’t die, you might have a chance of being reelected. If you don’t shut it down and millions of people die, and the economy crashes anyway, you’re never going to get reelected.” The political risk reward for people in office in my calculus is to shut the economy down. You take the risk of the economy, but then at least don’t get blamed for a direct cause of millions of people dying in your state or your country.
In the end, I don’t think politicians give two craps about the economy. I don’t think politicians give two craps about you, about your safety. They don’t care about anything but getting reelected. That is always the default mindset when I’m picturing anyone who has gone through and chosen to play the republican democrat and run through their rubric and gone through their vetting system. If they’ve gone through all of that but on the ballot, I’m pretty sure they’re not on your side. They just want to get reelected. That is always their goal. Any policy that they put in is basically them trying to get reelected, which is not always directly correlated with what’s good for you.
Subscriber:
I think that this crisis, could make the gap between wealthy and poor be further and further and further apart, because a lot of these people who are unemployed today, whether they be restaurant workers, other types of… Uber drivers, people who make less than the average aren’t going to find new jobs. We’re going to say there’s going to be new industries created, but these people won’t be able to retrain to get into these new industries. The government is going to have to keep heavy welfare to help these people.
Cody:
I agree and disagree with a couple of things on what you’re saying there. The part I agree with is that your dog is cute and adorable. What’s his name?
Subscriber:
Gizmo.
Cody:
Hi Gizmo. Look. I agree that the wealth disparity will get worse. I also agree that welfare to poor people will increase. There’s an article on CNBC yesterday about a woman who owns a couple of massage and hair salon things in Washington State, and how she called a conference call with all of her employees on Tuesday after she got the PPP, Paycheck Protection thing, and got her welfare so that she could give her employees their paychecks. The employees were all pissed because they had gotten their $1,200 stimulus welfare checks and then they got another $600 dollars from the state and they were going to be making more off that welfare than off their former paychecks. If you made $18 per hour or less, it was going to hurt you to go back to work. You were going to make more money by getting on unemployment. Those people were rightfully upset.
That underscores the complexity and the unintended consequences that we’re about to face across the broader economy. Like I was hitting on earlier, the powerful and the wealthy are going to get more powerful and wealthier, with more welfare and more protection and more bailouts. And the biggest corporations will expand and get bigger. Part of that means that yes, smaller businesses will be squeezed. Employees will be squeezed. Unions will be squeezed. Anything that helps the little guy is going to be squeezed. Little guy taxes will go up. Middle class taxes will go up. The really wealthy will not pay any more in taxes and will pay less and taxes and get more protections and new things like opportunity zone tax break packages. When Biden’s president, he’ll come up with some new giant corporate welfare package and call it “healthcare and homeownership for the poor” or something. You and I and Wes, working our butts off running our own businesses or helping someone run a business are about to get squeezed.
Stay tuned for part 2 of the transcript, featuring individual individual stock discussions, ETF strategies and more.
