Summary
In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- We Still Haven’t Figured Out How Jim Simons Makes Money
- Why Do Some CEO’s Insist On Taunting Traders That Short-Sell Their Stock?
- Warren Buffett’s Failed Bid For Tech Data Corp Could Be A Sign That Value Is Returning
- Why Can’t Anyone Make A Good Printer Anymore?
- The Life Of A Value Investor Is Not Easy
- US Corporate Debt Nearing $10 Trillion – What Impact Will It Have In The Future?
- 40% Is The Number You Give When Forecasting A Future Event – Here’s Why
- Bloomberg Would Be A Great Purchase For Warren Buffett
- Here’s One Example Of What Makes John Malone Great
- Fan Mail From Guantanamo Bay
References In This Podcast:
Dan Ferris Interview – The Investor’s Podcast
Joel Greenblatt Interview – Value Investing With Legends
Eric Cinnamon Interview – Real Vision interview
Dr. Gio Valiante Interview – Sustainable Excellence In Investing And Life
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Overcast
RadioPublic
Stitcher
Full Transcript
Tobias Carlisle: Okay, let’s do the intro.
Jake Taylor: Hey, Value Nerds. This is Value After Hours. I’m your co-host Jake Taylor and today with me I’ve got our usual, Toby Carlisle and Bill Brewster. Hey Bill, what are we going to be talking about for your segment?
Bill Brewster: We’re going to talk about Cleveland Cliffs using undervalued currency to complete a transaction.
Jake Taylor: Toby.
Tobias Carlisle: Morgan Housel’s tweet about Buffet buying Bloomberg. And Jake, what’s yours?
Jake Taylor: I’m going to be the party pooper and talk about $10 trillion worth of US corporate debt.
Tobias Carlisle: That sounds good. Right after the break.
Automated: Tobias Carlisle is the founder of Principle of Acquires Fund. For regulatory reasons, he will not discuss any of the Aquirer’s funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of acquired funds or affiliates. For more information, visit acquiresfunds.com.
Tobias Carlisle: I’ve been reading the book about Simon’s.
Jake Taylor: Yeah. Is that any good?
Tobias Carlisle: It’s very well written. The reason I’m reading is because Gregory Zuckerman reached out to talk about coming on. He’s going to be on my podcast and so I’m reading it to… I haven’t discovered anything in there that I didn’t already know. Basically, there’s no secret to what they do. Nobody knows. Greg doesn’t know if there is, Greg hasn’t shared it.
Bill Brewster: Did you tell him that? Were you like, “Your book’s not very good. There’s nothing I don’t know.
Tobias Carlisle: Which is good. If you hadn’t tried to find… I’ve tried to figure out what they’re doing for years. And I’ve come to the conclusion that nobody really knows. And I think what he says in the book is nobody really knows and possibly they don’t even know.
Tobias Carlisle: But I do think what they’re doing is smart. What I think what they’re doing is they’ve just got countless of these little strategies where they’ve found little anomalies in the market and they trade them-
Jake Taylor: Yeah, fuck out of them.
Tobias Carlisle: They just trade them to the point that they arbitrage it away themselves, and then continue doing it so nobody else can even pick it up that it’s there.
Bill Brewster: That is some gangster shit.
Tobias Carlisle: It’s smart. I don’t think they can blow up the way longterm capital management. I don’t think they can blow up the way any of the other quants do. Because I think they’ve got… And I do think it’s smart. You just build out as many different strategies as you possibly can. They all get a little bit of the portfolio and-
Jake Taylor: Do they use leverage though?
Tobias Carlisle: I think they do.
Jake Taylor: Because you can’t tell me at some point those things don’t correlate together. Like auto correlate.
Tobias Carlisle: They definitely did. You’ve read the book, haven’t you J?
Jake Taylor: I haven’t read that one yet.
Tobias Carlisle: There are definitely times when they’ve overwritten the models. There’s the quant quake in 2007, and there was another one where they overrode the models and Simon’s just stepped in and said, “We’re not going to do that because…” Everybody knows momentum, when momentum breaks down.
Bill Brewster: It breaks hard.
Tobias Carlisle: Yeah. Momentum goes down really hard and then it doesn’t work for-
Bill Brewster: Imagine that there’s a bunch of people buying because it’s higher selling because things are going lower. That’s amazing. Who would have thought?
Tobias Carlisle: It’s the most annoying thing when people say to me how do you know that deep value is going to come back because it’s so easy to implement arbitrage, I’m like, you’re right, it is not really hard to implement but it’s harder to implement the momentum. The momentum’s been working really well. Explain that-
Jake Taylor: Asking those questions.
Tobias Carlisle: The interesting thing about momentum is when it does break down. it has the big drop, the draw downs are sickening and then it doesn’t work for a year after the big draw down because the signal’s broken. And so I think Simon’s understood that. And he said, we’re just going to not trade this momentum strategy for,
Jake Taylor: It’s on a time map.
Tobias Carlisle: Yeah. We’re going to turn it off for a moment and we’re going to make sure we survive because we want to keep this as a good business. Then they turn it on a few days later because they’re not using one year momentum. They’re using all these different little short term trends. It seemed to work and they survived.
Bill Brewster: That’s what Greenblatt said too. Where he was not, that isn’t what I need to work on my phrasing things in a podcast. But what you are saying about momentum is what Greenblatt said in that if momentum ever breaks down, he’s not going to be able to stick with it. But buying stuff is just something that he’s like, no, fundamentally this must work. This is what I do.
Tobias Carlisle: Right. Because it makes logical sense.
Bill Brewster: That’s right.
Tobias Carlisle: That’s one of the interesting things about what a Renaissance do. Is that they don’t look for things that make logical sense. They just find the anomaly. If the anomalies robust according to their sampling statistical methods yet, then they implement it. Which I think is interesting because the argument for why back testing doesn’t work is that you find these things that aren’t real.
Tobias Carlisle: You just find these flukes in the data and then you implement that. They’re literally going out there and trying to find these things and they’re not worrying about the explanation. But [Tulibs 00:05:39] says you need to be careful of those sort of things. But then I can fit an exponent that I need. I’ll go and work at renascence and I’ll come up with the reasons for why the anomaly exists. I’ll come up with a good story for it.
Jake Taylor: Of course. Yeah.
Tobias Carlisle: I think that’s the easiest thing to do. You fit the story to the data,
Jake Taylor: They’re the ultimate argument for just random mass data mining. Not that it’s always bashing it, but these guys have done pretty well.
Tobias Carlisle: It’s an interesting approach though. You say, “so we’re going to go out and look for these things and not try and fit a story to them. Then how do we assure that they are real?” Then that’s a data science question that it’s kind of beyond my abilities, but that’s the, I don’t know how they do that, but they must have some… they take voice recognition type work and they do code breaking and other things like that and take those skills and apply them to anomalies that they find in the market. I find it interesting.
Bill Brewster: Anyone that can do what they did is insanely interesting. I mean that’s crazy.
Tobias Carlisle: Still going.
Bill Brewster: Yeah.
Tobias Carlisle: I saw somebody the other day said it’s like entering a Mack truck in a formula one race and consistently winning. Bill, do you want to kick it off with your topic?
Bill Brewster: Yeah. Something that came into the news recently was Lourenco got gun clevis or a gun Calvis at Cliff’s natural resources or Cleveland cliffs used to be Cliff’s natural resources. He is using stock to purchase US steel, I believe, and I find the transaction pretty interesting. I’m going to read an excerpt from his two conference calls ago. He says, “We increased the size of the share we purchase program and bought back another $130 million worth of cliff shares in the second quarter, bringing the total amount of the buyback to 300 million since inception. Other than this expansion project that they’re undertaking,” Anyway, he says, “To the short sellers, I want to thank you very much for the shares that we bought back. You sold your shares very cheap. Again, thanks for your gifts to Cliff shareholders. Besides the new normal for iron ore prices, the other view that drives our moves going forward is that the current weakness in the domestic steel market is temporary, so I guess that’s consistent with purchasing US steel.”
Bill Brewster: The thing that’s really tough for me to wrap my head around is, here he is saying thank you for selling your shares very cheap, and then he’s issuing shares that are now 30%, 40% lower than when he had this conference call, and it complicates the story. The story used to be they had these pellets that were premium and they had a distribution advantage that they could send the pellets on rail down to these HBI plant’s hot brick at iron. It’s a better way to manufacture. And now he’s turning this, what I think is a fairly clean story, into an integrated steel manufacturer in the US that appears, at least to me, to be somewhat dependent on tariffs and using cheap currency.
Bill Brewster: I just think it’s one of those interesting examples of somebody being in a less quality business and having to take actions to try to either grow the business or justify its existence. It’s just the opposite of something like Starbucks where the decision is just build more stores. I just think it’s A, interesting and B, a pretty good example of Buffett saying bad businesses throw up bad decisions.
Jake Taylor: Difficult decisions.
Bill Brewster: Yeah, that’s right.
Jake Taylor: Yeah. I would say that maybe we all need to add to our investment checklist. Taunting short sellers is probably a good sell signal for you. You just never want to be, you don’t want to tempt the gods like that.
Tobias Carlisle: I literally just wrote that down as one of the points that I wanted to make. That’s just not a good sign when somebody is out there bombing on the shorts. No good CEO even cares what the shorts are doing cause they just know they’re going to get beaten up in the next.
Jake Taylor: Run your business don’t touch short sellers.
Tobias Carlisle: Who cares what the shorts deeds. It’s bizarre because shorts are doing, I short over a short time frame. It could be nothing. Doesn’t necessarily, it’s not a comment on the everlasting business. It’s a comment on the business where it is at the time or the stock price where it is relative to the business. It’s a silly thing to say.
Bill Brewster: Well, I think it’s super interesting. I have a part of me that really likes that. There’s a part of me that likes the hubris of it and I don’t mind. Money Mayweather is a guy that I used to root for. I mean I like the villain coming out and winning and the hubris of it, but I do contrast that with Robert Para from Ubiquiti. When the shorts attacked him, he did go to Twitter and he said something about short sellers, but a lot of what he wrote, they invited him on CNBC and his response was, “I’m not going on CNBC. I have a business to run” and-
Tobias Carlisle: Good line.
Jake Taylor: That’s correct.
Bill Brewster: I mean it really is. And I think shorts got on him for that response because he did take a quick shot at short sellers, but he wasn’t on conference calls going at him. I should have not listened to the part of me that roots for entertainment, and I should have listened to the investing part of me. I mean, thankfully I’m out of the chairs already, but I don’t know.
Tobias Carlisle: Some CEOs are just great sport. Like Musk is great sport. I like Musk personally. I love watching his Twitter fit, and I love watching him go back and forth. I’m not a huge fan of Tesla, but I do like the shenanigans.
Bill Brewster: It’s entertaining. And for a while with gon Calvis or Clavis, I’m sorry if I keep pronouncing it incorrectly, but he was backing up the talk, and I like that a lot, but I don’t know the more that I pay attention-
Tobias Carlisle: But how about the thing where he’s on one hand, he’s issuing shares to buy US steel run.
Bill Brewster: I’m pretty sure it’s US steel.
Tobias Carlisle: And he’s saying on the other hand, they’re too cheap. Someone needs to sit in that book on capital allocation by Jake Taylor.
Bill Brewster: That’s exactly my point. I mean, Jake, you need to call this guy.
Jake Taylor: I think that was the outsiders. That was the one that you were thinking of?
Bill Brewster: No, it was, it was clearly yours.
Tobias Carlisle: Some people need that narrative voice.
Jake Taylor: That’s true. Well, I do wonder… I don’t know. I haven’t looked at the specific financials of either of the companies in quite a while, but what did he get for his giving away part of the company?
Bill Brewster: Yeah. I think that what… It looks like it’s AK steel. But regardless, if you pull up the stock price of AK steel, it is apparently going to be a decent deal for cliffs. He would argue on buying a more undervalued asset than I’m giving up. But if you pull up a longterm chart of any of the US steel makers, which I mean a chart can only tell you so much, but over a long duration, I do think it tells you something. They’re not good businesses.
Tobias Carlisle: Well, this is already beaten up at the moment. I think they ate cheap.
Bill Brewster: well, if you look over a long time, they never really get expense.
Tobias Carlisle: It’s a commodity, product is the problem.
Bill Brewster: That’s right. You’re dealing with all types of stuff. You got China, you’ve got a lot of dumping. I don’t know, it seems to me that he’s muddying the water and it’s a more complicated story and he’s issuing what he deems cheap currency. It doesn’t make a lot of sense to me.
Tobias Carlisle: Could you do with debt?
Bill Brewster: Well, so the problem, and this goes back to the bad business giving difficult decisions. He is building out a huge facility, it’s an HBI facility, and I think that’s going to be roughly a billion dollars. And that’s where a lot of the debt is pledged to that project. If he wants to execute this transaction today, the debt capacity really isn’t in the entity, so you’ve got an issue equity. But maybe that’s the trade off for starting a big project. That is you don’t get to buy another company.
Tobias Carlisle: Right then-
Jake Taylor: I think that is one of the interesting things of watching different managers and their pace of play over decades. You watch Berkshire as sort of on one end of the extreme of, they’ve always had more cash than they probably could’ve gotten away with. They’ve always been in minus one acquisitions. Whereas, other companies you see they’re oftentimes trying to bite at the Apple more than maybe they should at that time and they could probably stand to operate their businesses and build up some resources before going to try to tackle that next thing. And I guess there’s probably some perfectly optimal point of how aggressive you should be but I would say that betting in one of them, I would be able to sleep much easier at night compared to the other one.
Tobias Carlisle: I heard on a podcast and I’m sorry, I forget exactly which one, I think it was Dan Ferriss on the investors podcast, but he said, “I think after Buffet, did the cap cities steal he didn’t do anything for three years.”
Bill Brewster: Yeah,
Jake Taylor: You got to digest that. Right? I mean it takes time.
Tobias Carlisle: That’s a long time to have the bat on the shoulder.
Jake Taylor: Not if you’re thinking in decades.
Tobias Carlisle: What’s true.
Bill Brewster: Well, and you look at what, they just walked away with this tech data. Isn’t that the company tech data that they just sort of, I guess didn’t miss the bid but got outbid. Part of me says, “well boy, if you’ve got something in the crosshair and you’re sitting on all this cash stretch a little.” And I know that that’s very not Berkshire.
Jake Taylor: Late cycle talk, right there.
Bill Brewster: There probably is. That’s fair. Guilty as charged.
Jake Taylor: Yolo.
Bill Brewster: That’s right. But no, I, yeah, I mean it is late cycle for sure. But the other side of that is if you’re thinking about 10 years down the road and you say, “I got this thought from my guy science of hitting investing, it’s beneficial to walk away to say, “look, we’re going to put one bit in front of you. We’re coming over the top of a bid that you’ve already accepted, so this is a good deal. You shop us, we’re gone.” And that makes a lot of sense if you’re playing the long game
Tobias Carlisle: For sure. I own tech data. Sold it before the bid came in.
Jake Taylor: Well played, sir.
Tobias Carlisle: They don’t get any. Thanks. I deserve everything.
Bill Brewster: [inaudible 00:17:09] one up for market timing.
Tobias Carlisle: Can’t win them all.
Bill Brewster: Well, you were in the right pond so I congratulate you for that.
Tobias Carlisle: I feel pretty good. I’ve been getting in to a few positions before, so I was in HPQ before. I can’t shut up. I feel good. I think that value is starting to make sense again. But for a long time I feel like for the last five years, value just hasn’t made sense. You buy stuff and it just goes down and just rebalance out, buy some more stuff and it goes down.
Jake Taylor: Do you think that there’s starting to be more M&A in your type of investment at-
Tobias Carlisle: 100%.
Jake Taylor: …poles for like unlocks that catalyst that everyone always loves to think that they have,
Tobias Carlisle: I think everything’s just been dormant for a while, but like the last three months in particular, I feel like the activities just exploded.
Jake Taylor: Does that show up in the data? I haven’t seen anything recent on M&A activity.
Tobias Carlisle: I don’t want to look in case it’s not true. I just want to enjoy the feeling.
Jake Taylor: Okay, fair enough.
Bill Brewster: I found myself listening to our old podcast. I’m one of the fans,
Tobias Carlisle: one of the dozen.
Jake Taylor: Yeah. Two views.
Bill Brewster: Yeah. Potentially a little conceited there, whatever. But I was listening to your HPQ pitch and I thought, “Toby’s got an interesting one on this one.” I mean there’s, if that doesn’t work, like you said, nothing’s going to and that entity at least it doesn’t seem from a high level. I mean I don’t know all the details but.
Tobias Carlisle: It’s not a modern value position. It’s not a compounder but it’s under valued and it’s not going to go away. They make the worst printers in the world, but nobody else makes good printers, what are you going to do?
Jake Taylor: Yeah, what is that? How come there is no home printer that is worth anything? I get eight pages out of a printer before either the ink goes away or it just totally goes to hell in a hand basket. What is that? We’re not at that level of a sophistication as a species.
Tobias Carlisle: Well, I’m used to working in, you know in law firms you get these things that are the size of a family car and they just pump them out. Now I’ve had lots of them break down like the time they’d like to break down about 4:00 AM when you’ve got something to check to file at nine in the morning and all the air conditioners are off, so you’re sweating like an animal trying to get this thing to work panicking.
Bill Brewster: [crosstalk 00:19:34] space at the end.
Tobias Carlisle: Fortunately like because every firm, I’ve ever worked in and it was over like three floors and every floor had like 10 printers. You just go down to the next one, but I’ll just leave them broken up because it was… But at least those things did work. Those things were pumping out thousands of pages every day at. I asked mine to print out about five pages once a quarter.
Jake Taylor: I won’t do it.
Tobias Carlisle: We ran out of. Ink I just bought some ink.
Bill Brewster: 3 Gs got to take over some law firms and get that printer pages down.
Tobias Carlisle: That’s back in ancient history that they probably don’t print stuff out anymore. I don’t know.
Bill Brewster: [inaudible 00:20:07] at the bank.
Jake Taylor: I was thinking about just stacking them on top of each other as they break down so that the new one coming in knows like-
Tobias Carlisle: This is what happens.
Jake Taylor: There’s dead bodies here.
Bill Brewster: This is the graveyard of fallen printers.
Tobias Carlisle: There’s not a person who hasn’t watched that office space movie where they beat that printer up with the baseball bats that didn’t just like that moment of catharsis just kicking the-
Jake Taylor: So carthatic.
Tobias Carlisle: What’s the… I forget the era, HP print era or something like that.
Jake Taylor: Yeah, I was trying to think about what it was to drop that as a joke, but then I couldn’t come up with it.
Tobias Carlisle: Can’t do it, too hard.
Bill Brewster: One thing, just circling back to the actual discussion that we were having the interesting thing that everyone agrees on today is compounders are where value should go. I’ve said before that works, but eventually the outcomes look rosier and rosier and it’s a self fulfilling prophecy and eventually the price gets to the point where it doesn’t make sense. There are so few cigar bud investors out there anymore that-
Tobias Carlisle: Because they’re all broke.
Bill Brewster: Yeah. It’s just hard to think that that’s going to stay that way forever. I mean, by definition that… Markets evolve and that should be in theory, a place that eventually has strong out performance and then…
Tobias Carlisle: It’s the law of vivid, changing cycles. It’s victim, Nita Hoffer’s education of a speculator. He talks about the law of ever changing cycles. Basically, you’ve got to be looking at what has just worked is what’s not going to work. The thing that has not been working is the place that’s a better place to bet. That’s mean reversion. That’s deep value investing.
Jake Taylor: Boy, you’re really talking to your book right now.
Tobias Carlisle: I’m flogging a dead horse.
Bill Brewster: It’s not like you spend any time thinking about this.
Tobias Carlisle: I’m a bulldog. I’m never going to let that go. I’ll be 80 years old still talking about fat. He’s just about to come back.
Jake Taylor: Just hang in there one more quarter.
Bill Brewster: That is the wrong time to have my career.
Tobias Carlisle: Isn’t that a shame?
Jake Taylor: It does feel that way. A little bit. Have you imagined the guru status that you would be walking around with every day if you had launched in 99?
Tobias Carlisle: Well that’s true.
Bill Brewster: This man is Walter Schloss. I’m telling you now, it may not be the right time to be Walter Schloss, but I do think eventually you’re going to be proven correct.
Tobias Carlisle: That’s very kind.
Bill Brewster: And I’ll be there saying, “I’ve been saying this for a while.”
Tobias Carlisle: The thing I find like Walter Schloss is like the redheaded stepchild to Buffet’s golden head boy. The crazy thing is that Schloss did 20% a year for 50 years. Like only beside Buffet, is that not a good record?
Bill Brewster: The guy’s a beast.
Jake Taylor: Yeah. He picked the wrong comparison to ever, like don’t get into that pool. Don’t play Michael Jordan at basketball. Even if you’re really good, that’s going to be a bad outcome for you.
Tobias Carlisle: The thing I love most as he did it in like a tiny little office space and he borrowed somebody else’s copy of value line to do it. Just flip through value line. He couldn’t have any and he walked home at 4:00 PM every day.
Bill Brewster: Did he really?
Tobias Carlisle: Yeah, he lived a couple of blocks from the… I think that’s right. Lived a couple of blocks from his home. Just the market’s closed at four. He was like, it’s nothing to do. I’m going home.
Bill Brewster: That reminds me a little bit of, and if any listeners don’t know this guy, you got to look him up, is Arnold Vandenberg. I got to listen to him speak. He is one impressive man, but.
Jake Taylor: His backstory is unbelievable.
Tobias Carlisle: Yeah, it’s harrowing isn’t it?
Bill Brewster: It’s crazy. He was talking about when he was getting started, his wife wanted to borrow a little bit of money and he just didn’t have it. And he wrote her out this check for, I think it was $125,000 or something and they clearly didn’t have it and it was one of those, “Put this in your cabinet. I’ll make sure that I can pay it someday.”
Tobias Carlisle: That’s great.
Bill Brewster: He manifested it. I mean that’s why he loves to talk about that think and grow rich book. But he was talking about drinking wine and he said, “I’ll never drink wine. It’s just not my DNA. That’s not what a value investor does.” And then I thought to myself, “darn it.”
Tobias Carlisle: It looks at different types of value investors out there.
Bill Brewster: That’s all right. I’m the monger type. I want to live a decent life while I invest.
Tobias Carlisle: Jake, what’s your topic?
Jake Taylor: I’m going to be a Debbie Downer, I think for this discussion. I saw this article and I followed up with some more research on it, into some more of the primary documentation of where it came from, but the US corporate debt is approaching $10 trillion. We’ve been borrowing a lot of money at the corporate level. That’s to fund $3 trillion in buybacks in the last five years.
Bill Brewster: Fake news.
Jake Taylor: Yeah, I know. Right now, another data point I saw was that $250 trillion of government, corporate, and household debt right now, which is about three times global output and it adds up to about $32,000 per human on earth. I don’t know what you do with that number, but it’s such a huge number. It’s just surprising.
Tobias Carlisle: I saw something like this on Twitter and I saw somebody responded. It was probably, it was Jake at economic probably. And he said that the scale of GDP is up commensurately with the debt. Is that fair, do you think?
Jake Taylor: I don’t know. I think that three times global output to me says that that’s a pretty big number. I mean didn’t rogue off and Reinhardt’s studies show that like once you got over about a hundred debt to GDP or whatever kind of output number that you want to use, you started to run into problems.
Tobias Carlisle: I thought they found out it wasn’t there a hard coded cell in the Excel spreadsheet that their research assistant and that disproves the whole thing. I’m joking there. They actually did find the hard-coded error though.
Jake Taylor: Yeah. I don’t know if that totally we can throw everything that they said in the garbage because of that. I don’t know. But here’s another thing, I read this IMF study that came out here recently and I know like why am I reading IMF studies? I don’t know.
Tobias Carlisle: But you’re a macro guy.
Bill Brewster: You’re just crying reading IMF studies. Why so much debt?
Jake Taylor: I’ve turned into a macro guy.
Bill Brewster: Holo become Rolo just roll the debt. You’re fine.
Jake Taylor: That’s an interesting transition because what they, and granted you have to take everything with a grain of salt here, but they said that if there was a slow down that was half as bad as the great financial crisis, that 40% of the total global corporate debt, which amounts to $19 trillion, would be at risk of not being able to make interest payments. That’s half of the GFC that we were all around for. If it’s half as bad as that, there’s all this debt that is probably not money good.
Tobias Carlisle: It’s just going to be slighted away, isn’t it? That’s what the central banks of the world are doing.
Jake Taylor: This by itself is an interesting conversation, but I think what I’d like to go with it would actually be, what are some of the second and third order effects of this much debt? If you think about the zombie companies, which I’ve seen two different numbers, anywhere from 6 to 10% of companies today even don’t have enough earnings to cover interest expense.
Tobias Carlisle: Why are they are collapsing. Why are they going through bankruptcy?
Jake Taylor: Because they’re able to borrow more money and just keep the game going. Rolling. [crosstalk 00:28:09]
Tobias Carlisle: I like it.
Jake Taylor: What does that mean for profit margins of the companies like that exist today that are competing with these companies? What does that mean for the amount of demand for other things? There’s so many implications to this. I don’t know. Where do you guys minds go with that?
Bill Brewster: I don’t want to get too macro on this. I’m going to try to tick some of my thoughts off quickly. Whenever I see these numbers, I think of ABM Bev because it’s something that I’m somewhat familiar with. The debt maturity schedule on that entity is a lot less scary than the headline number.
Jake Taylor: Okay.
Bill Brewster: I think to the extent the debt markets are willing to accept long-dated paper, issue with rates this low and then if rates go lower you roll it. Which brings me to another point. In my opinion, I don’t allocate much right now outside of government paper to any corporate paper because I don’t think there’s yield commensurate with the risk that you’re taking.
Jake Taylor: To give you a number on that is the triple B rated debt right now that the spread between that and higher quality paper in 2009 was 7%, today it’s 1.4%.
Bill Brewster: Yeah, you’ve got a ton of spread compression. There’s a lot of that are looking for yield and I found an interesting thing when grub hub reported their earnings and they wrote that letter, I thought to myself, I wonder what the debt looks like today. I pulled up their credit agreement or the bond venture, the definition of EBITDA was roughly four and a half pages long.
Bill Brewster: Some of those adjustments make sense and somebody would probably tell me they all make sense. That’s crazy. EBITDA, dozens already a lot. Seven lines, long story short, I think there is a lot of risk in the debt markets. I don’t know that it’s a huge risk for the equity markets. Someone at grants or something is going to call me an idiot and tell me what happens if they’re all cross defaulted, and that’s a real issue. The only other macro thought that I do get to thinking about when I hear these things is debt does pull forward consumption. I do think we’re starting to potentially see GDP slowing to what I would deem concerning rates. I do wonder how much have we pulled forward but about-
Jake Taylor: $450 trillion by my math.
Bill Brewster: Well, I put a lot of this in my too hard pile, but that’s where my mind goes.
Tobias Carlisle: I saw Rogoff speak at a macro conference that my buddy, Chris Cole invited me. There’s no reason why I should be at a macro conference. He had a spare ticket, so I went along and I was interested like what happens at a macro conference, what macro guys talk about. It’s pretty interesting actually. The macro guys are special situations at a macro level. Like they’re all talking about there’s little triggers. If this happens, then this is what happens in a pretty direct way. Some of the ideas, some people are talking their book, but some of the ideas are pretty interesting. Rogolf was the headline speaker and it was just after the scandal where his research associate had found the hard coded cell or whatever it was that made some error. Krogman had just a eviscerated him in his column.
Tobias Carlisle: I thought this is going to be really interesting because Rog was probably a little bit of a firebrand, he’s probably going to get up and say something about, governments shouldn’t borrow too much. I think that that’s got to be the case, they must, governments fall over all the time. The Asian tigers defaulted in the nineties. Russia defaulted in the 90s. The South American economies default all the time. Default is a natural state. I think the US has defaulted too a long, long time ago. Not for a very long period of time but most countries default eventually when they get too much debt.
Jake Taylor: Or on our third central bank. That’s a form of defaulting. Sorry, keep going.
Tobias Carlisle: No, that’s interesting. I was aware of at least one other, but Rogoff got up and Rogoff is the most mainstream… Rogoff just delivered exactly what every other economist at this is like Rogoff. Often there’s not, there’s no difference between Rogoff and Krogman. They have exactly the same views. I was kind of blown away. I was like, well, why did you put out this big paper saying that there was some issue and then, and he didn’t defend it at all. I thought it was utterly bizarre.
Jake Taylor: Let me ask you guys this, if I feel like that there’s some of that dynamic of standing up at a parade where if ever everyone’s doing it, it makes sense but then in aggregate it really starts to not make sense. Think about borrowing all this money to do share buy backs. Individually, it seems like it makes sense, like borrow all this cheap money, it’s long dated and then buy back your equity. By the way corporate profits in the U S peaked in 2014 and it’s all been just share shrinkage to drive EPS up and since then-
Tobias Carlisle: Is that right? I looked at S&P 500 operating earnings pretty recently and I thought it had bounced back up to, it looked like it was pretty much at all time highs.
Jake Taylor: I’ll try to find the chart. I’ll send it to you. Maybe we can post it somewhere. Yeah, could be. I mean sometimes I feel like those numbers, like earnings numbers can be-
Tobias Carlisle: It’s softened and it was off and then basically from like sometime in 2016 it bounced. The market didn’t ever follow the earnings. The earnings fell off and then bounced in. The markets just proceeded on,
Bill Brewster: I guess how much of that was tax cut related? It would be the only follow up but-
Tobias Carlisle: The animal spirits.
Bill Brewster: I mean what Starbucks did make sense? I get that. They didn’t have a lot of debt. That balance sheet can handle that. You’re selling something that people are addicted to. I’m not worried about stuff like that, and I’ll probably die on this hill. This is part of why I believe in active. I think in aggregate it’s hard to argue to me that there’s not going to be some negative consequence to all the debt. A lot of these companies can handle it, so make sure you’re buying companies that can handle the debt is my suggestion. I’m a don’t pay too much. And then if you find them cheap, call us.
Tobias Carlisle: Yeah, it’s like an S&P for me that I think that there’s way too much debt, but I’ve only been working for about 20 years and I’ve watched the debt, like they said, 10 trillion was like unsupportable and that, well this is U S government debt. US government did a 10 trillion was unsupportable. I don’t know what we’re at now. It’s like two and a half times that run.
Jake Taylor: Yeah, we’d do that. We can wrap that up a decade, right? Well, we’re just trillion dollar deficit.
Tobias Carlisle: We’re 25, we’ll be at 60 in a decade probably. It’s just nothing ever changes. It just keeps on going up.
Jake Taylor: I know, but doesn’t it feel like that stuff doesn’t matter until all of a sudden it totally matters.
Bill Brewster: Yeah. But it also feels like people have been saying this for a really long time and it hasn’t had it. I think that there is this tension between… You’re almost certainly right that at some point it matters. Lacy Hunt would say it’s pulled forward a lot of the demand and that’s why growth is slow. I don’t think that that’s necessarily a wrong perspective. Part of me wonders if low rates get low rates because they fund these super long duration things like Uber and that has a deflationary impact. And that-
Jake Taylor: Especially you default on it,
Bill Brewster: Yeah. That means that… I mean, we’ll see what they can do, but.
Tobias Carlisle: I think that’s interesting. I think that’s right.
Bill Brewster: I think it’s from a Fivestar stock on Morningstar. That’s pretty shocking to me considering who they are and what that is.
Jake Taylor: Dude, have you taken and lit a number anywhere?
Bill Brewster: It’s sweet. Yeah. That’s my theory on low rates. I don’t know if it makes any sense. I’m sure one of the listeners is going to send me well justified hate mail, but.
Tobias Carlisle: I think that’s right though.
Jake Taylor: I used to ask myself the question, what would 1972 Buffet write about on this topic? He didn’t care as much about he wrote about thing, he would call things out a little bit more at that time period of his career.
Tobias Carlisle: He’s written one in the last 10 years about… He said, it’s not carbon dioxide emissions. It’s-
Jake Taylor: Dollar emission.
Tobias Carlisle: Dollar emissions. Yeah.
Jake Taylor: Pollution.
Tobias Carlisle: Again, he’s been pretty quiet for the last decade. It’s got worse over that period. I think he has done that a few times. His views are out there. I don’t know what it… It just doesn’t seem to hammer the view. He sort of makes the point and then-
Jake Taylor: Goes on with his life.
Tobias Carlisle: Yeah,
Jake Taylor: That’s what I need to do.
Bill Brewster: But unlike spin hammering it, you can call up Jeff and-
Tobias Carlisle: He says there’s a 40% chance of going into recession last year. The 40% chance is just that. If you don’t know what’s going to happen, but you want to be able to claim credit for whatever horrific. 40% said it was then people were just like, Oh God. Like I said, that was going to happen, but if it doesn’t happen, he said, “I only said it was 40% that’s like two and five it’s the three and five chance that it didn’t happen.”
Bill Brewster: Straight thinking in bets.
Jake Taylor: That’s not nobody takes. Like the 40% bet is much more common than the 60%. You never go 60. Because then that implies-
Tobias Carlisle: Depends on the pay off.
Jake Taylor: Well, but I’m saying in these grandiose proclamations, no one says 60%.
Tobias Carlisle: No one remembers the ones that were wrong. Anyway, that’s why just pray. Just keep on saying it next year when it works, you’d be like, yeah, get it right.
Bill Brewster: Somewhere, Nouriel Roubini is still saying that we’re about to all collapse. He was right 10 years ago. He might be right again sometime soon.
Tobias Carlisle: Dr doom. Yeah, he’s been partying pretty hard I think for the last… He’s been dining out on that for a long time.
Jake Taylor: Tobby, what’s your topic for today?
Tobias Carlisle: I saw this great tweet from Morgan Housel like every Morgan Housel thing, brevity being the soul of wit. It’s alliterative to all of the things that are really love in a short little tweet. Buffet should buy Bloomberg. So Bloomberg is running for president. Who knows what his chances are. But you probably can’t go into that owning a big news organization and probably not a good look. He’s going to have to divest himself or stick it in a blind trust or something like that.
Jake Taylor: doesn’t Trump own Twitter?
Tobias Carlisle: Psychologically.
Jake Taylor: Yeah, exactly.
Tobias Carlisle: It’s a good stock for Buffet because it’s one of those things that it’s got that lock in that it’s a very, very high margin profit. It’s got lots of lock in. I’ve been pitched like a dozen times over the last 10 years for all of these competitors to Bloomberg that they’re just going to supply the data. At some stage I think somebody is going to come in and I think it’s $35,000 a year for a terminal. Someone’s going to come in with a… We’re going to charge you 10,000 or 5,000. Give you comparable data feeds, maybe they can compete, but from Buffet’s perspective it’s probably is a pretty good Buffet and I think he said, I think Morgan was pitching 50 billion. I’ve got no idea what the kind of money that he’s making out of it, but Buffet’s got the cash. I think it’s a pretty good acquisition for him.
Bill Brewster: It’s not quite 35 grand a year, but it’s not cheap.
Tobias Carlisle: What is it?
Bill Brewster: 6750 a quarter is the most recent number that I can recall.
Tobias Carlisle: Is it 26? 26 a year.
Bill Brewster: Yeah.
Tobias Carlisle: 27. I said that if the deal gets done, they should give Morgan a slang from the commission because the commission, I don’t know what kind of commission you get in it, but it used to be like 3% on 50 billion is 1.5 billion. They can give him 5% of that, which is still 75 million and then I want 5% out of Morgan for suggesting it, which comes in at like three and a half million.
Bill Brewster: It’s not a bad haul. Just for piggy backing Morgan’s twitch.
Tobias Carlisle: Quick Twitch. Yeah.
Jake Taylor: Do we know any of the numbers of the business in Bloomberg other than just users and rough estimated revenue?
Bill Brewster: I doubt it. I mean, I do not.
Jake Taylor: I haven’t seen any either. Is that not part of your Bloomberg feed?
Bill Brewster: No. Mike doesn’t tell people how much he makes. Come on now.
Tobias Carlisle: It’s crazy-
Bill Brewster: It’s a perfect business for Berkshire. I mean, it would be perfect. And I’ve actually found that The Terminal, as much as people like to hate on it, is a very solid product. And they’re adding features to make it worth, I think the value proposition slightly better. I don’t know, I just pulled up on Google it appears as though the revenue is 10 billion, but who knows if that’s true.
Jake Taylor: [crosstalk 00:42:16] What’s that get you? 300 billion.
Bill Brewster: I don’t know. Even pretty sure when LBO.
Tobias Carlisle: When renascence started out, there was no good data. They started at before Bloomberg. So Bloomberg came on the scene with reasonable data and it was a game changer for renascence and everybody else. So their motto is the best data is more data and this is renascence, which I thought was… I don’t know if that’s my, I don’t think that’s my motto. I think my motto is the right data is the best data, but too much data kind of overwhelms that. You can’t open up. And I think that’s the only criticism that I’ve ever seen of a Bloomberg terminal was out of Gut Spear. And he said, I feel too good when I open it up and I start using it. So he had to move it into a different room and it’s at a standup desk, which I have a standup desk too. I’m the only value investor who’s ever got to from trying to read 10 K’s.
Bill Brewster: Pretty awesome that you can walk on that thing too. That’s legit.
Tobias Carlisle: It’s very good for it.
Bill Brewster: It’s very California.
Tobias Carlisle: Good For the core. ”
Bill Brewster: No, I don’t know. I mean, I saw that tweet. I thought that was a really good take. If you can think of a perfect business that goes to Berkshire, he can promise that the employees will stay the same. He can promise the culture is not going to change. He can, you know, I mean it’s, it is theoretically set up perfectly. I hope he has not told Mike what he told the Mars family, which has never sell this thing. I hope he told them you call me first, but, I would be a happy owner of the Bloomberg terminal even if it’s a declining asset.
Tobias Carlisle: You don’t have to. I guess Trump hasn’t sold it as far as I know, does Trump still Gren Trump?
Bill Brewster: No, it’s in a blind trust. I think the way to do it is you get elected and then you can sell tax-free. That’s how John Malone would do it. Or spin off of Bloomberg tracker stock somehow.
Jake Taylor: I did see recently a friend sent me a little story about Malone that he was looking at buying a bunch of set top boxes and there was a company that was offering to make them and it was going to be a pretty big deal for this company. They hadn’t delivered 300 million boxes before and Malone asked as part of the deal for some warrants in that company and those turned into more money than it costs for the order because of the like King maker status-
Bill Brewster: He’s such a gangster. That dude is a beast.
Jake Taylor: He actually made money by getting the set top boxes by cranking a warrant out of this company.
Bill Brewster: In case people want to fact check me on the QVC and discovery statement from last week that was out of Cable Cowboy. And that’s what I was saying. He used to do with these stations. They would come to him and they’d say, we have some content. And he’d say, all right, fine. You can get on my cable network and I’ll take a little bit of your equity. He’s a monster.
Tobias Carlisle: It’s smart. When you’re telling that story, I thought Jake initially that that he was buying set top boxes for his house, but he’s buying, this was part of the deal. I mean he didn’t presumably get the warrants that went into the company.
Jake Taylor: Not him but like TCI or whatever the vehicle was at the time. Got the warrants that turned into you know, one and a half times the cost of the boxes.
Tobias Carlisle: Oh Piatt man that’s smart.
Bill Brewster: My buddy that’s from the oil sector thinks that ultimately what happens with Occidental is they chew through all the synergies and then Chevron comes in and buys the lean company and that’s how Buffet wins because he’s got the warrants. Sort of interesting. Good structure.
Tobias Carlisle: Just before we go, we have a question of the week. This one was from Jim, I’m not going to read this, his Twitter cause it’s a bit rude but said, I mentioned Eric cinnamon’s real vision interview, which is a good one if you, if you want to listen to one that’s worth listening to. Any good value focused podcasts or interviews that you want to recommend, Jakes, what are your thoughts?
Jake Taylor: Well I’ll go first. Actually I’ve been enjoying, Eric’s been writing recently more and so I subscribed to his letters that come out I think once a month ish, maybe a little bit more frequently than that, but I always find them to be very high value add, so I’m a big Cinnamon fan.
Tobias Carlisle: What’s the name of his site?
Jake Taylor: It’s like Palm Valley capital or something like that.
Tobias Carlisle: That’s far as I got to.
Jake Taylor: Have that wrong but-
Tobias Carlisle: We’ll put it in the show notes. We’ll give him a link in the show notes.
Bill Brewster: I’ve got two I’ve been ruminating on Joel Greenblatt’s interview with Columbia’s value investing with legends and then real vision did one with dr geo Valley NT sustainable excellence in investing in life. That is a fantastic podcast that I think everyone could benefit from listening to.
Tobias Carlisle: I haven’t heard that one. I definitely go and listen to that one. So when I mentioned it earlier, but it’s a good one. Dan Farris was on investor’s podcasts. It’s worth listening to because Dan’s got a crazy background. He used to be a professional or semi-professional Spanish guitar player and I think he got whatever the finger equivalent of turf toe isn’t, he had to give it away, which is why he became a value investor.
Bill Brewster: It’s brutal injury to be relegated to value investing. That’s real career ending right there.
Tobias Carlisle: One of the interesting things in Greg Zachary Zuckerman’s book, he was talking about the guys were getting a carpal tunnel from doing too much typing. That’s the big risk for a value investor. You get some sort of wrist injury from too much onanism, or too much typing. I think we’re coming up on time. So just before we go, I want to give a shout out to Donald at Guantanamo Bay. Thanks for the kind note. I forwarded that on to Jake and Bill. We’re glad that you are watching and listening down there. Hope it’s providing some interesting things to think about while you’re there.
Jake Taylor: The first-
Bill Brewster: Shout out to all the troops.
Jake Taylor: Yeah, the first and probably last piece of fan mail that we’ll get.
Tobias Carlisle: From Guantanamo.
Bill Brewster: Happy to provide some enjoyment. I was hoping that someone out there would be listening to us. The fact that it’s actually active military made me really feel good inside, probably we can continue to entertain.
Tobias Carlisle: Was a great note to get. Thanks very much folks. We’ll be back next week.
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