Transcription
Yeah. So, okay. So, now we're in the mid, we're sort of, well, we got 2008 to get through as well. So, how did you navigate that?
Well, by then, my role had morphed at JP Morgan. So, in 2007, in 2004, JP Morgan asked me to take on a second role there. So, I was, um, doing wireless carrier research. Um, but then I also became their head of small and midcap strategy, and, uh, that, that was like a co, a bit of a coaching job because they had a lot of young analysts. So, I was teaching them stock picking, um, just because I like wireless. It lent itself to stock picking because the industry grew exponentially, yet the stocks were very cyclical. So, it was really a way to, you know, I always had to understand sentiment. But this, the second reason I think they gave me that job was during this, the tumult post-.com bubble, a lot of wireless carriers were going bankrupt. And, uh, I had to work with our dip lending desk. Um, the dip lending desk is the desk JP Morgan uses whenever there's distress, and so they provide financing, um, either in a distress moment or when they're bankrupt. And it, it actually is one of the most profitable businesses because that's really when, uh, they have an edge.
And, um, some of the carriers like Leap Wireless, uh, fell into dip lending trading. And, uh, Jerry Madigan was the trader at the time. He was buying wireless, the Leap Wireless bonds, and he was buying them at, you know, 16 cents. And he started to ask me all these questions about wireless. And we went through, and he realized that this, the spectrum, uh, itself may be money good. So, he was able to turn that into a le, a Leap prepackaged reorganization. Leap, he was paid 127 on his 16, so he, uh, made the firm several hundred million dollars on a trade that should have just, he was just thinking was originally a scalp. And he became a managing director very young.
But I, it inspired me because at that, around that same time, um, Eddie Lampert, uh, was doing stuff with Sears and Kmart. And so I realized that there was a lot to this idea that things that were in bankruptcy might actually have value if you could sort of, uh, find the right opportunity. So, I, uh, asked JP Morgan if I could write a, a larger piece. And I, they had just opened this office in Mumbai called, which is a research office of really talented Indians out of Mumbai, but they weren't being utilized. And so I had them comb through, I think, like 4,000 bankruptcy filings since the '70s. And we put together all this analysis. And then we wrote a report called "The Chapter After Chapter 11," which looked at whether or not money was made on stocks that emerged from bankruptcy. And it turns out, like, under the right conditions, I don't remember the report, like, we, we, like, listed six things that if they happen, then the, then there's a higher probability that you can actually buy the stock, um, as it emerges, or you could even buy the stock that never got canceled, like American Airlines was one subsequent example, like, where the equity wasn't canceled. And that became a very popular report because it was a way for people to speculate on something that people weren't previously speculating on. So, it almost created a new class.
Yeah, new class. And so that is why they asked me to do small midcap research because this was, you know, there were metals, US, and there was a lot of hedge funds starting in that space as well. Yes, that's right. And there were like a lot of interesting, like Imperial Sugar, I remembered. And, uh, anyway, so I did that for a while. And, uh, and then in '07, in, in late '07, they asked me if I wanted to take over the role of head of strategy because Abijet Chakaorti, who was the JP Morgan Strat at the time, had moved to Morgan Stanley. And so that's when they asked me to take on the, the broader macro role. And, uh, at the time, I was actually very skeptical because I was, I was a stock analyst my entire career. So, I'm used to going through 10Ks, calling companies, you know, doing road shows, and really thinking of the world as a bottoms-up of companies. And then they asked me to do something that's very macro. And I always thought strategists really never knew what they were talking about. So, um, and us macro guys never thought you guys did. Yeah, that's right. And so, uh, I said I would do it. And it took me a while to figure it out because, you know, going from stocks to looking at the market, it's a very different skill set because there's no edge. You know, at least I felt I had edge when I covered companies because I could, you know, have my own sources, do my own channel checks. Um, you can't really do that with equities.
But I did that, and I would say it wasn't a great experience because that's really like when the bear market started. Um, and, but, but we, uh, found our footing because in 2008, we wrote this report which was called "Guide to Stock Bottoms Part One." And, um, and, uh, we still get requests for it these days because it was, what we did was, we looked at every major bare market, um, since 19, I don't remember, 1918 or something. And we had detailed two things. One was that almost every major bare market is a retracement of the prior bull market. So, it's not about time, it's about how much you, you unwind of the prior gains. And if we took 1929, the Great Depression, or the '74 bare market, those were 125% retracements of the prior bull. So, you have to go unwind the entire gain and then go down even more. But, um, just using those two prior bare markets, we said the bottom would be 670 to 720 on the S&P, and it was what, 666 or something? Yeah. 666. Yeah. And, uh, and then there's a time like that, the, the bear is a ratio of the prior bull. So, um, so this, the bottom would be the latest we said would be July '09. So, that was our first sort of conclusion.
Second conclusion was we listed, and this was kind of just more simple. We took like seven metrics that you saw before bottom and the order. And it was like things like the ISM and, and employment. But we basically pointed out that like employment doesn't recover till after the bare market bottom. So, things that happen before a bottom have nothing to do with fundamentals. And so we published that report in '08. But then on like February 20th, the S&P fell below whatever the minimum threshold, like it w, it fell to 710 or something in February or not. So, we turned bullish, which was of course too early because then it went down all the way to, um, 666. But it was close enough to the bottom that, um, that actually really gave us a lot of visibility at JP Morgan because we were, you know, really one of the first people to actually believe the market had already bottomed in '09. Um, even as you remember during the GFC, people thought that there was so much ghost inventory that housing wouldn't recover for decades, and we were in a new normal because rates were so low. But actually, we were just arguing that this would look like a typical bull market recovery. And in retrospect, it was.
Yeah, that caught me wildly offside. I mean, I got 2008 really right, 2007 really right. 2009, I just kind of emotionally overrode my business cycle models by thinking there was an a further overhang of debt deflation that was going to. And, you know, even though the ISM was picking up, all of the forward-looking indicators were picking up, a lot of people got caught offside because it got so emotionally charged by what just happened. Correct. Whether you made money or lost money, kind of caught people out in 2009. Yeah.
I mean, something that I kind of remember that from that period, and I don't know if you can relate, but I was an equity person my entire career. But in 2008, JP Morgan essentially got taken over by, uh, the bond side of the business. So, um, you know, like our, and they were these guys were amazing. I wished I understood what they were saying in '07 because Eric Binstein and Pete and Chris Flanigan were all panicked and freaking out in '07. And so you, you know, you obviously caught it right, like I didn't really know how to interpret what they were saying. Um, but of course, a huge disaster unfolded. But what was interesting is that in '09, the firm was really controlled by the bond side of the business, which had a very structurally negative view about the prospects for a recovery, which of course was good for the, the bond side of the business anyways. And, um, so I, I think that the stock market got taken over by the bond market, basically, or macro. And that, and that made people structurally bearish for much of that recovery because the equity investor got wiped out that very episode. And then because most of us have been around for 2001, then missed all of the tech boom that then happened. Yeah. Because they kind of couldn't believe it could happen, and it did. And then Amazon was trading at a P of 800, and everyone's like, what the [ __ ] is this? And everybody missed it because everyone was so macro focused and just didn't see it. Yeah. Yeah, that's right.
So, you know, it probably helped that I had a technology background. And it did. Yeah. And I understood the importance of sentiment and how people, when in the equity world, when someone gets tired of an idea, even if they're the smartest person, they'll reach a point that just says, get me out at any price. They don't even care, and they'll never revisit the idea. And, um, but that's when opportunities created, you know. So, um, and then I, you know, around 2014, I was, you know, things were going very well at JP Morgan. And, uh, we were in a, a good bull market, but I was starting to realize that if, if I stayed at JP Morgan, which is a great place, that was going to be my last job ever because I was approaching, you know, 15 years there. And, uh, as much as I kind of, I think a lot of people would love the idea, I had always followed entrepreneurs and tech people. So, I thought, I need to think about starting my own company, which is when I left in 2014 to start Fundstrat. But it was based on a small bet, which was that, uh, I thought that the non-institutional business would come back. You know, the recovery of equities from 2009 to 2014 was largely institutional trading. There was actually almost a, a dwindling or an attrition of the retail investor. And, um, you know, in fact, you know, things like Schwab, I mean, they were trading very poorly. And so I, I thought that the environment would return that was very akin to the '90s. So, that's the bet we made when I started Fundstrat, which was really to produce institutional quality research, but try to make it available to a wider audience. And that's really started playing out by, co, I mean, it, we saw a bit of retail participation, but it wasn't really. But then co, it was like the entire millennial cohort became financialized overnight. And we'd all kind of given up that the millennials were ever going to be financialized. We thought they're never going to trade stocks. They hate the whole thing. They grew up with Occupy Wall Street. They've had enough. And then overnight, they just turned it on, and it never looked back. I mean, it just, Yeah. Exploded.
That's right. And, you know, that kind of makes sense because as we know, post-Great Depression, so let's say you got into the '40s, there were children born during the Great Depression that were becoming adults in their '50s, and they saw how their parents lost everything because the stock market. So, from 1950 to 1960, for instance, um, using the Fed flow of funds data, net household allocation to equities was negative. People weren't putting new money into stocks. They were taking it out and putting it into bonds. And bonds were actually having rolling negative performance because yields went from roughly, uh, I don't remember, like 3% starting level to almost 7% by the end of the '60s. So, they were losing money in their bond portfolio. And there was yield curve control. So, these were, this was financial repression. So, they're actually losing money in real terms as well. That's right. And so, of course, guys like Warren Buffett did famously well. But it shows you, like, there's a generational scar. And I think that, uh, post-.com, Gen X was generationally scarred, which is why hedge funds did very well, um, in the 2000s, but retail investors didn't buy stocks. And then, like you're saying, um, 2020 is when the first millennials were in their 30s, 1980. Yeah. So, they'd be like in their 30s by that point, and they, they're the ones that suddenly discovered equities. And they discovered crypto as well, which was, yes, at the same time.
So, give me your crypto story as well. Where did that come in? You know, Bitcoin actually had come up in several discussions when I was at JP Morgan. And John Normand, uh, who was the head of FX at the time, had talked about it. He wrote, wrote several pieces about, he wrote one that we had a whole conversation around our firm did, which is that he thought that Bitcoin could become a currency at some point. Now, I think the network value of Bitcoin was like 20 billion. Okay, which made it like a decent-sized stock. Um, but he was saying that it was obviously, uh, mostly for dark web and, you know, illicit purposes. So, I didn't think much of it, and I didn't, didn't even follow Bitcoin.
But then, uh, we started Fundstrat. And then in 2017, I remember just for some reason, I think I saw the price of Bitcoin again, and I was like, whoa, this thing just went 10x, um, in just a few years. And so I'm like, I've covered stocks enough to know that sometimes when something does a 10x, it means there is, uh, something to it, not that it's a bubble. Like, most people, I think, tend to think if something's gone up a lot, it's a bubble. But actually, in the equity world, a lot of times it's actually telling you something's real, particularly when it's a network. That's the big difference. Networks tend to do this, um, much more consistently. Correct.
So, with our not great understanding, we did spend about four months doing a research white paper on Bitcoin. It's exactly what you said. First, we found that if you just did a very simple two-factor model, which is the number of wallets and then activity per wallet, it explained over 90% of the rise of Bitcoin since in. Yeah. And it also, it's a good approximation for Metcalfe's law. It's the best, best way I got of fitting Metcalfe's law to the network value. That's right. And then, you know, to, we realized that's exactly why social media networks created value because, I mean, those, the idea of like eyeballs and the c, someone being the customer, and then because it's free and you sell them out, like that was a very new concept. So, to me, I had already believed in this idea that you could create businesses digitally that didn't start with a factory. And, uh, so we published our first report on Bitcoin. It was around $1,000 though. Um, and, uh, but we said that by using the same two-factor model, by 2022, um, it could be $25,000. And that was either saying it was going to be worth 10% of gold, or, uh, the number of wallets were going to increase. I don't remember the, whatever assumptions we used. Um, and then at, when we published, at the time, I did it more as like a thought piece. And, uh, of course, I was advocating for Bitcoin. We recommended 2%, but it wasn't something that we thought we would hang our reputation on. But it created immediate backlash for us, uh, with our institutional client, um, who became very angry that we were trying to pitch something that had no tangible value and was clearly just used for, for buying drugs. Um, so we actually got famously fired by several, uh, well-known hedge funds. But then I assumed we were probably on to something because I figured if some, Yeah, that's right. When you see that reaction, it's probably right. Yeah. Because if someone hates it, they haven't done the work. Yeah.
And so, uh, so now it's, uh, almost nine years later, eight, eight years later. Um, you know, and, and Bitcoin's obviously done really well. It's actually had, uh, cycles. And it, you know, I mean, you've been involved for a long time, too. I remember you told me you got involved like in 2014. 2013. 2013. Yeah. I wrote the first ever macro strategy piece on Bitcoin in 2013. Wow. You know what, if that was the report John Normand saw, and that might have been, might have been because all the hedge funds, everybody passed it around because it became this thing of like, oh, so I onboarded everybody from Dan Tapiro to Mark Yusko to, I mean, you name it, all the macro people, it was all because of me. John Burbank, I mean, you name it. I might say that that might have been your report because I don't know why John Normand would have brought up Bitcoin unless it was sitting around his desk, you know. Maybe, maybe it was.
So, I know we've got a hard stop coming up. So, I just want to cover where we are today. So, what's your framework for understanding the year ahead, next year? Just kind of, just give me your data dump of, you know, what are you looking at, what's interesting for you, how the macro plays out or the markets play.
I, I mean, I think the story arcs are pretty bullish right now. Um, I mean, from the shorter lens, uh, this incoming administration, I think, is doing things that look very disruptive at the moment, but I think structurally are really positive, um, because it's a, it's a path for US deficit to normalize. And I think indeed, I think animal spirits are coming back, even though things like these consumer confidence reports don't show it. And we know that there are, um, there is tangible drivers of productivity, including AI, in front of us, um, that justify, um, you know, investors allocating capital. And of course, there's still plenty of disruption ahead, including crypto. You know, I think Bitcoin is, is still our favorite idea for this year. Um, so we think it'll be the best performing, um, asset class, even better than gold. But I think anchoring all of this is, um, you know, is a demographic story. Um, I can send you some charts later, but it, if we look at the number of people aged 30 to 50 in the US, um, that's actually been steadily rising since 2018, 20, sorry, since 2009. Um, it actually went positive in 2016. Um, and what I mean by that is the number of people aged 30-50 matters in an economy because they're the ones that are driving both credit consumption, but also, uh, productiv innovation. Yeah. And investment. In the end, I think all of macro is just demographics. By the time, if you do enough work, go deep enough down the rabbit hole, the one monster factor of all is basically demographics. And then there's a contrast because, as you know, in the rest, rest of the world, actually has a depletion of population. And so that's creating the demand for AI workers, which is what the US tech companies are producing. So, I think that this does feel like it's going to be a very bullish equity cycle ahead, and that's why we're constructive. And it's been a rough start for this year, but I, I think we're just sort of getting through some of the kinks and burning off some of the recent bullishness.
Yeah, I'm the same. You know, we get the overoptimist optimism about Trump, then we get the correction until we get the actual news story. How are you thinking through, I mean, you and I obviously thinking through the AI in the same way. We're about to produce infinite workers. AI and robots is infinite human intelligence and infinite humans, right? I mean, this completely breaks the economic model. We have no understanding what this is going to do. But let's assume we'll get there whenever that happens. You're starting to even hear Satya Nadella start thinking, and this might be, I want to go back to the psychology of 2000. That many of these people worry about is they're worrying about, have we overbuilt, or are we overbuilding data? Are we overbuilding chips? Are we overbuilding? I'm not sure that we're not still underbuilding, but we might be scarred. I want to, and I haven't decided, but where do you, where do you lie on this? Is this an overbuild, and everyone's going to write off a whole bunch of capital, or is this still too early to say?
People who are going to call the top in data center and demand have never really experienced, um, industrial cycles, right? Because the cycles actually are going to extend until return on invested capital is well past negative. And I, I would be very surprised if we're already reaching that saturation now because we know that any model today would be, would have improved capabilities if you improved computing power or power or capacity. So, we aren't even experiencing the negative side of that utility yet. So, I, I think that it actually would still argue that you need to be investing more capital. And I know, um, uh, you know, like when you look at percentage of GDP, I mean, look at what happened with China when p, direct private investment, you know, it got to 40% of GDP, and that was lasted years before you had overcapacity in China. So, I don't know how we're even at saturation today in AI, but that's just in broad strokes. But so, I agree with you. I think there's still a big runway ahead.
[Music]