Grant’s Current Yield Podcast

Episode: Manifestation of Earnings

Date: June 12, 2024
Host: Jim Grant (A)
Co-Host: Evan Lorenz (B)
Guest: Bob Robotti, President & CIO of Robotti & Company (C)

Episode Overview

In this lively episode, Jim Grant and Evan Lorenz welcome veteran investor Bob Robotti to dissect the peculiarities of America's current market strength and high valuation, the dominance of a few tech giants, and the long-term outlook for cyclical and commodity-driven businesses. The discussion ranges from historical market perspective to granular analysis of inflation, commodities, industrial supply chains, and structural economic transitions, all delivered with characteristic wit and skepticism toward consensus narratives.

Key Discussion Points & Insights

1. America’s Exceptionalism & Market Concentration

• Opening Observations (00:00–02:16)
  • Grant opens with a light, baseball-themed riff on American exceptionalism before pivoting to the S&P 500’s outperformance.
  • Evan: “Since the start of 2023, the S&P 500 is up 41%, whereas the MSCI World Index ex-USA is up 13% less. America's beating everybody else.” (00:59)
  • The discussion highlights the outsized role of tech stocks and AI, with "Nvidia…responsible for 40% of the S&P 500’s gains year to date." (02:24)

2. Tech Boom Historical Parallels

• Market Valuations & History (02:57–04:48)
  • Grant: “Bob Robotti, you didn’t get into this business yesterday... Have you seen the likes…with respect to the concentration in a country, concentration in a sector, and concentration within that sector of a particular, very exciting new technology?” (02:57)
  • Robotti: “Nothing like that. Nope.” (03:31), though he draws parallels to 1999, clarifying that current tech giants have much stronger economics than dot-com-era darlings.

3. Market Efficiency & Human Behavior

• Behavioral Factors (04:13–06:49)
  • Grant queries market “efficiency.”
  • Robotti: “Security analysis…is all about the human emotion…human emotions and fear and greed and all of those things…humans are flawed, and those flaws then work their way into the system.” (04:22)
  • He coins the phrase “financial Brigadoon”—a mirage-like era of ultra-low interest rates, now vanished.

4. Inflation, Commodities, and Structural Changes

• Inflation's Persistence (06:49–08:23)
  • Robotti: “Raw materials are always in scarce supply…we see persistent inflationary pressures…a multitude of reasons that lead us to believe…in the physical world we’re in tight supply of many different things.” (06:52)
  • The argument is: higher costs for commodities are not fleeting; structural tightness is the norm moving forward.

5. Investing in a Frothy Market: Finding Value

• Stock Picking in Overvalued Markets (07:42–09:25)
  • Grant asks whether bargains exist in a headline-expensive market.
  • Robotti: “Yes…if anything, I think that it’s even more so today…We compounded at 22% in 01-04 because stocks we owned in 99 were extremely cheap and performed extremely well when their economics turned.” (08:23)
  • He sees similar latent value and secular opportunity now, citing structural growth and “manifestation of earnings.”
  • Quote: “Earnings improved and then capital follows earnings…” (08:52)

6. Case Study: Copper & Resource Scarcity

• Copper’s Bull Case (09:25–12:18)
  • Robotti makes the case for a durable copper shortage, grounded in the transition to renewables.
  • Robotti: “The identifiable need for copper in 10 years’ time is going to be substantially more than what it is today…projects have gotten more complicated, more environmentally sensitive…it requires more energy, it requires more materials…projects will be much more expensive.” (09:29–12:08)
  • He highlights environmental constraints and supply chain delays.

7. Commodity Cycle, China, and Global Demand

• China’s Role (14:01–19:33)
  • Lorenz: Challenges Robotti on the bearish thesis: “China is either the absolute largest consumer of most commodities…China's business model…is kind of hitting a wall.” (14:56)
  • Robotti: Notes short-term uncertainty but underscores broader global migration of industrial demand to India & Southeast Asia, echoing historic transitions from Japan to Korea to China.
  • Robotti: “It's not deglobalization…it’s the evolution of globalization. Things are moving out of China…to India and Southeast Asia…material and energy intensive.” (17:22)

8. North American Energy Resources and Competitiveness

• Nat Gas & Energy Prices (19:33–23:24)
  • Lorenz asks about potential scarcity in U.S. natural gas.
  • Robotti: “We can produce twice as much natural gas in North America as what we do today…energy intensive businesses in North America are competitively advantaged against the rest of the developed world.” (20:55)
  • Special mention of Canadian oil & gas as undervalued and well-resourced.

9. Interest Rates, Commercial Real Estate, & Banking Risk

• Misallocation of Capital (23:24–28:40)
  • Grant questions where the “boom” or bust, stemming from low rates, will materialize.
  • Robotti: “I’m actually surprised at how blind to the risk that a number of institutions are…Schwab is a long bond levered long bond fund…How could they possibly have done that?” (24:34)
  • He is pessimistic about all real estate valuations, citing structurally higher risk-free rates and lack of price discovery in long bonds:
  • Quote: “All real estate in my mind is at risk of being worth less money…The next 10 years is all going to be stock picking.” (26:16)

10. Stock Picking, The Cycle, and Old Economy Transformation

• Where to Find Value Today (28:40–31:04)
  • Robotti stresses sector and company selection.
  • Robotti: “Energy intensive businesses in North America…have an industry structure that’s substantially changed…not looking to do a cyclical trade…looking for secular, structural opportunity.” (29:34)
  • He singles out Olin, Westlake, and Oxy in the chlor-alkali business as energy- and cost-advantaged.

11. Thinking vs. Data: Quoting Bernard Baruch

• Mental Models > Data Dependence (31:32–32:56)
  • Robotti: “Data and information are no substitute for thinking…The world is in the process of fundamentally changing the underlying economics…Data is a limited and potentially negative value because you’re looking at trends in a period of time when the fundamentals are different.”
  • “We are not data driven.” (32:13)
  • The Fed, by contrast, “is data driven…the Fed is the tail of the dog. The dog is inflation. The Fed can’t control the dog…” (32:19)

Notable Quotes & Memorable Moments

• Robotti on markets and psychology:
  “Security analysis, Graham. It’s all about the human emotion…humans are flawed, and those flaws then work their way into the system.” (04:22)
• Grant, dryly:
  “Markets are said to be efficient institutions. Are they just as efficient as the people who operate in them?” (04:13)
• Robotti, on investing for the long run:
  “The only thing I know is when there’s consensus, it’ll be wrong.” (12:12)
• Robotti, on where secular growth is forming:
  “Energy intensive businesses in North America are competitively advantaged against the rest of the developed world.” (20:55)
• Robotti, on data:
  “Data and information are no substitute for thinking.” (31:34)
• Robotti, on the Fed:
  “The Fed is the tail of the dog. The dog is inflation…And the Fed can’t control the dog.” (32:19)

Timestamps for Important Segments

• S&P 500 performance vs. rest of the world (00:59)
• Market valuation—Shiller PE discussion (01:36)
• Tech sector concentration & impact on S&P gains (02:16)
• Investor psychology and market inefficiency (04:22)
• Financial Brigadoon—effects of long-term low rates (04:50)
• Commodities, inflation, and copper bull case (09:29–12:18)
• China, globalization, and shifting industrial demand (14:56–19:33)
• North American energy resources (20:55)
• Risks in banking and commercial real estate (24:34–28:40)
• Stock picking and transformations in “old economy” sectors (29:34)
• Data vs. thinking: Bernard Baruch quote (31:34)
• Fed as “tail of the dog” (32:19)

Conclusion

A fast-paced, insight-filled conversation blending historical perspective, skepticism about consensus narratives, and optimism in specific sectors. Robotti champions patient, fundamental investing, particularly in cyclical and commodity-driven North American businesses, while warning of the perils of data-driven complacency and the illusion of efficiency. Listeners get a clear case for structural inflation pressures and why the next decade will belong to active, discerning investors.