Odd Lots — James van Geelen on Thematic Investing Right Now

Podcast: Odd Lots by Bloomberg
Hosts: Joe Weisenthal and Tracy Alloway
Guest: James van Geelen (Founder, Citrini Research)
Date: July 12, 2024

Episode Overview

This episode delves into the art and challenges of thematic investing in today’s uncertain climate. With major uncertainties swirling—ranging from US presidential elections, the path of AI and tech stocks, to economic policy and regulation—Joe and Tracy invite James van Geelen back to Odd Lots. James shares his frameworks for identifying, riding, and managing thematic trades, including how he approaches second-order effects and the importance of “story” in markets. The conversation covers everything from the AI boom and Apple’s positioning, to constructing election-oriented baskets, the complications of water investing, and recognizing bubbles or signals that the story has changed.

Key Discussion Points

1. The Era of Uncertainty in Markets (01:12–05:12)

• The markets are dealing with unprecedented uncertainty: US presidential elections (“We’re not entirely sure who the Democratic candidate is going to be” — Tracy, 01:25), the direction and durability of the AI “theme,” mixed signals from the Fed/economic data, and the difficulty of making thematic investment calls.
• Quote:
  “If you’re a discretionary investor … you really have to get the call correct. The only way you beat the market … is if you got the AI call ... These are really tough questions for investors who have to do well, relatively.”
  — Joe Weisenthal, 03:42

2. James van Geelen's Thematic Investing Framework (05:12–10:01)

• James describes a spectrum: disruption vs. continuation, and macro vs. micro drivers.
• Narratives are critical: “Price is a number today multiplied by a story tomorrow.” (citing Kyle Harrison, 06:28)
• For AI, he started with “picks and shovels” (e.g. Nvidia) but quickly realized use cases and second/third order ramifications are where alpha may lie.
• Quote:
  “The way that I view investing is it’s always going to prioritize a good story and a good narrative. And that’s what has the makings of a theme.”
  — James van Geelen, 06:28

Timestamps

• [05:13] — Tracy invites James to share his current themes
• [06:28] — James on the priority of narrative and stories in investing

3. The AI Theme: From Infrastructure to Use Cases (10:01–16:25)

• James believes the next inflection point in AI is consumer-facing (B2C), especially with Apple as the potential “enabler” due to privacy/trust advantages: “If any company can get it done, it’s going to be Apple.” (09:07)
• The move to edge AI (on-device inference) could trigger an iPhone “replacement cycle” — suddenly, the new hardware is necessary for basic digital integration, driving a true picks-and-shovels refresh.
• Tracy and Joe discuss the growing irrelevance of iPhone model cycles—James argues AI may reverse this.
• Quote:
  “You might see the first real true replacement cycle ... where Apple comes out with a new phone ... if you don’t have it, you can’t do it ... it becomes kind of like that sci-fi movie Gattaca ... if you’re left out, you’re left behind.”
  — James van Geelen, 13:59

Timestamps

• [09:07] — James on Apple, AI, and privacy
• [14:18] — Joe & James on personal tech, replacement cycles

4. How Thematic Trades Are Constructed (17:24–25:02)

• James discusses prepping for the US elections and thematic baskets:
  • Tariff exposure: shorting companies vulnerable to China trade (Five Below, Restoration Hardware, Floor & Decor, Best Buy), while going long companies with pricing power (Costco, Walmart, O’Reilly).
  • “Bidenomics” exposures (clean energy, electrification, infrastructure) require offsetting “Trump beta.” He uses Fannie Mae, Freddie Mac, private prison stocks, and even storefront glass makers as second-order plays.
• Importance of broad security-level diversification but thematic concentration.
• Quotes:
  “It comes down to pricing power ... who can kind of keep that regardless? Like Costco, Walmart.” — James van Geelen, 19:24
  “The weighting kind of changes throughout the ... narrative progressing.” — James van Geelen, 24:29

Timestamps

• [17:46] — How James preps for election-related themes
• [19:07] — Construction and thought process behind long/short baskets
• [22:38] — The role of stories, even when “unrealistic”

5. Second-Order Effects & Non-Obvious Thematic Plays (25:02–30:29)

• Using second-order thinking to identify less crowded trades: e.g., fashion retailer Torrid as a play on weight loss drugs (people need new clothes as they lose weight), not just betting on the obvious drug manufacturers.
• Tracy, Joe, and James share favorite second-order anecdotes: sawdust prices after the housing bust affecting milk supply, and the auto industry’s effects on gummy bear production (gelatin).
• Quote:
  “The general idea is applying second order thinking to capture a theme in not just the most obvious way, because that’s going to be the most crowded way.”
  — James van Geelen, 26:56

Timestamps

• [27:25] — Second-order effects and the Torrid trade
• [28:48] — Podcast favorites: sawdust, gummy bears, and supply chain side effects

6. Water as the Ultimate “Hard” Thematic Play, and Regulatory Uncertainty (30:56–37:53)

• Water investing is seen as perennially “safe and obvious”, but regulatory clarity is critical. Recent Supreme Court decision (Chevron deference overturned) creates uncertainty around enforceability of EPA water quality rules (PFAS remediation).
• “Uncertainty is kind of anathema to [thematic investing] where people want to buy on a story… You want this cultural touchstone, you want everyone to realize that, oh, this is going to be big.” (33:47)
• Even a strong secular theme can be clipped by regulatory ambiguity.
• Quote:
  “When you have something that adds uncertainty – even if you disagree – when it comes to what happened with the Chevron deference, ... That has wide, wide ranging impacts that I don’t know because I am not an attorney.”
  — James van Geelen, 35:31

Timestamps

• [31:29] — Water, PFAS, and the Big Short
• [35:30] — The impact of regulatory regime shifts

7. Is AI a CapEx Bubble? Lessons from History (39:06–45:57)

• AI’s “CapEx arms race” sparks debate: is this necessary for progress, or will we look back and see rampant waste?
• James: All revolutionary technology comes with bouts of over-investment (railroads, Internet). “Maybe we have to ask ourselves … do you need this capex bubble in order to progress the technology?” (42:58)
• Cites historical sell-side reports overestimating power demand for tech booms.
• Tracy: What would get you to take money off?
  James: Always looking for better opportunities; not just momentum chasing or story following, but reassessing as stories and narratives progress.
• Quote:
  “There’s never been a truly revolutionary technology that has not been accompanied by some excess capex that we look back and say, ‘Well, that was wasteful.’”
  — James van Geelen, 41:26

Timestamps

• [39:06] — Joe’s Druckenmiller anecdotes
• [42:58] — CapEx bubbles as technology drivers
• [44:55] — When does James exit a theme?

8. The Interplay of Price and Narrative (47:07–49:21)

• Recap by Tracy and Joe: Price and story must both align for a theme to “work” in markets. You can be “too early” or “too smart,” but if narrative never catches up, the trade may disappoint.
• Example: Nvidia and the AI chip story — widely known, but only after momentum and story align does it become a big winner.
• Quote:
  “You really need both the, I guess, the underpricing or … price to be … relatively attractive, plus the momentum provided by that story to make a really compelling investment.”
  — Tracy Alloway, 47:07

Timestamps

• [47:07] — Hosts discuss why story and price must align for thematic investing to work

Notable Quotes & Memorable Moments

• “Nobody has ever made a decision based on a number. They always need a story.”
  — (James, referencing Robert Shiller, 06:28)

• “With social media and the idea that you can make everyone aware of like microplastics … there’s so many emerging contaminants out there just from … unabashed capitalist progress and industry.”
  — James van Geelen, 36:52

• “Maybe we have to ask ourselves sometimes, do you need this capex bubble in order to progress the technology?”
  — James van Geelen, 42:58

• “I’m a strong believer that there’s always an opportunity somewhere … It only matters if the market is all right.”
  — James van Geelen, 44:55

• “If you own a company and the CEO starts coming on and spends half the earnings call talking about macroeconomics, sell that company.”
  — James van Geelen, 30:29

Useful Timestamps

• [01:12]: The hosts lay out the “uncertainty trifecta” — elections, AI, and Fed policy
• [05:13]: James describes his thematic investing approach
• [09:07]: Why Apple, not Microsoft, could unlock AI’s next frontier
• [14:18]: The coming AI-driven hardware replacement cycle
• [17:46]: Constructing election-based long/short baskets
• [27:25]: Second-order effects in thematic trades
• [31:29]: Water as theme, Chevron deference and regulatory risk
• [39:06]: AI, capex cycles, and technology bubbles
• [44:55]: How and why to exit a theme
• [47:07]: Why both price and story matter for true thematic winners

Tone & Takeaways

The tone throughout is conversational, candid, and occasionally wry—replete with market war stories and humility about the unpredictability of themes. James van Geelen emphasizes the need for both rigorous research and humility: narratives, market positioning, and cultural touchstones can be as powerful as “hard” numbers, but beware when regulatory or storyline ambiguity arises. Classic winners emerge when price, narrative, and momentum converge—otherwise, even the “smartest” thesis may quietly lose.

Ideal for: Investors, finance professionals, or anyone curious about how big stories drive markets, and how pros try (and sometimes fail) to profit from them.