Lead-Lag Live

Decoding Today's Market: Navigating Toxicity, Overvaluation, and Uncharted Investment Strategies with David Collum

• Michael A. Gayed, CFA

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What if you had the chance to peer into the mind of an experienced market analyst? You do. Join us as we sit down with David Collum for a profound discussion that navigates the murky waters of today's market. From dissecting the toxicity marked by cognitive dissonance and the return of uneducated speculation to pondering the sustainability of super stocks like NVIDIA and Tesla, we serve up an enriching conversation that's guaranteed to challenge your current perspectives.

Are we witnessing the death of intelligent investing? The market's current state suggests we might be. We pick apart the concerning overvaluation in the market, where 490 out of the S&P 500 companies return nothing, and investing has become a high-stakes gamble. We question the financially dangerous belief that you'll never lose money investing and reflect on the implications of the market's inflationary gains. Stand by as we expose the harsh realities of the contemporary investing landscape.

But, it's not all doom and gloom. We explore potential lifeboats in this turbulent sea, discussing the role of gold, silver, and energy stocks in a portfolio. We analyze the potential of companies like Rio Tinto and weigh in on the controversial topics of investing and trading. Balancing the scales, we also delve into the challenges of managing a sizeable social media presence and how it can impact your investing habits. Tune in and equip yourself with insights that could help you navigate these tumultuous times.

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The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions. Don't forget to follow at LeadLagReport on Twitter to join these conversations live and check out the LeadLagReport at wwwleadlagreportcom. Choose promo code podcast30 for two weeks free and 30% off to get access to award-winning research and anticipate stock market crashes, corrections and bear markets. And now on to our LeadLag Live discussion hosted by Michael Guyant.

Speaker 2:

Thank you everybody for joining us. I wanted to get David Colm on for a market chat here. Dave, you and I spoke a long time ago before I started turning the LeadLag Live conversations into podcasts. A lot of people love you. A lot of people don't Same with me, by the way, but you wear with a badge of honor. My friend is, i think, the way to think about it. But I want to focus the conversation for a bit on toxicity, because we're in a very unusual market where there's a degree of toxic cognitive dissonance in the way the markets are acting. So, lea, just from your vantage point, what's going on in markets today?

Speaker 3:

Well, i think the big story that somehow is being ignored is, i think, that Powell doesn't care about inflation. I don't think he cares about money flow. I don't think he cares about any of that stuff. I think he cares about getting the market to heal. So I think he's trying to get the speculators to stop speculating, and Volcker had the same problem. He sort of beat on them and then they came back and he beat on them again And I think that's what Powell's face. I think he's embarrassed by headlines of NVIDIA and headlines of Tesla and headlines of the super stocks running the entire market.

Speaker 2:

Yeah, and I've used that line all throughout 2021. It's like I was seeing back then I set the amount of uneducated speculation back then is astounding as sort of a warning sign that things might top out, and I think we're kind of back in that mode. I put this tweet out a couple of weeks ago. It's like I'm starting to see the Lambos again on Fintuit. I'm starting to see a lot of people getting very boldly about their call options because they're making money with it.

Speaker 3:

But the other thing that I think is something that's been bugging me for a while is there is no smart money. It's all dumb money. So you've got. If you read analyses by supposedly very bright guys, you'll listen to their language. It's all technical analysis language. It's all about momentum and flow and stuff like that. There's just so few people out there saying, well, this is a good place to be because over the next 10 years it's going to do really well And you can run into it. You know, i think things like the uranium play fits into that, but for the most part everyone's just trying to catch big waves And I can't do that, so that absolutely appalls me. I think that if you buy pay over pay for any asset, you will underperform in the long run.

Speaker 2:

I think that's the truest. So what you're saying is that you would agree that NVIDIA is fucked.

Speaker 3:

Especially because I don't buy into the whole AI thing. To me, AI is probably going to be a detriment to society. You know I look at these super stocks, as I mentioned in a private communication.

Speaker 3:

And you know most of them are kind of garbage too. You know, i would not want to put these companies against Standard Oil and US Steel and Ford Motors and General Motors and you know the railroads and stuff like that for wealth creation. I know that it's just junk. Facebook went away today. Who cares? That's my best example. But if Tesla went away today, who cares? Tesla doesn't know how to make cars. They don't know how to. Their market cap, you know, reflects a company that's selling half the cars in the world and their sales do not, i mean at the level of that point.

Speaker 2:

It's like there is no smart money, everyone is just. I mean I would raise myself, Met a lot of advisors, production institutions. I mean they are no different than we do, they just retail with a lot more money, and it's they're forced to do it.

Speaker 3:

I mean there's guys, just that thing go. That's the game I gotta play, right, this, this is a hand-to-hand it, so I can do. A very smart guy who's a value guy. He says I'm not as bearish, as I said to you last time We were together, and then he qualified, said you know, i think the whole thing's gonna come crashing to our ankles in the fall, but and I go, what kind of timescale is that? I mean, if you're not bear, if you told me it's gonna crash anytime the next three years, i'm out, i'm out, i don't want to be there. And so the other problem is it goes way, way back.

Speaker 3:

This is something that I've been obsessing over, and that is that when defined benefit plans converted to defined Contribution plans, they went from money being handled by not only smart guys But guys who, if they failed, lost money for their company and they handed it over to the masses, which means now there's no one to answer to. So there's, you know, you got. Calper still may be kind of who knows? you know Things like that, but Activists, investors, are rare. When in the olden days they were all activists, investors, they sold you out if you did poorly. And Now you have millions, fund millions of people who were completely stupid money because a they don't know what they're doing. It'd be their indexing, and the index is, as we know, are non-linearly putting all the money into the super stocks. And and I one time had a chat with John Bogle, believe it or not, and I asked him about this idea, i said didn't democratization of the market also take away adults of provision? He said yes. So there's the guy invented the index Bondon, and a staff that I like to give in every podcast I do from 1981 to the present 40 years, market valuations which are inherently inflation corrected, so you don't have to worry about you know money flows or anything.

Speaker 3:

It's just. It's just the market, divided by some metric that ought to track whether it's GDP or private sales or whatever, and there's a I keep track by 25. They that should mean regress more than any metric in the market period. There's nothing more mean regressing than a market valuation and that has compounded over 40 years and over 3% a year. Now what happens in the next 40 years? It's not going to do that again. What happens if a reverses which mean regression says it has to? what if the next 40 years is negative 3% a year valuation compounding What's gonna happen? and that is it.

Speaker 2:

It'll be an entire lost generation of investors as you were saying that my mind went to. Democratization leads to concentration. I think it's your point about the passive move in with the department side right It did. The full option ended up being vanguard type large cap, market cap, weeded strategies Which, to your point, grossly disproportionate of it's the top names and results, everybody having a lot more companies, specific risk than they realize.

Speaker 3:

And the problem also is that the guys running the companies don't. They don't have to answer to anybody Because you know what index funds gonna raise, holy hell, right. And so I mentioned this idea of the cantaloupe effect. Well, i mean mention my obsession over Super stocks. Read an article a couple weeks ago about super stocks. I went right by it because it's one of these articles that says if you don't know, if you own these 10 stocks, you're rich, and if you didn't, you're not, you know. So it's like oh, now you tell me right. And so I said so. The message they're saying is you got to own the 10 super stocks to the next decade, i go, but no knows who they are. So and the guys who do, or just it's just full by randomness, someone's gonna get it right, but it doesn't mean they knew what they were doing.

Speaker 3:

And I blew by it because it's one of those stupid stories. And then I realized, no, the subplot is. Out of the S&P 500, there are 490 companies who, collectively, are returning nothing. And then I realized that you know, if you bought a gas station and Ten years later you had made no money, there was no cash flow, there's no net gain at the end of the year. You're an idiot, you really blew it. Yet We're buying 90 of the biggest companies in the world and they are returning nothing.

Speaker 3:

And then I started thinking about the fact that, you know, when I was young, i was buying assets when they were dirt cheap and they were building up value and they were growing in terms of valuation. The current youngsters, if they're averaging into the market, they're averaging in a completely losing situation, and if it takes eternity, like the Fed seems to want it to do, then they will buy instead of me, who bought for 20 years and really made money, or my dad really did. They will buy expensive stuff for the first 20 years and build up sort of a nest egg, but without much gains, and then they'll lose money. And so I just you do not want to be forced to buy expensive assets.

Speaker 2:

There's no way to win that. You get a sense that there's still a lot of overvaluation.

Speaker 3:

I mean, take out the magnificent seven, right, i think you can find stocks that are cheap, i think I started buying a little bit of energy. But if you read about secular bears I'm not talking the ones where they take a year and a half and within another three years they've recovered That's correct. Nothing, you know. It doesn't. All that does is reinforce the investors' predisposition to believe that you can simply never lose money investing. You can at times pause and at times go down for a little while, but ask someone who owned the Nikkei in 1990, how they're doing. Ask someone who owned the Nifty 50 in 1967, how they did to 1981. Answer in place, they adjusted. They lost 75% over 14 years. That's a third of your investing life. You're not gonna make that up period. You cannot make that up.

Speaker 3:

And so it turns out that when the PE of the market I hate PE because it's such a cheesable metric You know any good account can make the PE look good Bollocks Youth PE just as a way to talk When the PE of the market is six, then half the stocks below that are have a PE of less than six. And what that means is if you buy a stock now, you think it's cheap at 12, you could end up losing 60% without the company actually losing any of its efficacy, its veracity, its ability to make money. You'll be down, and Haswin does a good job at that. He does do a good job at making his people money, but he does a great job of showing that all 10 deciles get wooshed out When the secular bear filing acts as revenge. That is gonna be a 25 year bear. I'm the most bearish guy on Twitter.

Speaker 2:

And you're not anonymous, which is pretty amazing. That you're bearish And I gotta say Fintzwood draws me crazy with just the amount of people that are in close bearish and they get these huge followings. It's not their real names. You know what the fuck they're doing as far as their actual trades. Right, it's all just hindsight nonsense, right? I wouldn't rude you. I don't know about the 25 year, but I've been public, like myself, saying I think we're still in the bear market. A lot of that has to do with the writing of last year, at least in my mind, in terms of fixing the drawdown of treasuries against equities, meaning if we're not out of the equity drawdown, then treasuries still have a chance to look like the better place to have been throughout this whole period Kind of the flight to safety type of dynamic.

Speaker 3:

Well, i think we're still in a bear, much the way 1930 was still in a bear, i don't think we're in 1932. And so, if you, i've got two plots that I keep track of. One is the inflation adjusted S&P back to the turn of the century, and there's at least four events that are like this. That is, if you own the market in 1906, and you look at just the capital gains, inflation adjusted, and you ask, not when did it recover from that 1906 top, but when did it last I'd say 1906 top, which to me means you treaded water When did you finally stop treading water? And the answer is 1981, 75 years. Same from 1929, 75 years, but it hits the same. It comes back and touches the 29 high again in 1981.

Speaker 3:

And so people don't understand this. Take Ron Grice's chart that shows the S&P and not adjusted for traditional inflation but adjusted for money supply, m2. Is M2 the right M? I don't know, but it's not a bad one. The market has flattered the pancake for a hundred years. It's all money supply. So we're basically reaping inflationary gains, which means they're not gains, which means you better be making some money off that, off that financial concern that's supposed to be kicking revenue like a gas station, and so I just think it's gonna be very ugly, and I think it's gonna happen right when the boomers think they have enough money.

Speaker 2:

They don't. The problem is you see that stuff and it's logical, and people say, well, you're just a perma bearer, you've always been.

Speaker 3:

Like I said, maybe consumption's a little crazy, my point I was a raging bull until mid-98, which felt you was a market top. I mean, i was stupid boy And I was no one's gonna believe this. I was 150% exposed to the market. People know me. go, no, dave, never leopard, i go, yes, i did. That's how stupid I was. And then in mid-98, i said something's wrong. I had to read enough books and read enough articles. I emptied half my equities And right as we started the trek down to the Asian crisis. when it got down there, i said if it comes back, i'm getting rid of the rest because something's wrong here. They came back and by mid-99, i was out of equities And the only exposure I took after that was energy. starting around 2001, i took a big energy position and did well. So my best decade compared to the pros was the knots from 2000 to 2009,. while they were getting their ass kicked by two bear markets, i completed 13%. And that you do that for one decade, you'll be okay.

Speaker 2:

Yeah, and that was, i would argue, a more even market than what we've had the last decade. Right, I mean, the reality is it's been a story of just fangs concentration, risk, large cap tech. Most of the world has not participated, so it's been a very and that spread. The difference is getting even wider. Yeah, i put it out there.

Speaker 3:

It's getting insane. It's like great original rhythm within the original right.

Speaker 3:

There's also credit spreads that are getting insane now. So the clock is ticking Whether it plays out according to my plan. I don't think you ripped the heart out of investors with one fell swoop of a machete. I think it gets carved out one little slice at a time. If you wanna look at, if you wanna know how overvalued we are, or you get some new metric that says here's a new metric for evaluation.

Speaker 3:

I'll tell you the year 1994 is when the markets, in my opinion, left orbit. 1994 is the year I attributed it to bailing up the bond market and then somehow the Fed just never looked back. Michael Green, who's smarter than me and who's model about flows makes total sense and nauseates me at the same time. So I have to give full credit for getting it right. I do believe it's some, and I think Michael's getting nervous there. I think Michael's getting nervous that the flows are going to stop. But he said that's when the indexing really got going And so that's when the dumb money appeared in, starting in 1994. But if you look at any metric, he say how are we doing today relative to the historic mean? Just look at the price of the market, look at the valuation of the market in 1994 and look at whatever metric you're using now and say that's how much we're overvalued.

Speaker 2:

All right, so what are you doing? So you have this thesis and obviously, if we're a long bear market, well, plenty of rip your face off rallies before lower lows. rip your face off rallies, lower lows, but go back to path matter of more than the prediction. So for you yourself, under that framework, one, do you believe that means you have to trade more often Because it means that you're not going to have a second mark? I can't do it though. Can't do it sorry, but there'll be the Michael. if you're going to be buying old, you still have to kind of rebalance it in an environment where there's going to be some big swings.

Speaker 3:

Well, so I find now I'm getting you know 5% in cash equivalent, and I personally don't believe that's tracking inflation, not my inflation, and a lot of people don't realize everyone has their own inflation. So if I'm somehow exposed to a rent, my inflation is different than if I'm not, and so my inflation is largely just expenses of fixing things in the house and buying food and stuff like that and paying for utilities and whatever. My inflation seems higher than 5%. Is it 13 or 14? Probably not, but if I found out it was, that wouldn't shock me. So 5% right now at least gives me a little breathing room to be patient. When it returned nothing, it was a problem. But the inflation was said to be low, so I still had a little breathing room, so I wasn't missing fixed income opportunity either.

Speaker 3:

I these guys just say go long, long. That's trading. The question I like to hear. I'll ask you, michael, if I told you look, you gotta buy. Let's say you're 30 years old and you gotta buy at 30 year treasury. And here's the rule You gotta buy it, you gotta hold it. It can't hedge it. You're buying it for a revenue stream. You don't know the future, you don't know inflation, you don't know anything, but you can't sell it. This is Lock box annuity for you. What interest rate would you demand for a treasury? You're gonna get your money back, you're gonna get the interest, everything safe, but you don't know the future. What would you demand?

Speaker 2:

Yeah, it's gotta be something that's uncertain in terms of what the yield should be relative to inflation.

Speaker 1:

I mean, this is right, you know no it's no way to know right.

Speaker 2:

So it's more of a disinflation It's I would probably still do it paired against other things like a risk parity type growth. Right. But your fundamental questions right. It's like no knows if we're gonna go with the route of hyperinflation.

Speaker 3:

So this is being auctioned off and there's a guy at the front of the room, an auctioneer, saying do I hear this? Do I hear this? What interest rate would you say?

Speaker 2:

sold. I'll take it. It's a good question. I mean I Putting you on the spot. Yeah, i'm honestly probably it.

Speaker 3:

You know somewhere between 10%, right, i might go higher, but eight and 10% with I wouldn't go lower than eight And you know you could end up being a complete idiot, buying a 10 for all we know. So you have to factor in the unknown, the risk, all the ways that you can get humped by that deal, and There's even risk of default right 30 years, a long time, and so so you factor it all in and you know, get 4% And that means there, for the Treasury market is not priced correctly Because it's now a trading vehicle and it's supported by statutory rules that say you to buy them if you're an insurance company, if you're a regional bank. So that that's the problem we face the assets are not being priced correct at all.

Speaker 2:

Yeah, if you were to mark the market most things last year, you would have probably seen as worse than oh wait, i've been at many times before. The magic of not being marked to market is that you continue to lie longer Right in terms of leverage against assets, i am okay. So, aside from the 5% that you know a real after place just basis you're losing money on as you look to, what else are you doing? Gold you do, and you know other mixture asset class something.

Speaker 3:

It's more unique chemistry I've owned a ton of gold since 99 so I went aggressively long, got a hunch by a bunch attitude and I went pre-long gold and I was buying it steadily, up to around 500 bucks an ounce and Love the trip to 1900. Didn't like the trip back down again, bought some more at 1200 and Probably we give it to you an annual salaries I have a like six or seven annual salaries and gold. I like units of annual salary because that's the unit you ought to be using when you decide to retire. How many annual salaries do you have then? you should probably assume you're gonna spend one per year And if we're not gonna make any money then you better have 25 when you retire. I have, and of course I've silver and platinum a tiny amount, fortunately, because it's done nothing. I bought platinum miners, not a lot. I don't like going in bold, i don't want to be Stan Drucken, miller 2.0 and you know losing a billion. But the platinum miners are Pheas of five, net cash in the balance sheet, dividend yields of eight, and I'm gonna meet up with the largest holder, private holder of SBSW the summer, and He's very helpful because when you're the largest private owner you pay attention to the details and And I buy.

Speaker 3:

In 2020 I may have bought the bottom, at least a short term bottom again, my model is it could, there could be a new bottom in our future, even for cheap stuff. But I bought the bottom in energy, not big enough, but pretty big in 2020, and that was triggered by two events X sign getting booted from the Dow. I sent back and said, holy shit, you just replaced X on with with Salesforcecom. There There's a smart move, there's a genius move by the Dow guys. And then Jesse Felder pointed out. So I was in energy from 2001 to 2013 or 15. I think I can't remember. So I caught some of the downside Cornell actually put to be out of the funds, which saved me some money. And then I got back in 2020 and Jesse said that energy was 16% of the S&P in 2016 and now at 2020 it dropped to 2%. I said that's another top call, that's another bottom call, that's a box.

Speaker 3:

I want to own energy because I want to own the thing that fuels the entire system. Period. I bought a bunch of Rio Tinto. So I don't know how to analyze stocks I'm not good at this, i'm not an account. I don't know how to read a balance sheet. But I looked at Rio Tinto and I see no dad. Their mining operations are so distributed that it would take an asteroid to take them out, and at some level it's potentially even a play on the ESG crap, which I really detest. Good dividend, so it has all the metrics of an ongoing concern that turns the money crank slowly but surely year after year. So that's it.

Speaker 2:

A few other silly things, but my equity exposure is so pretty low And you have fun with all of your investing and trading, regardless of equity exposure being low. A lot of people find you, I wouldn't say, controversial, but there are things which we know, you say and I say too that are controversial. but you always struck me as a very reasonable, logical person in the way that you frame the world Right. So I appreciate that from a personal point of view.

Speaker 3:

Well, when you scrubbed your account down and then put me back on, i took that as quite an honor, because you said, look, i'm not going after losers this time And you didn't quite say it that way.

Speaker 2:

Yeah, well, that's a side. I mean, I'm doing that because trust me social media is not healthy folks.

Speaker 3:

That's right. And anyone who, anyone who has a big follower, knows exactly what just happened. I got Max Kaiser, who's wired very different than me. He did a complete scrub to zero And I said okay, well, i got knocked out of that one apparently. And then I reappear and I go holy shit. So I asked him, i said what just happened? He said I just had to scrub the barnacles off. Yeah, totally, but it is, they're human beings and they want to talk. totally get that. but you reach a point where it just swallows.

Speaker 2:

Yeah, it becomes a full-time job. I have an actual full-time job that's like you do, which we both have to get back to you, so that's a good way to wrap this random live market conversation. I'm trying to do this every now and then with a surprise and delayed dynamic when it comes to social media, so if you haven't watched this, make sure you follow David and you might see another surprise market chat later today. Negative I haveboarddecomÍ.

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Michael A. Gayed, CFA

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