← Grant's Current Yield Podcast
Grant's Current Yield Podcast
INNER WORKINGS
00:29:13
Behind the scenes at Grant's with Jim, Evan and Phil.
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- [00:00]
A
Foreign. This is Current Yale, Grant's interest rate observer of the air. And I am Jim Grant. And with me, as always, is the great deputy editor of Grants, Evan Lorenz. With me today, not as always, but it's a special treat to have him with us is Phil Grant, who is the editor of and the progenitor of Almost Daily Grants, which you ladies and gentlemen may have for the simple request of having it. And Henry French, as per always, is our sound engineer. And welcome to you, Henry. And let's see. Oh, this, I meant to say this is a unique Grant's podcast because it is just us. That is to say, ladies and gentlemen, you and Grants. And the idea for kind of a Grants Only and Friends of Grants podcast came to Evan and me when someone said, I didn't realize you guys also published periodically. I thought it was just a couple of mellifluous voices on the radio. God, we've been. Evan, I have been. You've been with me. I think I've been with you better part of 15 years. Just about. Yeah, almost. Yeah. And. And I have been with me during this Grants thing for more than 40 years. So you can imagine that when people begin asking you, you, you publish something, I think it's high time to remind them that we do so we actually.
- [01:21]
B
Do have a business model that produces revenue.
- [01:23]
A
Yeah. Yes, and I have the tuition receipts to prove it. Yeah. This is a profit making business and we want you to, ladies and gentlemen, to be a part of it. We want you to know who we are, what we do, why we do it, and how you can become a part of it. That's the agenda today. But we're not going to. Yeah, you're probably thinking we're just going to pitch you on grain. Nope. We are going to tell you what we're thinking about what? What we have thought about, what's worked, what has not worked. What's worked is a much longer part of the discussion, is it not, Evan? Then?
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B
Yeah.
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A
We tried to think of a couple of things that fell flat on their faces and I don't know, but I couldn't quite find them in my memory.
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B
But yeah, after a beer or two, they complete that in my mind too.
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A
Yeah. Let the record show that we're entirely sober. That goes for you too, right?
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C
Yes, I just checked, Henry, Everything's good.
- [02:12]
A
Okay, so to begin. I don't know, I thought Evan and Phil and Henry, I thought I would begin, if I may indulge myself in the audience by reading something that I delivered in the way of A kind of a short talk at a recent party given by a subscriber of ours whose name is Diego Segura. And Diego is the most interesting character. He is a downtown Denison, downtown Manhattan, a craftsman. He is a designer. And he has an interest in finance, hence his interest in grants, and full of energy and enterprise. And he asked me whether I'd come and say a few words to people he was going to gather on tax day to talk about creativity. Creativity and flattered to death. I mean, I happened to be, ladies and gentlemen, 77 and a half years old. And here was this guy who is probably a little bit old for a grandson, although actually not, but certainly of a different generation, wanting to hear from me and wanting his friends to hear from me. Not so much about me, but about how it is that grants came into the world and what it has to do with the downtown scene of creation, creativity and craftsmanship. I think the younger people call themselves creatives. That's not that word, isn't for me. But anyway, so I'm going to. I'm going to read a little bit of this and then we're going to get into securities that you have selected, long and short. We're going to get into some of the macroeconomic themes we have developed and are developing, developing. And Phil's going to talk about some of the things that he does almost every day. That's the agenda. Here is a few paragraphs from my talk to the Diego Segura Tax Day party. I'm a bookworm, a gold bug and a newspaperman. I'm the father of four, the grandfather of six, and the husband of Patricia Cavanaugh, MD. And we have been married for 50 years. I've been writing about money and investing for 52 years. Grant's interest Rate observer, the periodical I own and edit, has been publishing for over 40 years. And so Diego wrote a book actually called the Dropout Manifesto, which I think was kind of a cool thing, you know. So I found in Diego kind of a spiritual brother and a help meet. And I said that I dropped out of stuff. I dropped out of college after one semester. I went back and in 1983 I dropped out of the Dow Jones company to found the best 12 page financial periodical in the world. It didn't start that way exactly, but that was the ambition. So no salary for the first three years. That's kind of par for the course. No money or not much money to take from the business. So I went on to say that I can't say that I never wanted to quit. But I can say that Patricia wouldn't hear of it. By this time she was pregnant with her fourth child. Wife, house, everything. The full catastrophe was the line from the Anthony Quinn starred movie called Zorba the Greek. So I said that. So I described a little bit about what we were doing, what downtown life was like, because I've been working down here off and for since 1967, if you please. So. And I said, so what does all this have to do with creativity? I don't know, I said, but it has everything to do with craft. By craft in the journalistic sense, I mean the production of ordered, rhythmic, pleasing sentences. So craftsmanship can in no way be confused with genius. But geniuses can be craftsmen. Here are the credo of the great 19th century German composer Johannes Brahms. Work it over and over, he would say, quote, until there is not a note too much or too little, not a bar you could improve on. Whether it is also beautiful is an entirely different matter. But perfect it must be. So I addressed these young people, I said, not a word here about work, life, balance, for that matter. Not a word about the happiness or mental health of the Creator. Perfect it must be. So genius is God's gift sparingly dispensed. Talent is more generously apportioned, and craftsmanship is within the reach of many of us. It is no mean thing, craftsmanship. Evelyn Waugh, the wonderful British novelist, called himself a craftsman. He said he had a craftsman's hands. So Grant publishes 7,000 words, or 28 to 30 double spaced pages, every two weeks. My God. Oh no. I approach each deadline with a constructive sense of dread. Put perfect, I have told myself two dozen times a year for the past four decades. It ought to be, though how rarely it is. You remember the term paper you dreaded writing, that is, before you dropped out of school. I have somehow chosen to make that millstone my life's work. What do our words say? I went on to ask rhetorically. Well, they deal with value and integrity. That is the value, or lack of it, in stocks and bonds and the integrity of the currency. We look for mispriced securities and we journalistically ride herd on the Federal Reserve. The Fed, as our central bank is familiarly known, sets out to cheapen the purchasing power of the dollar by 2% a year. It believes that a little bit of inflation lubricates the wheels of commerce. No such thing, we have told them time and again. Do they listen? Evan?
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B
No.
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A
So money is work. Work is heartbeats, and heartbeats are finite. Hence our affinity for gold, the legacy monetary asset which hold its value as we, each of us should hold our value. Money is ultimately a moral question, period. So that was the heart of the talk I gave to the creatives at a hip event space in lower Manhattan. That's not bad for 77 and a half. But I would like now to bring in the great Evan Lorenz, who is the first vice president in charge of security selection in grants. So we publish this periodically, every two weeks, 12 pages long. There's typically always a macroeconomic comment dealing with interest rates of which more presently, you know, we are eclectic. We deal with credit and all its forms and manifestations. We deal with interest rates, of course, and aren't we glad we have some again? We went through years and years that was hard going. It was like sledding without on green.
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B
Grass, you know, you needed a magnifying glass to find them. Yeah, what Was it like? $17 trillion worth of debt at its peak was priced to a negative yield.
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C
Yes, I think that's the number.
- [08:18]
A
Yeah, 20, 21 or so. They paid you to borrow. Go figure. Posterity. So anyway, so we macro credit interest rates and unfailingly in every issue there is a piece Evan does it of really, really prime securities analysis. I mean top to bottom. Evan, tell our listeners what you do and how you do it.
- [08:42]
B
So every two weeks we start afresh. I go to Bloomberg. I screen for stocks that look overpriced, look underpriced, might have some change coming, might have insider selling, might have insider buying. I check investor forms for ideas. I talk to our readers. I read the newspaper. You never know where inspiration is going to strike. So kind of casting a very wide net and seeing what you haul in is kind of the name of the game. Then I start doing channel checks. I call investors who are involved in the company, I call the company itself, its competitors, its suppliers, companies that are adjacent to it, and try to figure out is this germ of an idea something that actually has legs to it and if it does, then dive in. I try to read as deeply as possible, starting with the company's own financial reports. You kind of need to start with the 10k and have a very good understanding of what the business is, what it does, what the risk factors it tells you are, and then kind of work your way out to the softer information, what people say about it, how people feel about it, and kind of see what the picture is. And hopefully by the end of two weeks we have an idea that's fit.
- [09:43]
A
To publish one Thing about having a deadline every two weeks. We do have something. Now, Evan, I suspect that people listening to this might be wondering, you know, what is your edge? You guys, there aren't that many of this. Let's see, we have four people actively working on. Well, on the issue of grants, we have three of us. Phil does the adt, of course, and Harrison minds the store and runs the business, and James Robertson does. So it's not exactly a cast of thousands. And so what edge can we tell the people to be try to bring this? What do we do differently?
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B
Well, one, both of us have been through more than one market cycle and having kind of those scars and kind of understanding that what's happening at the moment could just be the excess or the bottom as opposed to a whole new thing is important. For example, in the December 2021 issue, we published a basket of 10 companies that had come public through special purpose acquisition companies. We identified these companies because we thought people should bet against them. In aggregate, they fell over 95%. Most of these companies either didn't have a business when they merged. They were more of a germ of an idea, or they had a tiny business that they promised would grow from maybe $10 million in revenue to $5 billion in three years. Now, some businesses have done that. They're vanishingly few. But having kind of that just experience of being through more than one cycle is important. One of the other edges we have is our readership base. We have, I think in our subscriber base, some of the best the country and in the world. And being able to bounce ideas off of them and talk to them is also something that is hugely valuable. And being able to get them quickly on the phone has helped us more than one time.
- [11:27]
A
Yeah, you know, I know. I, I've talked about this with Phil. I dare say I've mentioned it even to the listeners of our podcast. So ever present is it in my mind, but this is our motto. If we had a motto, it would be the following. And I got, I got this from one of our very smart subscribers years and years ago. Okay, here's it. Here's our motto. Successful investing is about having everyone agree with you later. Right. So how many of your ideas begin with the world actively opposing them? Whether you propose to be long, that is to say bullish or be short. Bearish. Are we typically bloody mindedly contrarian?
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B
Oh, we try to be, but not.
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A
For the sake of that. Right.
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B
But for the no. So like, one category of ideas we have are good businesses that are marked down due to temporary problems. And a great example of that is Meta Platforms, aka Facebook. So we wrote about this stock bullishly in July 2022 after having been bearish on it for a number of years and being correctly bearish. In summer of 2022, Meta was hit by a number of problems. One, Apple and Google had changed the advertising landscape on mobile phones. TikTok was rising and it was seen as kind of the great threat to Facebook. And then you also had Mark Zuckerberg spending billions and billions of dollars on virtual reality with no foreseeable payoff, at least in the present. However, when you started digging into the company, you found that engagement on Instagram and Facebook were still rising. And in as much as the changes that Apple had put in place, making it more difficult to track how ads actually perform, it perversely kind of made Facebook better because it was the largest social network. It also had the most funds to invest in infrastructure to rediscover the signal that ads have. And it's actually made Facebook a stronger monopoly in terms of online advertising. And then also as a founder controlled company, Zuckerberg can do vanity projects like virtual reality, but he can also make choices that incur short term pain but result in long term gain. So he was pushing out these things called reels, which are short term videos. They competed directly with TikTok and they're driving huge engagement increases on Instagram and Facebook at the time, but they were monetized less than the traditional feed on Instagram or Facebook. So he was driving long term value in the business, but it was resulting in declines in advertising. Since we wrote about it, the stock's up 188%, which ain't nothing. But we have other businesses that were marked down due to temporary problems and have succeeded since then. Last November we wrote about Fidelity national information services or FIS, to its friends. FIS's core business is making operating systems for banks. It's a very, very sticky business because ripping out the operating system that processes loans, handles deposits has been likened to ripping out the lungs of a patient and trying to operate them at the same time. It leads to a lot of disruption. Now it's a good business, but in 2019 they paid $43 billion for Worldpay. At the time, it was the largest financial services acquisition in the history and the company mismanaged it. And not only did they mismanage it, but worldpay, which is an emergent acquirer, faced an incredible increase in competition in the years following. Well, since then, FIS spun off worldpay there's a new CEO who seems to have gotten the company back on track and the stock's up 38%. And also when things are going wrong, we can look at good businesses that have been marked down to extreme levels. And just two examples, in April 2020, during the COVID scare, we recommended Lennar, which is a home builder and it's up 386% since then. Or in March of 2020 at the depth of the COVID bottom, we recommended of all things, a Puerto Rican bank named Popular, which has returned 275%.
- [14:53]
A
Those are typical success stories, are they not?
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B
Oh, of course, anything below 200% is just.
- [14:59]
A
Yeah. Well, ladies and gentlemen, it is needless to say sometimes we just step in it, but let the competition cite that.
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B
Well, sometimes also our picks not to click step in it. We were bearish on Signature bank in 2020 and Silicon Valley bank in 2019 and neither of those banks exist today.
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A
Do they go down right away?
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C
No, they took the scenic route.
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B
Silicon Valley bank, after we wrote about it, its business model used to be serving Silicon Valley. It captured something like 2/3 of all the VC funded companies in the area. So in the everything bubble, when so much money was flowing into vc, the stock actually shot up at first, unfortunately it was not a very well run bank and they bet the farm on kind of low yielding long duration securities at the single worst juncture in history.
- [15:51]
A
There are half a dozen of us in the office. Del Coleman is handled circulation. She's been with us, I dare say the better part of 20 years, maybe more. And I bring up Del not only because she deserves to be mentioned and praised for her long service, long and excellent service, but also because she is typical of our approach to customer service. I bring up customer service because I think it's nice to know that when you call Grant you get a human being. And I was reminded of this by something I saw on Bloomberg today. It was a short piece and at the bottom of it was this was written with the assistance of some AI thing. And we've got nothing against AI, but we do have human beings answering the phone and handling your subscriptions. And we print on paper every two weeks and we print the typeface developed by William Caslin. Caslin540. Kaslin was the the great chief and father of English type. His dates were about 1700 to 1770. So we value the craft of publishing. We value the human touch of customer service. We also value the daily production of news copy, which brings me to almost daily grants produced, developed Edited and written by Philip J. Grant, who is right next to me on my left.
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C
Yes, thank you for that lovely intro.
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A
Yeah. So the way it works in this newsroom of ours is that four or five as they're sitting around reading the paper and thinking deep thoughts and one of us is on deadline.
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C
Yes. It's like a little hamster wheel that just keeps spinning.
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A
Yeah. So please Phil, tell our listeners about what you do and how they can read it.
- [17:39]
B
Sure.
- [17:39]
C
Well, so I'll start by just noting that Grant's Interest Rate observer, our flagship product is. One of the things we try to do is to be out in front of what will be news down the line. We want our stories to be featured in the Bloombergs, fts, Wall street journals are referenced in some way, not directly, but they become important and they become headline news later. Later, exactly. Just like, you know, similar to Jim's quote before about having people agree with you later in terms of security selection, what I do is, is sort of the opposite of that. I'm coming in each and every day, almost every day looking for stories that are, that are informed by the news of the day that I can use to supplement the themes of Grant's Interest Rate observer that we have already written about, using institutional knowledge, drawing on the Grants Interest Rate observer archives to introduce our work to a wider audience.
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A
And our work is to a great degree thematic. For example, we get these ideas in our heads such as that there's going to be inflation won't be transitory. So 1920, 19, 2021, we beat the drum for the distant or not so distant inflationary consequences of the then current uber stimulative policies of both the treasury and the Fed. And we have developed the idea that interest rates will be higher for much, much, much longer, which has to do with our, we think, identifying what we think is going to prove a long term, or as they say in the trade secular bear market and bonds. And that's a long story, probably not suitable for a podcast, but it has to do with the demonstrated tendency, tendency of interest rates to move up and down in generation length intervals. And this is not anything speculative, it is kind of pattern recognition. It's been going on since the middle of the 19th century. And sure enough, interest rates rose from 1946-81, that's what, 35 years. And then they fell from 1981, you know, persistently, not invariably, but persistently for 40 years, 1981, 2021. So it seems to, to me, to Evan and to Phil that perhaps we're embarked on something more than a mere flirtation with higher rates. But the nice thing, ladies and gentlemen, being 77 and a half is that the falsification of this particular 40 year prognosis will be for others to pick up and explain.
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C
Also I think what it was 0.8% long bond is it's going to be a tough one to beat I think in the next bond bull market.
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A
Yeah, I dare say it will be. So that's our story. We try to apply the investment precept of buying low and selling high to what we do journalistically or sometimes selling high and buying low. We have a settled view, I think that the future is a closed book. But to borrow a line from the Sorcerer in Shakespeare's Antony and Cleopatra in Nature's infinite book of Secrecy, a little I can read. So what we don't believe in is the kind of macroeconomic forecasting that the Fed demonstrates the impossibility of which the Fed seems to make it its business to demonstrate. That's not for us but what we do observe is the proclivity of human beings in markets to a herd to bunch up together as if for safety and comfort and to think the same thing at the same time and to take that thought perhaps to an excess that is going to prove unprofitable. So we can't predict the future, we can't observe how the future is being handicapped. And having made that observation, we can look for opportunities that will exploit the likely reversal of of an overpopular trend. One of the nice intersections of the macro and the micro was. Remember Harley Bassman's invention, the Pfix, it's the ticker symbol for. It was an etf. It is an etf.
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B
The ETF I believe had was it five or seven year Treasuries that was half its capital. The other half were options on longer dated bonds that had an expiration I think five or seven years after its after the ETF was introduced. The idea being that you could never lose more than half the money in the ETF because it would be backed by Treasuries and you get those back after five or seven years. But the options would give you a huge amount of torque if interest rates ever rose.
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A
And this was maybe in 2022, was.
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B
It, was it 21?
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A
Maybe 2121. Yeah, it was a great invention of.
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B
Harley's and most timely.
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A
Yeah, and wasn't a great thing. We were the first to write about it.
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B
We were the first to write about it and then it I think went instantly down before it went up.
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A
Yeah. Well, that's not the first time that happened.
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B
No. Talking about another kind of groupthink and herding. So 2021, which was kind of the peak of what people call the everything bubble, which saw bond prices and yields fall, stock prices rise, cryptocurrency soar. We saw this incredible rash of just low quality companies coming public, whether through IPOs or through SPACs. But my favorite one, just because of the name and because of a little side note, was Mr. Carwash. Now, Mr. Carwash, exactly like it sounds, runs car washes. This is a service that's been around since there have been cars. But the Wall street analyst who hyped up the IPO got the price so high that they actually pitched it as a services, as a service company. This, of course, is a play on the highly valued sector of software as a services. Now, it wasn't the most successful short we had that year. Year, but since August 2021, when we had our say, the stock's down 66%. But the services as a service stuck with me and it killed me at the time. I could not stop laughing.
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C
That's a signpost. I guess.
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A
It's a Seinfeld. Yeah.
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B
Yes. But isn't a service as a service, just the service?
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A
Yeah. This reminds me of the coffee table.
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C
Oh, yeah. Coffee table book. Coffee table, yeah.
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A
Well, before signing off, I want to talk about another element of what we do, which is the integration of historical experience. Some of it lived, some of it exhumed from the public library. That really is a big part of an ordinary issue of grants. I've written a fair number. Well, I've written some books, biography and history. And they're mostly financial themed. And if not directly financial themed, certainly there's a lot of finance in each of them. And I've come to see not so much that history does not, to repeat, it rhymes. Yeah. But there are recurrent patterns and the human tendencies are certainly recurrent, I must say a lifetime in this. In that weakness, the weakness to buy high and sell low, the weakness to follow the leader, the weakness to fall in behind the glibest of the talking heads or the salesman is that is recurrent cycle to cycle. So, you know, we. We looked for precedents to. To credit events, for example. We looked. So we got into business in 1983 and the first theme we developed at great length was junk bonds. We thought that they were two. I dare say that I missed a lot of a nuance in kind of a moralistic reaction initially to speculative grade debt. I thought it was an overhyped and inherently dangerous promotion. I became a little more worldly about things such as? Well, I became more understanding of the epigram or the motto that there are no such things as bad bonds, only bad prices. But we developed a deep and rather informed by the time it was over bearish line on junk bonds, the fad of which ended in 1990 or so with the bankruptcy of Drexel Burnham. We developed a similar line in the Japanese stock market that ended also in 1990. We were properly suspicious of the great housing and housing mortgage levitation that was evident as early as the year 2000 in 2001. We started writing bearish stories about house prices in 2001. And ladies and gentlemen, the elapsed time between that speculative journalistic venture of 2001 and the payoff of 2008 and 9, that elapsed time was about 50 years in journalistic time. We bore the pants off the readers talking about these mortgage structures.
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C
It's like the opposite of dog years.
- [26:12]
B
Although a little more rapidly. I think that Grant's wrote about CDS and Greek sovereign debt in Was it 08?
- [26:18]
A
Yeah, that was okay.
- [26:19]
B
That one worked out okay.
- [26:19]
A
It was okay. Anyway, enough self promotion. Again, I want to extend a most sincere indeed heartfelt invitation to all of our current listeners, Current Yield listeners to read what we do. I want you to and I think that you will want to do more once you get a taste of it. So all the articles that we discussed today, including Evan's favorites, picks to click and picks not to click, are available on a website I'll give into the the URL I will give you presently. And we are also making available the digital version, the E version of our 40th anniversary anthology which has some of the editors favorite stories going back to, well, 40 years. So that too is available. And it's available on the following it's grantspub.com current yield. One word. Current yield. That's the name of this podcast so www.grantspub.com current yield. So log on that, read what we got to say, savor it because we take so much time in making it saver worthy and then subscribe. Oh, did I mention the price of them? Some people think it's rather a lift. Let me just say it's 1,400. What is it?
- [27:36]
B
1425.
- [27:37]
A
14? That cheap? Yeah. Well 1425 and if you are in the business of investing or if you do it seriously, you needless to say 1425 is within your reach. But anyways I will suspend the salesmanship with simple mentioning that yes Evan, can.
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B
I add one thing? If you invest irresponsibly it's a fraction of a price of a bitcoin.
- [28:01]
A
Correct. And even perhaps by now of the doggy coin. Oh yeah, right.
- [28:08]
C
Makes bitcoin look like Microsoft.
- [28:09]
A
Yeah so anyway, if you subscribe we got a special offer. You get one year plus an additional two issues just for being you and for listening to Current Yield. And I say prospectively for subscribing to adg the price of which is unbeatably nothing although the value greatly surpasses that almost derisory price point. In fact not almost. Why do we charge nothing for it? I don't know. Yeah, I think generosity of spirit. So ladies and gentlemen, that's it for this special and I hope informative and action directed installment of Current Yield. On behalf of Evan Lorenz and Phil Grant and Henry French, our sound engineer and me, Jim Grant, thank you for being with us and we will talk to you again soon. Ram.