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Expert: Julian McCormack – Platinum believe there is more pain ahead

HOSTS Alec Renehan & Bryce Leske|25 August, 2022

Julian McCormack is an investment specialist and Platinum Asset Management and we welcome him to the brand new Equity Mates podcast studio.

In today’s episode the lads cover all things current markets conditions, where to from here, and where Platinum are seeing market opportunities.

Books mentioned in this episode:

The Alchemy of Finance: Reading the Mind of the Market – George Soros

The Misbehavior of Markets: A Fractal View of Financial Turbulence – Benoit Mandelbrot

One Up On Wall Street: Beating the Street – Peter Lynch

Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). This information is general in nature and does not take into account your specific needs or circumstances. You should consider your own financial position, objectives and requirements and seek professional financial advice before making any financial decisions.

You should also read the latest product disclosure statement and target market determination before making any decision to acquire units in any of the funds, copies of which are available at www.platinum.com.au/Investing-with-Us/New-Investors.

Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice.

Certain information contained in this presentation constitutes “forward-looking statements”. 

Due to various risks and uncertainties, actual events or results, may differ materially from those reflected or contemplated in such forward-looking statements and no undue reliance should be placed on those forward-looking statements.

Past performance is not a reliable indicator of future returns.

To the extent permitted by law, no liability is accepted by Platinum for any loss or damage as a result of any reliance on this information.

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All information in this podcast is for education and entertainment purposes only. Equity Mates gives listeners access to information and educational content provided by a range of financial services professionals. It is not intended as a substitute for professional finance, legal or tax advice. 

The hosts of Equity Mates Investing Podcast are not financial professionals and are not aware of your personal financial circumstances. Equity Mates Media does not operate under an Australian financial services licence and relies on the exemption available under the Corporations Act 2001 (Cth) in respect of any information or advice given.

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are. [00:00:30][15.5]

Alec: [00:00:31] You? I'm very good, Bryce. I'm very excited. We are. We have our first guest in our new studio. Yes. This will be a trivia question one day. Who was the first guest at the Equity Mates studio? [00:00:42][11.3]

Speaker 4: [00:00:43] Do you think you're excited? [00:00:43][0.5]

Bryce: [00:00:46] It is an absolute pleasure to welcome to the new studio, Julian McCormack. Welcome, Julian. [00:00:50][4.4]

Julian McCormack: [00:00:51] I'm so happy to be here. Thank you. [00:00:52][1.2]

Bryce: [00:00:52] So just a quick reminder before we start that we're not experts, we're not financial professionals, we're not licenced. We're just here learning like you. And nothing on this podcast should be taken as advice. Julian is an expert though, so don't listen to us. [00:01:07][14.8]

Alec: [00:01:07] Don't listen to us. Still don't take everything Julian says as advice. But he is licenced under platinum. And we're going to be learning a lot from him today. [00:01:16][8.4]

Julian McCormack: [00:01:17] But not licenced to give advice. It's not legal advice. It's it's. [00:01:20][3.0]

Alec: [00:01:20] There we go. [00:01:20][0.3]

Julian McCormack: [00:01:21] Legal free to provide advice. [00:01:21][0.9]

Alec: [00:01:22] Okay. Okay. And as we always say, just generally don't take financial advice from a podcast. [00:01:27][5.2]

Julian McCormack: [00:01:28] Totally. And can I just say one thing with that? I think it's really important to express to people, if you take anything seriously in your life, get a coach. Oh, yeah, right. So there's a bit of a perception, I think, around financial matters that I should be so clever, I should do it myself. And I like to say to people, do you reckon Rafael Nadal knows a lot about tennis? Probably knows a lot about tennis. Right. Does he have a coach? He has a whole coaching staff. Yeah. Right. So if you're going to take this seriously, go get a coach. Yeah. Just get accountable, get serious, get that. It's hugely important. And the more you think you can afford it, probably the more you should do it. It's money very, very well spent. You can go and talk to people for free for for one, you know, see if you have a meeting of minds, whatever, a financial planner, financial advisor or whatever. But it's actually really important. [00:02:18][49.9]

Alec: [00:02:19] Good shout out. [00:02:20][1.0]

Bryce: [00:02:20] Yeah, well, if you haven't come across Julien before we had him on our Cosby Show way back in 2021, I think it was, well, something like 2020. [00:02:28][8.5]

Julian McCormack: [00:02:29] It was in London Village. [00:02:31][1.8]

Bryce: [00:02:32] Julian is an investment specialist at Platinum Asset Management, and today we're going to be covering all things current market conditions. Where to from here and where platinum are seeing opportunities. [00:02:43][10.3]

Alec: [00:02:44] Yeah. So Julian, for people who haven't watched Al Osborne's show and may be coming across to you for the first time, we always love to start with the story of someone's first investment. We find there's a good story, a good lesson that comes out of it. So do you remember the story of your first investment? [00:02:59][15.0]

Julian McCormack: [00:02:59] Yeah, totally crystal clear. So first I ever what was Macquarie Bank? I was about 19 or 20. Stock was 18 bucks. I was doing an internship with a group called Capital Partners back then, which became CPA two. That was just pure nepotism. That was just a friend of the old friend of the family who needed someone to do the filing type stuff. And I was at uni and that all worked out really well. They were working in infrastructure and their basic thing was boiled down to the cost of capital for these very stable infrastructure type businesses is way lower than everyone thinks. And the only other mob who they saw who knew that was Macquarie. So that was the early days of things like Hills Motorway and Transurban and blah blah blah. These, these early public, public private partnership things that that went around and hoovered up, you know, these sort of toll road type investments. And the only other guys out there, guys and girls I use that term generically who got it was Macquarie Bank and so and then so just got to know a little bit about the culture of Macquarie Bank. My brother in law worked there, my sister had worked there and just got an appreciation of what that thing kind of was. I didn't really know anything about the balance sheet because that's unknowable. I didn't really know much about, you know, what the potential risks around the financial sector were, you know, at that point, which became apparent about ten years later. But but it just looked like something that was robust and had an edge on everybody else relative to a big sector. And I thought that's that's pretty good. And then I'll flog that about. I'm going to say, yeah, in about 2007. So yes I was going to say that when. Alright. Yeah that was good. [00:04:54][114.7]

Alec: [00:04:55] I mean it's, it's kept going on right after that. [00:04:57][2.2]

Speaker 1: [00:04:57] I should have flipped. [00:04:58][1.1]

Julian McCormack: [00:04:59] It and went back and report it but. Oh no, no, no, no. But that's, that's actually when you read the sort of masters that's something they do really well is they. Oh I missed that one. I was bought now or I. Yeah. That's, that's a good discipline and. Long word. It's just a good practise, you know, to always remember to to go back to things. [00:05:20][20.8]

Bryce: [00:05:20] Bought at 18 and it's now 180. [00:05:21][1.3]

Julian McCormack: [00:05:22] So yeah. And I floated it 80 so it was sort of low eighties responded. [00:05:26][4.4]

Bryce: [00:05:27] Well. [00:05:27][0.0]

Alec: [00:05:28] Behaved. [00:05:28][0.0]

Bryce: [00:05:29] Well played well. I guess following that, have you developed an investment philosophy or like what? What's the investment philosophy that carries through platinum? [00:05:36][7.2]

Julian McCormack: [00:05:36] Yeah. So let me let me talk about platinum because that's, that's better than my investment philosophy. My personal investment philosophy is I'm very comfortable to wear massive amounts of risk. And also, I don't ever want to run third party money because. Yeah. Because, you know, I just observe what it's like doing that. Yeah. And it's not much fun. [00:05:55][18.7]

Speaker 1: [00:05:57] So. [00:05:57][0.0]

Julian McCormack: [00:05:57] That, you know, if you do well it's the client's idea. If you do badly, it's your idea. So it's, it's lovely sort of, you know, sort of thing. So, but at platinum, we're very lucky to have a business that's built over repeated instances that that bond people to our business and most young investors don't have any appreciation of that. And so as a result, we have a relatively old client base, you know, in terms of age who've been through either one or two cycles with us. And so we have a business because of what happened 2000 through 2004. And then we gelled people out of the business, welded people out of the business. We what happened in oh eight and 910. And then since then we've been pretty mediocre, to be frank, in terms of performance. We'd be the first to say that, first of all into that, you know, we did things like, you know, I told everyone about how great Microsoft was in 2010, sold it in 2013, and that's what we did. So but what's that reflective of? Let me take a step back and say what I think people don't have a great appreciation of is that we are acting in the fog of war. We cannot wait for proof. We cannot wait for things to be known, because by the time you do that, it is too late. That is what that thing out there is. That's what the economy is. It's it's a massive, you know, mathematically chaotic thing that's unknowable. And I think there's a sense that the general public gets with investment that if I just had a better mousetrap and more data to put in the mousetrap, then I'd know everything. And I could predict anything. But. But you can't. It doesn't work like that. It's much more like, you know, systems under great stress. So, you know, in material sciences you get to two points of criticality and then it's, you know, you sort of know the outcomes, but you can't know with any certainty when they'll happen. Or subatomic particle physics. We can know a bit about a particle, but not all of it. So. So Heisenberg. Uncertainty means you can't know direction, spin and velocity or one time if you know one, you know the other is less mathematically. That's what this is like. So then what is a philosophy main? A philosophy from there is just a guideline that helps you deal with that fog of war. And so it lets you know, okay, I don't know, this is the right thing to do, but I know this is why I should do it right. And that's really, really important because it just means you don't get suckered in one way or the other. The thing I'm thinking of is you don't get suckered into bubbles. You might miss a bit of fun on the way up, but you don't you don't have massive drawdowns on the way down because of what you're doing. The reverse of that is also true, and I fully acknowledge that there are brilliant growth investors out there and all that happens is over cycles. Returns cluster so different people make different returns at different times. Everyone, everyone, everyone, everyone. So no one ever makes their average return every year, right? I mean, Bernie Madoff did. [00:09:15][197.6]

Speaker 1: [00:09:15] Yeah. [00:09:15][0.0]

Julian McCormack: [00:09:16] That's true. Right. So, you know, that was that was his thing. Everyone else has these periods where they suck. Yeah. If you understand why something sucks and if it's sucking at the right time, that should actually be fine because it means okay, I get why that might be or whatever. And then you can actually and that has informational value for you. You can then say, okay, well maybe I shouldn't use that manager now, or if I expect the conditions that drive that performance to continue, maybe, maybe I shouldn't is is dismal right now. So that's all by way of prevarication, obfuscation and background. But so what do we do? We basically sell expensive and buy cheap. Yeah. And the way we can do that because those terms don't mean anything cheap doesn't mean anything expensive doesn't mean anything. Because if you can get a Ferrari for 200 grand, it's cheap. It's cheap. If you're forced to buy a 1994 Corolla for 100. And it's super expensive. Right. So obviously. So how do we know what's cheap and what's expensive? There's a whole bunch of things we can know. So the first point is valuation versus itself versus other things itself over time. This is I think this is the first much really obvious. The next thing we can know is how are people positioned versus that thing? Do people love it? Do people hate it? Two people own. A lot of it is an underrated are there flows going into what are other flows coming out of it? That's extremely helpful. And then we can know how does that thing perform, you know, in different parts of the economic cycle. You know, as a as a bit of a cyclical thing as opposed to a structural thing. So that boils down to we are looking for things that are that are overlooked and neglected. And they happen all the time. They happen all the time. And what's more, they sort of seem to be happening more. Okay. That's the interesting thing. And I think there's a sense in this cycle that technology has allowed us all to become great investors. And I think there's just a hell of a lot of wood and people can't see the trees. And that's leading to massive valuation dispersion and that's amplified by this incredible initially monetary and latterly fiscal experiment we've all lived through that's amplified that that cycle. So if anyone wants a quick summary of where we see the world, the set ups really bad for risk assets from here and especially from here now, you know, six weeks ago we could had this chat. I would have felt like, oh, everyone thinks that might. Yeah. And everyone was bearish. Hey, that went away pretty quick. [00:11:54][158.1]

Alec: [00:11:55] It I would just speaking about this the sentiment has changed so quickly and you know, the Nasdaq composite is up 20% from its June lows. Yeah, Australia's tech sector up 30% from its lows. It's funny how things change quickly. Let's put a pin in overlooked things and where you're saying some overlooked things because we'll get back to that. But let's start with this macro picture and what's happening. You you feel like maybe people forgot how risky the stock market was a little bit too quickly in the last month. So I guess tell us what Platinum's view is, what your view is of the the macro environment, you know, inflation, recession, bear market, all that stuff. Yeah. [00:12:33][38.4]

Julian McCormack: [00:12:34] So so let's start with this top point, which is where were we coming from at the end of last year? And that was about the most expensive the equity markets have been in the history. So that's not a good stat point. Now, now, why do I say that? And we could look at price to earnings, price to book, price to sales, enterprise value to invested capital market cap to GDP. On the average of all those things, we were about the most expensive we'd ever been, largely in the US, which then dominates the MSCI International. All markets, you know, average because at 60% of the average. [00:13:09][35.2]

Alec: [00:13:09] Yeah. [00:13:09][0.0]

Julian McCormack: [00:13:11] So on average that market was very that index and those pair of indices, you know, the S&P and the market were about as expensive as they've ever been. That doesn't convey any information that because well can buy limited information because expensive can get more expensive. What I like to impose upon people is a thought experiment and just it's very trivial. So bear with me. You might have seen this before, but if I get a balloon, it's very fully inflated. And I pop that balloon with a pencil. Pencil has to be reasonably sharp. It's a pacer, right? Yes. It's a it's. [00:13:46][35.9]

Alec: [00:13:47] Sort of something I haven't thought about in a long time. [00:13:49][1.9]

Speaker 1: [00:13:50] I gave the. [00:13:50][0.5]

Julian McCormack: [00:13:51] School, you know, pencil case and getting a probably a relatively thick, you know, maybe half a mill pacer. Poppet, did the did the pencil pop the balloon, you think? Yeah, of course it did, you idiot. But but now let me get the same balloon, same make of balloon from the same packet of balloon and inflate it, you know, only one third. And now I hit the balloon with that pencil on. It might pop so the pencil didn't change. It's the air in the balloon that's doing the popping and the pencil just helps. So what happens in cycles is as the balloon inflates, it becomes self-fulfilling for the participants, for the air in the balloon to believe that the balloon is inviolable. Right. Because they see the balloon. They feel the balloon. They're in the balloon as it inflates. And the difference, making money, it's all good. It's all fun. And then so the the possibility of a of a pop loses any veracity or, you know, mental possibility for the people in it, because you don't need to tell me about Netflix. I've been here for ten years. You don't need to tell me about Microsoft. I benefit. Right. That certainty, paradoxically, is what makes cycles possible. And every cycle is the same. And we live in an economic system that is cyclical. That is what capital does. Right. Right. So capital is really simple, right? The iron law of capital is return on capital. Right. So you have to get a return on capital. How is that determined by price? Price goes up. Capital comes in. Price goes down. Capital goes out. But then we can tell ourselves that. No, no, no, no, no, no. This is a structural grower. Inflation is we're in a secular stagnation. Now, see how they're different. They're things that are not cyclical. They're known there. So now I have a certainty on which I can build my worldview, and they're not subject to debate. You don't have to tell me about that. It's because think about it. Maybe a year ago, there was a bit of doubt creeping in, but most people were really wedded to, hey, man, this inflation is transitory. You know, it's like, look, it's debt, it's demographics, it's technology will never have much inflation. We're in a very different environment now. It's all known. And so that certainty lets them build an incredible cyclical bubble. Yeah. And incredible. I mean, I'm a really staggering cyclical bubble. And and the certainty that that gives people is what leads to that bubble. So it's it's the it's the belief that we're not in a bubble. The knowledge, in inverted commas, that we're not in a bubble that can lead to a bubble. It's really paradoxical. And it's also, again, not all that helpful because you don't know halfway through the bubble how big the bubble can get expensive can always get more expensive. And so you get this behaviour where a house of cards gets higher and higher and higher and I'm tolerant on taller and the taller it gets the more stable it feels. That's the start point. Fully acknowledge that could be wrong. Fully acknowledge that this might not be anything like what I'm describing because millions of economic agents are doing the reverse of what I'm saying. So let's be humble about that. Let's go back to that fog of war. Right. You know, Napoleon couldn't wait around at Austerlitz and think, you know, maybe that guy will go there. So I should take that hillside. He couldn't wait till a guy went there because it was too late. Right. You can't it's not a mechanical process where someone comes with a PowerPoint and says, I proved that. I've proven it as we are off we're off to the races. We you know, we know it is a constant state of uncertainty that we're dealing with. And therefore, we've got to watch out for what the boundary conditions of these things are. And we got to really radical boundary conditions. So if you look at the valuation of markets versus all of the great bubble episodes of history, so I'm not going to go back too far, but you think, you know, so the US in 1929, the US in 1967, Japan in 1989, China in 2007, the US in 2000. In the tech boom, we reached a level of market valuation that rivalled all of those and people need to know, understand, have a sense of from those points. Markets fell by more than half every time and often didn't make new highs for decades, if ever so. [00:18:23][272.1]

Alec: [00:18:23] On. The markets fell by more than half. Each time is what we saw about 20% in the S&P 500, a bit more in the Nasdaq, and then it's rallied a bit from there. So are you saying the worst is yet to come? [00:18:36][12.5]

Julian McCormack: [00:18:37] From my perspective, absolutely. Irrefutably. That's what it looks like. And so why would I say that? I think where the markets narrative, where the market's prevailing bias right now is, well, the big the big problems, inflation that's triggering action by the Fed. If the inflation comes off, the Fed can pivot and we're all good. And that's what I see being demonstrated. [00:19:00][23.3]

Alec: [00:19:01] I have actually seen that a lot on like Instagram and social media in the last 24 hours. Yeah, yeah. [00:19:06][5.9]

Julian McCormack: [00:19:07] Now, when I. [00:19:07][0.3]

Bryce: [00:19:08] Waited a post while I did one this morning called Stocks are bad. [00:19:10][2.1]

Speaker 1: [00:19:10] Did You Please? The problem. [00:19:12][2.2]

Bryce: [00:19:14] Is if it was as is appears to. [00:19:15][1.7]

Speaker 1: [00:19:17] Us, by the. [00:19:17][0.5]

Julian McCormack: [00:19:18] Way, it could be right where that. [00:19:20][2.8]

Bryce: [00:19:21] Content clickbait is. [00:19:21][0.9]

Speaker 1: [00:19:24] Yeah, yeah, yeah. [00:19:25][1.1]

Julian McCormack: [00:19:25] But, but let me also volunteer. That could be right like so I see people present things is all it's a mathematical certainty and and whatever and I think things like the the big short does this where where people know right and guys that Michael O'Leary whatever know that an outcome can happen it is so hard to convey how how brutal the uncertainty of markets is and how self eroding that uncertainty is because you'd never know. You never ever know. And also it actually it did a pretty good job in that movie and in the book of expressing that when you're halfway through that process and you've begun to see very serious default rates in the master trust data in the books of subprime stuff, but none of the prices are reacting. Then you've got to think. Or maybe I'm. [00:20:14][48.8]

Alec: [00:20:14] Wrong. Yeah. [00:20:14][0.3]

Julian McCormack: [00:20:15] Maybe I'm wrong. There's something about this that doesn't make sense. So. And by the way, that could have been the case. You know, there could have been something about that set up that was missed by guys like Beery or, you know, I mean, we were we were short, you know, American financials at that time. And we took those shorts off. We took the shorts off. So just before. Just before Bear Stearns, I'm going to say four months ish, before Bear Stearns. But we had shorted these things for at least ten years before. I mean, we shorted seek out Homes to zero in 2001 and two because this subprime stuff was obvious. It was just awful. Yeah, the accounting was terrible. So. So it was all in inverted commas. Cash accounting. So you're a subprime provider. You put together a book of loans. [00:21:03][47.9]

Alec: [00:21:03] Yeah. [00:21:03][0.0]

Julian McCormack: [00:21:04] You securitise them, kick them out, and you. You count that as profit today. Oh, my God. That's what cash accounting meant. [00:21:10][6.0]

Alec: [00:21:11] Was that like, completely different example. But Slater and Gordon, where they were recognising all their potential work as revenue. [00:21:16][5.8]

Julian McCormack: [00:21:17] That sounds a lot like it. [00:21:18][0.9]

Alec: [00:21:18] Yeah, yeah. [00:21:18][0.2]

Julian McCormack: [00:21:18] Yeah, yeah. It sounds a lot like it. Yeah, I didn't I don't know the ins and outs of that, but sounds exactly like that. And I use that term prevailing bias. That's a term straight out of Soros. Right? So Soros's thing is these machines don't work around equilibria. They are constantly in disequilibrium and they constantly when I say machines, I mean markets. They're constantly being dominated by a prevailing bias. And once you understand what that prevailing bias is, you can either agree with it or disagree with it. Right. And and also understand that they're self re-imposing their self. You know, they're self-perpetuating. That's his idea of reflex reflexivity. And so, you know, and some of your younger listeners might just know Cyrus from like right wing names or whatever. This guy was an absolute all time. Great. Yeah. A genius, you know, 30% for 30 years, largely of his own money. And he laid his thought processes out for everybody to see in a whole number of books. And unbelievably brilliant at this by the way bad at maths did did like philosophy and forget his other major at university but but was obsessed with the understanding the world and he and he had access to tools that most people died because his large exposures generated huge amounts of money was to borrow in one currency and buy another currency and use the borrowings to then buy financial assets underneath that. So he was making money in in multiple different ways. So if he borrowed in Deutsche Mark and bought in dollars, right, he was short Deutsche Mark long dollars before he bought a stock and then he'd have a stock book underneath that as well. And then and then he'd buy index commodity futures around that as well. So and he was doing that all basically in his head. [00:23:10][111.7]

Alec: [00:23:10] Yeah. So it's like he was okay at maths. [00:23:12][1.7]

Julian McCormack: [00:23:14] He was, he was really good at mathematical concepts. Yeah, yeah. Yeah. So anyway, so where are we now that providing boss has been explained. What, what do I think is actually happening in the economy where we're careening into recession? Okay, just ploughing into recession, I just, just galloping into it. And that's bad for stocks, so. Well. [00:23:36][22.6]

Alec: [00:23:37] It's bad for everything and. Yeah. Galloping interest. Yeah. [00:23:39][2.5]

Julian McCormack: [00:23:40] Yeah. Now Australia, I don't know anything about Australia, but you guys don't know more about Australia. I spend my time in a little bubble that looks everywhere else. I don't have much time to look at Australia, I don't know. So I'm largely talking about the states which is like the financing cycle that matters. So what do I say there? I see a deeply inverted yield curve. So two tens and the Fed and the Fed has published at least two research papers in the last five years that say, no, no, no, there's no explanatory value, no predictive value in the yield curve, especially not to tend to which I say I disagree. Okay. And not yeah. Whether it's a family show. [00:24:15][35.0]

Alec: [00:24:16] We can bleep you out. [00:24:16][0.6]

Julian McCormack: [00:24:18] So what is a bank? A bank is a big thing that borrows short and lends long and has a government right to do that. And by definition they borrow at zero duration, which is a deposit. So your deposit is a loan to the bank and you can take it at any time. So it's a one is it like a zero, you know, time horizon borrowing through to about three years? That's a wholesale funding market that banks operate in. So now what happens if the two year note, two year Treasury note is that we were 320 and the ten year is it to 70 and everything's priced off the back of those two things, banks automatically will say, Well, hang on a minute, I'm not going to lend these guys lend to, you know, Julian, Bruce and Alec because because I'm borrowing it some rate that set off, you know, 320 and these guys are. There reference rats out there. I said off to 70, I'm going to Titan. What do we see observing? Huge tightening, massive tightening. So going Google Senior Loan Officer survey, Fred, and look at what that looks like. So the only times you've ever had both small business and medium and large business tightening of this magnitude recession and the only times you've ever had a net 20% tight, which is where we got to Friday week ago. Right. It's a recession. The only times we've ever had the forward indicators in, you know, so the three branches of the free of the Fed reserve type survey data from businesses, so the Texas, the Philly and the New York Fed, the only time their future new orders have gone to zero simultaneously was 2008. That just happened last two weeks ago. And people say, no, no, but but unemployment is really low and job ads are really high, blah, blah, blah. Yeah. Just go and look at the shape of the unemployment curve and overlay that on recessions. It's always at the lows as you're going into recession. It's not the level, it's the rate of change that matters and the direction of travel that matters. So absent everything else on the monetary and fiscal side, this looks like an economy that is ploughing into recession. And it's not a crisis. No one comes and helps in a recession. That's the whole point. So go and look at what the Fed is saying in their minutes. The greater risk would be not to restore price stability. We have a role in moderating demand. Yeah, there are direct quotes from the Fed minutes. [00:26:59][160.8]

Alec: [00:26:59] Yeah. [00:26:59][0.0]

Julian McCormack: [00:27:01] What does that mean? It means we're not coming to help everybody. We want to choke you out until your legs stop wiggling. Then we take the pressure off. Yeah, because they have a, they have a dual mandate ones unemployment or full employment. And one is price stability that becomes a sole mandate in the presence of very low unemployment, obviously. And they've got the sitting president of the United States holding hour long press conferences devoted just to inflation. And Jay Powell has the prior to Fed chairs openly criticising the current sitting Fed chair handling of inflation, totally unprecedented. So from a personal perspective, I think he's probably thinking, oh, you want me to you want to control inflation? Do you watch me dance? Yeah, but how are you going to Chris and I've got four more years to do it. [00:27:52][51.7]

Alec: [00:27:52] Yeah, right. [00:27:53][0.5]

Julian McCormack: [00:27:54] So that's the set up on the Yes. Of lead indicators of, of the real economy side. I just ask people to think about why the real economy didn't do anything for more than a decade in the post GFC world, in the presence of low interest rates, we had the longest but the dullest that the lowest average growth expansion of the post-war period with zero interest rates. So why are we so excited about interest rates going down a bit now? There's something else in the system and that something else is bleeding the obvious. It's 10% per year GDP injected straight into people's bank accounts. That's what just happened. So if you look at corporate profitability and people can just Google US corporate profits unadjusted, Fred, and go and look at that on the Federal Reserve's, you know, saying the St Louis Fed's data thing and look at the shape of the curve. Amazing, amazing. So US dollars billion pre-tax unadjusted earned by corporates went up 40% in 18 months. Yeah. Well not from a recessionary low, I don't mean from the low of like the Covid one month's low, I mean from a full employment, two and a half per cent inflation economy in 2019 at the end of the longest post-war expansion. But let me make it more concrete. The 2018 2019 is reasonable economy in the States, the earnings of Google, Microsoft, Apple and matter no matter what a name that they all basically double. Yeah from 2019 to mid 2021 that's pretty unusual. So that's all happening all at once. What else is happening? Retail sales are up 20% in 18 months. The dollars in people's bank accounts, just the dollars in bank accounts go from 13 trillion to 18 trillion in 18 months. [00:29:51][117.0]

Alec: [00:29:51] Yeah. [00:29:51][0.0]

Julian McCormack: [00:29:52] New business formation goes from a run rate of 3 million through cycle. It does, you know, look at the GFC in oh six new business formation in the States was you know, call it about 2.5 by the depths million businesses per year in the depths of the GFC in 2019 it went to like two point. 3 million. So. So an amplitude of 0.2. Yeah. That went up by 2 million in the same 18 months. So all these things will happen together all in the same eight months. Yeah. And so now people are anchored on to the most radical economic experiment in human history and thinking that the earnings power of businesses in the last two years is reflective of the underlying earnings power. And I just ask people to think about how things look versus a full employment economy of 2019. Do they look cheap or expensive? And we're going to find out. Yeah, we're going to find out. So because what's happening now is the largest fiscal contraction almost in history. So we're going from an 8 to 9% of GDP budget deficit at the margin. So change year on year not not the level but the change year on year 2020. This is 19 to an 8% contraction. 2022 versus 2021. So. So think of it as like a peak to peak about 9 to -8. We've never done that before apart from one time. So that one time was in the late 1940s. I don't know if you guys the history, but there's a big series of things happening in the forties, namely a big world war. [00:31:34][101.7]

Alec: [00:31:35] Hmm. [00:31:35][0.0]

Julian McCormack: [00:31:35] We find out that the US financed that with deficits. So they went from a 15% deficit to a 15% contraction of that deficit from about 46 to about 48. Then what happened? 4849 saw CPI go -3% monthly change year on year, which is the deepest deflation since the Great Depression. And corporate profits fell just in dollars Billion by over 20%, nearly 25% from 48 through 4950. So that's pretty sobering. And so when I see people doing the prevailing biased thing of, Oh cool, let's buy some stocks because interest rates are falling, I think that prevailing bias is wildly wrong and missing what is an enormous contraction in the underlying economy that's driving the earnings of the businesses they're buying. And the corporates are all telling you, not all, because I think there's some pretty nasty guidance out there that will prove pretty ordinary that look at the fast cycle businesses versus the slow cycle businesses. This is the worst conditions in Metters history, according to Zuckerberg. It's the first quarter on quarter decline in revenue ever in the firm's history. But Microsoft is telling you, oh, hey, we lowered guidance and missed it. We lowered 90 days ago. Well, you know, a bit over three months ago now. And we missed that guidance on both revenue and profit. But our business will stay at its current level, reaccelerate from here on what's going on. So made a bad Microsoft could I mean the easy answer is Microsoft's great business is contracted revenues and it's different maybe I'd posit a different thing. Matter is all small business and it's fast. So if if a small businesses revenue goes down and profit part of bill is being squeezed, which is happening right now, go and look at the NFIB Small Business Survey. You can say that that's something right now they go, oh, sorry matter. I'm not going to pay for any advertising next week. In fact, what happens if people contract for Azure Office three, six, five or Alibaba? That's a really slow budgeting cycle. So Chevron does their budget in whenever November last year. Anybody, Rosie, it's all good. They're all sit down and do their budget for next year in like October-November. So they're not saying to Microsoft, look, we've got to talk about this. They're not saying anything. It is. Yeah, that's it. That's a contracted revenue for the year and that's the services we use and proper. And so I think Microsoft is seeing this enormous level of activity, maybe moderating. It will obviously moderate at the margin because they missed revenue, you know, two quarters in a row. But they're just thinking, oh, no, whatever. That's just a blip. And my contention is that's just a fast cycle versus a slower cycle and that slower cycle will catch up. [00:34:24][168.6]

Bryce: [00:34:24] Mm Well Julian, let's take a look at where Platinum are seeing opportunities. Now. Before we do, though, we're just going to take a quick break to hear from our sponsors. So Julian, towards the start of the episode you mentioned platinum are looking for the overlooked. And you said that there seem to be more now than perhaps there were in the not too distant past. So where are where are you seeing these opportunities? What is the overlooked? [00:34:51][26.4]

Julian McCormack: [00:34:52] So cyclicality Bryce. So things that are responsive to fast nominal global growth. So GDP growth, not growth, is a sort of factor. So I'd ask people to think about BHP and Rio. So I'm old enough to remember when BHP and Rio was sort of rah rah growth stocks at about the same share prices is now 15 years ago with a one and a half per cent dividend yield. [00:35:16][23.9]

Alec: [00:35:16] Hmm. [00:35:16][0.0]

Julian McCormack: [00:35:17] That's now, I don't know, six or seven. Up about ten for your franking credits. So that's a colossal D rating of those businesses, right. Just in terms of the multiple of the thing they give me today, what people will pay for them now with either those stocks, that's just an example. But that those things globally look really interesting over 5 to 10 years. One of the reasons we had very low inflation at the end of the last decade was because we were eating the seed corn. We were living off prior investment. So massive booms in investment in metals and mining, massive boom in investment in energy, in particularly shale, colossal boom prior to that and ship building and colossal boom prior to that in Chipmaking. Then we get to the end of the last decade and when things are well, inflation's really low. Well, yeah, that's because we've spent like 5 trillion in shale and you know, CapEx to mining CapEx to GDP in Australia went to eight and the mining boom and then it fell because we live in a cyclical economy. Right. So now those cycles have to be caught up because the COVID stimulus wave and the behavioural thing of physical stuff I can buy on Amazon basically versus services which I can't go and consume because I can't go outside. Right. That then hit an underinvested field of possibility. And so that's what happened. So now we have to make up all that CapEx across energy and metals, mining and manufacturing and all sorts of things. So so that is really interesting. However, in the near-term, we are much, much more focussed on capital preservation. [00:36:51][93.8]

Alec: [00:36:52] So on that point, you know, people who have listened to this interview are probably getting quite nervous right now. A few people might have pulled out their brokerage up and looking at some of the growth stocks in there and worrying. But platinum, you know, you have a mandate to be invested that, you know, people, institutions and stuff give you money to invest. You can't sit at 100% cash. So I guess how is platinum positioning the portfolio in that in that short term, careering, galloping into a recession? What's going to happen next? We know. [00:37:24][32.0]

Julian McCormack: [00:37:24] So we are. So we raise cash in in times where we're nervous. But we also short market ten stocks and we can't sit in those. So if people go and look at a point in time, you know, at the end of last month, I think we weren't all that short, but we weren't all that short. But over the sort of journey from about March through to now, we've almost never been shorter and had more cash in our existence. And we've been around for 28 years. [00:37:53][28.9]

Alec: [00:37:53] Yeah. [00:37:53][0.0]

Julian McCormack: [00:37:54] So we are saying to anyone who listen across our suite of funds, for God's sake, preserve your capital. That's the stage of the cycle we're at. Yeah, right. That's what we think. [00:38:04][10.2]

Bryce: [00:38:05] And to my mind's already gone. [00:38:06][1.2]

Julian McCormack: [00:38:09] I'll get some more and then preserve it. So fully acknowledging that could be wrong, you know, the Fed could pivot. The Fed, you know, whatever. You know, it's not advice to you. That's what the world looks like to us. And in particular, what we think happens now is the truly great companies now come off. So what's happened is the reaper comes for the weak first. Right. So you're more speculative. You're obviously loss making when they get your Robinhood. [00:38:36][27.9]

Alec: [00:38:37] Your peloton tumble where we saw in the back end of last year. [00:38:41][3.5]

Julian McCormack: [00:38:41] Totally but they peaked in January oh one if I'm getting my history right, as did biotech, which is classic and we said this publicly like over a year ago, this is what happens in early bear markets. The froth gets cleaned up first and people rotate back to the great champions because they can't lose. Right. Everybody can just go and look at what happens to Microsoft three cycles. Go and look at it from, you know, sort of late nineties through mid 2000s. Go and look at it from oh seven through to 2010. Smoked. [00:39:14][33.4]

Alec: [00:39:15] Yeah. [00:39:15][0.0]

Julian McCormack: [00:39:16] Saw, smoked. [00:39:17][0.7]

Alec: [00:39:18] And that did start to play out like Apple was down what 20% at one stage. But it's, it's come back on a totally. [00:39:23][5.2]

Julian McCormack: [00:39:23] Yeah, totally. Now think about a pretty expensive consumer discretionary purchase over a couple of years of recession. I don't think that looks good at all. [00:39:34][10.7]

Alec: [00:39:35] Yeah. Mm hmm. [00:39:35][0.5]

Julian McCormack: [00:39:36] But I could be wrong. [00:39:37][0.5]

Alec: [00:39:37] I mean, Apple might even argue they're not consumer discretionary anymore. They're a staple in everyone's lives. [00:39:42][4.5]

Julian McCormack: [00:39:43] They're right. But you do economise on staples. Yeah. [00:39:46][3.0]

Alec: [00:39:47] 100%. [00:39:47][0.0]

Julian McCormack: [00:39:47] Yeah. So, anyway, that's what the world looks like to us. [00:39:50][2.7]

Alec: [00:39:51] Yeah. Okay. And then in terms of your short book, is it a lot of those highly speculative and profitable tech? It has been. [00:40:00][9.9]

Julian McCormack: [00:40:01] Yeah, it has been. And now more and more, it's gravitating back to the champions. Yeah. To. To take to the champions. Yeah. I have to be careful about disclosure and shorts, cause it's like, not because they move quickly, and it can be very misleading to say we're short, there's in tomorrow or not. But yeah, that by and large has been so unprofitable. Tech is a basket that Goldman Sachs put together. That's a that's a great example of the kind of stuff we have been short. And now increasingly, we're looking to short absolute champions. Things like, for example, not necessarily today, but maybe. Yeah, Apple's your Microsofts you CBA's okay. Yeah. You have to be your absolute. [00:40:41][40.7]

Alec: [00:40:42] Best maybe I would be stoked that the just been bucketed with Apple and Microsoft. [00:40:46][3.7]

Julian McCormack: [00:40:47] Well it's got that kind of vibe. It's the best bank in a pretty good market and it's going to be fine. And it's been a Widowmaker trade forever. And I'll never go down as ever. Well, we'll see. [00:40:56][9.4]

Bryce: [00:40:57] So, Julian, for a retail investor who's sitting at home, that doesn't have the luxury of being able to short as easily as some of the big institutions to protect to preserve some of their capital. And sitting there with the philosophy as well of not selling your positions in a market crash, because we all know it's probably one of the worst times to sell. [00:41:15][17.7]

Julian McCormack: [00:41:15] We're not in a market crash yet. [00:41:16][1.0]

Bryce: [00:41:17] Okay. Well, leading up to my crash. [00:41:18][1.7]

Speaker 1: [00:41:19] I mean, I feel volatility certainly has a. [00:41:23][3.8]

Alec: [00:41:23] Bit of a market for. [00:41:24][0.6]

Speaker 1: [00:41:25] This. [00:41:25][0.0]

Bryce: [00:41:26] What are some practical ways that we should think about preserving capital if we don't have those sort of. [00:41:32][5.8]

Julian McCormack: [00:41:33] Targets. [00:41:33][0.0]

Bryce: [00:41:33] Or tools available. [00:41:34][0.5]

Julian McCormack: [00:41:34] To you to great asset allocations at a time like this are cash and patience. Cash and patience. And everyone say, oh, cash doesn't need our attention, blah, blah, blah. Okay. But think about a world that just got mega returns and then average that forward over time. You're preserving those returns by holding some cash. Right. And cash is an option is an option to go and do anything with it. Yeah. You know, so that's really, really important. I think that's amplified in a place like Australia that has massive levels of household debt where people are basically leveraged long, what is kind of a risk asset in their house and then they want to go and own a whole lot of other risk assets in the form of equities. So they're running a little household hedge fund and they're massively leveraged long and they want to think about, okay, well, what happens in a in a in a relatively serious not and again, it's not going to be like the GFC, it's not a crisis like I said before. So it's not like, oh, I'm going to vomit and you know, the banks are all going broke and blah blah blah people. If people can remember, remember if people can't ask someone what was the early nineties like, what was the early eighties like? Yeah. And it's just. It's just dreary. Yeah, yeah, yeah. [00:42:49][74.9]

Alec: [00:42:50] It's not like a systemic crisis when the economy is going to collapse. It's just slower growth. Less growth. No growth. Yeah. [00:42:56][6.5]

Julian McCormack: [00:42:57] Less or negative growth. [00:42:58][0.8]

Alec: [00:42:58] Yeah. [00:42:58][0.0]

Julian McCormack: [00:42:59] With central banks wanting to and by the way, all that stuff before about central banks, inflation wasn't normative. I don't think they should tighten here because what did I just say? Cash and patience. Well, I can print the cash and they've got a lot. I should have more patience. [00:43:12][13.3]

Alec: [00:43:13] Yeah. [00:43:13][0.0]

Julian McCormack: [00:43:13] So why am I saying that? Well, the boom in stimulus stuff happened in 2020, and it wasn't really observable as a proven, you know, hey, we're getting too hot here until almost two years later. And so now that's all reversing and central banks want to tighten into it. Maybe that's a good idea. I doubt it. Hmm. So no one's coming to help from CPI in this country of, what is it, six and CPI in the states of eight and a half and CPI and in in England of 919 to CPI in Europe have nine CPI in China beginning to accelerate towards three. Japan begin to accelerate towards one or two. These are average rates of inflation not seen for decades and decades. And so yeah, they're going to tighten into that. I probably shouldn't they publish it quite, but that's what's going to happen. [00:44:00][46.6]

Alec: [00:44:01] I mean, there are so many, so many ways we can go from here. We haven't spoken about China and I know platinum and you've got views on China. We haven't spoken about active management VAT. [00:44:11][9.7]

Julian McCormack: [00:44:11] Let me give you a quick summary. China. No, no, no. [00:44:12][1.4]

Alec: [00:44:14] We get worry. It's boring. [00:44:15][1.5]

Julian McCormack: [00:44:16] Boring is good. Boring. Fine is boring. Nice. We'll come back to another topic. [00:44:20][3.7]

Alec: [00:44:20] Yeah, I was going to say we're going to have to get you back on to talk about these things because there's so much more to unpack. But we have run out of time and we do like to finish with the same final three questions. So we'll get into them. But before we do, if people can't. Wait until you come back and join us again. And I want to hear more from you. Follow you online anywhere in particular. I should go. [00:44:40][20.7]

Julian McCormack: [00:44:41] I'm on LinkedIn. And that's it for me, for social media. Nice start, dude. Way to be. [00:44:45][4.1]

Alec: [00:44:45] You're not saying you're not saying Bryce is clickbait on Instagram. [00:44:47][2.0]

Julian McCormack: [00:44:48] That's out of preserving my sanity, not visiting you. But I'm a medium. I'm on LinkedIn and that's just a purely I don't know about professional, but that's just work stuff, right? I don't really like social media. I don't want to expose myself to it, you know, go and look at our website, platinum dot com video and there's a bit on there called the Journal and that that's got a whole bunch of thoughts about the world constantly. [00:45:09][21.2]

Alec: [00:45:10] Great and keep subscribed to Equity Mates because we'll get Julian back on in the future. Please do but we'll get to our final three questions will make him rapid fire the first one. Do you have any books that you consider a must read? [00:45:22][11.9]

Julian McCormack: [00:45:23] Yeah. The Alchemy of Finance by George Soros, The Misbehaviour of Markets by Ben Mandelbrot and one up on Wall Street or betting the street by page. [00:45:31][7.8]

Alec: [00:45:32] Hi. Nice second question. Forget valuation. Forget the the idea of investing in them today just purely on who the company is, what it does and who it's run by. What's the best company you've ever come across? [00:45:43][11.5]

Julian McCormack: [00:45:44] Wrigley's chewing gum. Okay. Yeah, that was just phenomenal business. Phenomenal business. Got taken out by Buffet and Mars in oh nine. Just an incredible business. So it never it didn't have any barriers. So ethnically, culturally, whatever, no one really cares about chewing gum apart from Singapore, so it could open all these new markets. Let me give an example of how open markets, when the Berlin Wall fell in 89 and Russia sort of began to really open from 91 on, that was one of the first American businesses in. And they kept on finding that their delivery trucks would get knocked off for the cash. So they formed armed convoys. [00:46:19][35.5]

Speaker 1: [00:46:21] No, I'd delivered the chewing gum. [00:46:22][1.6]

Julian McCormack: [00:46:23] In these convoys and took cash, cash on delivery and then repatriated that like that kind of business with unbelievable return profile, you know, sort of 20% return on capital profile over 100 odd years or a bit short of that, a truly brilliant business never had a dollar of debt in the war, for example. It began to run into shortages and it just said, sorry, we're not going to sell to anyone in the public. We're going to send all our chewing gum to the troops. Yeah, just stuff like that. Just. Just a brilliant understanding of their own business and the societies they operate in and an incredible return profile that just, you know, the margins on a sticker becomes really very high. But then they're constantly innovating around that as well. You know, the stuff the air waves or the stuff that cleans the teeth or the the packaging formats change, but the underlying single thing never changes in price. So you can buy the one at the same price, which is really low, or you go to the, you know, the big tubs of it. And that's a better, much higher price point. But a stick of gum, just incredible business. [00:47:24][60.9]

Alec: [00:47:24] Yeah. All right. Love that answer. And then, Julien, final question. If you think back to your early days as an investor, starting off on the right foot, investing in Macquarie at $18, what advice would you give your younger self to. [00:47:38][13.6]

Julian McCormack: [00:47:39] Be more patient? Yeah, be more patient. That would be my advice. I love that. [00:47:44][4.8]

Bryce: [00:47:44] Great way to close given where the market's at at the moment. Time of recording the Nasdaq ripped into a bull market overnight. Good to have a sobering and more realistic view of where the world might be at. But do your own research. Check out the resources on the platinum page as well. It's certainly an interesting time and you've left us a lot to ponder, Julian, so thank you very much for sharing your time with us and the Equity Mates community. [00:48:07][23.2]

Julian McCormack: [00:48:07] It's a pleasure. My great pleasure. Thanks then. Thanks for what you're doing as well. It's great. It's really good. [00:48:11][3.4]

Bryce: [00:48:11] Thank you. [00:48:12][0.2]

Alec: [00:48:12] Thank you. [00:48:12][0.2]

Bryce: [00:48:14] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at Contact@equitymates.com. Or even better go to your podcast player and leave a five star review. Also a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group. We're on Instagram, YouTube and slowly making our way as an influencer on Tik Tok Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time. [00:48:14][0.0]

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Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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