Lead-Lag Live

David Nelson on Credit Markets, Global De-Dollarization, and AI's Market Impact

• Michael A. Gayed, CFA

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Can market rhythms mirror musical progressions? Join us as we sit down with David Nelson of Belpointe Asset Management, who shares his one-of-a-kind journey from recording artist to finance professional. David brings a unique lens to understanding the current market environment and its parallels with past financial crises. We'll explore the essential role of credit markets, the real impact of leverage unwinds, and dispel the myth that stock declines are always tied to recessions. Plus, gain insight into the potential for an upcoming recession and the market's reaction to Federal Reserve interest rate changes.

Ever wondered about the future of the U.S. dollar on the global stage? This episode tackles the pressing issue of global de-dollarization and how MAG-7 giants like Apple and Microsoft manage to self-fund their operations. We discuss the U.S.'s mounting debts and deficits, the growing influence of BRICS nations, and the potential geopolitical triggers that could accelerate a shift away from the dollar. Additionally, we dive into emerging economic trends, including the transformative power of artificial intelligence and its impact across various sectors. Don't miss our exploration of the challenges and opportunities that lie ahead in today's volatile market landscape.

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:

My name is Michael Guyette, publisher of the Lead Lagrime. We're joining me for the rough 40-minute time period here with Mr David Nelson of Bellpoint. David, introduce yourself to the audience. Who are you? What's your background? What have you done throughout your career? Where are you from?

Speaker 2:

Yeah, sure, I'm David Nelson. Obviously this is a second career for me. I got into this business in the early 90s. I'm David Nelson. Obviously this is a second career for me. I got into this business in the early 90s. I was a recording artist for much of my adult life, Made the transition of finance, you know, I ran money for Lehman Brothers and several other firms but broke out onto my own, you know, maybe right after the dot-com bust, and I've been at Bellpoint Asset Management since, I guess, 2011. I've known Michael for really a long time. Did some anchor work at Newsmax for a while. Michael was a guest of mine and we always appeared a lot together on CNBC and a lot of the various shows. So, Michael, it's great to be on the show today. Thanks for having me.

Speaker 1:

So I always love the musical background that you have and I always think of markets in terms of having a progression. Right, just as the songs have certain chord combinations that you can always hear and listen to. In songs certain popular ones Markets have a certain rhythm. You can argue too let's talk about that, because there's always a temptation to say this time is different, but if markets follow some kind of rhythm, then it's still going to be similar to other prior songs. Any parallels that you can point to that today's environment remind you of in the past?

Speaker 2:

Yeah, and we talked about this last week and I actually put an article out on it. It's kind of the ghost of the financial crisis in some ways. Not that the same conditions necessarily exist or certainly the banks are far more well-capitalized and I'm not predicting anything like that, but I was running long short money back then in 2008, and there are some parallels here Both times the carry on trade was starting to unwind. You can see that in the carry index. But what I remember about trading back then was, even though in the early part of the year some of the earnings of some of the companies I own were good, they'd gap up higher and then go down significantly lower, and back then there was a huge leverage on wind. I didn't really understand it at the time, but I kind of learned it after the fact.

Speaker 2:

And one of the things I found was, for instance, goldman had their global alpha fund and by today's standards it was actually pretty small. I think it was somewhere around $5 billion. But they were levered up probably three, four, five to one in that fund and the decision had been made by them and many others to just kind of take that leverage down. They weren't sure what was going on in the market. But okay, we still like all these securities, the longs and the shorts, but we got to get smaller, that you've got to sell the good with the bad, and I have a feeling that's what we're seeing. Certainly in the last week, on that Monday they were selling the good with the bad. A lot of good companies went down pretty hard that day. The good news is that that was bought by and large, but that's kind of what I see taking place today. So kind of this leverage unwind and bad things always seem to happen in credit markets first.

Speaker 1:

Okay, actually, I'm glad you said it that way, because I think that's really important for the audience. I feel like most people don't understand the credit market at all. They think of just the world in terms of the lens of stocks. Let's explain the importance of credit markets, what they tell you and don't tell you, and what tends to lead historically.

Speaker 2:

Well, certainly, many people think of their portfolio, even portfolio managers. Most people are not levered. Most people are running books that are just whatever capital they have in the fund. Sometimes they use modest leverage. But when you get into global macro markets and you get into especially things like the yen carry trade, you're talking about massive leverage. Even companies like Citadel with these fantastic systems, very often they're running a lot of leverage. So they may be a $50 billion book, but think of that levered many, many times. And if they decide to just reduce that leverage not like they think there's a calamity they're not selling their Apple because they think there's something wrong with the company. They're selling it because it's levered up four or five times and they just want to bring that exposure down. That creates an enormous pressure on markets worldwide. That exposure down that creates an enormous pressure on markets worldwide and we saw that in 2008. We've seen it at other times in the market and I think we're seeing it to a certain degree right now.

Speaker 1:

It's interesting that there's this impression that you need to have a recession for stocks to go down heavy, and you and I both know that's not true. I mean, plenty of major dislocations happen in expanding economies, but this does look like it could coincide with a weakening economy, maybe even a recession. Just as everybody gave up on that narrative, I'm curious to hear your thoughts on where we are economically, with the caveat that from a trading asset allocation perspective, I'm not sure how much of that really helps right Sort of if it's a recession or expansion.

Speaker 2:

But where are we from your vantage point? Yeah, we're likely coming up on a recession for a couple of reasons, and I'm not even sure that really matters to the market. You know the market might look right through that. There are some really good backdrops. We have some very good particular things going on right now, but everybody's all bulled up because the Fed is about to cut rates and if they don't, it'll be a, in large part because they probably were late and they hung on too long. So if in fact we do cut in September or sooner, some type of recession, however mild or heavy, will follow that.

Speaker 2:

Also some research out of JP Morgan last week and I put a chart to it and I found it really kind of interesting. I hadn't considered it and it was just looking at the unemployment rate, say, over the last 20 years, and every time unemployment hits a cyclical low, whatever that bottom is whether that is 5%, 4%, 3% sometime shortly after, the recession follows. And it doesn't take much. All it takes is the unemployment rate going up two, three-tenths of a percent. But the cyclical low was the important thing to look at. I found that kind of interesting. So a lot of things, a lot of parallels there. I'm not seeing it in earnings Earnings. For the most part, the EPS trends are robust. But, michael, you write about this all the time you wrote the book on this. Bull markets are not usually led by utilities and coming into this week it was only number two by a small amount.

Speaker 1:

Yeah, I've been trying to highlight that point. It's like when me that you said the point that the Fed is already too restrictive. I wonder if the Fed's been maybe deceived a little bit by the S&P 500, by the AI mania trade, because if the S&P 500 traded like the Russell 2000 instead, it would be very clear they were too restrictive because stocks would be nowhere back to the 2021 highs. I mean, most small cap stocks are below that level. How much of this is just because of a concentration momentum distortion, where the wealth effect from the S&P 500 because of the AI trade has made the Fed think things are okay when in reality maybe they're really not?

Speaker 2:

I think that's a great point. I hadn't really thought of it in those terms. Let's put it into some earnings perspective. If you look at those maybe not the seven but if you look at the five best performing stocks in the S&P coming out of the first quarter, the estimates for those companies went up an average of 38% for the year. The other 495, the estimates were lowered by about 5%. So when you look at the market as a whole, outside of this secular growth driver of artificial intelligence and, by the way, it better work because we're banking so much on it better work because we're banking so much on it Outside of that, a lot of companies are struggling and maybe the Fed should really look a little bit more about what's taking place on the smaller market caps. That's probably a better tell on where the economy really is.

Speaker 1:

Yeah, I guess the response by the people that disagree with that would be most people are not in the roster of 1,000. They're indexed to the S&P 500, so who cares? But again, if the S&P 500 is being distorted because of this AI dynamic, then there's no real signal there. There's a question from somebody on YouTube, Chip Shiner. I'll show here. What do you think is the best way or best proxy for credit spreads for those of us that do not have a Bloomberg terminal? I've referenced before just looking at high-yield junk debt relative to AGG, AAA. But are there certain credit stress indicators you yourself like to track?

Speaker 2:

No, those are the ones that I use. I do look at high-yield spreads have been widening, but it's not alarming yet. It's nothing really dramatic. I kind of look at some of the anecdotal evidence. It's a little bit more telling for me. We're almost done with the earnings season. Right now. We've got Home Depot and a few others.

Speaker 2:

Some retailers report, but by and large, I'm on a lot of conference calls during the course of an earning season and one of the things that stuck out is, if you listen to some companies that just deal in food in the services industries, like restaurants, foot traffic has fallen off a cliff and you saw that there was a company out there I hadn't even followed. This company called Lamb Weston. This is a potato company and you look at a chart of that. That went down unbelievably a dramatic cut, and they sell French fries to leading restaurants like McDonald's and others and their business fell off a cliff because the restaurant's traffic is falling off a cliff. So at the lower end, these people are really struggling.

Speaker 2:

We can worry about inflation and we can be excited, rather, that inflation has come down from those historic highs back in September, I guess, of 2022. And inflation has come down a lot, but all that means is the rate of change is slowing, inflation is still, prices are just going up at a slower rate. They're still very, very elevated from where they were a few years ago and for a lot of people, certainly a lot of Americans, that's a real struggle and that eventually has to translate down into some of the retail numbers.

Speaker 1:

So I think that's interesting and that's something that only those that are actually actively listening to earnings calls can get insight on. Are there other examples of situations like that that most are not paying attention to but are like good anecdotal evidence that things are slowing down, maybe precipitously?

Speaker 2:

Even in AI we're seeing it there's kind of a disconnect in AI. There's a disconnect in between the rollout of AI, the infrastructure buildup. Out of this. We're spending obviously lots of money we saw it with companies like Alphabet the $13 billion but a lot of these companies aren't yet able to capitalize and get the revenue generation. An exception to that might be a meta. They seem to be able to apply that to their advertising models quite quickly. We also saw it in a company that I'm actually looking to get long again.

Speaker 2:

I've been out of this for a while. It's a company called Vertiv that has come down quite a bit and maybe it's priced in, but on their conference call it was almost a second derivative is what we were seeing? Just a hint of a slowdown, and it was the rate of change had happened. It was just they were growing a hint of a slowdown and the rate of change had happened. It was just they were growing, but growing at a little bit slower pace. So it was kind of an indication that we kind of got ahead of ourselves. And then we saw that again with the SMCI, supermicro. So there is anecdotal evidence that things are not quite as good as we'd like them to be.

Speaker 1:

Another question off of YouTube I'll show here, which I think is appropriate what are the timeframe for the non-profitable Russell 2000 companies to really feel the bite of higher interest rates? I know a lot borrowed at low rates in 2021. I'm sure you've seen some of this data around the refinancing wall right, that's coming Part of my own thesis for credit events. But any sense of sort of these how much time some of these companies have left, or are they just going to be zombie companies that just keep on persisting?

Speaker 2:

Some of them will be zombie companies. There's a vast difference between be zombie companies. There's a vast difference between. One of the reasons the MAG-7 does so well is because they can self-fund their working capital. They don't need access to credit, they don't need banks, they don't even really care where interest rates are. It's not going to affect Apple. They can build out whatever they have to build out. The same for Microsoft, the same for Alphabet and others, but most companies have to have access to credit to fund their working capital, and where those rates are really matter.

Speaker 2:

Now, we all know this is nothing new. We're running debts and deficits that are obviously unsustainable. The current deficit is probably, at this point, larger than the defense budget. Everybody gives lip service to it, but we never seem to do anything about it. I think the bigger issue and we really should talk about it, michael is the de-dollarization around the world that's taking place. We've gotten away with this largely because the dollar is the reserve currency, but half the planet is trying to get off that. Brics, which used to be just Brazil, russia, india, china, and then they added South Africa. Now it's a lot more countries. You can throw in Iran, I think, egypt, saudi Arabia, several others. Even within the G20, there were countries that wanted to join. They're doing a lot of the transactions, including oil and non-dollar currency. That's going to come back and come back to haunt us at some point in time and they're pulling away. That means there's going to be less appetite for US treasuries.

Speaker 1:

So I think actually that's good to kind of peel back, because a lot of people talk about that and that's a really slow process, though, right, I mean, the de-dollarization has been ongoing for years, but it's really really kind of gradual. Is there anything that you think could kind of accelerate that to be a legit like immediate concern?

Speaker 2:

Certainly war in the Middle East, that would do it. That's a powder keg. Who knows what's going to happen there? We never know how close Iran is to a nuclear weapon. Once they have one, they might certainly threaten to use it. That could accelerate it, certainly politically. Who ends up in the White House? Who our friends are, how much we're spending funding wars all of those things kind of weigh in and of course the budget here in the United States If we keep pushing that deficit higher and higher and higher.

Speaker 2:

And that's really been the challenge for portfolio managers. You know, everybody wanted to be long the longer end of the curve. Knowing that the Fed was going to cut, everybody wanted to be there, all right. Longer end of the curve knowing that the Fed was going to cut, everybody wanted to be there, all right. But there is a pervasive fear within the community, within the fixed income community, that the action of the 10-year and the long end of the curve is going to be a little different this time because the United States, as the risk-free asset, the treasury is maybe a little less risk-free. A little bit of concern there.

Speaker 1:

To your elections. Do you have a? Is there a sense that Trump or Harris one of them might be better or worse when it comes to the de-dollarization process, or is it the same result because they're both going to keep on spending?

Speaker 2:

Well, you know, at this point it's probably close to the same, I think, the difference being is that I think Donald Trump wants to go after the administrative state, If he's successful in that, and that would be very, very difficult, because if you think about Washington, the president of the United States appoints maybe 4,000 people out of a workforce of a couple of million. All right, the administrative state, the bureaucrats that work there, they're going to be there long after the president is gone. They'll be there for the next several administrations. So they're the ones who really, you know, make the rules around all this. If you could somehow shrink that, that would go a long way towards, you know, fixing the budget deficit, and that might be it. So I'd have to give it at least a nod to the Republicans on that side. But both sides want to spend. Certainly, trump wants to reduce taxes. He'll replace those taxes with tariffs on the other side, but, net-net, we're still going to spend a lot of money.

Speaker 1:

So you mentioned utilities and you're on a lot of these earnings calls Any interesting trends emerging from other sectors from an earnings perspective, or is it more just sentiment driven when it comes to what's leading, what's lagging?

Speaker 2:

You know it's tough to get our hands around the secular backdrop of artificial intelligence. We know it, we know it's, I use it and it works. And from what I've seen, this use it and it works. You know, and from what I've seen, this is going to be a pretty big platform. I'm actually seeing it within the music industry. I've been in touch with some world-class musicians from my former career who are now creating music through artificial intelligence. If you get a chance, somebody should check out an artist called Sophia and that's S-I-P-H-I-A. All right, this is completely, completely manufactured by artificial intelligence. Musicians were involved in this, but they did this all through prompting of a computer. So that tells me, from an artistic standpoint it can work.

Speaker 2:

Another anecdote would be somebody like a producer like Tyler Perry. Tyler Perry, I believe I read the article correctly, was about to launch a billion dollar studio complex in Los Angeles. I believe he has one on the East Coast was the Solera platform, which is a video form of AI, and I believe pulled back or even canceled that project, the billion dollar project, thinking that perhaps AI is the future for him, at least for some of his projects. So it's a pretty big platform and it's obviously going to drive a lot of revenue, but it's probably very deflationary in some ways as we get down the road. So a lot of companies may not make the kind of revenue they thought they were going to make on that, but that's probably the biggest takeaway I've taken from artificial intelligence in the last couple of months.

Speaker 1:

Right, which is funny, because I would argue that, even further to the point that a lot of companies will actually go bankrupt, probably Rather than suddenly be able to survive because AI now allows them to.

Speaker 2:

Yeah, I think a lot of companies would go bankrupt. It's very difficult to compete in the space. Apparently it's you know, many, many billions of dollars and the pervasive feeling is that you know the mega cap companies are going to own it all. I suspect there'll be some startups within the AI community that have just unique products. We saw one company recently. It's a private equity deal, sorry, a VC deal where they're actually digitizing chemistry. Imagine making molecules from just typing into a computer. It's going to go a long way, obviously to things like in health sciences, but I suspect it's going to be the Eli Lillies of the world, maybe even funded by the Alphabets and the Apples and the others. They have the cash. The amount of money that's needed to do this is beyond what even maybe a VC can raise is beyond what even maybe a VC can raise.

Speaker 1:

So when I think of the way you look at markets, David, I think of you much more as a thoughtful stock picker taking some high conviction bets in a portfolio. Has stock picking been easier or harder in this environment, and if we're going to have more volatility, what's the best way to play that? I mean, do you really want to do individual names or do you?

Speaker 2:

want to just go broad-based. I'm more of a broad-based player One because of the type of fund that I run, but of course I could run sector-specific or even theme-specific portfolios, but that's what I'm mandated to do right now. I have noticed that there's been a trend to stock picking working better, and I'll say that with a caveat. I run money. I run stock portfolios from a quantitative standpoint. I build models, we backtest those models and it has nothing to do with price momentum or anything. It's all fundamentally driven, but they're multi-factor models.

Speaker 2:

Looking at the valuation metrics of a company, back in 2004 or 2005, when I first started doing this, it was like shooting fish in the barrel. We were minting money. Everybody was doing it. We were making way more than the S&P 500. After the financial crisis, it got really difficult to beat the S&P 500. After the financial crisis, it got really difficult to beat the S&P, and I really think it was the Federal Reserve that did this. They sucked all the alpha out of the market by bringing rates down to close to zero and keeping them there. It became very, very difficult. Now that they're normalizing or that rates are higher, it's been easier, but it's not like it was back then. It's still a pretty tough job.

Speaker 1:

So actually I want to tease that out more because I think that's a really interesting and important observation that the Fed has been the ultimate reason why passive has worked as well as it has, and it's why hedge funds have all gone destroyed, because, to your point, all the alpha gets sucked out of the room. Is that? I know you said it's because of the Fed, but are there other dynamics that maybe are structural? For example, one of the arguments that I tend to agree with is everybody's 401k now just automatically goes into Vanguard passive funds and it's very hard to end up doing anything there because it's almost like a structural insanity type of bid that's pervasive. Anything outside of the Fed that you can point to that maybe explains why it's been so hard to beat the S&P.

Speaker 2:

I think you just said it. I think a lot of players left. They couldn't compete and passive works well for so long. Eventually people just gave up. Investors got tired of being in a fund. It would outperform one year, underperform the next and they just kind of threw in the towel and went passive and, frankly, the markets did so well during that period of time. By and large it paid off, so you couldn't argue with success. Once it gets more challenging, suddenly some good strategies start to rise from the top. I see out there several funds out there. I see a lot of funds out there long short that are doing quite well, running fairly low volatility. Portfolios and a mix and match of some of these things can do very well for an investor. They just don't know about it because all they see in their 401k, the only thing available to them is the mega cap ETF or the Vanguard S&P 500. Not a lot of nuanced strategies within those what you call menus.

Speaker 1:

So at Bellpoint you're interacting with a lot of other portfolio managers and advisors. Is there any sort of worry that you can say is consistent across people that you're interacting with? Anything that's a common theme or thread that's out there.

Speaker 2:

Well, I can tell you the investors aren't worried. They're pretty complacent right now. I don't think we had an incoming call on Monday. That was a little frightening. It felt a little bit like 87. On Sunday night the world was coming apart in Japan and the open looked like it was an interesting open. I remember I got to the office pretty early and I guess at the lows we were probably looking like we were going to open down 4.5%, maybe 5%. That was around 8 o'clock, 8.30. We didn't open quite that bad. We opened around. We opened down a little less than that and even though we closed a little better during the day, it was clear that some stocks were bought. I mean, I saw Nvidia gap down. Probably was down 13%, 14% at the open. If you bought that open in that stock, you made 10% by the end of the day. The same was true for some other tech stars like KLA. You probably made 8%. Apple you probably made even Apple that Buffett had sold. You probably made about five. So at least for a day, buy the dip worked.

Speaker 1:

I wonder how that breaks. I mean, the buy the dip mentality has been so ingrained in people. Now, is it just a function of you just need time, you need whipsaws, you need a couple of big downs, big ups, then big downs again. I mean, what kind of sequence will break the mentality?

Speaker 2:

It'll take like a couple of versions of that where you go in and buy down 13% and a week later you're losing money. You thought you were smart and you got in. I just sat and watched it. I did not buy in. I run a book.

Speaker 2:

The particular product that I run right now is pretty much mandated to be fully invested. So my defensiveness comes from what I own, not so much that I've raised. Now is pretty much mandated to be fully invested. So my defensiveness comes from what I own, not so much that I've raised a lot of cash. So if I was going to buy something that morning, I would have had to have sold something. So I don't think I did a trade that day and managed to get through the week unscathed. So that alone was a victory.

Speaker 2:

But I think that the mindset will change dramatically, just like it did in 2008. People bought the dip. Probably the most obvious example of that was financials In 2008,. How many people did we watch Michael come on TV and said, pounding the table, some pretty famous guys, some of the best money managers in the world, were coming on and say this is the opportunity of a lifetime. All right down 30 or 40% in some of those names and those guys ended up the year down maybe 70%, because they buried themselves in stocks that they thought were ultimately safe when in fact they weren't.

Speaker 1:

Yeah, I mean that's the thing with this stuff. It's yeah, you want to buy low, but nobody knows how much lower it can go. Right, that's always the.

Speaker 2:

It can go a lot lower.

Speaker 1:

It always goes up a lot more than you think, it goes down a lot more than you think. I think that's sort of the consistency. Let's talk about risk management broadly though. So if we're in an environment where you can step on a landmine at any moment in time, it can just happen overnight, just like this kind of did. I mean, I didn't think it would happen suddenly like that, but then it did, even though I had that reverse carry trade thesis out for some time. Is the answer just what? Just already defensively positioned trade, smaller, have some cash play with put options. How do you manage risk when you're going to wake up and suddenly markets gap down?

Speaker 2:

The way we manage risk here. For most of the last I would say more than a year and it worked really well and it's kind of being taken away from us was the barbell approach of having the short end of the curve on one side and a risk asset on the other side, and it worked great. Unfortunately, it's kind of going away, but what worked great was if you put 50% of your money in the T-bill, you locked it up at, say, 5%. I don't care what the other side of the portfolio looked at. Put it in Bitcoin, all right, put a risk asset in there. If it goes down and you're hit, it'll hurt, but it's not going to be that bad. You got 5% on the other side, so a down 20% year is going to be still a modest retraction for you. But now, if the Fed does start cutting rates, that five is going to go to three and that's probably where I think it'll settle out at best. And that's assuming that the inflation numbers we get tomorrow and Wednesday are relatively benign. That's what we did, but I think what investors are going to have to do? They're going to have to play it a little bit smaller, and this is what becomes the challenge for portfolio managers.

Speaker 2:

When I own a stock, I think in terms of what's its relative position to my benchmark. Most investors don't think that way. They think if they own, say, a 3% position in Apple, that's enough for them. Well, for a portfolio manager it may not be enough because it's probably 6.5% of the S&P 500. 500. Nvidia hurts me more when it goes up than when it goes down Because I own a 4.5% position, but it's well over 6%, probably in the S&P 500. So if it goes up 6%, like I saw it earlier today, that's costing me probably 10 basis points of relative performance.

Speaker 1:

So PMs have to think a lot differently than the individual investor. Yeah, it's funny I've been on this kick lately that the term portfolio manager in reality is just a product developer. They have to think in terms of the fit of a portfolio right In the industry when there's so much saturation, and how do you get attention right? You've got to do something that you know can stand out in a big way when it works, and otherwise you're going to be competing against Vanguard and BlackRock. Talk about, from the industry's perspective, the challenges of being a product developer trying to create something different, because there's a whole bunch of Me Too products out there.

Speaker 2:

There are and there's, you know, for portfolio managers and money management firms, the challenge is twofold. One, there is what your intellect is telling you to do. What 10%? Then you go down 9% or even 10%, all right, you're probably not going to lose your customer base, all right. If the market goes up 20% and you go up 12%, you're going to lose a lot of assets. All right, and it takes a long time to learn that for a lot of firms. And what you lose the most assets not in the bear market, you lose it in the bull market that you don't participate in, and that's the way Wall Street thinks about it is assets under management. What's it going to take to keep the assets under management?

Speaker 2:

Now, some are doing some far-flung strategies that may suck people into something for a little while, like, maybe, an ETF that focuses on one minute area of the market, like I saw that happen with. Like an ETF called Hack. It was just cybersecurity, didn't have much assets in it, and then there was a cyber attack. This was a number of years ago and suddenly there's a cyber attack. This was a number of years ago and suddenly there's a billion dollars in there, but for the average portfolio manager. It's maintaining the assets on a manager, making people money in the long run. But the main thing is we got to keep them with us and when your performance vacillates quite a bit relative to a benchmark, the assets walk out the door.

Speaker 1:

I felt that to my core right. You lose assets in a bull market is so unbelievably true because they will forgive you for being down heavy as long as everything else is down heavy. They will not forgive you for being up less.

Speaker 2:

There's actually almost no reward for when the market if you're down like 5%. There's actually almost no reward for when the market if you're down like 5%. In 2008, I had a hedge fund that was down about 3%, I think the and the market was down I get what? 36 by the end of the year and no money came in. Not a dollar came into the fund the following year. All right, I was only up 7%. I stayed bearish too long and the market was up probably 20-something. Money flew out the door that year because it was a pretty big underperformance even for a hedge fund big underperformance, even for a hedge fund.

Speaker 1:

Is there anything that excites you about the cycle that we're in? I mean, for me, the thing that is really exciting for me is I think we're in a cycle shift, right, it's going back to that point about you lose assets when markets go up. If markets are going to get more volatile, and by markets in this case I'm referring to the S&P 500, you think it becomes a little bit easier to manage a portfolio because it's a lot easier to be benchmarked against the S&P when it's no longer the only game in town. I mean, what should professional money managers be thinking about and be excited for?

Speaker 2:

You know, we were laughing about this just a couple of weeks ago, excited for we were laughing about this just a couple of weeks ago, prior to this hiccup in Japan and this one of the carry trade, really before the peak market peak, I guess what did we peak in June? I'm not quite sure, but whatever that peak was, prior to that, we actually had a call and one of the PMs was talking about maybe this is the time we should be going out and like trying to raise business, you know doing, maybe focusing on some other parts of the business, because we can relax with the portfolio. The portfolio is taking care of itself and, of course, everything went to hell in a handbasket after that. I'm excited about the fact that in some ways, from the business standpoint, hard research and work can be rewarded. You can come up with a set of tools that you can maybe outperform.

Speaker 2:

The benchmark Hasn't existed in a while. I can't tell you how frustrating it was for me doing what I was doing to almost every year to be maybe 100, 150 basis points under the benchmarks, doing everything I thought was right and frankly, it's just been in the last couple of years. It's just gotten a little easier and we're kind of returning to an environment that I kind of remember earlier on in my career. I'm excited about that.

Speaker 1:

Yeah, I agree with that. I'd love to see that happen. I mean, the thing is, every time I feel like it's about to happen, it just goes back to, you know, mac 7 tech, smp and passive, you know, momentum. As far as major opportunities that you see ahead, I always like to think through what's the fat pitch right that could be coming?

Speaker 2:

Anything that you're looking to swing at, I mean something brand new.

Speaker 2:

Sure, yeah, it'll probably come from the aviation space only because I'm a pilot and I'm fascinated with aviation. But where we're going to go it's going to be a lot different than it is now. The technology is already there right now. Probably, at some point in our lifetime, planes will be pilotless. Even planes that I fly can almost land themselves. Most airliners today can land with what they call auto land. They have no need for the pilot. Today, a pilot is a systems engineer. All right, he's there for when things break down and then he takes over. But the alternative fuel fuels that will come along with this and plus the you know we're going to go back to supersonic. That excites me and that's something I'll invest in, mainly because it's a passion.

Speaker 1:

I'm not going to lie, that sounds terrifying. It's like I'm already not a big fan of flying, even though I do it all the time. Just the idea that it's although, it's like one of those things where, like, the less I know the better.

Speaker 2:

In that case, I hope AI does not mess up we're going to fly and I does not mess up, we're going to fly. I'm going to take you up on a thunderstorm. You're going to love it.

Speaker 1:

Yeah, I remember that story you told me of what was it like? The engine or propeller stopped working while you were flying.

Speaker 2:

Yeah, that was a long. It was about 10 years ago but I was with my son, who was about 17 at the time, and we didn't know quite what had happened. But all in what had happened is the prop had come off the airplane and we were blind from oil being on the windshield and, knock on wood, I don't know how we made it back. I was guided by an air traffic controller who was telling me where to go, and somehow we got the plane on the ground and managed to tell about it. It's probably the best thing I've ever done in my life. I'll never be able to do that, anything that good again, and I don't want to do anything quite like that again.

Speaker 1:

The only real soft landing out there is what David wrote in that time period.

Speaker 2:

Trust me, it wasn't that soft a landing. It was a little rocky but it was a landing.

Speaker 1:

David, for those who want to track more of your thoughts, more of your work, where would you point them to and talk about the Substack for a bit?

Speaker 2:

Yeah, the Substack DCNelson123 at Substackcom. My YouTube podcast site, is the Money Runner and Michael's been a guest of mine on that show, but the Substack side will get you all of that. That'll work great.

Speaker 1:

I've already given David a follow on Substack on X as well. I always enjoy talking to him One of the real greats in the business and a good guy, and can fly a plane in case anything goes haywire, so make sure he's a passenger with it. I will have this as an edited podcast soon enough. I'm also doing two other of these interviews later in the day, so stay tuned. David, always appreciate you and thank everybody for watching.

Speaker 2:

Thank you.

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Michael A. Gayed, CFA

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