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David Trainer on why, for the near-term, it’s really all about liquidity (0:55) and why the Fed is hoping to walk the primrose path (4:00). This is an abridged conversation from Seeking Alpha’s Investing Experts podcast.
Transcript
Rena Sherbill: David, welcome to Seeking Alpha. I’d love if you could update listeners on how you’re looking at the markets?
David Trainer: Yes. I think that for me, despite all the sort of popular narratives about this or that driving the market, I feel like, for the near-term, it’s really all about liquidity and how much either the Fed or the treasury are pumping into the economy.
I’ve seen plenty of charts showing a very tight alignment between, hey, if they’re still putting money in, stocks are going to, the animal spirits are alive and well. And when that liquidity begins to be drained or, when the treasury typically tends to sort of back off and the Fed’s tightening actually starts to take hold, you see stocks retract.
And I think that’s a consistent theme for, really, most of the last 20-years. The long-term decline in interest rates effectively just put more money into circulation and certainly lowered the threshold for what would be a profitable investment, and therefore, made it easier to make money. That’s just a lower cost of capital effectively does that.
We’ve been awash in too much liquidity for a long time. So at some point, there probably needs to be a reckoning. And I think the real question is when and maybe never, who knows, I mean, look, they could potentially kick the can down the road forever. And what we’re seeing with the federal deficit and spending and federal debt, is not necessarily a good example for fiscal behavior. And I think a lot of that’s mimicked at the consumer level too. So we’re in interesting times , who knows, maybe we can borrow forever.
RS: Do you think we’re ever going to get out of interesting times? It seems like we’re in a perpetual interesting time cycle. What do you think the reckoning if it does come, what do you think that looks like and what do you think it would mean for investors?
DT: I think what this means mainly is it hopes… I think the hope is and because they know this, right, I mean, they understand that if you’ve got too much money chasing too few good opportunities, right, there’s not an infinite number of great business ideas, and we’ve certainly seen a lot of bad ones get a lot of funding, FTX, a lot of these IPOs that came out several years ago, right? I mean, there’s just a lot of been colossal failures, and we’re seeing more and more all the time in some of the private equity space.
So there’s, sort of, three ways this kind of happens, like, in a very, very simplistic model, Rena, right? You’ve got, like, you’ve got — it goes on forever and never stops. You got it comes to a crashing halt, and it’s cataclysmic. And, we have a long – a lot of people lose a lot of money, and a lot of people discourage and don’t invest for a long time. And you have something in between where you have more of a gradual unwinding of these bad investments and a gradual, steady, but sure reallocation of capital towards higher returning investments or higher return on capital type of investments.
And I think what the Fed is hoping for is something right there in the middle, to sort of walk the primrose path of, hey, we want to return to a world where people are more discerning about where they allocate capital. And therefore, we can kind of get back to longer term growth opportunities and without creating too much damage. I don’t know if it’s possible.
At some point, people have got to effectively pay the price for putting the hand on the hot stove. I mean, you can’t not lose money for putting money in a bad investment.
How we navigate this I think will be honestly the — is the quintessential question of our time. It will be what defines a lot of financial history and economic history and history books and textbooks, because we live in this new age where people can, sort of, print money, and we’re seeing the lengths to which that can go to affect economies.
RS: Based on how the Fed has acted and how you think the history of the market is going to write itself, write with a W, the coming quarters the rest of this year, how do you envision the macro picture? How are you looking at earnings? What’s your general take?
DT: I think that, I think, sort of, the consensus amongst the sort of, the more rigorous investors is that Q3 earnings are – or Q2 earnings are still way too high. They’ve got to come down quite a bit, and that’s going to potentially cause some issues.
As for, like, the Fed and CPI and those kinds of things, I sort of shy away from some of that, Rena, because, I mean, there’s just too much opportunity for some manipulation. Look, we’ve — there are many books and studies that have shown since before Nixon, the White House Administration and other regulators have effectively rewritten the formulas for how CPI and other things are measured.
So depending how you slice it, and honestly, depending how the narratives are spun, we’ve got bad news all the time. The Fed said we’re pausing, but we’re going to raise rates more later. And it didn’t matter what the Fed said. The market, sort of, had its own narrative, and that’s all it cared about. And so I’ve kind of given up trying to figure out what the prevailing narrative is going to be, because I don’t — I can’t control. And I think it’s hard to predict it.
I do think that most of sophisticated investors understand that there needs to be some reconciliation. We hear that a lot. Whether it’s from Druckenmiller or Warren Buffett or Charlie Munger or many other folks, right.
We hear it quite a bit and so how it’s going to actually unfold and when, I mean, that’s the that’s the billion dollar question if I could tell you that. We’d be doing this on my yacht, right? If we’d be doing it at all, and so I think that’s the tough part, I think that’s what makes market tricky. It’s what makes our time interesting.
RS: Yes. So speaking of these interesting times, I think part of what is making it interesting are these disruptions across the board. I think every sector you look at, you can see this disruption happening in tech, it’s AI. In finance, it’s crypto and various degrees of successful crypto. But there’s so much happening in every sector. What — do you have favorite sectors to look at or are you more focused on the stocks?
DT: No, we definitely look at things at a sector level. So because we cover so many stocks and that we definitely have insights on the overall market, in terms of just fundamentals and valuation. Now that doesn’t mean I can predict when these disconnects will rectify, it just means that we see them, and we can look at them in historical context.
But when you look at historical context at the macro level and a lot of things, we’re in uncharted territory. So exactly when that territory starts to look or revert to the mean, I am not going to predict.
But, yes, on a sector level, we like a re — a sort of reallocation into basic materials, financials, and energy. These are some sectors that have been really beaten down, right, whether it’s energy stocks and the ESG, sort of, movement has led a lot of these stocks to be effectively thrown out with the bathwater, because they are fossil fuel related and fossil fuels are going away. And you look at anybody that’s done any research in the industry, and it shows that demand for 30, 50-years from now is expected at worst to be slightly lower than where it is today, right? Fossil fuels aren’t going away.
EV and green energy sources are coming online, but not necessarily fast enough to offset the actual overall increase in the demand for energy. So as the rest of the world, sort of, gentrifies or continues to gentrify, energy consumption is growing faster than alternative sources of energy are growing. So there’s plenty of demand for fossil fuels, that’s not going away.
Basic materials, this is the engine that makes the world go. We’re so excited about AI and all these fancy technologies that are going to make spaceships to the moon, and cars drive themselves, and cars fly, and machines do all our work for us, that we’ve forgotten that at some point in time we need the steel to build these machines.
We need the manufacturing to keep people fed, to keep people – to keep the systems and bridges and basic infrastructure going. We’ve got so sort of disconnected, I think, from our roots to these ethereal ideas around crypto and things that we’ve forgotten, we still got to build the things that make America work or make the world work.
I guess that’s all three, right? I guess banks, we just — we’ve obviously seen a lot of banks get beaten down. And for a long time, be undervalued, right? I mean, the financial sector as a percentage of the S&P has been on a long-term secular decline and we think it’s a bit overstated. And a lot of that’s just because you get too much in technology. And so I think those are sectors where we’re seeing a lot of opportunity.
We got a lot of long ideas. So I’m not cataclysmic about the market at all. I don’t believe in the cataclysmic scenario. I believe in the Fed attempting to walk the primrose path. And I believe in giving our clients in the world, like, opportunities to put money work in the safest places in the market now. And then — be very, very clear about avoiding, for sure, what we call micro bubbles or places in the market where we think are just ridiculously overvalued, and will for sure suffer.
RS: You think this AI hype, just frothy, frothy companies getting swept up in a narrative?
DT: A lot of it, absolutely, just like we’re seen with every other kind of hype. I mean, look at the fast casual restaurant hype. Hype is everywhere all the time, especially in a world where it can be whipped up and channeled and profited from so easily. Right? I mean, people are selling activity on Reddit to institutional investors. People are selling activity on Robinhood to institutional investors, payment for order flow. Information is currency, and there are big firms that are set up to do nothing but exploit it.
And AI is just another one. Does that mean all AI businesses are bad? No. Again, you got to be discerning. Some AI is positive. Some is great. Some isn’t. But Wall Street is going to sell you on all of it, so it can sell you more of it. Right? Just like a car dealer or any salesperson. Do they want to sell you more or less? Do they want you to be more or less educated? Do they want you to be more or less discerning? No. They make money right now by selling as much to you as they possibly can. And I’ve been on Wall Street and I’ve seen that’s exactly what the behavior is all about.
There have been many books written on that, whether it’s Michael Lewis or Nassim Taleb. I mean, they’ve written books. Like, biography — biographies on just the personalities, and I’ve seen it firsthand. They want to make as much money as they can right now. That means, saying whatever they need to say to get you to buy as much as — as much of what they’re selling as possible. And that’s part of why I kind of say, look, be discerning, understand what you’re up against, realize. These people in Wall Street made lots of money. Why? Because they’re good at selling, the best salespeople in the world. We’ve seen it, time and again.
So understand that if that’s who you’re up against, do some diligence in making sure they’re telling you the truth, making sure that you understand the fundamentals. Don’t just trust what you hear.
RS: So what’s a good example of discernment in the tech space? What’s a good example of that?
DT: Let me go through the list here. I’m trying to think of — Intel (INTC) is one that jumps to the top of the screen here. A great stock, really cheap that’s just been beaten down for a long time. That has a lot of tailwinds, whether it’s the re-shoring of a very important industry, whether it’s the growth of a very important industry, in many ways Intel is sort of a pick and shovel for AI. And the continued digitization and growth in data.
Cisco (CSCO) is another one of those. That’s like that. And those are two examples I think of being discerning, understanding where there’s not a lot of hype and where the underlying fundamentals and economics of the business are good.
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