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March 25, 2020 - The Delingpod - James Delingpole
01:11:45
Delingpod 62: Will Nutting
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Welcome to the Deli with me, James Deli-Mole.
And I'm so excited about this week's special guest.
But before I tell you who he is and why I'm so excited about it, I just wanted a brief word about these dark times we're living through.
I'm going to try and ease your burden by producing as many brilliant podcasts as I possibly can.
It's going to be a bit difficult given that I'm isolated in my rural fastness and it means that obviously I can't do face-to-face podcasts, which is a shame because I love doing the face-to-face ones.
I'm going to try and work out how best to do it on the phone.
Maybe I'll do it like I do with my podcast, my London Calling podcast with Toby.
See how that works.
Anyway, I'm going to give you lots and lots of really good stuff.
I just wanted to ask you, in return, is there any chance that you could give me some support?
Either by donating to my Patreon page, I think you'll find the details on the website, which is delingpolworld.com, by the way.
Or perhaps by buying a special friend badge or perhaps by doing both.
And by the way, I do occasionally get messages from you saying, where is my special friend badge?
And rest assured, every time I get one of those messages, I get a stab of guilt and horror because I have to admit, I am me, and I can't help being me, and fulfilling orders is not my greatest strength, and I think there may be glitches in our system.
But generally, I do try and get them to you on time, or rather, Oliver and Dick do.
They're in charge of fulfilment.
And...
If you haven't had your badge, don't think I'm deliberately withholding it and denying you the chance to own your pure gold, Anglo-Saxon-style enamel work, incredibly rare and desirable and covetable badge.
It's not that.
It's just there's a glitch in the system and I promise you, you will get your badge in the end.
So anyway, please support me via Patreon.
Please buy special friend badges, which are going to be collectible one day.
In fact, they already are collectible.
And enjoy this podcast, which is with an old friend of mine called Will Nutting.
And he works for an investment company called Stiefel.
And he writes the most brilliant newsletter on the market.
He's got just the most amazing tips.
And I'm so excited to be talking to him in these extraordinary times.
Because I think, given that we've all probably lost quite a lot of money, whether it's our pensions or our ISAs or whatever, it would be nice to think that we might yet be able to remedy this disaster and come out of this situation smiling.
So Will Nutting is going to help you do that because he's the perfect man for the moment.
You work for Stiefel?
I work for Stiefel, that's right.
Stiefel.
Which is an American...
American investment bank, and we have a big operation in London, and I write a daily, a rag, a blog, an email, whatever you want to call it, and what I try to do...
It's called Nut Stuff, and what I try to do is connect the micro and the macro.
It's very much geared towards and has to be geared towards institutional investors.
But it's a commonsensical approach to equity investments in this kind of environment, and it's very much based around a long portfolio and a short portfolio, which I think is essential to have both.
Of course.
I love your newsletter.
Can ordinary mortals...
Get it?
Or is it only for institutional investors?
It's really only for institutional investors.
Because you're not allowed to give retail advice to retail investors.
I'm not allowed to give the equivalent advice to retail investors.
But you'll be able to give some general pointers to our special friends listening to this on how to make sense of the markets.
Of course.
I'm happy to discuss anything as a...
As a genuine experienced observer of markets, I worked at Lehman in 2008.
That worked out well.
I first-hand saw the experience.
I was getting divorced, actually, at the same time as working for Lehman in 2008.
So I know what it's like to have double trouble.
Were you personally responsible for the destruction of Lehman?
I was not, but my ex-wife's divorce lawyer at the time, I think, did hold my expense account personally responsible for part of the demise.
So you've at least got a degree of perspective on the mayhem that's going on right now.
I mean, obviously you've probably never seen a crash of this big because there hasn't been one in our lifetime.
Correct.
Can you put it in context?
I mean, the context of previous crashes.
How much bigger is this one?
Well, I think I was right in saying that I think when I look strictly at the S&P 500, I think if you look today as to where we fell from in 2008-2009, it's quite interesting that today we could fall another 57% in the S&P to a level from which the market then fell 57%.
Oh, so we've got a way to go down yet.
So if you paint a doomsday scenario and tell me that there is no bid in the market and it's just people desperate for liquidity and wanting to get out, then arguably the market could fall back to those lows. then arguably the market could fall back to those lows.
And I think the analogy I would use is, it's an analogy used by someone who actually works for Steve Hall, who's a very smart sage commentator, is that it's a bit like being a pilot in an aeroplane when you go into fog or you go out of control.
And you ultimately know that you can't fall further than the earth.
So you look at your altimeter and you have to trust your instruments, but ultimately you know how far you are from the ground.
So the clear thing is you know there's a flaw, you obviously don't want to hit it, and you have to trust your instruments.
And I think at the moment...
Where I guess some of us have an advantage as looking at the markets the way we do is that we have an understanding of what the instruments are and some of the technicals and we can, I guess, look at stocks, asset classes and get a sense as to where they might trough or where that floor might be.
Are we in a situation at the moment where people are selling good, healthy stocks to basically get liquidity, cover their positions and so on?
I think that's always the case.
I'm a fairly simple soul, so I always use fairly commonsensical arguments to why and where and what do you sell first.
And the things that you sell first are the things that you can sell first.
The things that you sell first are the things that have got good profits in them.
And clearly, if you look at where markets have come from in the last, even the last three or four years, there are plenty of stocks out there with multiple profits in them, not least of all the FAANG stocks, you know, a lot of technology companies.
So I think that's arguably, you sell your winners almost before you sell your losers.
Right.
Yeah, that's interesting.
So we're talking about things like Apple, Google.
I mean, Amazon's actually performed very well.
And I imagine Netflix has as well, hasn't it?
Netflix has performed very well.
But I mean, I think you've got, you know, we can talk about, we'll talk about it in a second.
But I think, you know, there's, and it's an unfashionable thing.
And it's a thing I feel somewhat reticent to talk about.
Profiting from doom or profiting from the environment we're in.
But I think when you look at environments like this, it's very clear that there are, to me, very obvious winners and very obvious losers.
And then it's really just a case of having some simple valuation parameters or some technical parameters around those winners and those losers.
And that gives you, I think, a natural hedge in your portfolios on the long side and the short side.
What I'm not willing to do at the moment is make a call on the general market because, frankly, I don't know whether the market, as I said, is going to go up or whether it's going to go down.
And I think it will have days when it squeezes hard.
It'll have days when it makes new lows.
And I don't need to actually make that call or make that bet to make money in this market.
Yes.
Can I just hazard a guess here?
Because I have a tiny little investment Fund is a laughable word.
But with my eldest boy, we play the markets a little bit.
And we're looking at the markets thinking, well, when is bottom?
When is the time to buy, say, I don't know, cruise liners?
You may have a different view on that, but...
When do you buy things that have really plummeted and actually offer good long-term value?
And I'm thinking, we haven't reached the point yet where our hospitals are...
I mean, they're really bad now.
But I reckon in two weeks' time, when we start reaching the peak of people dying in droves and we get non-stop wall-to-wall horror stories of doctors being overwhelmed, nurses collapsing of exhaustion and stuff, the markets are going to...
They're going to tumble because of the kind of general air of panic.
And maybe when there's blood on the floor, that's the time to buy?
I mean, listen, it's a crystal ball.
I think you have to apply some fairly simple psychology to this, which is that when people have been at home for two weeks globally, you know, we've all received the WhatsApp group of, you know, what our grandparents had to do to save the world.
And we're all being told we have to go home for three months and sit on the sofa and watch Netflix.
And that's how we're going to save the world.
But the reality is once we've been at home for three weeks or four weeks, you're going to see where the economic data is.
You'll see what companies begin to say or what they'll be allowed to say about how things are.
And I think you will have another leg potentially probably down because there will be an absence of good news and there will be some very material bad news.
Yes.
And I don't think it's difficult to say anything much more than that.
But everything has a price and there will be a flaw.
And there will be, and I guess the flip side of this is there are going to be companies out there That right now are going to potentially earn what they were going to earn in 2021 this year.
There are companies out there that will potentially have upside profit warnings.
There are companies out there right now that are hugely benefiting from the environment that we're in.
Like the manufacturers of chest freezers, for example.
Chest freezers, video games companies.
Verizon talked last week.
Verizon Wireless talked last week about their data usage.
Netflix, potentially biotech company Gilead, who may well have a drug that will be very efficacious in the environment we're in.
With all the government stimulus and the fiscal and monetary stimulus we're having, it's very clearly going to be inflationary.
And given that environment, that's a perfect environment for gold.
It's a perfect environment arguably for gold equities whose biggest input cost price is in fact Oil.
And, you know, we can talk about the oil price, but obviously with the oil price down and inflation coming, those stocks which haven't been good performers on the kind of second derivative move in the market, those I think are the things that, to my mind, should and could react and respond very well.
Because gold, I mean, it has been quite disappointing over the last decade.
I mean, obviously, it's recently come up.
But we gold bugs, I mean, I have been a gold bug for quite some time.
And I've got 20% of my portfolio in gold because that's the kind of stupid guy I am.
But I think we're going to be vindicated, aren't we, soon?
I can't remember who gave me the analogy.
It's not an original one.
But I think gold is the goalkeeper in your football team.
You're never going to play soccer without a goalie.
But he's probably, he or she, is never going to be your best paid player.
So I think the reality is, more than ever now, when you're under attack, you want to make sure that you've got a good goalie.
And I think the right goalie is gold in an inflationary environment.
I've always, to be honest, advocated owning gold bullion, not owning the equity, because I think the equities and the ETFs, Are just by nature manipulated financially and when there is a general need for liquidity, those are the types of vehicles that people go to to get liquidity.
So again, I've been a fan of gold.
I remain a fan of gold.
The gold bullion stocks have actually been incredibly good relative performers.
I think the second derivative rally, or the second derivative move, once we get through this liquidity bids wanted on all asset classes, general panic, I do think that gold to me That should be an important part of one's portfolio.
Yes, tell me about this.
There seems to have been a sort of, is decoupling the right word between physical gold and ETFs?
That physical gold is holding its value much better than ETFs, which have gone down like a thousand.
That's right.
I was giving this analogy the other day that someone was talking to me about their wine, about wine merchants.
And there was an incident I think about a year ago with someone who, a bunch of people who bought their wine from somebody who used to buy Burgundy or Empremeur wine for them.
And the person who bought the wine for them used to, effectively they found out was selling the same case of wine about seven times over.
And his expectation was that none of his clients would ever want to have the wine delivered.
But all they wanted to do was receive a statement that they owned it.
And I think there is a slight real world parallel to be drawn to ETFs and gold stocks.
Whereas the great thing is if you own the bullion, then it's the next best thing to having the case of wine in your cellar.
And that is again how I view owning things like those physical assets.
Right.
Where are you on silver?
Silver's been a laggard, but I think silver has good industrial cases and I think silver, you know, the gold oil ratio and the gold to silver ratio and the silver to oil ratio, all those technically and in a hyperinflationary environment all look to me like interesting places to be hunting.
Right, right.
Yeah, talk to me about the oil price.
What does this mean for everything?
Well, I mean, I think the oil price on an absolute basis here, again, has dramatic impact in the long term on political stability in the Middle East.
It's got dramatic input on the viability of shale energy.
Yes, so the shale camp is going to go to the wall at this price.
They can't?
I think a lot of shale companies would have to go to the wall at this price and clearly credit markets and the high yield market where a lot of these things were funded are very much reflecting that already.
And clearly that's where some of the stimulus is being directed and some of the commentary obviously we've seen out of Trump in the States is very much saying that.
It's also, you know, causing some major ructions in offshore drilling, on the equipment side of life.
But ultimately, these things can have an effect on really tightening the market.
And so I look at this environment and I think to myself, Who are the losers and who are the winners?
Again, and so I guess the real winners of this or when you end up with an oil price in what's known as Catango and you end up having the relationship between the front end of the oil curve and the back end of the oil curve, it benefits you to store oil and hopefully wait for a higher price.
And given that environment, I think there are 764 BLCC tanker stocks in the world.
I think 20 of them are Iranian or in Iran, and so it's highly likely you have to really exclude those.
The balance of these ships, and they're not making loads and loads of new ships either, the balance of these ships are basically sitting out there, owned by ship brokers and shipping companies, and the day rates on these are going through the roof.
And these are ships that have a, you know, a financial 20-year life that could ultimately pay for themselves in the next six months in terms of where the rates are.
So to go back to your original comment about cruise lines, the weirdness of the market is that last week, cruise stocks are going up because governments are apparently going to save them and bail them out.
Yet last time I looked, most of them are now becoming floating hospital companies.
And most of them are domiciled in tax havens in order to pay less tax.
And yet tanker stocks went down and most of them are going to pay for themselves in the next six months if their rates stay anywhere near where they are.
And they're trading at one, two times PEs.
But how does one get exposure to tanker stocks?
Well, you can go into the market and buy them.
There are portfolios of tanker stocks.
You can buy the stocks directly.
And, you know, they are, you know, they're all, some of them are, some of them, there's some very interesting stocks to own.
Tell me about the cruise liners for a moment.
Because I made, with my eldest, nearly 10 grand shorting Carnival.
And we sort of want to use that money to maybe buy back into them at the bottom.
Somebody pointed out to me that, look, the cruise business long term has very good prospects.
I mean, this is where oldies go to spend their retirement money if they've got any left after this crash.
And the ships aren't going to die suddenly.
You have reservations about that, do you?
I think it's a bigger issue as to what the societal changes of what we are going through at the moment are going to be.
I mean, forget about the coronavirus.
What I've always been told in the times I've met cruise companies is that if you ever got a virus, you ever got a tummy flu or an unpleasant tummy flu, the ability for it to spread like a petri dish inside the average cruise ship is a truly terrifying thing to experience.
Okay.
And I think people may well, you know, I guess one of my thematics is, you know, more at home and less group.
I think the travel industry may change inexorably.
I mean, the cruise industry is always said to be an industry for the newlywed, the overfed and the nearly dead.
And I look at these businesses, I look at some of the indebtedness that they have, and again, I'm not sure that they are going to be able to be recipients of government bailouts unless their domiciles in some shape or form get changed.
And I would be unsure as to whether in any time, kind of medium, medium period, you are going to be able to get the customers to come back and go cruising.
Fine.
That's very interesting.
But I can't even see the moral case for any kind of government bailout of private companies.
I mean, you know, lots of people are going to go to the wall.
Since when should the government be picking winners when we know it's so rubbish at it anyway?
Well, listen, I think you've seen a lot in the press recently about the airline industry and the degree to which they've used their own cash to buy back their own stocks.
And I think that's obviously going to be an ongoing debate.
I'm just going to anticipate and just going to make a bet that it will be more likely for airlines to be bailed out here.
I mean, you've seen today, I think, that the UK government has made a decision on all the rail franchises, on the private rail franchises, and they said for the next six months, I think effectively all the revenue from the railways will now go to the government, and that will ensure that the trains keep running, that the private enterprise, the private owners basically, you know, can't claim force majeure or anything else.
So I just would, I think there's going to have to be selectivity, and I think airlines are just going to be more naturally beneficiaries of government bailouts than cruise lines.
No, no, I certainly wasn't making my theoretical investment decision based on the possibility of a government bailout.
I mean, that seems a mad way to, well, actually, no, probably it's a very sensible way to invest in a way.
But why should airlines be bailed out?
I think when it comes down to your point about the government picking and choosing, I think you make a very good point.
And I think, as an investor, I just want to try and focus on, I think, the businesses that probably are going to choose, hopefully not to get a bailout or choose to be bailed out by their shareholders rather than the government.
I can only go on what I've been reading, but I would imagine that IAG, the owner of British Airways, has made it very clear they don't want government money.
And I think they don't want government money because they probably know that fear is temporary and greed is permanent.
And air travel will come back as and when we get through this.
And if they do, they will find themselves in a very good competitive position.
And if they find themselves in a competitive position with a big cash buffer, they will be able to outperform, outfly and outcompete their peer group.
What peer groups that have been bailed out?
I mean, yeah.
Because presumably there'll be some contractual obligation with companies that have been bailed out.
So ultimately it could be a short-term gain but long-term bad decision.
I think that's exactly right.
Right.
That's really interesting.
Given that we're thinking kind of blue sky thinking about how the world will change, do you not think that one of the things that may happen as a result of all this is that people will realise that they don't necessarily have to live in London.
They can do their work from home.
That they've been cooped up in their houses in London for three months, say, with simmering tensions.
And they're thinking, my God, I wish I'd lived in the country.
Do you think that's going to...
I think there's some big dramatic changes to happen.
I think the remote working or going to an office, all the investments that have been made in technology, and I go back to the case of my own children who live in California, And from what I can understand on a fairly limited basis, my youngest daughter is attending school in San Francisco every day, virtually.
And it is literally the next best thing to being at school for her.
And yet the commentary that I'm having from people over here is that even the UK private schools that are trying to do it, it's clunky and it sort of works and it doesn't really work and it's a sort of half-cocked effort.
And so I think when you look at companies who've invested in this stuff, there's just going to be more investment in remote working.
I think that there are some very big changes to happen.
I think that the taxation system is going to have to become much simpler.
I think that the prospect of a universal basic income, I agree with our friend Jim Mellon.
I think Jim's written some good stuff about this.
I think that is potentially going to be a big issue.
And I just think in general, the idea of commuting into an office will become a much less needed thing for people to do.
So there's a short then, isn't it?
Office, how would that affect, what companies would that affect, that shift?
Well, I guess it's going to affect restaurant companies.
It's going to affect a lot of the businesses that are co-located around big office buildings that benefit on, you know, it's going to benefit, it'll affect pubs, it will affect restaurants, it will affect fast food restaurants, the general infrastructure around offices and, you know, big office developments.
But maybe in the future, cities will become not workplaces, but kind of live play spaces.
Because there are obviously lots of advantages to people living together near restaurants and stuff, near health clubs and all that.
Some people can't abide the country lifestyle.
They find it boring.
So isn't an argument that actually there will be a shift from commercial to residential in places like London and that that could be a sort of, that wouldn't be so bad for restaurants and stuff?
No, I think that's right.
I think there's some interesting things that come.
I always think about how if you went to a town like Guildford and you walked down the high street at 8 o'clock in the winter and you looked above all the shops, you'd find that there were hardly any lights on above most of the shops because what's happened in a lot of these centres of these towns out in the country,
if we want to call it, Is that they've got office spaces above the shops and maybe actually what we need to do is we need to bring people back into some of these smaller towns, Guildford may be a bad example, some of the regional towns, relax change of use planning, get people out of the cities, get people living more in a place where they don't need to commute, they don't need to get into a car, and where they've got more of their local life around them.
And they've got more of their local infrastructure around them and they can work from home or work from home a few days a week.
So I think people will just start to think more local.
I think undoubtedly the people I'm talking to are saying it's very clear I don't need to travel.
I don't need to get on an airplane as much as I have done in the past.
I don't know what will happen with car usage.
I don't know what will happen with electric cars as a substitute for petrol cars.
I think those are all interesting debates that probably aren't particularly relevant right now.
No, I think it's actually quite boring.
I can give a fuck about electric cars.
I think that's old world debate.
And I bloody well hope the whole climate change thing takes a dive after this as well.
You know, when we've seen, when we've compared what a real disaster looks like with an imaginary disaster.
You know, suddenly we can't divert one point...
This is a while ago.
The figure that Joe Nova calculated was that $1.5 trillion a year was spent on the climate change industry.
I suspect it's probably more like two, two and a half.
But that's money we could actually spend on things that matter rather than on kind of imaginary things that may happen in the future.
Listen, I mean, I hear you.
I guess I, you know, I now walked out of my house in London the other day and I looked at my kind of yard stroke garden and I felt rather embarrassed that I wasn't growing carrots or, you know, I didn't have a little allotment there.
And if that means that people spend a bit more time thinking about growing their own food and it means that we can't have avocados 12 months a year.
Don't say that.
I love avocados.
LAUGHTER I mean, it's the one area of my life where I'm like a Generation Z. I think avocados are important.
Sorry, carry on.
You're looking at me like I'm mad.
They destroy farmland in South America.
That's the main reason I like them.
They destroy farmland in South America, yeah.
They're like the blood diamonds.
I'm going to plead the Fifth Amendment when it comes to avocados.
But I think, you know, ubiquitous consumer choice.
Everyone expecting to be able to have whatever they have, no matter what the consequences are.
I refuse to get into the Greta Thunberg debate, but I think mindfulness and responsibility towards the planet and...
And focusing more on the elderly and focusing more on family and focusing more on what's around you.
I think these are some of the very good things that can come out of this.
I totally agree.
These are nice, lovely things.
I mean, even though it's been horrible, I have kind of been enjoying the kind of the way it's brought families together.
But we've got a family WhatsApp group.
I think probably loads of people have.
I made sure to go and see my mum the weekend before I knew it was going to all kick off and that she was going to be isolated for a while.
And it was just great, sort of those special moments.
And I think we're all sort of cherishing things like that more.
We're appreciating the country more.
We're appreciating just going for a walk and stuff like that, which is nice.
Can we talk, though, about the really big issue from this?
Which is that it seems to me, and I think you probably agree with me, that the cure is going to be worse than the disease.
Already we're seeing, you know, we've shut down the global economy for what?
I read someone wrote something at the weekend.
They were describing it as an elephant that was suddenly attacked by a cat.
And in order to save itself, the elephant basically jumped off a cliff.
And I'm not sure anyone gets the analogy, but the analogy really says that there almost seems a little bit like a voluntary suicide.
by the economy in the face of something that of course is horrendous and you would never want to play down any of this and I hear it on a daily basis of people's specific personal experiences and everything else but no matter what if If this is a perpetual infection that we're having to deal with and there is no immunity and there is no cure, then I think all bets are off.
But I think fear is temporary and greed is permanent.
And if we have to try and be greedy because we want to think there's a future, then I do think that the governments are doing an enormous amount in terms of fiscal stimulus and monetary stimulus.
But also...
There's got to be some signposts, some clear signposts, and as and when things do get better, whether infection rates slow down, whether there is any good news, we have to have the confidence that the government will be much quicker to respond, arguably, than maybe they were to shut everything down.
Yes.
Well, exactly.
I mean, I'm already seeing a lot of very, very stupid...
All the people that were anti-free markets, that were statist, they're doubling down.
I mean, they're really showing their colours now.
Lots of people arguing.
I mean, there was Gideon Rackman in the FT arguing that, you know, what we need now is a government of all the parties.
As if somehow anyone from the Labour Party had anything to offer whatsoever.
I think Boris is doing pretty well on the whole, but that's by the by.
That there are people who have always inclined towards massive statism, who are now really relishing this moment as the vindication of all they believed in, and they want it to stay that way.
And I think people like you and me, and I think lots of people who understand the markets and business and so on, are saying...
Let's not throw out the baby with the bathwater.
No, I think that's right.
I mean, if you're a restaurant business or you're a business in, you know, if it's leisure or retail, in retail it wasn't as if you didn't have enough problems as it is.
But I think you have to look at the businesses that employ people, the businesses that employ people on short-term contracts, You know, they have got to try and get back to doing what they do.
Because, you know, ultimately, we all have to remember governments have no money.
The only money they have is yours and my money.
And so they can continue to print money.
And if you look at, we haven't talked about currencies, but you look at where sterling is today and where sterling was last week at a 35 year low.
I don't want Weimar.
But the reality is this is kind of early stage Weimar in terms of how the market is going to treat and has treated our currency.
And therefore I think promising everything to everybody Is absolutely the right reaction.
And I think our new Chancellor and I think the Prime Minister have, from my perspective, been excellent and built a lot of confidence.
Ultimately, think about this as a patient.
You can keep pumping drugs into the patient through an intravenous drip.
But ultimately, the drip has to come out sometime and the patient has to survive on its own.
And the question is, how many drugs are they going to need to keep the patient alive?
And when do we think the drip is going to be able to be taken out?
And that is really, that's the question that no one can answer.
Just tell me briefly about what's happened to sterling.
So the reason is that flight to safety of the dollar, people are selling sterling to buy dollars, and isn't there some kind of liquidity crisis at the moment caused by this massive flight to the dollar?
I must say, I'm not a massive, I'm not a huge understander of the intricacies of currencies.
And I think there's a wider perspective here, which is that one of the difficult things, one of the really depressing things for an equity investor in the last few years has been really that the old-fashioned active equity investor who looked at companies and wanted to buy them because they thought they were undervalued or cheap and sold them because they thought they were overvalued.
You were ultimately really at the behest of the machines and this whole emergence in algorithmic trading and technology and quant funds has really meant that I've never got any good empirical analysis, but let's just say that 20% of the volume in the market was what I call real investors and the rest of it was passive algorithmic trading.
Well, the only good thing out of this Is that we may, correlations are broken down.
And correlations simplistically just meaning that everything was either going up or everything was going down.
Good companies are being differentiated from bad companies.
And the good news is the smoke pouring out the back of all these quantitative machines and all the propeller heads and professors who built these things aren't looking quite as smart as everyone thought they were.
And ultimately, when things settle down, which I'm hoping and bet that they do, for the real investor who's willing to do the analysis and pay an active fee to an active manager, there is going to be a great opportunity for the old-fashioned stock investor to make money buying good companies at, I believe, once-in-a-generation valuations.
Finally, we've got some good news from you.
And that is good news.
There was that bet that Warren Buffett placed that any five hedge funds could not perform as well as the S&P. Yeah, there was that.
There was that bet.
It was a very good quote.
In fact, it was something I read that Charlie Munger, who was Buffett's right-hand man, said...
And he was asked at the end of the last global financial crisis, he was asked whether he was phased by the 50% decline in his stock.
And he said, and I quote him, he said, if you're not willing to react with equanimity to a market price decline of 50%, Two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre results you're going to get compared to the people who do have that temperament, who can be more philosophical about market fluctuations.
So just simplistically, I think that, you know, What goes up comes down.
You look at the analysis of where the market came from at the 666 level and where it got to when it peaked three weeks ago, where the S&P peaked three weeks ago.
And you look at the multiple thousand percent rises in stocks that you can all name.
They're not stocks that no one's ever heard of.
And some of those have cratered and some of those are down 50 or 60%.
Companies like Disney are down, you know, to an enormous degree.
You know, we've talked about Delta Airlines.
We've talked about Las Vegas Sands, you know, who completely dominate Macau.
There's a company called Zimmer Biomet who make one of the biggest and most successful orthopedic companies in the world.
So there are just some extraordinarily interesting companies that have had very, very, very big price, absolute price declines.
I had my eye on Las Vegas Sands because my eldest is very much, very familiar with Macau.
And he was talking to me about the experience after SARS. That, you know, as soon as they get the chance, the Chinese will be back gambling like mad.
Yeah.
I think that's right.
I think when you think as an investor, you have to think, to go back to some of the conversations we've had before, is how the world's going to change.
Who are the companies that are going to emerge from this that are going to snap back fairly quickly because of the nature of human nature?
You know, addiction, you know, greed.
Human behavior.
And who are the companies out there that potentially won't re-emerge because as a result of this people will change their behavior and change their habits.
And I think if you can look at A portfolio or look at your investments and try and split them into those, I think ultimately you're just going to stand a better chance as and when the average stock in the market or as and when the indexes find some kind of a flaw, who knows where they are.
I think you will end up having a portfolio of the right companies, as I say, at incredibly great entry points that potentially, I think, can all be huge outperformers.
And just while I'm on that train, I always remember having this conversation with Jim Mellon.
We were looking at the most valuable companies in the world and we were saying a while back that it was extraordinary that in the top 20 most valuable companies in the world, not a single one of them was a healthcare company.
And we thought that was very ironic because if you don't have your health, you don't have anything.
And I think it's the one thing that we've looked at this all today, which is that you can put a multiple valuation on Google or Facebook or any of these businesses.
But ultimately, we can debate whether Facebook's billions of people wasting time or entertaining themselves or whatever it is.
But I think right now, I would argue that in the next 10 years, we should all be looking for the companies that are likely to be some of the most valuable companies in the world.
One of them should be a healthcare company.
One of them should be a company that helps us save lives or helps us get out of the problems we've got ourselves into.
When you say healthcare, do you mean companies like pharmaceuticals like Gilead or do you mean something more general than that?
Well, I think, by nature, blockbuster drugs are probably going to be, you know, the person who comes up with the cure or the vaccine for this is not going to be allowed to make supernormal profits.
And I think it would be probably wrong for them to be able to make supernormal profits.
But I just think as a broader spectrum, you know, there are going to be companies out there that are going to help you to prolong life.
There are going to be companies out there that are going to help make old age better.
There are going to be companies out there that are just ultimately going to, you know, going to be able to, you know, do things on a much more fundamental basis to make your life better.
And I think if those are, they could be incredibly good investments.
So it's the J&Js of this world.
It's the Beckton Dickensons of this world.
It's the Abbott Laboratories of this world.
You know, some of these who ultimately do make the picks and shovels to the healthcare gold rush, if you like.
Right, right.
Okay.
Do you worry, as I do, that...
Somebody pointed out to me the other day, actually, this was quite interesting.
They said, if you read a NICE report on whether NICE is going to...
National Institute for Clinical Excellence, is that it?
They make the decisions on behalf of the NHS, don't they?
Which drugs that the NHS can bring in and treat patients with and which ones we can't afford.
And what their reports say very clearly is, you know, okay, so they set against the outcomes, the potential outcomes in terms of life expectancy and prolonged living standards with the cost to the consumer or the taxpayer, and they make the decisions.
Yet, at the moment, we seem to have abandoned that, that cost-benefit analysis.
We seem to be chucking...
Chucking the global economy at saving the lives of a lot of people who are going to die anyway, quite soon.
Where are you on that one?
I mean, this is the very difficult point to make of who is saved, where do you ultimately put And I think right now we are clearly in an environment where the government has to be seen to be doing...
You know, more than it could ever have imagined it could do.
And I think those debates are probably debates for an environment of cooler times.
And I think a post this current environment.
But it's our job to think ahead.
And it's surely the case at the moment.
This is what worries me.
That all the decisions are effectively being deferred to, if that's the right word, to the medics and the scientists.
Not to anyone who...
It's as if the economy doesn't matter.
It's as if business doesn't matter.
And yet business is everything.
Business is what pays us.
Business is our future.
The sun is going to come up tomorrow.
We're going to get through this, this medical emergency.
I worry greatly, and I'm sure you do.
You're just trying to find a way of expressing it without kind of saying, let the old people die.
But you must surely worry, as I do, that we are steering, of course, dangerously close to an iceberg which is going to wipe out everything that we've fought for since the war, all the benefits that have accrued, all the freedoms we've acquired.
We're heading towards all the things we don't want.
Yeah, I mean, I don't think we...
I'm not aware that we've got troops on the streets yet.
Yet?
I get we wait till five o'clock this evening to see what the Prime Minister has to say.
But I was horrified and shocked to see the scenes of Ferraris and Lamborghinis racing up and down the King's Road last night and over the weekend.
Were they?
I was shocked to see people crowded into pubs in London for their kind of last supper, last few pints.
I think, you know, it was daft and idiotic and...
And I think that the common sense approach to this is simply about protecting the old.
And I think focusing on the old and vulnerable and making sure that they are isolated.
And I can see the arguments for the greater population also.
Ultimately, having to weather what is horrendous and horrific.
But once you get to a stage whereby 60 or 70% of the population have actually contracted the disease, the virus, hopefully on a mild basis, then you begin to have a recovery process.
And who knows whether that's a one month, two month, three month.
And I'm the worst type of, you know, I'm a bad armchair sportsman and I'm an even worse armchair virologist.
But I agree with you.
I think there has to be a thought process of what happens when we come out the other side of this.
But I do think...
I mean, a friend of mine is a doctor, and he said that his father qualified in 1952 in Ireland.
And he said he was asking his father, what do you think would have happened if this had happened in 1952?
Well, he said, well, of course, none of us have known anything about coronavirus.
And all we would have said is that this was just a particularly bad bout of the flu, which of course happens.
And that is of course not meaning to decry in any shape or form what is going on at the moment.
But I think that's the reality.
And I saw some incredibly crass analysis done the other day that was trying to...
Say that the 140 trillion of global GDP, which had been impaired by 30 trillion.
So if you take the 30 trillion and you divide it by, you know, how many people have been lost through coronavirus, you assign a value of X billion dollars per person dead.
And I think, you know, that type of analysis is just horrendous and horrific and we mustn't do it.
But as I say, I think you have to trust that our politicians know what they're doing.
They know that ultimately putting the economy on a hold has got some very big effects.
But they better hope that having turned the machine off at the wall and pulled the plug out, they better hope that when they pull the plug back in and turn the machine on, That it boots up again.
And I think that is the big question for all of us.
Which part of the economy can boot up quickly and which part of the economy can't?
And that's, I guess, where intelligence analysis needs to take place.
Yes.
Well, one hopes, doesn't one, that there is going to be an extraordinary rapid recovery.
I mean, I don't know what the trigger will be.
It's not going to be...
What's President Trump done in terms of...
What's the big bazooka?
What do we have left that we can use to kind of reassure people financially?
I think in the US there is the relaxation of the Volcker rules, which ultimately means that banks can pretty much do whatever they want to do.
There's clearly unlimited and open-ended both monetary and fiscal response, which is exactly what the government's saying.
There is not really a great deal else that I'm aware of.
So what I'm asking is, can we expect any more kind of intervention which is going to cause a spike, which then turns into a dead cat, which realises a dead cat bounce, or is that it now in terms of intervention?
To be honest, I've looked at some of the innovation stuff that came out over the weekend and such, and it looks to me just, you know, it's bigger bullets down the similar bazooka.
As I say, I think the relaxation of the vocal rules, which I'm not a great expert on, but my understanding is they could be the next and final thing.
Can you tell me a bit more about when you said that the world where buying a Vanguard thing was the only sensible option, that now you're beginning to return to times when people like you, who are prepared to do their research, can see stocks that are undervalued.
How has that come about?
I think that's just coming about because a lot of delta hedging that happened inside convertible bond funds and a lot of multi asset funds and multi asset portfolios that had An enormous amount of leverage involved.
They used equities, which ultimately are tangible.
They used equity portfolios to hedge some of these as part of these.
And I think what's happened is, as ultimately some of these structures and some of these over-leveled structures, because of liquidity issues, Are unwound as certain hedge funds that basically have been the wrong way round on a whole bunch of these asset classes unwind, then ultimately I think you're going to get a lot of common equity.
You've seen it already and I think it could happen more, get booted out.
At which stage you would then argue what percentage of the shareholder base of Disney Or of Delta Airlines or of Las Vegas Sands, in six months' time, it's going to be, you know, a more simple, more old-fashioned, more plain vanilla equity shareholder vis-a-vis...
be you know I may well be talking my own book here and hoping that the world reverts back to active active fund management away from passive fund management but it does feel at the moment as if that's the case so the machine people have taken a massive hit is what you're saying I I think, yeah, what's the S&P down?
I think 25% this year or something, and I think the median hedge funds down about 9%.
So I think hedge funds have done exactly what hedge funds should have done, which is they protected your capital.
There are remarkably few that have really outperformed, that have actually delivered you a positive return.
I can think of a couple.
Or Odie, Crispin Odie, I think.
We can talk about Crispin, but yeah, you know, Crispin's come good, which is great, which I'm very pleased for him.
And there's certainly a few others.
But in reality, you know, hedge funds have done what hedge funds were supposed to do, which is to protect your capital, you know, better than being nakedly exposed to the market.
Can I just boast, my hedge fund, with my boy in Hong Kong, is up 15% in January.
How good is that?
Spectacular.
Thank you.
You didn't sound totally, totally convinced.
Tell me about Crispin Odie.
I mean, Crispin has, you know, Crispin is, if nothing else, high conviction.
I think Crispin has had a Crispin's a genius stock picker who has on occasions I think been tripped up with his macro overlay, whether it's being negative bets on China or bets in South America and various other places.
And I think just as this is a perfect storm for a lot of investors in a negative way, this is really, I think, a perfect storm for Crispin in as much as he has seen this bubble building, this leverage bubble building, this issue of Common equity prices being pumped up by stock buybacks.
And so this is an environment where you would imagine and hope that not once in a generation, but Crispin does this.
Just at the very moment when people are thinking, I can no longer stomach the underperformance, where Crispin's been really, really good.
And I remember having this conversation with an investor of his a while back, maybe six months back, and I said...
Is this really the stage at which you would want to redeem your investment in Crispin?
Because he's your hedge.
He's your bet.
He is your bet.
Bloody right.
And the good thing about Crispin is, you know, he's always apologized to his investors and he's always stayed true.
And so I think, you know, I'm a diet in the world Odie fan.
And as I say, I think he's...
My God, he's had his periods of misery.
So let's allow him to bask in the glory of our performance at the moment.
Yeah.
So who else has done well out of this?
I mean, haven't there been some uber-uber dark, you know, mayhem funds that one could have bought into that...
Yeah, I can't think of many.
I think Russell Clark runs a fund called Horseman Global, which is run by a guy called John Horseman, who I think retired.
I think it's Russell Clark runs that.
Not as in Horseman of the Apocalypse.
No, well, he could be Horseman of the Apocalypse.
I think his fund was the Horseman of the Apocalypse for quite a long time.
But I think my understanding is they've done really well.
And there are certainly a few other macro hedge fund managers.
I think, you know, there are a bunch of macro funds out there who have clearly seen very, very clearly some of the stresses in this environment.
As they saw the kind of the first couple of cracks in the dam, they were very clearly able to position themselves for what they knew was going to be the first dribble to come through the dam.
And then as the first dribble came, they could exacerbate those bets.
And as the first block started to fall out of the dam, they then began to make those bets.
And what you've seen, I think, and you will begin to see over the next couple of months, is that some of those funds, as potentially things get worse before they get better, their alpha or their outperformance will continue.
And I think that's what they're very good at doing.
Now there are those, I'm sure Crispin would have been among them, who argued for some time that the markets were overvalued, that QE and other central bank measures were causing malinvestment, zombie companies.
Even without the coronavirus, we were due a market correction to clear out the zombie companies.
But is this going to clear them out, or are they just going to end up being bailed out some other way again?
And that's a very interesting one.
I mean, what's difficult is you go back to, I think I said it three and a half weeks ago when the S&P hit an all-time high and you went and talked to the average US company.
Chief executives had never been more bullish.
I remember writing and I remember doing the analysis of where the nifty-fifty was and where the P multiple could have been on the nifty-fifty.
We could have argued that there would have been a seven or eight multiple point expansion, which would have justified a Much higher move than the S&P 500, which, you know, meant that forget what the market did.
There was upside in all sorts of different businesses.
And the only thing I was trying to look at and see and listen to people on was whether we were going to have a kind of value rotation versus growth, whether some of the old world companies got so cheap versus the new world companies.
So, I guess, right here and now, The thing that the world needs more than anything else is yield.
And the thing that savers need more than anything else is yield.
And the problem we have with this bubble that we built was that there was no yield in bonds.
There was a yield in equities, which is dragging everyone into equities.
And the biggest issue was we hadn't put anything back in the store in terms of interest rates.
So if the storm hit...
Ultimately, to go back to your earlier question, what is the other weapon in your armoury you've got?
If the bazooka's not big enough, where's your tank?
Where's your rail gun?
Where's your whatever it is?
And the fact of the matter is we don't really have a bigger gun to fire.
Prayer.
I think prayer could be our final...
I think faith and prayer is probably the right thing.
But I think the only good thing as investors and as market observers is that because we don't have anywhere to go and because of the effects of all this stimulus, we do know there is going to be a corollary to the other side of this that we can potentially benefit from.
Yes.
And that's probably going to be your next question.
It is rather.
Okay, I imagine there's going to be lots of retail investors, special friends, listening to this.
And they're going, okay, well, I've watched with horror my ISAs and whatever I have in my savings.
I've watched them zooming down.
I've been like a rabbit in the headlights.
I haven't done anything.
Is there anything they can do at this stage with anything?
Yes.
I think I wrote this the other day.
Someone said, why do property investors always somehow seem to do better in downturns?
And why do property investors always seem to be the rich guys rather than the stock market investors?
Always seem to be the guys who are boom or bust.
And I guess the great thing about property is you can't just sell a building after breakfast.
And also, your building doesn't get quoted every day up in lights.
And so the reality is, I think we all need to remember, you don't crystallize a loss in a stock until you sell it.
Right.
So, to go back to the very first question you asked me, which is, why are things doing what they're doing at the moment?
And why there is a need for liquidity?
It's because of margin calls, and it's because people in portfolios who borrowed money to own portfolios, or they have losses elsewhere they need to fund, They either write the check themselves or they do it from selling stocks.
So if you're going to sell stocks today, I think, you have to make sure that you're going to, I think, sell the names that are arguably going to be the ones that don't potentially recover because their businesses may be fatally impaired or they may be partially impaired for a period of time from the environment that we have been in.
And if you're going to stay invested, you're better off to have some bigger bets in some things that ultimately stand a good chance of recovering.
Who knows when, but as and when markets recover.
Do you want to venture a rough area which is going to bounce back?
Well, I think already, really simplistically, at home versus group...
You know, domestically more focused things than things, you know, out and away.
So I guess, you know, I simplistically look at, you know, and Netflix, I simplistically look at video games companies.
Yes.
I look at, thinking about without getting too specifically, I look at companies that make medical-grade oxygen.
I look at companies that right now will be delivering loads and loads of stuff into the loading depots of hospitals, whether it be hospital gowns, whether it be medical supplies, whatever it is, you know.
All those are ultimately the kind of businesses that are going to have, I would anticipate, companies that make cereal.
You know, if you go to your local supermarket, you know, apart from the fact that no one's buying Corona beer for some completely unknown reason, you know, you can't buy cereal, you can't buy tin food.
Well, you know, Campbell's Soup, you know, makes tin soup.
I'm going to imagine that Campbell's Soup has probably sold more soup in the last three months than they have sold in the last three years.
So, those are the kind of things that I guess I'm going to want to stay focused on.
Telecommunications companies, companies that benefit from increased utilization.
Video conferencing companies like Zoom.
There's a whole plethora, I think, of companies that are very well positioned for this environment.
And then I think, you know, as I say, there's the companies that have basically been taken to the woodshed and ultimately potentially all have some significant upside as and when.
I was looking at one of my favorite companies out there is Greggs.
Greggs is an amazing business in the UK that's ubiquitous and, you know, I think the demand for veggie sausage rolls or sausage rolls or all the fantastic products that If Greggs produce and sell and you look at what your breakfast in Greggs, the quality of your breakfast in Greggs versus the quality and price of your breakfast in Starbucks, there is no comparison.
So to me, a company like Greggs is going to bounce back very, very well as and when the high streets get full again.
And then there's a whole bunch of companies out there that I think are going to have a very, very tough time of it at the moment.
And not saying that they won't recover, But in the near term, I think you have to anticipate the markets are negative, liquidity is negative, and the specific news flow that will come from these companies will be very, very negative.
And it will be specifically restaurant companies, hotel companies, obviously, you know, cruise lines, horrendous.
You know, would you want to be Rolls-Royce at the moment?
No.
Would you want to be Estee Lauder at the moment with airports closed and no one traveling?
You know, some of the kind of vanity, narcissism, you know, type stuff is probably going to be, you know, structurally impaired for a period of time.
And then the fourth basket is, you know, income is the new black.
Yield is the new black.
And you've then, I think, got to try and somehow find an environment where you can own some very high quality companies that have very well covered dividend yields that are going to basically ultimately give you some yield in a way that your bond portfolios don't and you can't find anywhere else.
And so there's some very obvious stocks out there.
Even with the current demise of the oil price, unless the oil price is going to, you know, it's going to have another fatal move downwards, you know.
Some of the big UK oil companies are delivering, you know, have got, you know, huge dividend yields, and I would argue that, you know, potentially maybe those are interesting.
They've got to be a buy, haven't they, the oil companies, at this price?
On an utterly unsophisticated level, I've got to say a 12% dividend yield on Royal Dutch or BP prices.
You know, to me, you know, would be obvious places to go.
Have they got lots of cash, these companies?
Well, not lots of cash, but they certainly, their dividend yields look quite well covered.
And I think the other things to say is when we get out the other side of this, you know, It's an oft-used expression that I use.
Fear is temporary and greed is permanent.
There will be ongoing consolidation.
The winners will become stronger and the losers will become weaker.
So we are very close to semiconductor companies, for example, that make all the chips that go inside all the devices that none of us could even survive or stay sane without using.
There are some fantastic opportunities in some of those businesses.
So I feel...
Rather simplistically, that there are almost kind of like three or four baskets into which you can put your companies.
And so if I was talking, if I was looking at my portfolio from my private client, stockbroker, you know, my big question would be, you know, asking, you know, does he have a goalkeeper?
What's the goalkeeper in his team?
You know, who are his, and I'm really loathe to use a football, a soccer or football analogy because it's something I know nothing about.
But I would think about it in terms of players, you know, goalkeeper, defence, midfield, offence.
And I guess I sort of almost psychologically structured portfolios, a long portfolio in that way.
And then I guess a short portfolio would be something on the inverse of that.
I've really enjoyed this, and I think so many people are going to be really helped by what you've said.
I think we need to remind ourselves, don't we, that we're going to get out of this, and there is going to be an upside.
And there's nothing wrong with that.
Yeah, I think you have to believe that.
It's a very difficult thing.
You don't want to talk down or talk against or talk down the seriousness of what we're facing or what we could be facing in the next couple of weeks.
We're humbled by all those people who go to work and have to go to work and do all the most amazing, incredible things.
But the flip side of it, too, is we have to hope and believe that we come out the other side of this.
And if we come out the other side of this, there are companies that are going to need money.
And there are investors out there who are going to need to find a way to rebuild the destruction that they've had as a result of what's going on.
I mean, I think it is...
It's about 30 to 35 trillion has come out of, I think 25 trillion has come out of stocks so far.
That sounds quite a lot to me.
And that's a, you know, it's a 30% plus markdown on global stock valuations.
A friend of mine in the investment space reckons that we're going to see 50% fall in the markets before.
Does that sound reasonable?
Well, it goes back to what I said before, which is I think that the 57% of 57% is we could go down if we went down another 57%.
Yeah.
We could then get another 57% from there.
So I will say it's a bit like who wants to be a millionaire in reverse.
It's a bit like divorce.
You know, you start with nothing and 10 questions later you're a millionaire.
It's amazing how the law of compounding mathematics means you start with a million quid and it takes much less than 10 questions to get to zero.
I found that.
It's so much easier to lose money than make it.
It's so much easier to lose money than make it.
Piece of piss losing.
I'm really good at that.
So I think everyone just has to...
I go back to it.
You don't lose in the stock market until you crystallize your losses.
And just make sure this is an environment where hopefully if you can, you just kind of rejig your team so you feel sure that you've got a winning team rather than a mediocre team.
And I think right now, you don't really want to or need to bet on the middle.
I think you want to try and bet on just the very best.
And if you can, bet against or bet on the very worst.
And just hope your team members don't get coronavirus.
And hope your team members don't get coronavirus.
Or if they do, you hope they get it very mildly and they all recover.
Exactly.
Great.
Well, that's brilliant.
Thank you, Will Nutting.
James, thanks so much.
Really appreciate your time.
And let's have you back, hopefully in brighter times.
Excellent.
Look forward to it.
Okay, thank you.
Bye.
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