Expert: Jesse Felder – “We haven’t hit the bottom yet”

Bryce: [00:00:13] Good day Equity Mates. And welcome back to another episode where we are following our journey of learning to invest. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividends. Now we are licensed, but we're not aware of your personal circumstances. So any information on this show is for education and entertainment purposes only. Any advice is general advice. But with that said, my name is Bryce and it is an absolute pleasure to welcome to the studio alongside me. As always, Mr. What did I say? Mr. Ren Anyway, welcome. 

Alec: [00:00:50] Was wondering why that was going. 

Bryce: [00:00:51] Oh, I remember. I remember I was listening back to the first 12 part series we did on GSI, and my intro was. His parents call him Alec, but the markets call him Ren. 

Alec: [00:01:04] Good. Back in the day. I think that might be the first time you've officially welcomed me into the studio as well.

Bryce: [00:01:12] I think so. So, yeah, I know what's going on. 

Alec: [00:01:14] I feel very welcome here, which is ironic because I wasn't welcome in this interview. 

Bryce: [00:01:19] You are not welcome in this interview. No, I was fortunate enough to sit down with a returning guest from overseas. Jesse Felder, someone we've had on the show a couple of times over the last few years. But Ren, you you were off on the holidays taking a well-earned break over Easter. But this is an interview that I did with Jesse. It was born out of his commentary on gold. And given what's going on in the macro environment at the moment, we just wanted to check in with him and get an understanding of how he's thinking about the commodity, but also more broadly how his approach in current market conditions and where he's seeing investment opportunities. So Ren It was unfortunate you weren't able to join us, but I hope you had a good holiday.

Alec: [00:01:58] Yeah, well, I am still on holiday time, so I'm going to wrap it there and let's get to your interview.

Bryce: [00:02:06] So Jesse began his professional career at Bear, Stearns and Co and later co-founded a multibillion dollar hedge fund firm headquartered in Santa monica, California. But since then, he's founded Felder Investment Research and is the publisher of the Felder Report, where he writes and provides plenty of research that has been featured in major publications and websites like The Wall Street Journal, Barron's, Yahoo! Finance, Business Insider, and more. Jesse is also host and produces the super investors and the art of worldly worldly wisdom podcasts. He's an incredible thinker and articulates his ideas so clearly through his writings. So make sure you check out his his research and analysis. But without further ado, here is my discussion with Jesse. Which I see. Welcome to Equity Mates or welcome back, I should say returning guest. It's great to have you with us. 

Jesse: [00:02:59] Yes, you're back. 

Bryce: [00:03:00] So, Jesse, we play the Equity Mates Biznerdle our company guessing game with all our experts. So the way this works, there's five clues you can jump in at any time. If you think you know what the publicly listed company is, you don't have to wait for the end of five clues. I have no idea how hard or easy this one will be. Let's just say let's just see how we go. Clue number one, at $100 billion is My IPO was the biggest in the US for 2020. Clue two into in 2019 I acquired Hoteltonight for 400 million. Clue number three. I was founded by Brian Chesky, Joe Gebbia and Nathan Blecharczyk, and I'm headquartered in San Francisco, California.

Jesse: [00:03:54] Is That Airbnb. 

Bryce: [00:03:55] Well, let's have a look. Clue number five. Correct is now that Airbnb.

Jesse: [00:04:01] Is there a couple extra. 

Bryce: [00:04:03] Which I see, you can now add that to your daily routine. If you go to equitymates.com/biznerdle, you can play everyday

Jesse: [00:04:09] You know I played world some other, you know like mind games every day so don't give me addicted. I'll be taking that every day. 

Bryce: [00:04:17] So, Jesse, for those that have just joined us for the first time, you've appeared on Equity Mates for a couple of interviews now. So so thank you so much for coming back. We always love reading your analysis over on the Felder Report and listening to your podcasts. So we wanted to get you on today to sort of cover three broad buckets, just your views on the current state of markets. Specifically, thoughts on where gold is currently at and then close out with a discussion on just where you're seeing opportunities and perhaps where the market goes from here. And there's plenty happening at the moment with inflation, monetary policy, you know, activity and banking. How would you just summarise where the market is sort of currently at? 

Jesse: [00:05:00] Well, I think that the average investor thinks that you've had a bear market and that bear market over. We look at where these, you know, boring into tech stocks and you know some doctors lately you know big tech is the kind of the led the market this year. It's pretty clear investors look at this decline that we've had in 2022 as a buying opportunity. And I think the lesson of, you know, bubbles and bursting bubbles is that we haven't hit the bottom yet. I think that we've seen the first phase of this bear market and there's a new phase to come. First phase has just been the reaction to the reversal in monetary policy and the rise in interest rates. Right. So much money printed, an interest rate fell to, you know, 40 basis points on the ten year Treasury yield. And that created a pretty epic speculative blow off that wants monetary policy reversed. Interest rates kind of normalise to an extent. We've seen markets risk assets having to price start price out in again and I think helps to explain nice stocks. It's a play last year but when you look at what really drives bear markets recession and namely earnings recessions and we are now two quarters into an earnings recession and I think earnings are going to get worse through the year. Right now, analysts expect the first quarter earnings report to be the bottom, but a lot of the leading indicators for earnings that I look at suggest that it's probably not the bottom. We're going to see second and third quarter earnings clients infrequently. And so that's not priced in yet to the stock market. And so if I'm right and earnings are going to decline, you know, further in second and third quarter, we're going to get a second phase of a bear market will be driven by an earnings recession. 

Bryce: [00:07:05] Yeah, right. So what we're seeing in the market at the moment, which is a bit of a you know, markets are performing reasonably well, is what you could say is a bit of a dead cat bounce then. 

Jesse: [00:07:16] Absolutely. And it's you know, it's really amazing to watch investors kind of embrace these rallies because when you look back at the dot com bust in 2012, one, 2002 had many rallies like this where saw Nasdaq rally 20% plus dramatically. And it always sucked investors in like, okay, great, this is not them and they heavily and then they gave you know the rally was given back in and you know fell to new lows. I mean, you look at those rallies in 2001 and 2002 or the final low in late 2002, you know, those declines from those rallies, rain, 35, 40% declines from the peaks of those rallies. And so now I do think this is, you know, can call it did sucker's rally, call it whatever you want. This is what we're seeing is bear is typical bear market behaviour. It's not at all what would expect to see it at a, you know, a bottom, a bear market and a new new bull market beginning.

Bryce: [00:08:24] And over what period of time do you expect this to sort of play out like is it in the next quarter, like how a market's getting, in your view, getting it so wrong that they're not pricing this in?

Jesse: [00:08:35] Well, it's going to be really interesting this earnings season because I think that, you know, like I said, the answer expecting this quarter to be an earnings trough and that companies will return to earnings growth. But so many things like I guess point to a protracted decline in earnings. And, you know, there's one indicator I look at in particular, which is kind of my, you know, macro corporate earnings, you know, Leigh, which is essentially interesting, oil prices and the dollar, when you see these three things rise dramatically, you know, it has a very important information with earnings two years later. So we have a strong rise in interest rates, oil prices and the dollar. It creates a pretty earnings risk two years later. So a set from which those 20, 20 lows, you know, for oil price, when negative rates were super low, you know, you know the dollar and, you know, sold off pretty hard. And then, you know, those have been rallying from essentially 2010 through now last year. Right. That suggests that over the next, you know, 18 months, we're kind of a real danger zone for earnings and intel. U.S. interest rates call me down and the dot com way down and prices come way down. You need to see those three things to kind of lay the foundation for a really nice earnings trough and strong earnings in the future. So we're just not in there. You know, you can also talk about how the pandemic of big tech earnings and those kinds of things. And now it's actually very similar to dot com mania and the Y2K, very big record of demand that was unsustainable. And you saw it throughout the sector. And then in 2001 and two, when that demand vacuum appeared after that pull forward created a very painful earnings experience for all of those companies. And it lasted longer than analysts expected. And in and so business I think is really similar where we had a pull forward in demand related to the pandemic work from home. Everybody needs a new laptop you know or upgrade to five smartphone ever it is and that pulled for a lot has been and now we're seeing you know just this week you announced Apple you know computer sales down 40% year over year in in in March. And so you know, that's what I think about like a demand vacuum that's going to we're going to see something similar smartphone and in other areas. And that's even before you see this, I think, you know, like a mass extinction event in, you know, a lot of these non-profitable start-ups, which are all, you know, customers of, you know, these big tech companies, they were advertising on YouTube and advertising on and all of these things. And so, you know, when that goes away, that's going to be, you know, a problem for these companies as well. 

Bryce: [00:11:38] Do you think that the Fed did the right thing with what they've done with interest rates? Have they gone too far here in Australia this month? Our Reserve Bank actually paused, raising rates. There's a question on whether they do that again this coming month. But it seems the the Fed is still very much on the path of rising. What's your sort of sentiment around the action of central banks around the world at the. 

Jesse: [00:12:05] Well, I think, you know, I've used the metaphor of speed wobbles. I think what we're seeing right now is central bank speed wobble. You know, written support. You know, I grew up surfing a sport, and so, you know, you get going down too fast, downhill on a skateboard or even dumber, holding on to his bumper while he drives skateboard. But you get, you know, speed wobbles. And that's basically the board. Now, it happens on bikes, too. If you're down, you know, if you're a road bike or go down to downhill test, you know, starts oscillating faster than you. Correct. So you either need to just kind of veer calmly, you know, try and centre yourself to the end those speed off or you're going to just go handlebars, you know, crash on your skateboard, whatever. I think that's where we're at with central banks, where they're so far down the curve, they let inflation get out of control, waited way too long to try and normalise monetary policy. Now they're so far behind the curve, they're probably going to tighten. We're going to get a painful recession. They're going to you know, Jay Powell has already told us that, you know, here in the United States, if we get a recession, the Fed will use its tools, which Powell, quote unquote, to address that recession. Now, using inflation don't come back down to target that point, then you're just creating another inflation problem down the road. And so I think they're in this. Oh, but this is the problem also being data dependent. And Mohamed El-Erian has been a very insightful critic in this regard that the Fed doesn't really have a a forward looking framework how to deal with things. The one they had was dead wrong, where they changed the initial framework and said, we're going to go for average inflation targeting right at the wrong time. So now that they're basically being data dependent, looking backwards and trying to steer the economy by looking in the rear-view mirror, you know, they're going to be behind the curve on inflation and then they're going to be behind on, you know, I think there's a good chance we're probably already in recession here in the United States. You'll get, you know, Treasury revenue and debt and, you know, declining significantly. There's a lot of other signs and they'll know the fact that they're probably could tighten again in May, raise another quarter basis or 25 basis points is only going to exacerbate that. And I think that, you know, we're in this speed wobbles and it really takes a steady hand, somebody like a Volcker to say, you know, we're going to hold rates here, we're going to just hang out and let things work. It might be a painful session, but we need to we need to just kind of do what we have to do to get the economy on the right track. Again. I don't have that same kind of concern, Jay Powell, that is he's willing to do that sort of thing. He's even said as much. 

Bryce: [00:15:03] So didn't the states technically have a recession? But then the Fed came out and said that by their definition, it's not a recession or something crazy like that. A couple of months ago. 

Jesse: [00:15:14] Yeah, we had those. Two quarters of negative GDP growth, but we didn't have unemployment rising. And so, you know, how they define recession is, you know, it's not GDP, It's it's you have to have unemployment and other things. And so but I think the real point is that I'm looking at whether it meets the definition of recession or not. You know, we're in this stagflation environment where nominal growth is maybe still growing great. You know, maybe it's still running five, 6%. But if inflation is running 5 to 6%, you're getting you're not going anywhere. You're right. You know, you're like running as fast as you can to stay still. And that's not a healthy situation. So, no, I do think, you know, probably looking at a scenario like the 1970s where you have, you know, bouts of inflation titans creates a recession, but they don't, you know, hold they don't hold monetary policy in a way that's restrictive enough to really translate the bad. And this is what this is what we'll see what they're pricing in it, that they'll cut 75 basis points per year. And, you know, if they were to to pivot and start cutting interest rates again before interest for inflation normalise, you know, probably a longer term inflation problem and all types of macro things that suggest inflation's a problem regardless of the Fed, you know, demographics and the globalisation and these other things. And and just the amount of debt that, you know, it suggests that inflation is, is not going away and the powers that be really don't want it to occur. That's the only way we, we can manage that over, you know, any period of time. 

Bryce: [00:17:03] Do you have a view on where rates need to get to in order to get back to that two 3% inflation target? 

Jesse: [00:17:10] Yeah, I think historically we would need probably a real positive funds rate. So you need to raise the Fed funds rate above the red to see, you know, CPI came in today at 5%. You probably need a 6% rate. You know, and we still have a negative, you know, real Fed funds rate the Fed funds rates bullseye. Now, you could also look at something like the Taylor Rule, which is, you know, developed on tailored to create a guidepost for that where where the funds rate needs to be to in order to achieve their you know, stable prices mandate. And you could argue stable prices mean 0% inflation, not 2%, but to achieve stable prices. You know, the Taylor Rule has said for a while now that Fed funds should be closer to ten versus where nominal GDP is and all the other inputs into the two rules. So, you know, I think you at least need a positive real Fed funds rate, you know, and possibly you might need to go closer to a Taylor Rule type of policy framework. 

Bryce: [00:18:21] Well, a lot to think about there. But, Jesse, we will take a quick break. And on the other side, we're going to get your thoughts on gold, because the last couple of times we've had you on the show, you've been very bullish on the asset class. So really came to understand where you're sitting on it now. So we'll take a quick break. We'll be right back after this. I'm here with Jesse Felder, a founder of Felder investment research and publisher of the Felder Report. You can find Jesse's research at the Felder Report dot com. I would strongly recommend checking it out. It's a really, really good read. But Jesse, as I said before the break, we first came across you with the analysis and commentary that you were doing around gold. And I think our first episode just completely centred around gold and was a really interesting eye opening moment for us. You have been quite bullish on it. I think the first question must be, are you still bullish on gold? 

Jesse: [00:19:12] Absolutely. I think for, you know, fundamental and, you know, technical reason mentally, you know, the whole base is, you know, for a very long time have been seen by human beings as and, you know, it's funny, my wife and I just went through and watched the John Wick trilogy. Before we go watch John for the new one. And there's no coincidence that they meet, you know, in this underworld, they deal in gold coins. It's cause, you know, no matter what happens in the war, monetary world would be outside world gold coins. Going to buy you a tailored suit day 100 years a hundred years ago. Gold coin is going to be have the same purchasing power that I've always had. So you know, so it interesting to me to see that you know environment when your purchasing power in terms of the currency the currency is being debased to power is going down and it's going down more rapidly today than it has in, you know, since the 1980s. And you you need to find things that help you protect purchasing power, gold that has done that for literally thousands of years. And so I think it's it's it serves that purpose is which is important in an environment like. 

Bryce: [00:20:37] What we haven't had the chance to ask you about is bitcoin what is what is your thoughts on the new digital gold? Where do you sit on bitcoin? 

Jesse: [00:20:45] To me, Bitcoin has no influence, are you? It is a you know, Warren Buffett was talking about it today on CNBC. It's a speculative vehicle and I think that's it's proven itself in that in that respect that it has not a very good inflation hedge and you know, it has it really doesn't have any correlation with inflation or the dollar or anything like that, that, you know, the top correlation is with essentially unprofitable companies that trade on the Nasdaq, where, you know, most speculative securities on planet. So I look at it as a vehicle for speculation. 

Bryce: [00:21:33] So for a retail investors like ourselves, how would how should we think about having gold in our portfolio, you know, from like an asset allocation point of view? I mean, if you're able to give insight into the weighting that you might put towards it, we kind of often hear, you know, 5% is probably a good a good sort of weight to consider. But how should we think about gold in our total portfolios? 

Jesse: [00:21:58] I think it's critical right now. This is something I've tried to make an important point to emphasise for the past five, six, seven years, which is when you look at the greatest asset allocators on the planet, whether it's Ted Swensen or Ray Dalio or anybody else, the big difference you'll see between what they do and what the average investor does is that not only do they have stocks and bonds, they have a very healthy allocation to real assets. Now that's going to be things that do well in an inflationary environment because stocks and bonds typically do poorly in an inflationary environment which other investors are running. Last year, you know, about 6040 portfolio, you had its worst year in a long time last year. And so if you only own stocks and bonds, you better hope that inflation comes back down to 2% and stays there. Better than hoping is to say, I'm going to take a piece of my overall asset allocation mix and put it towards things that protect from protect purchasing the things like treasuries and protected securities, inflation adjusted bonds, commodities and and precious metals. So gold is part of that. And I think, you know, some people prefer real estate is also a part of that. Some people prefer different types of real assets. For me, I think when you look at, you know, currency diversification, I want to be diversified across asset class. I want to be diversified across sciences. Then you know what currency is in more more attractive than others or gold can't literally. You know, DBAs or, you know, Guy. It's so you know that is a good head and currency base. And so I think yeah, it's important to have some type of allocation. You know you can look at you know my from Meb Faber wrote a great book on this topic called Global Asset Allocation. And you know, it's anywhere from 5% to 25%. You'll see across these asset allocation kind of models. And so for in that range, I think is a good long term scenario. Now I think for like tactical investors, you might want to even have a bigger allocation than that based on the type environment that we're in And the technicals, essentially the momentum and the technical pattern in gold is very bullish, which would argue it's a good time to be a gold. 

Bryce: [00:24:31] Just on that, you know, a lot of the stuff you write does sort of centre around using technicals and you're suggesting that it's I guess pushing towards an increase in price for gold. Over what period of time does are you expecting this to play out for gold. 

Jesse: [00:24:51] You know, I think goat's had a really good run over the last few months. It might, you know, need to see you look at the seasonal pattern. It would suggest, you know, gold could have, you know, take a little bit of a breather here. But the next couple of months, July, September, are the next really Bush seasonal period for gold. And, you know, seasonality is usually not super important in a lot of an asset class as it is in gold, because there are several factors to weigh physical and in India happens in China and whatnot. And so, you know, the seasonal pattern is more important for gold. They could taper, but it's also breaking out in the process of breaking out in terms of, you know, in dollar terms to new highs right now. And it's very possible that if, you know, the Fed is on and appears is going to start cutting gold, could could you know, breakout strongly higher since the peak in 2020 over the last two and a half years or whatever. Gold formed a very clean bullish flag pattern in technical analysis of bullish flag when you see, you know, a trend go on for a period of time and then basically create like a high waves pattern before it breaks out and moves higher. It seems like a continuation pattern. So what does that mean that that bullish pattern for the past two half years or so, if you look back, what did gold do 2018 to 2020? The really good, I think, example of what it could do. One breaks out to highs. That's about a $700 price. Wow. 2018 to 2020 is could be what's had gold over the next year or two. 

Bryce: [00:26:43] Well, that kind of moves nicely into opportunities. And you sort of mentioned at the top that it's sort of a bit of a false horizon at the moment. And for the equity markets where we could be looking at a continued bear market for the next 18 months or so. But are there any parts of the market that are exciting you at the moment? 

Jesse: [00:27:03] Absolutely. I mean, the commodities sector generally, I mean, the two areas within commodities have been focussed on are precious metals and energy. So gas and the oil price is another one that just looks very, very bullish to me. We've had this consolidation in the oil price has been longer since the 2008 top. It's essentially been in a, you know, a 15 year long and not quite 13, 14 year long consolidation pattern, you know, where we, you know, not even tested those 2008 highs. It broke it a downtrend last year, which is, you know, a very bullish sign. You know when you and Paul Tudor Jones is seven box the quote but he said we see no a very clear kind of consolidation range and a price breaks out above it. It's a very clear sign that's going to continue going in that direction. And so momentum, I think, if any, anything seemed to learn from technical analysis just how to look at momentum, because when something has long term, the strong momentum is unlikely to reverse directions at that point. Usually reversals, major reversals come when you see momentum slim down and waning are kind of a sign that things are ready roll over in that direction. So I think the oil price have very strong long term momentum. It's a breaking out above, you know, levels in this over the last year or so. It's come back to test those breakout levels, you know, on a technical and from a sentiment standpoint, people got very, very bullish or bearish on. The oil price in the last month. You think you all got into recession. Oil price is going to crater again. But what's different this time is that the frackers here in the United States are running out of new wells. And so when oil prices were really strong in 20 tens, frackers would go and pump a bunch of new oil and then repeating a crash into 14. And the oil price that crash from 2014 to 2020 was a very, very painful bear market for energy. Is no longer a pump like mad like did before. And so that that supply response just isn't there anymore. That is a key differentiator for the type of cycle that we're in now. I personally believe I think we're in the early innings of a new commodity supercycle. Oil prices. Gold prices are in the early stages of a multi-year move high. 

Bryce: [00:29:40] Wow. Love to hear that. We'll definitely take note of that and keep a close eye. You mentioned momentum there. And technical analysis is something that I don't spend a lot of time doing but can understand the benefits of including it as part of an investment process. Is there a simple way for those or for us listening at home to be able to measure momentum for a for a stock or a an asset class that we're looking to get into to understand? Does it actually have momentum behind it? 

Jesse: [00:30:10] Yeah, I think if you look at, you know, RSI is one of the most. If you pull up a chart on stock trades like I'm or anywhere else in RSI. McAteer Usually the two technical indicators that come up, I think people make the mistake of looking at overbought and oversold indicators on our asset as signs that, you know, the trend is ready to reverse. And I think that's not the case. If you see really high RSI ratings are really low. I mean, it's to me that's a sign that's a very strong trend and this is going to continue in that direction for time. So you could do something like that. It's also very easy to use things like moving averages. You know, I think the the first place to get started with technical analysis is to use just moving averages, you know, looking, following framework. So if, you know, Paul Tudor Jones has said I don't need to know anything about security other than whether it's above or below its two day moving average, if it's above the 200 day moving average in an uptrend, I want to buy it. Interestingly, below the 200 day moving averages in the downtrend, I want to sell it. And so that's a very simple kind of framework. I think investors to if you're looking at a security or, you know, an asset class or whatever, just you can look at 200 day moving average versus price and understand kind of what the trend is.

Bryce: [00:31:34] And so 200 day, the 50 day, that 200 is the one that you sort of would suggest starting with. 

Jesse: [00:31:40] Yeah, I think if you look at price versus the 200 day moving average cycles, you know, like the other trend followers might use the fifth day and the 200 day when the 50 day moving average is above the 200 day, that's an uptrend. 50 day crosses below the 200 moving average. That's a downtrend. And when you just applied to the S&P 500 index, I mean you have a B, you have really effective March timing methodology right there. But I can look at 30 year history of that indicator and it keeps on the right side of the market the vast majority of the time and keeps you out of the market during bear markets and in the market during bull markets. And we're just understanding what the trend is. It is the first crucial step to utilising technical analysis. 

Bryce: [00:32:29] Well, Jesse, we have reached the end of our time together, so thank you so much. It's been a fascinating discussion. I've taken so much from it and I know the Equity Mates community love when you come on the show, always really clear thought on on current sort of state of market. And as I said, if you are listening at home, make sure you check out the Felder report dot com to keep up to date with Jesse his thoughts on markets and and and different asset classes. Absolutely pleasure as always Jesse thank you so much for your time. 

Jesse: [00:33:00] Thanks, Bryce. Always good to chat with you. Appreciate it. 

Bryce: [00:33:02] And Equity Mates, before you go, just one call out if you could please leave a five star rating and a review for the Equity Mates Investing podcast, we would really, really appreciate. It goes a long way to helping us get in front of new ears and to support the Equity Mates community. So if you could just leave five stars and a review, it would be very much appreciated. But we'll be back next week, as always. Have a good week.