169 TIP. Jesse Felder – Fang Stocks , Crypto, Central Banks, & Inflation

you're listening to TI P hey how's everyone doing out there today we've got our good friend Jesse Felder on the show and Jesse comes with multiple decades of experience in the markets he's the former founder of a multi-billion dollar hedge fund and as you might expect he always comes to the table with a tremendous amount of insights and ideas today we're talking about big tech companies and Stig what were some of the other topics that we covered on this show we transition into a macroeconomic discussion it seems like the central banks are currently looking to undo the quantitative easing and it might lead to inflation now this is a very interesting concept because if you feel that stocks and bonds are overvalued and you're holding cash if we do see inflation does that mean that you also need to diversify your cash not holding US dollars but also euro and yen perhaps and what about this new currency Bitcoin that's all the rage right now is that a good way of diversifying the cash position Jessie Felder doesn't think so you are listening to the investors podcast where we study the financial markets and read the books that influence self-made billionaires the most we keep you informed and prepared for the unexpected all right so we're really excited to have Jesse filter back on the show Jesse welcome back to the investors podcast always such a pleasure to have you here thanks for having me guys you know you was it a couple years ago you guys turned me on to the whole podcast world I really didn't know much about it and it's just awesome and so it's a pleasure to be here with you guys again look at where we are now Jesse you got your own show and everything it's awesome it was all inspired by you guys so we want to chat with you in particular about Fang stocks to open up the discussion we opened up this to our Twitter followers as well we said hey we're bringing Jesse filter on the show they threw a lot of questions at us to ask you tonight so talk to us about how you're seeing the fang stocks and before we do that just tell our audience what fang stocks are in case they don't know that terminology the term the acronym was coined by Jim Cramer and it just stands for Facebook Amazon Netflix and Google which is technically now alphabet so that I guess is the acronym doesn't work so well but I also add Apple and NVIDIA into that so you get a couple A's and a couple of ends in there so yeah that's that's why I look at the thing stocks is that bull six really awesome and so Jim started talking about them because they were just you know taking off like a rocket ship and when we talk about Fang stocks you're of the opinion that they don't have much more to climb so talk to our audience about this idea and why you have that opinion oh really you knows reading Howard Marx's latest memo and he talked about an every bull market you get a group of stocks that become priced for perfection and so I started looking at these sucks and since obviously it's the fame stocks in this bull market and when you look at them individually so the way I look at valuations of stocks is not necessarily the company relative to the broader market but I like to look at that stocks valuation relative to its own history I include Apple and some people say well apples you know not expensive relative to them to the broader market Apple is actually very expensive relative to its own history that's kind of what I'm talking about terms of valuation so I look at these stocks and I see they're almost across the board trading at their highest valuation relative to their own history in the last 5-10 years if not more and Vidia is a great example that straits 15 times revenues which is just absolutely insane and at the peak of the dot-com mania Nvidia traded at about seven eight times revenues and at that time revenues were growing a hundred percent year-over-year today it trades at 15 times revenues and revenue growth is 30% I think 28% of last quarter and projected to grow 12% or maybe even flat in subsequent quarters so revenue growth is much much slower today than it was at the peak of the dot-com mania in evaluations twice what it was back then so that's kind of what I'm talking about what these stocks just trading at really high valuations despite the fact that their growth is slowing apples gross margins are falling a minute in almost every case I could go stock by stock and Netflix is another great example free cash flow has plunged from 300 million positive to 2 billion negative and the stock trades at its highest valuation in its history so it's yeah these stocks are absolutely priced as if things could not get any better so Jesse let's specifically talk about the valuation of Netflix so I just looked up the stock here and it looks like the price to sell is seven point six price to earnings almost 200 and the reason I ask this is because Netflix has gradually changed strategy and now they're looking to go into constant creation I guess to me doesn't sound like higher margins if anything that sounds rather expensive but I guess my question also comes from an appreciation of knowing that you could be wrong and the mind could be right you know you're absolutely right state when you look at Netflix you know back in the you know 10 years ago when they were putting blockbuster out of business you can make the case that they're gonna own the DVD you know business so yeah I'm willing to pay a high multiple because they're going to take all of that business from Blockbuster then they went to video on to manual wow this is a new market they're doing something brand new and so maybe that does earn it a higher valuation and growth premium today you're right they're getting into content creation when you look at every single one of the company's competitors and content creation they trade one two two time sales so you know then you have Netflix free cash flows plummeting and the reason is because this content creations very expensive and the return is you know very minimal and very hit-or-miss right you have some hits you have some misses and so cash flow goes up and down deeply negative for them right now and I don't know how you justify seven and a half times sales when you have Disney two and a half or three times sales which is the own best in the business and Disney is an interesting example too because they've decided to take all of their video product away from Netflix and create a competing platform so it's a very interesting situation that science is in right now you know the thing that I can't understand about the Netflix doing their own content is back in the day you'd turn on your TV and you'd flip through the channels and try to see what was on and you'd give things kind of a try because you just had to there wasn't like you could do on demand TV but now with on-demand like when you go on the Netflix you're looking for something specifically you're not just perusing and seeing what pops onto the screen anymore there was a lot of discovery that happened with these original shows that were maybe coming across the network so I think that's a major problem for them as they're trying to I mean we all know why they're trying to do it they're trying to get people to stay hooked on some type of program that's decent that keeps them subscribed to the service but I think that it's a harder sell than it used to be back in the day when you're just channel surfing than it is now because of the way on the man TV works would you guys agree with that or do you see it a little differently I absolutely agree I you know I think in Netflix also when they had the first mover advantage you know for a long period of time in the video on-demand you know there was a great case everybody had to get Netflix but now you have Disney creating your own platform you have Amazon Prime who you know has its own platform HBO GO if Hulu you have a lot of different platforms a lot of choices for people and a lot of people you know were well placed in the media industry you're talking about a price work on the horizon and so I think that's another risk to Netflix you know something that I think a lot of people that just invest based off of the brand or they really don't they're not a numbers person this is how I would like to describe this for people as they're thinking about Netflix specifically so if you bought one share of stock for a hundred and eighty three dollars right now you could expect the profit after an entire year of buying that one hundred and eighty three dollar business to be forty three cents that's what it was at the end of 2016 looks like the past year it's about a dollar let's just say best-case scenario it's a dollar you're paying a hundred and eighty three dollars to own a business that's gonna give you one dollar after a year I wrote a blog post recently about this and this goes to the broader market too but you know this was specifically in regards to Nvidia Facebook stocks trading ten times revenues or more back in 2001 kind of late 2001 I think Scott McNealy gave an interview to Bloomberg and this was after his stock had you know just gotten crushed and he was talking about the valuation of Sun micro at the peak of the dot-com mania and I got to read you this quote because it is perfect for what we're seeing today says it 10 times revenues to give you a ten-year payback I have to pay you 100 percent of revenues for 10 straight years and dividends that as soon as I can get that past my shareholders that assumes I have zero cost of goods sold which is very hard for a computer company that assumes I have zero expenses which is really hard for 39,000 employees that assumes I pay no taxes which is very hard and that assumes that you pay no taxes on your dividends which is kind of illegal and that also assumes with zero R&D for the next 10 years I can maintain the current revenue run rate now having done that would any of you like to buy my stock at $64 share you how ridiculous those basic assumptions are you don't need any transparent so you don't need any footnotes what were you thinking end quote and so that's the Nvidia today that's Netflix today is Facebook today all these come as a trade at very high price to sales ratios and interestingly at the peak of the dot-com mania we had 29 of the sp500 components traded at ten times revenues are greater today we have 28 so it's very very similar situation actually you know so we had a comment from an individual on Twitter that said hey are some of these prices justified because interest rates are a whole lot lower than they were back in 2000 what do you say to something like that so I think the best way to think about this is there's an incredible dichotomy what do low interest rates imply low interest rates imply very low growth what justifies a high multiple of earnings high growth so Jim Grant said you know we have boom-time equity valuations and depression-era interest rates where basically you have the bond market saying there is no growth then you have the stock market saying growth is off the charts and so you know we could get into the math of it but when you use a discounted cash flow model you know if you discount the discount rate you lower the discount rate to one two percent or whatever you want to lower it to but you don't lower the growth rate in the discount cash flow model you're making a massive mistake and in fact the Federal Reserve has written a paper on this how every single cycle investors make this mistake you cannot lower the discount rate without lowering the growth rate when you lower both at the same time does it matter if you grow it 5% and discount at 5% grow at 10 and discount 1/10 the valuation stays the same I mean it doesn't justify high equity valuations although it does help explain it investors are desperate for returns and so they've piled them you know out on the risk curve to push the junk bond prices way too high equity prices way too high and it's just a sign of desperation on the part of investors but it doesn't mean they're not making a great mistake you can do more so let's talk more about valuations yes you know here with with the Fang stocks I've heard a lot of different arguments in terms of how to assess valuations because typically we'd be talking about this kind of cash flows as you talk about like how much money is flowing back to the owners now you hear other valuation metrics like the networking in fact for something like Facebook or the top-line growth for something like Amazon how much should we pay attention to these new valuation metrics also giving that these Fang stocks are impacting our lives in a way that perhaps you can argue we haven't seen before well I mean in every cycle it's different in some respect but the iron law of valuation you know is never different pervade you know literally you know my friend John husband likes to say that any security essentially the today's price is discounted future cash flows and so you know for a company like Amazon to justify today's valuation they have to be able to turn on the profits eventually and when I look at the valuation of Amazon specifically is trading at its highest valuation in ten years and I just look at price to sales again is that there really is no income so you can't look at a price earnings ratio you look at a price to sales ratio and at the same time growth has been cut in half or by two-thirds over the last ten years so growth rate it's falling dramatically you can see this in Amazon trying to get into other industries the risk there is that Amazon now is drawing the interests of regulators in terms of antitrust I talked to my friend Peter Atwater about this and he says you know welcome to the backlash era we're now seeing you know people around the world this populist movie people are tired of being taken advantage of Retired of being bullied there's been a backlash towards politicians there's been a very very justified backlash towards sexual harasser z– and that's not just eight you know a trendy thing that's very very justified but I think we're also going to start seeing a backlash towards these companies that are taking advantage of Facebook and Google's especially but Amazon destroying the retail sector destroying his competition has so much power so much monopoly power that it's drawing a lot of antitrust interest and if they were to start saying I'm sorry cannot get into your pharmacy benefit management will not let you enter these industries because you already have too much monopoly power then the growth could decline matter and then how do you justify you know a sky-high valuation yes very interesting point to bring up about regulators because it seems at least so far not to be something that investors are too worried about but obviously if it will happen if there will start to get regulated this is something that we all need to consider in terms of our valuations so where do you see this going in the future well I think there's a very big difference to be made between the way investors feel about these companies in the way the general population feels about these companies when you look at the way that politicians and the general population feels about these companies USA Today did a poll and more than half of respondents said these companies have too much power and we're afraid of their you know more than half of those people so we're afraid of how they could potentially use that power and then now you have you know in Congress there's a bipartisan effort I think this is one of the things that could pass Congress very easily is new legislation to rein in the powers companies because it's not just liberals you know talking about this you Steve Bannen came out and said that you know the Republican Party at least kind of the tea party side of it is gonna make it their top priority to rein in these companies next year so you have both sides of the aisle saying you know it was really the Russian influence in the elections that helps people to wake up to these risks and to the unchecked power that these companies have I think that was just a catalyst to understanding really like I said the power that they have I recently just I haven't published you but I recently had a conversation with Roger McNamee who was one of the first investors in Facebook he convinced Mark Zuckerberg not to sell Facebook yah-hoo for a billion dollars he also introduced sheryl sandberg to mark zuckerberg when the guy's been instrumental in facebook's evolution as a company in 18 months ago he went to them and said to Cheryl and to mark sit this platform has become extremely dangerous and it's because there is no oversight you guys will allow anybody to come in and pay any amount of money to use what what he calls your brain hacking platform happen people's brains to get them to consume what you want them to consume buy what you want them to buy both RB 104 and they both kind of have been rebuffing his efforts to get them to fix this and now Congress has you know is realizing the dangers involved you know it was actually the chief Google ethicist who's now coming out and saying that this is a legitimate brain hacking we have used these psychological principles of gambling and persuasion in order to create a platform that manipulates human brains more effectively than anything in history and so I think that as people wake up to this these companies they're going to be more highly regulated or they're gonna have to find a way to take greater control of their platforms you know one of the things I think about whenever you're using social media is confirmation bias and how powerful and how reinforcing it's like an echo chamber for people you know you like a couple things or you let's say you're a liberal or your conservative pick whichever one you want and you start liking things that are specific to that one thing well next thing you know the only thing you're receiving in your newsfeed are those things and so it has this positive maybe negative reinforcement so that's the only thing you're seeing and now that people were getting so much of their news through this stuff it's just the ultimate confirmation bias mechanism well so you call it brain hacking I completely agree with you and I think that most people aren't even aware of confirmation bias and so how can you set up your feed so that you're not being susceptible to something like this I mean it is a major concern I think it's something that I think a lot of people need to think about you that's a great question I think that social media these companies to it and I'm as guilty as anyone on Twitter I love Twitter I'm an addict I'm gonna confess that it but I think social media is just not the ideal platform to get most your news from I use it as my go-to source but I also read you know a bunch of the major media outlets which you know have to double-check their sources they have you know all those types of things so I read the Financial Times Wall Street Journal New York Times I mean I think you have to broaden you just can't get all of your news from social media because it is so unreliable at times when you have one little preconceived notion and you start liking a few things and now it's just it goes off on like a total tangent that's all you're thinking about yeah absolutely and they're not all legitimate sources either yeah I mean there's a lot of different people with a lot of different interests out there trying to shape public opinion so when we think about all this this is from an investing standpoint positive negative continues to exist for more years because it's not at a breaking point you know one of the things that I was looking at Jesse was when you look at each one of these companies top line the top line still growing I mean it's definitely not growing like it used to like you'd point it out but it's still growing and these things are definitely being traded off the top line and not the bottom line so if we expect the top line to continue to grow and to continue to expand should we expect the price to kind of go with it until that breaks we might not know about the risk of the top line until well you know it's interesting for me to talk to Roger because I said you know what are the biggest risks for this company goes you know investors in Facebook and Google should be praying for much tighter regulation right now because if Washington doesn't regulate cuz they're not gonna regulate themselves because it hurts the top-line too much if they don't get regulated then people are gonna start revolting from these platforms they're gonna start realizing I'm being manipulated and I don't like being manipulated and I don't like my data being sold to the highest bidder and you know regardless of who that is as investors we should hope that they're gonna get regulated because that is going to make them better corporate citizens you know Scott Galloway also makes a great point in Business School one of the case studies they use is Johnson & Johnson and the tylenol scare and you know when tylenol pills you know had killed a few people there was a huge scare about tylenol what did Johnson and Johnson do they pulled every bottle off of every shelf on the planet we are going to protect our customers at all costs right that is you know business school 101 when you have a crisis you literally just shut it down you do everything it takes to make it right and what's scary I think for investors if these companies is these books not doing that Facebook is still allowing you know I'm we're going to auction off brain hacking to the highest bidder we're not gonna change our business practices and nothing's changing and so they're not taking that lesson to heart and so I think as an investor that's a huge risk people would have so much more faith in the platform turning over their data and turning over their lives to Facebook and Google if they started showing those types of behaviors like look we put your interests first we're gonna make sure you are not manipulated that you are not you know that would be a hit go a long long way to giving people confidence and distill using the platforms I look at all those things as rapidly growing risks to their underlying business models really ok JC so this is the last question I have about the fang stocks and this is also the question I've been Luke most forward to asking because I kind of knew that there would be some kind of bashing so let me ask this counter question if you had to hold one of the fang stocks for at least a decade you couldn't sell it you have to hold it for a decade which stock would it be and why yeah that's tough you know so for me I want to own stocks that I think are very cheap out of favor classic value my favorite way to think of it is the way Jim Rogers put it wishes I want to wait until I see five dollars lying on the ground and all I have to just pick it up like it's that obvious and I don't really see any of these stocks as being that five dollars on the ground right up but I think for me it would probably be between Apple and alphabet I think those two have legitimate moats to their business that are probably more proven than any of the others and that and the valuation of Apple is obviously more reasonable than the others so interesting that you should mention Apple and you know reading through their financial statements it seems to me that they are perhaps too reliant on the iPhone can't remove the exact number but it's something like 70 or 80 percent of the revenue that comes from iPhone so as an investor even though that this is the biggest market cap in the world quickly approaching a trillion dollars should we be concerned that consumer preferences might simply change I really do think that's a legitimate risk cap I mean the thing about all these companies is people don't remember a time before the iPhone they don't remember a time before Facebook but the history of technology is that I mean somebody had a great tweet recently it was the cover of Forbes ten years ago okay will anybody ever be able to chip away at Nokia's ownership of the cell phone market this was ten years ago and you know so there's always a king of technology but it changes you know it doesn't seem like it changes very rapidly but it does every ten years there's it seems like there's a new king and you know for me I am an Apple fan totally sucked into the ecosystem I was just looking at Google Trends you look for searches for a feature phone and if what's a feature phone does talk text and music that's it and feature phones I think could be the next big thing in mobile devices because people need to be able to get away from the social media get away from notifications there's so many more studies coming out that these things make us to press more time the more notifications pop up on your cell phone the more frustrated and angst this is built up inside of you and social media does the same thing so you know people want breaks from these things and so I think that is maybe a risk to Apple I don't know I mean they have such a wonderful ecosystem and they do have a strong mode we'll protect the business to always be fans at the iPhone but for me I think there are risks wow that's a great story I'm glad you shared that all right so Jesse let's transition into talking a little bit about something you're hitting on earlier which was inflation and growth and intrinsic values when you're doing discount models because I think that this is something that a lot of people are wanting to hear more from you want so what would you say is you're looking at this moving forward into the next ten years what are you looking at for a growth rate like what do you think is reasonable gosh you know again my friend John Hussman has done some really interesting work here and it really depends on where you are in the cycle when you have 4% unemployment there's just not a lot of potential left in the economy to create a ton of new jobs and that's a lot of the times where growth comes from you look at you know periods it's really good growth and you start with a high unemployment rate and then you know the jobs take care of the rest you guys had eric cinnamon on the podcast recently and eric has been writing about you know inflationary and pressures building you know here in the United States at least for me is more interesting from his bottom-up perspective you know he's tracking and listen I don't how it does it all 300 conference calls a quarter you know yeah and when he does all that he's hearing like you know wage inflation becoming a big problem for these coming 4 percent unemployment it makes a lot of sense the only time you know real interest rates were held this low for this long was during the mid to late 60s and what was the experience after that was inflation just took off and you know I think there's a lot of pent-up inflation wage pressures building and things and you know we still have a Fed Funds rated you know 1% and change I think it's very possible the Fed is far behind the curve wage inflation is going to take up but it was a great stat today that I tweeted Japanese beer brewers just raised prices for the first time in ten years we're starting to see wage pressures in Japan you know the epicenter of deflation and so if deflation is potentially ending in Japan we're starting to see wage inflation there this is a global phenomenon and if we start to see inflation around the world all of these central banks are gonna find themselves so far behind the curve and have to you know raise interest rates rapidly to to Train like ketchup so it's a very interesting time I mean so when we talk about what does that mean for people that are listening to this and they hear you know if let's say that that is a true statement and that happens what happens if they have to start raising interest rates quickly like that well the first thing I think about is if you justify high valuations with low interest rates your premises immediately evaporated I don't think that means much in the minds of a lot of bowls today but when you look at you know junk bond yields in Europe at you know less than 3% you know companies a bit up a lot borrow it incredibly low interest rates you have you know jump on yields here in the United States at five percent these low interest rates have enabled a whole army of zombie companies to stay alive and that's you know kind of prolonged the cycle and prevented a real washout of businesses if you have been financing your business at you know three four or five percent for the last ten years and all of a sudden you got a refinance at six seven eight percent those zombie companies are toast and you're gonna have a new credit cycle where defaults start rising and it had a corporate level and you know then spreads start widening and that's you know not good for risk assets of any sort including equities yeah that's I mean this has been the story for so long that we've been talking about is you know how much longer can the Fed do this now something that I find really quite interesting is when you go back and you look at the balance sheet of the Bank of England the ECB the US and Japan and when you look at the balance sheet and you look at the QE that's been conducted and you look at the time whenever the US stopped doing its QE and then the ECB picked up and you look at that transition point we had a big correction in the markets here in the u.s. back in 2015 you go back I think it was in 13 2003 Dean was it 2012 I can't remember you saw another similar event where basically the quantitative easing was swapped then you saw a big correction in the market and this is when the ECB just started doing some QE right now you turn on the news and you see guys like Ray Dalio that are saying hey the central bankers are done they're gonna start pulling this back come 2018 they're not gonna be doing the QE like they've been doing in the past and I'm really curious to see how that plays out and whether that's even a true statement that's what ray is saying the Fed is obviously stopped but the ECB still has it turned on full throttle so are you hearing anything different are you seeing that the ECB is gonna start pulling back on some of their quantitative easing efforts is that gonna be something that we see a major transition in 2018 I think they're gonna have to I think you know they're running out of on stage you know they're starting Japanese on a ton of you know a huge percent more than fifty percent of the real bond market and you know ECB's running up against their constraints of the bonds that they're allowed to buy and so they're gonna have to start tapering but it's also you know the inflationary phenomenon in this is very very interesting to me because I talked to Carol Sokoloff about this recently and William white who was teeth comas the BIS we talked about the same topic that you know it turns out quantitative easing was actually deflationary right because it allowed for a massive amount of debt creation when you pile up all this debt it reduces the amount companies can spend or consumers can spend so it actually slows things down and it's a deflationary impact and I think that's what we've learned during the cycle so that when you reverse QE that's potentially an inflationary impact and so I think that's something that a lot of people aren't thinking about that if Cuba was deflationary undoing QE or tapering QE by all these central banks you can potentially be inflationary then what do they do then they have to you know obviously raise interest rates rapid leaving the ketchup all right so say that we don't want to be invested in stocks aren't bonds whether or not we believe is because the interest rate is going up we just don't see any kind of yield so basically we just want to hold cash now how do we hold cash should that just be in u.s. dollar or should we divide that up into call it USD yen euro perhaps pounds as well even though that some of these currencies starts to look more vulnerable than they have in the past what do you thoughts on that Jessie huh that is a great question and I am you know bearish on the dollar I think we started a new bear market for the dollar and you know chemi is very simple look at the way the federal deficit is going and this is potentially the first time in modern history where the federal deficit is widening during an economic expansion that's potentially a big problem that's saying you know this entitlement spending and stuff every economic expansion we've had no tax revenues grow and things are great for the federal government that's not happening right now so that's actually really worrisome and you know the federal deficit is only gonna widen and if you look at a chart of the dollar deficit it's very highly correlated right the better the US federal government's finances are the better if a dollar does you know the worst the deficit widens the worse the dollar does and then you also look at you know the Japanese yen is very very cheap relative to dollar you look at things like purchasing power parity or you know the Big Mac index you know and that the yen is very cheap and so if Japan is gonna see an end to their deflation airy scenario and the central bank is gonna have to start to tighten the yen is gonna do very very well against the dollar I think the Euro probably will do well against that I just look at me a relative central bank policy the Fed has been tightening for years now really and the ECB has been loosening for the last year's when that changes you know in the ECB has to start tightening and as Fed goes oh no we've maybe started in the recession that has to start easing again the dollars just going to tank against the euro yen but honestly you know I think you mentioned Ray Dalio earlier ray said everybody should have at least 5% of their portfolio in gold and you know when the dollar does poorly gold as well and so if you're bearish on the dollar or say you have to be bullish on cold and so financial assets are extremely expensive we have bonds and stocks I can't remember which which brokerage firm came out recently research house came out and showed that since 1900 the combination of stocks and bonds has never been this highly valued in history so you they're both extremely expensive so financial assets are something that you know there's a lot of risk there I think real assets or something you're gonna want to own over the next 10 years and so that to me is real estate commodities gold with potentially tips Treasury inflation-protected securities my favorites that are real estate and gold I think those two probably in an inflationary environment do the best so I mean a lot of these things tie in together right if the dollar goes down that creates inflation and so it's really kind of a holistic view over the next 10 years that I think real assets will do better and gold will probably do well because the dollar goes down the next few years if interest rates are going up wouldn't that be a concern for a real estate though because the prices are gonna go down it could when you think of residential real estate but when you look at invest of all real estate it's mostly commercial yeah and the nice thing about commercial is when there's inflation they can raise rents and so yes real estate prices are very very high I agree with you so maybe that's not the best area but they do have pricing power in an inflationary environment so gotcha so the next question obviously becomes because this is the hottest thing that everyone's talking about and you are you're smiling because you know where this is going what are your thoughts on that thing yeah bitcoin is a classic mania the classic mania and I think it is so fascinating to watch it play out real time and I done a lot of research on it and I understand and every time I say this room you don't understand what the point is I understand what bitcoin is and I was talking with a friend of mine today was a reporter for quartz as he was asking me about this and you know I think bitcoin is a technology block changes in new technology and blockchain possibly has a lot of potential value but if there's any lesson from technology it's whatever is great today there's somebody's gonna come up with a better version of it tomorrow and so I mean that's the simplest thing I think about in terms of Bitcoin somebody could create a better Bitcoin tomorrow but you know central banks are talking about creating their own Bitcoin and you know these types of things but fundamentally you know the argument for owning Bitcoin is there's only can only be 21 million points created and this is limited quantity but there is no limit to the number of digital currencies or crypto currencies that can be created and so I don't understand at all why Bitcoin should have any value over something very very minimal because the higher the value the harder it is to become a medium of exchange Wall Street Journal wrote about this last week that well a lot of companies are trying to use it an accept Bitcoin but people don't want to spend it so long as they think the price is going up so it actually works against itself the volatility and there's another point he made to that my friend Fred Hickey made in this latest newsletter which is now the IRS considers every purchase to be made with Bitcoin a sale that has to be you know we have to pay capital gains tax you don't have to do that on your dollar yeah I think that's a that's a bad time yeah a lot of these companies are saying okay we can't accept Bitcoin anymore because we don't want to be responsible for reporting to the IRS and so there's so many issues with it so many problems its modern-day tulip mania in my mind hmm see I'm I'm a fan of it I really am but I think that there's I have some concerns obviously and I think that there's concerns of it going into the mainstream adoption I think that's a lot of risk a whole lot of risk if you're if you're going down this path and I think the point that you just made I think is a huge point with it being treated as if it's a security because companies are not gonna want to accept this if it's being treated as a security for all those reasons I think the other concern is really from the government side of it you know how is the government gonna play with this as it continues to mature the part that you had mentioned there Jesse about people not wanting to spend it because the values going up I think that that has a potential to even compound the interest into it even more and I think that it has a potential to drive a network effect maybe even a bull case for it based on that but man there's a lot of there's a lot of smart people in this space there's a lot of coins trying to beat Bitcoin so like even though you own Bitcoin today there's a lot of ones that are very high a market cap that are trying to rise up in there and man I think if you're in this space it has a potential huge upside if it actually does become some type of world currency yeah I think it's an interesting my friend Stephen Bregman Rison kinetics I mean brilliant brilliant thinkers they're some of my favorite guys to talk to you and read their tusks they've been in Bitcoin for a long time they're very early in it and the way they look at it I think makes the most sense that if you look at it as a lottery ticket as that if it does take over a portion of you know global transaction you know market then it's worth a ton of money but I think you know for people to put any more than you know one two percent of the portfolio and it is taking way too much risk and what you're seeing today you know are the classic mania signs people selling their homes and putting the all of the money into Bitcoin X you know Neel Kashkari the president of the Reserve Bank of Minnesota said somebody stopped he tweeted this somebody stopped him in line at LAX when he's trying to get on a plane said what do you do for a living president know if photos are back well I just pulled out $35,000 my comment we need to put in a bit point what do you think in moments like those types of decisions are classic signs of mania yeah and the people people most people are not looking at it like Steve Bregman interests kinetics are looking at it that's exactly what stick and I have been saying on the show is you know it's almost like a venture capital play you know if you're in this you're kind of looking at it is like the odds of this turning up or probably 20% 10% but the upside is absolutely astronomical it's huge and so like if you're throwing more than five we were saying 5% if you're taking more than 5% of your net income and it really depends on the person like you know 5% for Jesse might be different than 5% for press than which is different than 5% for Stig because it's really about you know if you lose all that is that gonna impact your life that is actually a great point and that's what I tell people about trading about anything he knows create yourself a nice diversified portfolio stocks bonds and real assets which I think most people overlook and it can be a third a third a third would be very very simple and then if you want to speculate in the stock market you want to learn how to trade you want to you know speculate in Bitcoin take as much money as you're willing to lose and I'm talking about you knows in trading stocks you know don't put more money into that then you're willing to lose because even just in learning how to trade stocks you read market Wizards one of my favorite books these are the most brilliant minds in the business and almost every single one of these guys is gone you know completely wiped out their trading account as they're learning how to be good trader they're learning how to be good investors a lot of times more than once you know two three times they wipe out their trading accounts but they look at it like and I love this term tuition at the school of trading you know it's okay to lose money as long as you learn something from it and so for I think most people put the money in Bitcoin but don't put more than you're willing to lose so but look at it that way and I think that's something that also Paul Tudor Jones you know preaches is think about your risk first don't think about how much money I could make think about you know the risk first absolutely that's some sound advice right there I was just gonna say I don't know how environmentalists are not already completely up in arms about the whole Bitcoin thing you know Bitcoin just by itself excluding the other crypto currencies the blockchain behind is already using more energy than Nigeria and if it does get bigger the you know the estimates are it could use more energy than Japan and so you know for me that energy usage too is also that's just massive and costly and I don't understand how you could be an environmentalist and a bit an investor at the same time because they are mutually exclusive at this point great point Jesse so I would like to bring up the concept of trust here because whenever we're talking about money in the conventional sense you know it doesn't really have any type of utility the only reason why it's worth something is because we agree it's worth something you trust the system you trust it you can actually get milk or whatever you're trying to buy for your dollars so how does trust play into this discussion about the validity of Bitcoin in your opinion that is a really good question also and I think Bitcoin has yet to be really tested in terms of trust I worry about the platform's we saw the other day when there's some higher volatility that you know coinbase went down you know so you couldn't be traded that's the biggest trading platform for it there was an accident where a bunch of bitcoins were wiped out because somebody hacked a platform by accident you know for me I just come back to you know gold has been money for 5,000 years and no matter what you can take a gold coin and somebody will trade you something for it because it's been an accepted in society or very very long period of time and every time every single time throughout history when money has been debased to a great extent people have fled to gold and that's just a historical fact and so I think if you're looking for something that is as a historical you know basis in protecting you against money creation protecting you against those types of things you know gold is really the answer Bitcoin is very interesting to me and I really do sympathize with the underlying story of it the lack of faith and central bank's have created these bubbles and printed a ton of money I mean something that I've written about for a long long period of time so I do sympathize with it but I just think there are too many problems in the fundamental case for owning it too many inconsistencies that it's hard to really put much more faith in it than looking at it as an option or as a lottery ticket like I said yeah I would have to agree with you on the fact that there's no incentive if anything they're incentivized to manipulate their monetary baseline to manufacture growth and so for me it's really exciting to know that there's technology that's out there that could potentially fix that or to peg that on a global level and that's where I know Stig is also very excited about the technology that it could potentially do that but it's just a matter of what is this gonna actually look like as it shakes out because there's so many unknowns there's so much risk I mean you don't even have to start going into all the risk to know that there's a lot of risk in this and I think that anybody that's going into this space has to come in to with their eyes wide open to know and not just to buy into the narrative like this is gonna replace everything and they have to really do the due diligence and a lot of hard work to try to understand all those different variables if they're in the space absolutely and you know I think when you think about how do you reign in central bank's there's a reason why there is a gold standard begin with central bankers couldn't print money because it had to be backed by gold and when central banks after world war ii you know one by one went off the gold standard you know that was the beginning of all these problems now I'm not an expert on this but you know Neil House book and his thesis the fourth turning you know brings up some very very interesting points about where we are in this cycle and you know I really do think at some point if the monetary policy gets so out of control we do start saying hyperinflation potentially in some governments that these central banks will be reined in and they will have to be forced to you know just like Germany did and will go back to a currency that's backed by something it's a lot of you know speculation but when you look at the trajectory of the u.s. you know federal spending you have a hundred trillion dollars of unfunded liabilities how much will is there at Congress to reduce Medicare to reduce Social Security and do these things you vote for that you're going to get voted right out of office and so there's a lot of people have hypothesized that you know those things will never be reformed and the only way they're going to get paid for is by printing a ton of money and so yes I do understand and it makes a lot of sense when I own something like Bitcoin on something like gold that check them against that scenario hopefully you know someday we're going to hit some type of a crisis that forces people to rethink these central bank policies and to rein them in and take away these the powers that they have used very interesting discussion all right Jesse such an honor to have you back on the show we always have so much fun when you come on if people want to learn more about your work and they look you up I try and write on a regular basis that build a rapport a bit of blog posts there I'm really active on Twitter I trench you know I did a lot of reading and research and I tweet most of the stuff just add Jesse Felder and follow me on Twitter and you know like I said I put up most of the stuff that I read that I find interesting I'll tweet it out awesome thank you so much Jesse for coming on the podcast alright so this is the point in the show where we play a question from the audience and this question comes from amid hi Preston and Stig my name is Simon I'm from New Zealand thanks so much for putting together the right show and my wife and I are really big fans my question is what do you think will happen with the Bitcoin price if the CMA offers Bitcoin futures thanks and keep up the great work alright so Amit kind of cheating here by answering this one because the the futures started this past Monday actually Sunday night so it's been active for a couple days now it's we're recording this on a Wednesday so it's been about three days since the futures went active and what we actually saw was the price spiked up and it's plateaued and now it's coming off a little bit but I think it's still really early to have kind of any idea what kind of impact this is gonna have into the long term before the futures opened up I was talking with P Rashard about this and I told him that you know for me it was a 50/50 split as to whether this was gonna make the price pop or make the price go down I think a lot of people on Wall Street my personal opinion having friends on Wall Street are very skeptical with crypto in Bitcoin in general so I think a lot of them are anxious to short Bitcoin and to sell it short but I think that a lot of them aren't stupid either and they've seen the price go wild for the last year and I think a lot of people were hesitant to step in front of that freight train so I think what you might see with this is if you do see the price start to pull back which i think is a very real possibility at this point because the price movement has been just going wild and I mean on a on a tear and so I think if Wall Street does see this start to pull back and start getting a little bit momentum and a pull back I think you could see the futures market really heavily compound on that and really caused a pretty abrupt pullback you know maybe even down like 5,000 bucks or something like that but there's no way of really knowing I mean that's the thing with futures I'm curious to hear what stick things for some of the business that might be yeah like we heard futures but but what is grilling so I think before we talk about Bitcoin perhaps the easiest way to think about a future is to think about a typical commodity it could be something like oil so if I'm an oil producer and I plan to produce you know ten bells of RL and you know six months time I can lug in that price already so it's actually a very convenient mechanism for a lot of producers in terms of of purchasing and scheduling knowing that you have that price and obviously the price go up and obviously you'll be paying an opportunity cost for the price going up but you can also make the B County argument so it's basically a question about certainty so what's going on with Bitcoin futures well one thing I would like to add here is that a bit confuse settling cash so it's not like you actually see when you buy a future with physical delivery for someone like oil you actually own that oil that's not the cases so it's all settled in cash and basically what that means just to give you an example is that if you buy one Bitcoin contract and a contract is composed of five bitcoins so right now here's the the middle of December you know if the price is around 16,000 so it will be around $80,000 for one contract you will have what's called a tech it's basically just a fancy way of talking about the minimum fluctuation that would be $5 per Bitcoin so if you have a tick up there will be 25 so that means that if you are having the long position that contract you will be gaining $25 and then your counterpart will be losing 25 dollars probably doesn't come as surprise that most people at will if I look at the future with expiration date in March middle of March 18 its trading up 17,000 280 right now it's very interested to see what happens when the money is in the hands of the ball if you see it a transfer of wealth if that actually materializes or as Preston talked about if you see the upset perhaps I do want to point out again that you know this is not like an ETF is you know it's it's not like an ETF where you will buy that ETF in the sp500 and then they will actually go into the market and then buy those 500 securities in the S&P 500 that's not how it works this is all cash base and that's it's kind of like a separate market you can now pour a lot more money into the market but it's not like you were necessarily a whole Bitcoin which would clearly move the market a lot more for the new futures that you see I expect almost all of them if not all of them to be cash base but I would definitely pay a lot of attention if it's not the thing that I guess that I find interesting with the future side is the if the derivatives are now stood up that now opens the door to ETFs which then adds more and more credibility to all of this and I think that for the US the step in in the government to step in and shut down exchanges I think that that becomes so much harder the more reinforced all of this becomes with derivatives and ETF type products later on I'm kind of curious to hear what you think about that stake I thought a lot about that Preston because you're starting to see a lot of regulation and and regulation is something that we tip we'll look at as that is that at least for the price of of whatever like if this is a stock and there's that's a lot of red tape you know it it might limit the the growth that company and whatnot you know whenever something like Bitcoin I actually see it primarily as a good thing and if you look at the first regulation that you had about Bitcoin that was in Japan in 2014 after the exchange macaques was hacked the most welcoming country in the world for Bitcoin that Japan is probably because they're in the more getting used to it and also if you regulate it you legalize it you accept it in one shape or form and I think that's very important so if you set up futures and perhaps even that link directly to an exchange you will need to have to build a system around that you need to have something that's public that's going in and in handling it and that just provides a lot of legitimacy to a lot of investors not just private investor but also institutional investors so so what will happen if we see like an entire ban I mean because that's definitely a yeah a different concern it's actually very interesting now currently being in in in Korea and one of the reasons why the Korea's is one of the biggest markets in the world and we've seen all this volatility lately in this market specifically is because China you know regulated and said you closed down exchanges a few months ago and basically that doesn't mean that people stop buying bitcoins just means that they're going to Korean Japan I'm not trying to sell the story that you can't just ban it it's just but something like Bitcoin it's just a lot more difficult than for so many other things you know like that's impossible that's impossible to ban it globally even if you get the you know the biggest countries in the world and they'd all be in it together kind of like the the sequencing that you've been seeing with the ECB the Fed and the Bank of Japan recently with the way they've been doing monetary policy I mean it's totally sequenced they could maybe come together and say hey we got to shut this down because this is getting crazy but at the end of the day you still have small countries all around the world that would not be in it and it would be allowed now I think that that would be the price would get punished in the short term but Bitcoin continues to march along the protocol continues to operate I guess for me I'm looking at it more from like what happens when this thing hits a market cap of 5 trillion dollar does the Fed start interjecting with elected officials to start saying hey this thing's evil when they start spinning it from a political and media standpoint to try to really manipulate the markets and then try to shut down the exchanges I think all of that is a real possibility but I think that it's a much harder possibility the longer they wait and the more that the finance industry wraps itself around all of this which is what we're seeing right now I mean that's my opinion I'd be I would love to hear somebody say something you know a good strong counter-argument to that because I I mean for me it's a huge risk and it's something that I really want to fully understand I just haven't really met anyone that I think can really make a strong argument around why that's gonna happen I hear a lot of people say that that's gonna happen but then they have no substance behind the opinion you know like there's no substance on why or how they're gonna do that after so much is kind of you know III don't know shoot us some good articles if people were listening this and you've got good articles please send them our way because we're really curious about that risk and I think it's a big risk and it's a concern but I just don't have any substance behind it so we'd like to hear that so Amit we love these kind of questions this is really fun for us it's very speculative but I think it's an interesting topic for everyone to be aware of for submitting your question going to ask the investors comm and recording your question there we're gonna give you a free course on our TI P Academy website some of the courses on there are paid we're gonna give you our intrinsic value course stick and I had prepared it's 18 lessons long and we're really excited to be able to give this to you and thank you so much for being a part of our community and asking such an awesome question there Amit guys that was all at Preston I hat for this week's episode of the investors podcast we see each other again next week thanks for listening to t IP to access the shownotes courses or forums go to the investors podcast com to get your questions played on the show go to ask the investors comm and to win a free subscription to any of our courses on t IP academy this show is for entertainment purposes only before making investment decisions consult a professional this show is copyrighted by the T IP network written permission must be granted before syndication or rebroadcasting [Applause] you

9 thoughts on “169 TIP. Jesse Felder – Fang Stocks , Crypto, Central Banks, & Inflation”

  1. I think there are many flaws with his analysis on the FANG stocks. One thing that is on the top of my list, is that he completely skipped over the rate of Net Income / Free Cash Flow growth in these FANG stocks, (specifically Facebook and Google) in the past few years.

  2. Except, Netflix's stock went from 203 this month all the way to 272 as we speak. It seems that you guys were unfortunately wrong.

  3. Gold isn’t environmentally friendly. Also, differing consumption and saving bitcoin is positive for the environment. Endless money printing has probably done the more damage to the environment than anything else. Endless wars could not be sustained if it wasn’t for fiat money.

  4. Botcoin futures were a sell the news event, etf must have physical digital bitcoin, https://m.youtube.com/watch?v=QmQXrROZhaw only cash settled like current futures it is an empty ponzi scheme, sec will not allow, they must secure buyers with real not fake bigcoin.

  5. A backlash against bad actors destroying true gdp growth for people is coming, good point. _ hacking peoples brains, stealing and selling our data, shame!

  6. Swiss Government has bought a shitload of dollar Fang, to make our currency weak. Lateley we may have looked at bitcoin too… negative interest rates are king! Youtube is better than netflix. Would like to short it in looming trump crash.

  7. he doesn't seem to understand Bitcoin, despite his protestations. It's not an environmental threat for several reasons. He just sounds like another gold bug.

  8. the market is fairly valued based on where interest rates are. the market is undervalued based on the downward trajectory of the usd. with low interest rates the "confidence" that was lost during the recession is slowly being restored as a result globally hopefully we exit this demand based deflationary cycle we've been trapped in. my fear is that other currencies devalue to boost output like usd putting us in a situation of competitive devaluation like the 30s. lets see how things play out

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