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He Called It the Worst Chart Imaginable. Then He Bought It | Rupert Mitchell on Cracks in the Mag 7
00:55:10
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- [00:01]
A
This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50 page restoration block. Or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it, ready to make anything online make sense. There's no place like Chrome. Check responses set up required compatibility and availability. Various 18 plus foreign.
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B
You're watching excess Returns, the channel that makes complex investing ideas simple enough to actually use or better questions lead to better decisions. My guest today, if Mr. Magoo was a furry. Only look up half of that reference, kids, trust me. Oh, Mitchell, we've done it again. Blind Squirrel, Macro Zone. Rupert Mitchell, welcome back to Ask Guest returns.
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C
Hey, Matt. Matt Ziggler. Rhymes with Diggler. Now I know I'll never make a mistake again.
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B
I'm taking that not just because I was taunted in kindergarten, because it rhymes with Jello jiggler, which I think is part of what you're referencing.
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C
Not Dirk. Not Dirk.
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B
But I'm taking Dirk Diggler on Boogie Nights. If I was born maybe a decade or two later, I might have had that benefit.
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C
I don't see any roller skating porn stars behind you, but we're in good shape.
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B
It's the, the day is young. It's only 4 o' clock in my evening so far, so never, never say never. We're going straight into this. I want to talk about the chart of Truth. You bring it on every single time. It's the S and P versus the rest of the world. Only one can rule them all. It's better than a World cup final. At least I hope. Tell me, give me the update. What's the deal with our chart of truth?
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C
Do you know when were we last on? I think it was November. And it's done almost nothing since November.
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B
I think that, you know what's crazy is I feel like, yeah, we were, we were close to the 200 week moving average. It was just. Yeah, and now we're dead.
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C
We're just, we had, we had a, a big trip below at the beginning of the year and then we're back, we're back to flat. We're back to flat. And you know, interestingly, I mean, we're, we're, we're there. Notwithstanding the fact that, you know, the dollar has actually felt a little bit punchy so far. Year today, you know, and define punchy.
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B
Well, give me the Rupert Mitchell definition of a punchy dollar.
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C
Anytime the DXY is sort of above 100 and trending stronger typically that would be problematic for rest of world equities generally and they've been less perturbed by them. Yeah, we've had a really, I mean there's been a momentum trade that until recently has been sucking all of the oxygen out of the tent and looks to be rolling over now quite painfully. But you know, actually, you know, rest of world equities have just been chugging away and you know, it's been a difficult, it's been a difficult year. I mean I started the, started the year well and you know, felt that, felt that actually was too much too soon and started, started de risking well ahead of the war becoming an issue and then really sat on my hands for two months. I sort of had, I'm not adding risk until the straight is reopened and you know, that was beginning to feel a bit like waiting for Godot. Then you know, started, started adding energy equities which we can talk about in a second. And then you know, got into the, got into the true, true the crude trade quite aggressively too early round trip that. And now here we are, what we're on the 28th of July right now. A very punishing week again for the front of the crude trade. For me the numbers don't add up. You know, I, I, I struggle to not see an oil price higher by year end. You know, I'm, I've got a big position but not one that's, you know, scaring the bejesus out of me yet.
- [04:15]
B
As straight as the Hormuz itself. Let's go to the bushy update. I want to look at the portfolio, see where it's sitting. Talk me through the biggest changes. I know you just outlined a couple of them but let's talk biggest changes since beginning a year here.
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C
So it's a bit like, a bit like, I mean this, this, I mean this doesn't look dramatically different from when we last spoke but it changed a lot in the interim. There was a time, you know, back in, back in March, April where I was up at sort of 35, 40% cash and hedges and I've started allocating a lot of that back mainly. I mean the only, the only sort of major additions have been energy equities which sit in that thematic equities basket and the physical commodities which is both the crude position I was just talking about and also some position in, in AGS was originally corn, wheat and cotton. It's just wheat and cotton right now. The precious metal sleeve is predominantly Gold with a little bit of platinum and palladium. You know, the, the, the, the, the, the PM's performance has, has, has, has been, has been a sort of performance suck and a performance drag all year. Having been the rocket fuel last year. I guess good things can't come to good people all the time. But I, I, you know, it feels to me that we've got, we've got an enormous week. Let's talk, not talk too much about the Fed with it happening tomorrow. I'm not, not sure when you're going to put this out, but you know, ultimately, you know, if we do, if we do get an unpriced hike tomorrow, there's probably a bit more pain in the precious metal complex. But then I feel that we're going to be quite close to being able to strap it back on again.
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B
You feel pretty strongly about, about where precious metals are about gold in particular.
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C
I, I think, I think they merit a, you know, a non traditional size slug in a balanced portfolio. Right. I'm not a, I'm not a fanatical perma bull on gold, but I just think it's, it's, it's giving, it's giving the portfolio some pretty nice characteristics and defensive characteristics over time. And you know, where I am at 6 is probably about sort of 30 to 40% shy of where I might want to be. I mean I was, I was up at, I was up at 9, 10% towards the end of last year. Came out of the, came out of all of the white metals very quickly at the beginning of the year when they rolled, when they, when they rolled over, but have stuck with, stuck with it and drawn down with the, the residual gold position.
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B
Let's talk about supply. Let's talk about.
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C
Yeah, I think this is my original
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B
chasing you down for this. I want to get, I want to
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C
get here just, just in, just in terms of just before we leave the portfolio. I mean, you know, ultimately Bushy's doing what it's supposed to do. It's supposed to be the antidote to the 6040 portfolio at the moment on a. Where are we now? We're late July. It's outstripping the S and P since the beginning of last year on less than 50% of the, the volatility which is kind of what it says on
- [07:34]
B
the can, kind of what the goal is. And actually let's say this before we talk about supply. The goal on this portfolio do better than the 6040 help you sleep at night, but with a very different aspect than why you're not 6040ing it.
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C
Same thing it is, it's essentially, I mean, interesting. I'm going through this exercise this week in terms of red teaming. My antipathy towards bonds. I'm a notorious sort of bond disliker and have been over the last different
- [08:07]
B
from being a bond bear.
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C
Just a bond hater doesn't mean a bond bear. It means sort of passively, aggressively disinterested in long duration fixed income. Largely because I don't see the diversification benefits in a world where stocks and bonds and total returns in stocks and bonds appear to be positively correlated once again. Now we have this sort of magical 20 year period at the beginning of this century where you had this magical property of inverse correlation but is not working anymore. And therefore, you know, you are, you, you're, you're, you're required to make, you know, a long term bet on what kind of monetary regime we're in, right? And what kind of inflation regime we're in. And you know, listen, I'm, I'm, I'm, I'm, I, I see inflation everywhere, right? And so ultimately I'm looking within bushy to find other ways, other alternatives to bonds that are going to keep up, you know, keep the purchasing power of my, my investments. And I just don't think bonds are the answer for that here.
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B
So one place we're certainly seeing inflation is in equity issuance. Because man is a coming, man is a pro.
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C
You are a pro.
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B
I'm here for you, my friend. I am here for you. Take me to this. This is literally when you started putting out these notes on Blind Squirrel macro, I started hitting you back with replies. Because what I started saying was I don't think we get the former investment banker take on both why these things are happening, how it's happening, and then what the impact is on capital market assumptions. And you're stitching all these things together with ground up examples week after week for some months now. So lay out the thesis.
- [09:58]
C
Yeah, I mean, I mean, listen, I, on the record and wrong. I did think that the SpaceX IPO was almost too big for the market to absorb. But I've underestimated him before. But there is no doubt that Elon Musk is the best stock promoter that ever hit the planet. And if anyone was going to pull off $86 billion of capital on a single day in June, it was going to be him. And he did it. You know, the, the aftermarket has been soggy, shall we say. But, but really in the run up to the IPO when, when Google pulled that, you know, $85 billion capital raise, you know, that was a real wake up call for me. I had been, I'd got as far as going, okay, this, this, this, this data center capex boom is going to, you know, it's going to pull back the buyback bid from the market and sort of remove the de equitization effect that's been in US equities for the last 10 to 15 years. You know, there's some crowding out in the fixed income market that's coming from this, from this, from this activity. I really didn't think they'd go as far as printing new shares and that really. So they've got me. Okay. If you think of the linchpin of, of, of of US equities over the last 10 to 15 years, take away the buybacks, take away 401k flows. If AI is really taking everyone's jobs, you know, all of a sudden, you know, a massive tailwind has turned into, you know, a huge headwind which is, you know, something that would make me even more sort of pound the table on the chart of truth. And you know, that, that was part of the idea behind that positioning going back two years now. But now we've got this accelerant in the form of sort of constant supply and it sort of, it sort of leads me into sort of, well, you know, I'm, I'm underweight, I'm underweight in, in US equities generally. I mean, you know, this isn't a religion for me. It's just that I see better, better value elsewhere. But one of the, you know, market structure impacts of, of, of all this supply is that I think we're going to, and we're now finally seeing it, we're seeing a sort of internal rotation in US equities away from the cap weighted giants that have now started issuing shares. So I wrote up, you know, at the, at the beginning of June a call to, you know, to buy one of the worst looking charts that you could possibly imagine, which is the, the, the S and P equal weight, so the RSP ETF versus the trip versus the NASDAQ 100, the triple Q's. And so I, I've, I've got, you know, a big pair trade, long rsp, short QQQ which sits in the, the, the hedge book of bushy right now. And you know, it's, it's, it's worked pretty well so far. I mean it's, it's that, that's been a 10% move since, since, since since what, the third week of June. And you know, the reason is pretty simple. You know, obviously this, this slide sorted by price to sales ratio stolen from Jeff Winiga from and I, so I didn't bother recreating that from the NASDAQ 100 but you know the, that, that, that, that, THAT 51% of over 10 times sales is a much bigger number for the NASDAQ 100, you imagine. But I did bother to do the work of breaking down and this is about you know, five weeks old. So it's pretty good still looking at the, the, the equal weight S and P and you know, call me a boring value cure and, but I'd much rather own that stack of histograms on the right hand side of the chart there than, than, you know, you know, what, what, what do forward returns look look like whenever you buy something for 10 times forward sales? Outside of startup. Outside of startup and sort of B.C. right yeah, these, these are the largest equities on the planet and you're, you, you're buying them with you know, a terrible implied forward return.
- [14:30]
B
When you think about this from the, what you, what companies grow into. And I think this is one of the hardest parts when people talk at the index level because it's just how we're going to grow into the earnings. And then you think about well it's really only two companies contributing or three companies contributing to the earnings number that's showing up at the headline you peer beneath and you start to see a very different story. When I look at this, I think this is one of the clearer pictures that I could see where I go oh, a bunch of these companies could actually deliver on these growth metrics. Like this could happen. The whole market doesn't have to fall apart here. Am I wrong in seeing that from a chart like this? These are reasonable valuations on a lot of this page.
- [15:11]
C
Well in, in terms of the equal weight. Yeah, yeah, yeah. I think, I think you know, particularly towards the left hand side of that, you know, that looks pretty fair and pretty reasonable. I mean the trouble is because you know, in a sort of ticker focused environment, right, we spent 15 years talking about seven stocks and a couple of others and then you think, and occasionally attempted to think oh God, even the likes of Costco and Walmart are trading on it is astonishingly stupid valuations. But actually if you go go down to the full 500, you know, there's a bit more balance there and you know, ultimate ultimately, you know, it's you know, it's settled science that, that equal weighted indices have outperformed cap weighted indices over, over, over time. Right. It's just very inconvenient for big retirement because it's very difficult to allocate large quantities of capital to equal weighted indices. Right. You know, you, you, you can't, you can't move a jug and of a portfolio into, into equal weight, but you and I can. Right? And you and I should, and you know, I, you listen you've, you, you've seen, you've seen that, you've seen the mass on this stuff. And I think MEB Faber did this great study whereby if you just take out the largest stock in the S and P every single year, you'll outperform, you'll outperform the S and P. I, it's not by much but, but it's enough to make a difference certainly if you compound that over time. So you know, I, I think this is, this is, this is a trade that I think I can have on for, for a long time. It certainly, this feels like a, this feels like a 12 to 24 month trade before, before I need to review.
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B
Certainly looks that way when you understand, when you unpack the valuation side of it. Let's, let's jump over to the China collar and the energy equity rerating because these are two other themes showing up in the bushy portfolio. You're writing a lot about these. These are not your standard takes from a lot of the US based macro people that we talk to.
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C
Listen, I'm, I'm, I, I've been an on and off energy bull for, for a long time now. At times that's been frustrating, at times it's been exhilarating. But I think one thing that, you know, everyone got wrong was the, the extent to which China was willing and able to step off the gas in terms of its crude imports during the worst of the Hormuz crisis. And you know, and it's the ultimate triumph of engineers over attorneys. You know, China is run by engineers and the west and OPEC plus is run by, run by lawyers. You know, engineers build storage and attorneys negotiate voluntary export production and export quotas and ultimately, lovely favorite word, China has effectively become a monopsony. Right? You know, they are, they, they, they are fast becoming the, the price maker in energy markets having been, having been a taker from opec, OPEC plus over, over the years. And you know that, you know, the collar part of it is effectively, you know, China has, you know, written a put on, on, you know, Put it where you want, high 60s, high 60s a barrel. But it's also cut off the right tail a little bit. So I think we could see energy prices or crude prices spike into triple digits. But I really don't think that they stay there for very long with the existence of this China collar on energy prices. And what this does, it has a really important effect on, on, on energy equities. You know, ultimately energy equities always give the, the opposite of the benefit of the doubt in terms of longer term energy prices. And you can see it, it's not just the EMPs, although you know, I think it'll, it'll boost the value of the, the integrators world. But it's, it's, you know, even, even in midstream the collar, you know, cuts off the risk that you know there's another, there's enough if we have a triple digit environment then the shale guys go crazy. They pressure the midstream guys to build more pipelines and then you get sort of capital misallocation if you. So the, the sector benefits from the call leg of this collar as well. I mean the put leg is obvious. Right. And it's underwrites capex. So that's great news for offshore services over time. You know, if you can take out the nightmare of 30, $40 a barrel crude then you know a lot more, a lot more capex is underwritable. So I just think it's a very friendly environment for, it's very friendly environment for energy equities which still occupy far too small a percentage of the S and P to my mind.
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B
How do you think about that in the US versus globally with allocating towards companies in that space or index?
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C
Well, I think, I think, I think the global super majors look look interesting look interesting here. You know, obviously the refiners have been on a, on a complete tear for special reasons but I, I think that there's still a sort of a long term replacement value argument for them. I mean I trimmed a little bit of my refiners this week which felt like sacrilege. But I'm sure I'll be back, back back to full size again at some point in the future. You know, finally offshore services that, that really has worked incredibly well so far so far this year. I really like the Canadian EMPs particularly. Long, long reserve lives up there. Yeah, there aren't, there aren't many parts of the energy complex that suffer as a, as a result of the China color. Right. Just makes a whole, whole sector much more investable in my view.
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B
I think that's a very interesting take on energy without. And again, the key part you're doing no triple digits.
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C
It's not, it's not, it's not, it's not based on that. Yeah, yeah, absolutely. In fact, it's a recognition that triple digits over a sustained period of time is actually less likely. But that's good, but that's good.
- [22:09]
B
And it allows these businesses to function like you said, to underwrite the capex, to underwrite a bunch of investment and we know from prior cycles that's the part that pays off. Yes, that's what sets this up. So it's not just a trade.
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C
Yeah, exactly, exactly. One hopes it's a set and forget from here.
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B
Yeah, I can understand why you would do that. Let's, let's, let's go to the death shot, which is one of your more romantically colored images in this text.
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C
It's actually borrowed from my podcasting partner Benny.
- [22:41]
B
Benny did God's work on this one.
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C
He's, he's the, he, he, he, he coined the term the death shot, which is, yeah, I, I guess arguably the dramatic, the dramatic statement that ending of the cycle by central banks is almost always a conscious act. Right. It's that last hike, that last hike too far. And you know, the debate was, you know, will a new Fed chair in the form of Kevin Walsh, you know, keen to burnish his inflation busting credentials, will he deliver a death shot tomorrow? Now I'm on the record of thinking that he doesn't have many hikes in him. The government and this entire data center boom is largely financing itself at the front of the curve. And then you've got the entire private credit, private equity complex which is heavily, heavily reliant on the front of the curve. I don't think he's got that much room to move. So, you know, the market has not yet priced a hike for tomorrow. I think I just checked before we came on. It's now down from 34 to about 31 and a half percent here, here we are on, on, on Tuesday, Tuesday evening. You know, there are lots of sort of, sort of bond puristas that are out there saying yeah, he should, he should, he should hike 50, you know, I, I, I can't imagine he's not tempted to take, to, to take the hike if he thinks he can get away with it because I think it gets more difficult as we go on. As we go and go on through the year, as we get close to the midterm elections, it all becomes more political. But you know, I, I, you know, if, if he did do one of these macho 50s, you know, I think that's a big problem for a lot of risk assets. We might get a bit of term premium love in the short term but I'm not sure that that's a price worth paying yet. Just a regular 25. Yeah, fine. But we haven't had a hike that wasn't priced going into the meeting.
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B
Right. And those odds are very important since,
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C
since I started in the business in 94. Right.
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B
Greenspan arguably solidified. You can't do it another way.
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C
Yeah, I mean so November 1994, Greenspan, surprise. 75. Right. Was two months after I started in the business. Now you could say that we're primed for a surprise because you said, you know, in his first meeting that he's not giving any forward guidance. You guys are on your own. No more, no more trainer wheels for you guys. So, but I, you know, I, I, I'm not, I'm not sure, I'm not sure that the sort of anyone, anyone other than the term premium bros are going to be smiling about, about an unpriced hike. But there you go. Just that, just that picture there. The, the, the the the hall of fame for the, the the the the death, death shot deliverers. Trishe's the man with two out of the five spots there.
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B
Impressive. Impressive.
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C
It's impressive, it's, it's good, it's good stuff there, isn't it? Yeah.
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B
40 belonging to him. Respect, respect. Can I give you the scenario of where's your brain go for the portfolio? If, if, if the 50% there, the 50 basis point hike happens, what would your brain go like? What would the portfolio response be? What action would you take in the face of an announcement like that?
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C
I think you know, let's, let's. So, so my value low beta, high dividend international equities are probably not going to be too badly hurt. I think that the, the RSP QQQ trade just works on steroids. If that happens on the energy, right. If, if, if this turns out to be a real death shot. I think the, you know, the transmission mechanism into a sort of complete economic rollover probably is a bit more of a slow moving beast which will give me time to figure out if I own too many energy stocks. Right. I think you know, that we'll, we'll, we'll get, we'll get signs that I'm very wrong or you know, way too aggressive in that trade. I, I Don't think it's going to be an immediate, immediate impact. I think that, you know, I think that sort of momentum tech type trades get slammed very quickly if it comes, if it comes through to that.
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B
So worse shows up, there's like leaves in his hair, he's coming off some MDMA or something like that. He's walking in from the woods and he goes, guys, we're cutting 50 bips. Then what are you doing?
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C
Hiking. Hiking?
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B
No, I'm saying cut. What if he came giving you the opposite scenario? He shocks us all, he cuts, then what?
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C
Ironically, Ironically, I think that he could be in cutting mode quite soon anyway.
- [28:25]
B
Oh, I think so too. I think so.
- [28:29]
C
So I think everyone would be caught short term. I actually, I don't know how to handicap what would happen short term. I think he's going to be, I think he's going to be cutting by, by, by late this year anyway.
- [28:46]
B
Do you see anything big happening in the portfolio in response to that though? Or is it just, I like that your approach to this is almost discounting the uncertainty around Fed decisions and thinking on broader themes that'll take longer periods of time to play out. You're not worried about this part of what I'm trying to highlight here?
- [29:02]
C
Yeah, no, I, I'm, I'm not, I'm not, I think we'll deal with it when we get there. I, I, I actually I'm doing this exercise this week, as I said, of, of trying to really red team my antipathy towards bonds. Right. You know, ultimately if we are entering a new cutting cycle, isn't that a nice sort of following breeze to, to justify some kind of allocation? And where I'm getting to is that, you know, I'm getting paid pretty well in T bills right now. For now. Right. Cash is a liquidity option. You know, if there's dislocation in asset values, I'd much rather, I'd much rather have the opportunity to buy more, more stuff that I like cheaper than being locked into a, you know, a view on inflation disinflation over a three to five year view. And I'm really happy to sort of give up the, you know, the sort of little duration kicker that will give, you know, that might give the, that you might get in a sort of dopamine hit, you know, flight, flight to quality. I mean, you know, I'm happy to pass that. Pass that by is the, is Jomo again. It's the joy of missing out. I just, you know, it doesn't work for me on an expected Value basis.
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B
All right, we're going to, we're going to Jobo. I got all the transitions for you today. The joy of been facing out what's been face. Explain this one to me.
- [30:40]
C
Do you know who Camp Bin Face is? I'm sure you do.
- [30:43]
B
I mean only from being an online person. But how? Yeah, please explain.
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C
I mean it's, it's a fine tradition of, of, of UK special elections and we call them by elections. It's a fine tradition that the actually, actually in the generals as well there's, there's almost certainly particularly in a sort of high profile politician seat there'll always be one or two joke candidates and so Camp Bimves is not a, is not a new character for on the, on the UK electoral scene. But you know he, we have, we have coming up in August we have Nigel Farage restanding in his seat which he resigned from around basically trying to sort of divert the dialogue away from a rather sort of dubious sort of inquiry into how his, how his campaigns and how his personal life was being funded. All of the other major parties said this is publicity stunt, we're not going to put up a candidate against you in your seat. So he is left standing against a joke character. Now I, I don't think he's going to lose his seat Camp Bim Face. But I, I, I think this is, you know, this is, he's, he's spending the summer arguing with a bin. I, I, I, I, I, I take it as a sign, possibly a hope that we might be seeing peak populism in, in, in UK politics and this sort of comes, comes, you know, I mean it's hard to think of a, an asset class that's sort of more universally disliked than UK equities. Jesus. Even, even domestic pension funds in the UK don't own UK equities and they are trading at a, on a cape, a cape KP discount to US equities. Wider than during my entire life, right, Wider than the widest, the widest gap since the 70s. Right. Now there's some history why domestic pension funds in the UK don't have large equity allocations. But even that, that's all to do with ldi and we won't go into that. That's the leverage gilts trade, the, that most of the defined benefit pension schemes moved into. But even the relatively small equity allocation is predominantly overseas these days. Now there's going to be a bit of pearl clutching coming up with this one but you know, ultimately capital in this sort of multipolar geopolitical world capital and savings are strategic for sovereign nations. And you know, I think we're going to see an awful lot of state capitalism throughout the world. You're going to see a horrible word that's going to be an awful lot of mandation whereby you know, governments are basically going to instruct the pension, the pension industries to repatriate to capital where possible. And to be honest, the UK could do with some, some growth, growth capital. You know the, the fiscal situation in the UK is not going to allow the government to go crazy with the checkbook. It's going to need private sector capital and it doesn't need that much. Right. And in the meantime if you think politicians are never going to get their act together, that's never going to happen. The great thing about the UK is that if this doesn't happen the market's getting hollowed out by private capital anyway. So if you look at the M and A activity both strategic and from private equity going on in the UK market it's off the charts at the moment. Five of the FTSE 100 have been taken private this year alone. I mean, you know the M and A bankers in the City of London are busier than they ever have been right now. And so you've got these very cheap equities where there is, there's a, there's a real, there's a real underlying bid right now. And my, my, my sort of weapon of choice for, for, for dealing with this is, is UK investment trusts which are the London listed closed end funds. And there you've got actively managed portfolios of UK small and mid caps that are trading at a high single digit discount to Nav where trust busting activity is on the up with the likes of Bose, Weinstein and Saba Capital. And so you've got that nice kicker there. And then just in terms of the economics and the sort of doom and gloom around the UK there was, there are some signs that we may be, we, we may be getting, getting things wrong about the sort of headline economics stripe. I mean the fintech has an economics team and actually they write a really interesting substack that's worth, worth the follow. But they've been pointing out that business formation, at least I, I E Someone opening a, an enterprise striper cap has been absolutely exploding in the UK in the last 12 to 18 months. And it's interesting because that's, that, that, that the traditional measures of sort of business formation, right, you track through companies House business openings and, but I think in, in the world of solopreneurs and I think there's been an explosion of that since COVID I think that you know, micro small and mid micro, small, small business activity is a much, much rosier than the headline GDP numbers would ever pick up. And even the tax collection data operates for that end of the market on a sort of 18 month lag before you start seeing that kind of, that kind of tax collections show up in the account. So you know I, I, I love, I, I love, I love buying these kind of things when everyone, when, when, when everyone hates them. You know, I think the risk reward set up from here is, is pretty interesting.
- [37:27]
B
Does it feel like all the, whether or not all the bad news is ever priced in is a whole other existential question. But does it feel like the post Ukraine now strait of war moves, the energy situation, all the other problems, the underinvestment by the pension funds, the lack of interest from the rest of the world, is all of that adequately priced into the UK right now? Is there still room for a leg lower in any of those categories?
- [37:54]
C
It's not going to be a very big leg, right, because you've got, I mean you've got this sort of COVID bid from the, from the take privates. You know there are people that can buy these and take these companies private and, and which is not, I'm not
- [38:12]
B
saying it's not getting enough, it's getting it.
- [38:14]
C
We are now we are we. I'm talking about small and mid cap companies now, right? The footsie. If you buy the FTSE 100 you're basically only taking a 20 exposure to the UK economy and I want, I want an exposure to the UK economy. If you think about small and medium sized businesses now, they have now survived a decade of operating post Brexit, right? How agile, you know, how good are those management teams to, to, you know, to, to fought their way through losing your, your neighbor as a, a friction free economic trading partner, right. You know these guys, these are battle hardened management team, right? They're sitting on 40% net cash. If you look across the board in the 250 they're buying back their stock. If a strategic M and A bidder doesn't show up or a private equity company doesn't show up, these companies are buying back their own shares.
- [39:17]
B
Now you know I was going to ask you about this because doesn't have to be Thanksgiving for me to want to talk to you about places like Turkey. Start with Uzbekistan though. The Tashkent time, this whole slide, this Uzbekistan Thing I think I was very excitable about this when you told me about it last time. Tell me what's going on with the Uzbekistan macro machine. I love this slide too. Good, good. Use the graphic generators.
- [39:42]
C
Love, love, love. Gemini for that Nano Banana. It's my favorite. So we talked about this briefly, right? And I got a few, I got a few eyeball rolls around this time.
- [39:55]
B
Not for me. I love this idea.
- [39:58]
C
Ultimately. I first started writing about this in Q4 last year and I actually a buddy of mine runs, has, has been running a Uzbekistan fund in, in Tashkent for, for a few years now. I mean this is the, this is the belt buckle of the Silk Road. There is not a lot not to like about you know, the macro setup in Uzbekistan. It's the most interesting of the Stans by a long way. And they are, yeah, they're in the midst of a really ambitious privatization scheme and a sort of normalization, sort of macro normalization. And it is incredibly rare. I mean you get one or two chances in an investing career to get on, to get onto the ground floor of a frontier market sort of emerging onto the mainstream. And I think this is one of them now the vehicle, the, basically the only vehicle that most of us would be able to trade unless we're going to the private funds or setting up a very glamorous em stockbroking account. You've got GDRs in the Uzbek National Privatization Fund USNIF which trade on London and they, they IPO'd in May. The stock, the, the fund units are up 30% since then and it's still incredibly cheap. You are, you're buying you know, core sort of franchise infrastructure assets. So you know think the, the electric company, the airline, the telco, a couple of interesting private, private sector commercial banks and you're buying for low single digit earnings multiples. And you know this is a, you know an economy that's growing mid single digit real now inflation's, inflation's been brought completely under control. You know proper grown up. You know how much I like emerging market central bankers but they've got a proper EM central bank regime in place there and I you know this is, this for me is a set and forget. You know I've, I've, I've, I've made made an allocation I want to you know I sort of averaged into it over the first month post IPO and you know want to, want to want to wake up in. By the way, I should mention that this privatization fund is being managed by Templeton Right. And they've done this, they've done this trade before in Romania. So essentially you've got a lot of governance, protection. Templeton has a huge amount of control, sway and influence on how this privatization process is being managed in Tashkent. They, they, they are, you know, instrumental in setting up the sort of the, the, the follow on deals and it's, and it's worked for them before. And you know, I go back to this point, you so rarely get an opportunity to, you know, you think about the legends that got involved in the voucher privatizations in the former Soviet Union and people that have got on the ground floor of EMS before. When those trades work, their game changes. I'm not talking about going all in to USNIV with a 30% but small single digit allocation, could be 20% of a portfolio down the line.
- [43:48]
B
I was looking over someone's shoulder during the World cup and they were looking at some Uzbek odds for some of those games. I thought, you know, there might be a closed end fund that has slightly more promising value than.
- [44:01]
C
Well, it exists, it, it exists ever, ever.
- [44:06]
B
Interesting. Take me to Turkey. I want to go there next. I want to hear about what's going on with this one because I'm scared of this country. I'm going to be honest. This is one of those ones that it's, there's tempting times and there's terrifying times, but I tend to default on the terrifying times probably with like just Erdogan shock memory. So talk me through this comfort.
- [44:28]
C
So I spent a lot of time in turkey in the mid-1990s and you know, it was, it was, it was, it was, you know, inflation, this was pre Erdogan and the, you know, inflation, inflation was, was, it was a headache back then. You know, it's sort of, it's very easy to think about Turkey as a. Oh, this is just too hard, right? You've got, you, you've got a currency, you've got the chart there. You know, the red line's the lira, right? Just in the last, just in the last eight years, you know, you, you got CPI sort of touching 80, 80, 80% in, in, in 22 again. You think, think about this is that, this is, this is, this is a country that has dealt with a decade and a half of Erdogan. You know, my entire adult career, my, my entire professional career, it's been dealing with inflation problems, right? You know, economies and people that operate in those economies just learn to operate within those constraints. And actually Turkish Equity has done A really good job of holding value in dollar terms. Also on top of that, because of, you know, various sort of macro shenanigans, you've got a real bid from domestic, domestic investors in Turkish equities because this is, you know, this is equities are real assets, right? And you know, heaven forbid you keep money in a sort of in a deposit account in lira. That's not, that's not great for you. I should probably explain the decision meme on the thing. This is harking back to when I was going there in the 90s and the approved hotel list for Istanbul for Barings at the time was a choice of either the Churan palace button on the left or the Four Seasons in Sultanahmet on the button on the right. Both very nice pubs. You know, the, the emerging market corporate finance in the 90s was a lot of fun. Mobile phones didn't roam yet. Blackberries hadn't been invented. Your only communication with the office was via a fax machine to the hotel business center. It was a dream of low accountability. Absolutely perfect place to do it. Anyway, that was, I, I, I, I wrote about last, this last weekend and sort of was telling some tales around then. But I, I think going back to, back to the Turkish equities, I mean the, the macro story, right? Ignore the inflation noise. They know how to deal with that right now. But if you think about where Turkey is coming out as a emerging, you know, very significant middle power, right? They, you know, Turkey has this transactional relationship with all sides, right? Their economy is only 2% reliant on the, on the US consumer which is pretty rare as you go around the world. They've got this, you know, extraordinary defense export capacity. They're becoming, you know, pivotal, pivotal to, you know, logistics and you know, energy logistics and trade logistics as a hub. You know, they're even starting to sort of steal a bit of the Gulf's thunder in terms of attracting, you know, foreign capital and, and a bit of, a bit of a brain drain into Istanbul. They've got this very ambitious investment, investment visa program. You can buy a $400,000 flat and get permanent residency in, in, in Turkey right now with, you know, with very favorable tax treatments on inheritance and foreign earnings. And I think, you know, they're taking, in fact my, my buddy in Tashkent has just got his Turkish passport after, after playing, playing this, this Visa card. So, and then, you know, risk management, right? Right now if you, this is the weekly chart in the background. If you look at the, at the daily chart, you can, you can risk management entry against the 200 day moving average. And you know, I, I think that the, the risk reward looks really interesting here. I mean, if the chart tells me I'm wrong, you know, I'll step away and come back another time. But you know, I really like the fundamental story. And this is, it's another very, very cheap market. You know, you're buying the top 20 companies in the index which have got some serious, serious businesses in there, you know, just under 10 times forward earnings.
- [49:41]
B
Part of what I love about this, and I'm going to tie this back to the Uzbek discussion, I'm going to tie this back to the UK small and mid too, is all of these are companies and businesses who have been incubated under stress for an extended period of time now. And that hasn't killed them. Yeah, they're, they're not cockroaches. They're not cockroaches. These are, these are real businesses doing real things.
- [50:06]
C
Maybe connection to the cockroach family, but just, just in terms of their survival instincts.
- [50:11]
B
Extended families, fine. You know, there's probably not a raid invented to get rid of them yet or try to fight them or nuclear holocaust them out. But it's really interesting that this is almost the polar opposite from when we talk about the SpaceX IPO, when we talk about the upcoming, like next three giant tech IPOs, when we talk about all these companies that are stealing all the air out of the headlines. We're forgetting how many of these survivor portfolios a little bit below the market cap size are going. These are good businesses who have already figured out how to live in a tough environment and they are crazy cheap right now.
- [50:49]
C
Yeah, yeah, maybe they can get a little bit cheaper, but I don't think so. And if so, not by much.
- [50:56]
B
Like you said before, there's not a lot of a leg left to take these things down, which is a great expression on this. All right, tell me, just summarize, summarize where we are now. Summarize where you think in the next six months. What are some of the stuff in the setups here that you think? I'm thinking about oil, I'm thinking about gold, I'm thinking about some of the stuff you called out six months from now. How are people going to look back on today, do you think, Base case?
- [51:19]
C
Well, I mean, we're 24 hours ahead of a big binary event which we kind of, we've kind of discussed. You know, I don't know how to handicap the we're not getting a cut tomorrow. I, I think I'm recouple that I
- [51:35]
B
had, I had to ask it for absurdity purposes of just like let's really surprise the guy. Mr. Magoo, off the I beam, you know what happens?
- [51:45]
C
I mean I, all of the much covered topics of, you know, the AI Capex, the shenanigans in private credit and private equity, all of that stuff, you know, I think all of that stuff comes to a pretty rapid halt if there's a death shot. But that's why I don't think it's going to happen. I think that we've got the noise of midterms coming in November. We have got an awful lot of dry brush on the forest floor right now. Everywhere in risk right now we've got all of this leverage in equities. You've got this sort of record low dispersion in, it's a record record low implied correlation in, in exit. So I'm, you know, I'm, I'm concerned about a kind of a rerun of the, the leverage unwind that we saw two summers ago. You know, been adding, adding, adding a few volume positions to my hedge book recently again. I, I, I, I, I, I'm, I'm, I'm quite nervous about risk over the, over the course of, over the course of the summer. You know, we needed, we need a decent brush fire before I think we can advance much further forward. You know, so just cautious right now. You know, get a lot more comfort from, you know, owning stuff that is already cheap because I think there's plenty of scope for some very expensive stuff to get cheap. And that's going to be a painful repricing for a lot of market participants.
- [53:35]
B
Rupert, I always love these talks. I always love where in the world you get me paying attention to and thinking about even when you're taunting me with 90s Turkish hotels that don't exist
- [53:44]
C
anymore people, those two very much still exist. They're still. Do they exist?
- [53:48]
B
Like is it like the stories you told? Are they really like the stories you told in the newsletter?
- [53:53]
C
I was, I was, I was, I was totally smitten with Istanbul in those days.
- [53:59]
B
Understand why it's not constant. Opal, how can you resist?
- [54:03]
C
Absolutely. So much history.
- [54:06]
B
People want to bug you on the Internet. Where should we send them?
- [54:09]
C
Very easy. Blind squirrelmacker.com will be the gateway to all things Squirrel. Track down Benny and the Squirrel on, on YouTube as well. Ben and I broadcast on Sunday evenings Eastern time and Thursday evenings Eastern time. Sunday is just the two of us. And on Thursday we have a guest and I think you need to be one of those soon to work out
- [54:33]
B
one of these details here. I'm in. I'm in.
- [54:36]
C
Cool.
- [54:36]
B
Make sure you make sure you're checking out Benny and the Squirrels. Must must watch YouTube TV, whatever we call it these days.
- [54:43]
C
I don't know.
- [54:43]
B
The world's flattened. It's strange. Get over it. You're looking at Uzbekistan closed end funds. You might as well get over what we're calling this must watch tv. That Benny and the Squirrel Blind Squirrel macro. By far one of my favorite newsletters. It always forces my brain into another weird corner of the world and I just love learning something like that for you. Rupert, thanks so much for joining us.
- [55:03]
C
Thanks, Matt. Loved it.
- [55:05]
B
Excess Returns Like Comment subscribe all the things below. Check us out in the substack and we are out. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.