The Global Macro with The Notetaker - 7investing

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The Global Macro with The Notetaker

Brothers Vishal and Rishi Daryanani have a skill and a passion for deciphering the global macroeconomic puzzle. In today's podcast, they share what it all will mean for investors.

July 15, 2022

– By Simon Erickson

Watching the endless flood of financial headlines right now is like drinking from a highly-subjective firehouse.

Hindsight is always 20/20, yet there’s no shortage of opinions about the events that have transpired during the past year. There are opinions about why inflation is rising so quickly, why the Fed’s actions were the wrong decisions, or why the stock market is incredibly over or undervalued at this very moment.

Subjective opinions might succeed in stirring up provocative news show conversations, but they also often induce dangerous biases. Media and political biases put their spin on every story, and they aren’t shy about blaming the bad news on their opponents. The social media viral spread of misinformation can lead to cognitive biases, causing irrational conclusions due to misinterpretation. Emotional biases like anchoring or loss aversion paralyze us from taking action, even when great opportunities arise. And the endless debate about whether the glass is half full or half empty will continue for eternity, with bulls dismissing bearish pessimism and bears refusing to accept blind bullish optimism.

Of course, this is all normal as part of our human nature. We’re hard-wired to be triggered by the principles of influence, which is why these biases work against us. The mere recognition that they exist is the first step we can take in honing a better decision-making process.

Yet in today’s special 7investing podcast, we’re going to take another important step. We’re going to throw the opinions and the biases out the window, and we’re going to take an objective look at the data.

Now’s the right time to dig into the numbers. To search for important insights about the financial bigger-picture and the current state of the economy. And from that, make informed decisions about what’s in store for the stock market.

To help us accomplish this, we’ve brought in the help of two brilliant Panamanian brothers who share a passion and talent for looking at the global macro. In today’s special 7investing podcast, 7investing CEO Simon Erickson speaks with Vishal and Rishi Daryanani, who present an in-depth presentation full of detailed information investors should know about the macroeconomy.

Vishal and Rishi share a 22 slide, comprehensive look at several different topics:

  • Review of the 2008 – 2020 longest bull run in American history
  • Expansionary monetary policy: Zero interest rates and QE
  • Fiscal stimulus and the ‘wealth effect’
  • Rising inflation and why the Fed turned hawkish
  • The impact of tightening Financial Conditions on Exchange Rates, Credit Spreads, Equity Valuations, and Interest Rates
  • The impact of the war in Ukraine and China’s Zero Covid Policy
  • How to assess/measure economic strength: Income, consumption, production, and employment
  • Opinions of high-profile institutional investors, including Michael Burry and Cathie Wood

Following their presentation, Simon asks the brothers several questions — including the similarities between today and previous financial crises, what battle plan the Fed will likely follow later this year, how markets and capital raises are continually evolving, and what the most-likely expectations they have for corporate American and the stock market in 2022 and 2023.

We’ll upload Vishal and Rishi’s presentation slides as a publicly-available 7investing Advisor Update very soon. You can also follow along with their insights on Twitter, where they post using the alias “TheNotetaker“.

Publicly-traded companies mentioned in this interview include Upstart Holdings. 7investing’s advisors or its guests may have positions in the companies mentioned.

Unedited Transcript

Edited transcript coming soon!

Simon Erickson  02:16

Okay. Hello everyone and welcome to today’s episode of our 7investing podcast on 7investing founder and CEO Simon Erickson. It is our mission to empower you to invest in your future. I am very, very excited to welcome my guest today, because there was a lot going on in the macroeconomic picture. When you’re talking about rising interest rates, inflation or these zillion other things to get fit to consider this a lot for investors to make sense of right now. It’s very exciting for me to welcome two brothers, Vishal and Rishi Daryanani, who are located in Panama have got a really, really good insightful view of the global macro economic picture and what it will mean for stock market investors. Vishal, Rishi, I’m really excited to have you on the program. Thanks for being a part of our 7investing podcast.

 

Vishal and Rishi Daryanani

Thank you for having us. Yep, thank you, Simon.

 

Simon Erickson  03:03

Guys, I’m pretty excited to because you’ve done a ton of prep for this podcast, which is going to make my job even easier, even records presentation that we can kind of go through slideshow that you prepared for this, and then we’ll come back up for air and have a conversation to split it up a little bit. But if you would like to go ahead and get started, why not? Let’s let’s fire up the PowerPoint.

 

Vishal Daryanani 03:23

Yep, absolutely. So thank you so much for that warm introduction. We have a couple of slides prepared that I’ll pull up right now. And for everyone listening on audio only, don’t worry, we will go into a lot of detail on what we’re looking at here. Absolutely. Pull this up.

 

Simon Erickson  03:41

Make sure to watch it on video on YouTube too. So you can see the awesome backgrounds and genre screens right now.

 

Vishal Daryanani 03:48

All right, cool. Well, let’s get started. So we figured it would be a good idea to kind of give, you know, a 10,000 foot overview of what’s going on. And really take a step back and see what the markets have done since the great financial crisis of 2008. We figured this would be important because monetary policy really changed after oh eight. And for reasons that we’re going to discuss right now. But if we look at March 2009, and that’s when the great financial crisis bottoms. And it was a really scary moment for a lot of investors. But from that moment on, we had what was known as like as the great expansion. So we had 131 month Bull Run. It’s the longest bull run in history, starting in March 2009, and then ending in February 2020. So right before the COVID crash. And the reason we’re focusing in on this is what’s really interesting is if you look at that March 2009 dates, what happened, how did the market bottom, so interest rates are set to zero. So the federal funds rate or short term interest rates are set to zero, but the Fed needed a more accommodative monetary policy tool. So they implemented what’s called quantitative easing. And this was the first time that the Federal Reserve had had ever done QE. Other countries like Japan had done it before, for prior decades, but this is the first time the Fed had ever done QE. And basically all this is in a very general sense is that the Federal Reserve would buy longer dated assets or debt securities. So they would buy long dated treasuries, they would buy agency mortgage backed securities. And the idea is that they would be bidding up the prices for these debt securities. And in turn, the yields would go down, because naturally, there’s an inverse relationship between price and with the yields. So they would be driving down the yields of these long term debt securities. So what’s interesting is that, although 2009 was the first time that we’d ever seen the Federal Reserve do quantitative easing, they actually did three times between 2009 and 2014. However, the largest round of quantitative easing was done in March 2020. So that’s the bottom of the really scary COVID crash that we had, the Federal Reserve stepped in and they started their largest long term assets purchasing program. And if you look on screen, we’ve got a chart of both the s&p 500 and then a chart of the Federal Reserve’s balance sheet. So whenever the Federal Reserve does quantitative easing, the balance sheet grows. And you’ll notice that the bottom of the COVID crash in March 2020 lines of very perfectly with the big spike in the Federal Reserve’s balance sheet. So basically, the point we’re trying to illustrate here is that during this period of 131 months, naturally, markets went up because, you know, companies became more innovative companies grew, we overall became more productive, but also monetary policy became much more accommodative and much easier than it was in prior years. And that’s something that is going to be very relevant for the conversation moving forward. I think we can go on to the next slide and kind of look a little closer into how QE effected long term rates like mortgage rates and Treasury yields.

Rishi Daryanani

Okay, perfect. Okay, so thank you, Vishal, for that introduction, wonderful explanation of what’s been going on for the past 10 years. As the shell previously mentioned, QE four was the largest QE session that the Fed has ever conducted. To explain further, by March at the beginning, they injected about $700 billion to buy mortgage backed securities and treasuries. Then after that, by June 2020, they engaged in a more gradual structure where they were pumping in $120 billion to buy $80 billion worth of long dated treasuries and $40 billion worth of mortgage backed securities. So the result of all these purchases, as we mentioned earlier was that once the Fed pumped money by these assets, the yields dropped, meaning that before the 2020 crash and any effects from COVID, for example, a 30 year fixed mortgage was more close to around 4%, as we can see in the chart over here that we put up. But after QE program, that 30 year fixed mortgage dropped to 2.65%. Same with the 10 year Treasury yield, it was closer to around 2%. But then after QE, that yield dropped to a low of zero point 52% throughout the program. What does this say? It literally means that the cost of borrowing a house has dropped significantly, and overall borrowing in general, the cost for that has gone down because rates got really low. So as a result, what happened in the end, asset prices in general just went up. This is why we saw a booming in the housing market throughout as a response to whatever happened in COVID. And this is why we saw s&p 500 go through a complete V shaped recovery and go through one of its sharpest rallies ever in the year 2020 and 28 throughout 2022 even. So it’s a result of these lorring of this lowering of rates, this easier availability of liquidity, more accommodative monetary policy and financial system that made all these asset run offs possible. So as a result, we can see the why these asset prices went up. Some people argue that this behavior was inflationary. We would say that this was partly inflationary because they’re because of one simple phenomena, known as the wealth effect. Whenever these asset prices go up. What tends to happen is that the general population whoever owns these assets, stocks or houses tend to feel the effects of wealth effect. So this means that they gain increased consumer confidence. They become more bold in their spending, they’re, they’re fine with making more exuberant purchases, like, like, for example, have you seen like a Mercedes with a Bitcoin license plate like you’ve seen a lot of those during QE people have become more bold to spend. Since the price of their houses went up, they could post as collateral to borrow even more money at lower rates. And on top of that, all these assets provided like a source of passive income form of dividends or interest or rent. So this is a time in which QE did provide some some form of stimulus, it did inflate prices, because it made people want to spend more. But it isn’t necessarily the only cause of inflation. That’s a very common misconception. Qe did contribute to some inflation. But there are other factors that were more direct, we had to make it a point to say that QE is mainly limited to the Fed using reserves that stay in the banking system, instead of actually going into directly into computer consumers deposits. So that’s why we have to mention some other factors that lead to inflation, not only QE, and Vishal will go more into those in the next slide.

 

Vishal Daryanani04:03

Alright, so when we’re thinking about what caused inflation in 2020, and 2021 Sure, quantitative easing had a role in that due to the wealth effects and some other reasons but two of the very important factors are compromised supply chains, and then fiscal spending. So as far as compromised supply chains, you know, at the height of lock downs, I’m sure many people know that that ports were congested factories and big manufacturing hubs, we’re not operating at full capacity, because of all the restrictions. Our family works in the retail electronics space. So we felt this personally, we saw the you know, the the price of freight go up immensely during this time. So products in general just ended up costing a lot more even here in Panama and that basically happened all over the world because you had limited supply. So we had under investment in certain commodities. We had under investment certain supply chains. We had underinvestment in energy transport systems. And so all that led to big decreases in supply. But the other factor that was really important was the very large amounts of fiscal spending or government spending. So on screen, we have a chart of m two money supply. And prior to COVID, the the size of or sorry, the total money supply was about 15. Point 5 trillion. And right now it’s about 21.7 5 trillion. So it shot up completely. And that wasn’t due to quantitative easing that was due to mostly large amounts of fiscal spending. On screen, we also have a headline which says COVID Relief bigger than World War Two budget sounds right. So essentially, what that saying is that the fiscal spending as a percent of GDP, for COVID relief was actually larger than that of World War Two. So that came in the form of stimulus checks, helicopter money, unfunded loan cuts, basically, all that excessive spending was what gave, you know, put more money in the system and gave consumers the ability to demand more whilst supply was constrained. And hence, we saw an increase in CPI, which Rishi is going to go over just now.

 

Rishi Daryanani 06:14

Alright, so as a shot previously mentioned, there was a large sum of fiscal spending, a lot of this came in, came in the form of helicopter money, where the government would directly give stimulus checks to the people. So as a result, a lot of this pent up spending potential kind of stayed stayed in check, while locked down measures are still in place, meaning during throughout 2020 and 2021. We didn’t see like such high levels of CPI printing was only once we started seeing this trend where the reopening took place around March, April that we started seeing CPI increase. Because I mean, what do you expect you you’d like like a bunch of people up there saving up a ton of money, they have nothing to spend it on, then they’re collecting additional stimulus checks. So then, by time you reopen the economy and let people out, you’ll see this drastic change in CPI went from 2.6 in March, and hopped over 4% in April 2021. And this is a very historically high number. I mean, I don’t think we’ve had prints this high for a long time for decades. So that sense, we can see how reopening the economy, and the stimulus checks that were pent up until March allowed that spending to just come out in April and then and then it led to higher CPI prints as a result. Add that to with the fact that supply chains are just simply not ready for the sudden surge of demand this reaction to stepping up and we see supply pressure reading, leading to price pressure up and then demand the additional demand also driving prices up. And we we’ve noticed that it’s throughout March and April where that trend change and that breakout happened. CPI prints. Moving on.

 

Rishi Daryanani 08:08

Yeah, so So one thing we wanted to note that was really important was so in 2020 and 2021, we saw inflation in both asset prices. And then also in the real economy. As she mentioned, that really picked up more so in 2021. If you recall to 2021, Jerome Powell and many of the many of the members of the Fed often referred to inflation as transitory, that was like the big buzzword in 2021, essentially signalling that they believed inflation was going to peak relative, you know, in that year and then come down at a certain point. But as prints kept kept rising CPI prints kept rising, they weren’t falling, it eventually turned Jerome Powell to have to pivot into a much more hawkish stance. So on November 30 2021, he said that it was probably time to retire the word transitory in reference to inflation. Now, this was a really big moment. And honestly, it was the start of of the turn in financial markets, because when he said this, it told us a lot of things. It told us that financial conditions we’re going to tie it in, it told us that interest rates were going to rise and that the Fed was committed to fighting inflation and inflation was enemy number one. And due to this, the Fed basically guided us and told us what was going to happen in the future. So to illustrate what that means, I’ll go to the next slide, which shows the Goldman Sachs financial conditions. So one phrase that was used a lot by the Fed was financial conditions are going to tighten. Now that term financial conditions has a very specific meaning. It’s not just some you know, random term that they use, it actually has a very specific meaning. And to know what that means we can look at various financial conditions indices. One of the most popular ones is the Goldman Sachs financial Conditions Index. So if we break that down into the various components, well, what does that include? What what leads to a tightening of this index? One is wider credit spreads. Two is the foreign exchange rate. So stronger dollar, three is higher risk free rates, and four is lower equity valuations. We’re going to go through each of those components in a little bit more detail. But the idea is that the Fed told us financial conditions we’re going to tie it in. If you break that down into the various components, we can know what that means. And sure enough, all these four things happen. All these four components got tighter. And on the visual, here, we have the actual chart of the Goldman Sachs financial conditions index. Prior to Jerome Powell speech and November 30, the index was at around 97. It’s now closer to 100. That doesn’t seem like a massive jump. But but it really is, if you look at the picture, you’ll see how short that jump is. And also in historical terms, the value we’re at right now isn’t very restrictive, as far as historical terms, but it’s that that rate of change that pace that we went from very loose and easy policy to much tighter policy, that’s that’s quite impactful. So now we’re gonna go through and just break down each each one of the components.

 

Rishi Daryanani 11:17

First of all, this is the most obvious and relevant component, lower equity valuations, it’s very apparent in this chart, you can see an s&p 500 year today, we’ve been down roughly 20%. So that’s one checkmark in the for financial conditions index to demonstrate that there’s tightening. So there’s a checkmark there, the asset values have gone down. Furthermore, we’re going to go over wider credit credit spreads. In this scenario for anyone in the audience who is unfamiliar with credit spreads are it’s a difference between yields of the risk free rate, which tends to be treasuries and riskier assets, like I yield bonds, and they have to be at the same maturity to make the comparison. So in this scenario, high yield bond spreads have shot up. This means that the high yield bonds which are in other words, known as junk bonds, or bonds that deal with corporations that have a credit rating of double B or lower, that yield has gone up. That means that investors are looking for a higher return to be willing to take on this debt. Before Powell announced that he was going to go hawkish in November of last year, the high yield bond spread was at 3.02% difference between that and the Treasury. But then, but then we fast forward to today, after Paul switches Tony Hawk hawkish and more tightening has been conducted, that high yield bond spread has jumped up to five point 36%. Meaning now that these these assets are viewed as more risky, investors are going to require higher yield to be willing to take on that loan in their balance sheets. So this indicates that the conditions are tightening, money is less available, and investors are less willing to offer that to these corporations. And moving on. If you could see that if we could see the next slide, so you can see the investment grade bond bond spread. This means that these are bonds related to corporations with a with a better credit rating triple B or higher and includes popular companies like Apple or Microsoft are deemed more credit worthy and safer to invest. And even those spreads weren’t spared from this financial tightening condition. Before Paul’s announcement, the spreads were at point 86% meaning that investors need point eight 6% more return than the risk free rate to be willing to invest in this asset. That value jumped up to one point 57% If we fast forward to this month, after Paul, after Jerome Powell tightened. So even with the most credit worthy corporate bonds, we’re still seeing a widening and spread that checks off on the second condition on on verifying on how tight the financial conditions are, we can see that the credit spreads are in fact widening from these charts.

 

Rishi Daryanani 14:27

Third, we have the foreign exchange rates so the US dollar everyone knows is gone and much stronger throughout the year. On the screen, we have VX y which is the US Dollar Index. At the beginning of the year, the reading on that was about 96 And now we’re at about 108. So that’s that’s a pretty significant jump for the US Dollar Index. And that’s due to higher rates and just tightening conditions overall a lot of investors are looking for safety in the US dollar hence the run up in this index. Um The strength of the dollar is also seen in other exchange rates. So for example, the euro to US dollar is now at parity. So that’s a one to one, one to one exchange rate. A big part of that is the Euro becoming weaker from their own policies, but then also the US dollar becoming so much stronger. So to see this, this one on one parity is honestly quite, quite surprising, not something many of us expected to see for a long time. And that’s also something we were able to expect, you know, we were able to expect the dollar to become stronger because the Fed was telling us financial conditions, we’re going to tie them. And lastly, the fourth component of financial conditions is higher risk free rates. So no surprise here, the federal funds rate was at at a range of zero to 0.25%. Up until March of this year, March is when we had the first rate hike of 25 basis points. And then more recently, we’ve had a 75 point basis hike at the June meeting, that was the largest rate hikes since 1994. And that brought us up to a target Fed funds rate of 1.5% to 1.75%. So again, we knew rates were going to go up, the Fed told us rates are gonna go up and they did, they have gone up at a faster pace than then guided. And that’s something we’re going to discuss a little bit more later. But But again, just goes to show, the Fed guides the market and the market responds accordingly. And this is a clear indication that is rates all across the yield curve. So all risk free rates have gone up. We’ve got a chart here, which shows the yield curve was which essentially plots the yields of various maturities. So it’ll plot everywhere from the one month treasury bill to the 30 year treasury bonds. And rates across the entire curve have gone up since 2021, and 2020. And so this is just also signals a tightening of financial conditions, because the cost of borrowing has gone up across all maturities.

 

Rishi Daryanani 17:06

Furthermore, we can’t really ignore the effect of one important event that happened this year, which is the war in Ukraine between Russia and Ukraine. It’s definitely an impactful, impactful event because war is a highly destabilizing event, especially war between two fully formed nation states. One factor that we definitely have to take into consideration is the share of exports, for very crucial commodities and food products that come from this region, from the two from the two countries, even Belarus to mention it to mention some particular examples of we have natural gas palladium and and other fertilizers as well as food products like wheat and barley, large chunks of those products come from this area. If we look at the percentage of the share of global exports for palladium, for example, over more than 20% of all the exported palladium, which is a fertilizer component comes from Russia, and now that that that product has been cut off essentially from the West, that’s going to affect markets in that department to the price of these commodities are gonna go up wheat, wheat, for example, Ukraine, and Russia provides more than 20% of the exported wheat in the world now that the war is completely destabilize the region, that supply of this product has been completely cut off. So that’s definitely going to put a strain on the supply side when it comes to inflation. And we can’t ignore the effects of this war, as it is destabilizing the region and also affecting global trade and the ability for countries to acquire their basic food and energy needs. As we can see in this chart, which points up every single export that’s crucial for the region, it’s going to definitely have an impact on prices in the future as long as this conflict keeps going on. Moving on. We’ve also had the unfortunate luck of dealing with zero COVID policy in China. Although the situation has improved now in June, July. Back in May, we’ve had issues with ships just being congested in major shipping ports in Shanghai. We can see in this chart that in May that there’s peak congestion and the ports this put heavy strain on international trade in general. We see this also affecting us CPI trends because a lot of consumer discretionary products come from China they export all the consumer discretionary goods to the United States. So because of this event because of political tension, and tension caused by COVID measures. This would drive the price of discretionary goods up.

 

Rishi Daryanani 20:10

So the reason we brought up both of those events is that’s made inflation more elevated and even stickier than, than anticipated. So the recent reading on inflation was 8.6%. And those are numbers we haven’t seen since the late 1970s and early 1980s. And just to kind of give a little, a small little history lesson of the time, the United States went through a very inflationary period from 1965 to 1982, known as the Great inflation. And in that time, inflation was uncontrollable, and so was unemployment. And this was a product of excessive fiscal spending, easy monetary policy, and then also supply shocks. So there were two oil embargoes that happened in that time period. Some of those events sound pretty similar right now. I mean, there are definitely key differences. So we don’t want to make it sound as though it’s a direct comparison to the 70s. Although that that comparison is often is often used. But the way the great inflation period ended, was former Fed Chairman Paul Volcker, essentially resource constrained the rate of money supply growth, to the point that interest rates got got all the way to 20%, which is just something unfathomable, because we’re right now at at a range of 1.5%, to 1.75%. The key difference is, though, that in 1980, the US had a debt to GDP ratio of about 30%. But now we have a debt to GDP ratio of about 130%. So so the point here is the same measures that were taken back then won’t really are not really applicable or not really available to us right now, because the system is so much more leverage. You know, there’s, there’s what’s called zombie companies, which I think 20, about 20% of companies in the US are zombie companies, meaning that they, their debt servicing costs exceed the profits that they make. So when rates go up, that really puts that really harms those kinds of companies. And so this has led investors to really wonder, you know, how much can the Fed tight and we have so much more leverage and so much more debt can we really tied in as much as the Fed is guiding and investors are betting against the Fed doing that, and for reasons we’ll show in the next slide.

 

Rishi Daryanani 22:30

So the direction of the economy is highly uncertain, the Fed makes it a point in their dot plot. As we see in this chart, the Fed has their estimate of what the terminal value for the fence Fed funds rate is going to be. The Fed members themselves predict that by the end of 2023, will reach a terminal rate of 3.8%. But we’re seeing a lot more market participants going against this estimate. They essentially are challenging the challenging the Fed right now. And we can see this in the bond market. When you look at Fed Funds Futures, they’re pricing in a much lower terminal value than the actual Fed members are expecting. Right now. The bond market through Fed Funds Futures is pricing in a terminal value of 2.8%, as we can see in the chart, so as you can see here is a lot of uncertainty as to how much tightening the Fed has to do, how much tightening will they even be able to do? how strong the economy’s because there’s conflicting data. If even though the Purchasing Managers Index has gone down this year, we’re still seeing a strong labor market with unemployment at very low levels. So the reality is we’re not really certain how tight the Fed is going to be, not to mention that in many of Jerome Powell speeches, he he talks about the need to be nimble and to respond, respond immediately to data. So for example, in the past two years, we have examples of you have an example of Jerome Powell engaging in so called pivot vicia. We’ll go into this more in more detail.

 

Rishi Daryanani 24:23

So one of the big things people talk about right now is the Fed pivot if and when the Fed will pivot, are they going to move into more accommodative policy? Are they going to continue tightening and on the screen we have a chart which basically shows the the last time the Fed did quantitative tightening was in 2018. That was the first time or maybe it started in 2017. But that was the first time they had done quantitative tightening. However, they were forced to abruptly end Qt in September 2019 After a spike in repo rates, and the reason we’re showing this is that the This was something unexpected, this spike in repo rates was totally unexpected to the Fed. And since the financial system is so complex, and you know, we’re dealing with raising interest rates, we’re dealing with quantitative tightening. Now, we don’t really know what you know what might break next. We were recently watching an interview with Joseph Wang, who’s a former senior fed, fed trader. And he brought up this example of this September 2019, blow up and repo rates. And what he was saying is that it’s unlikely we’ll see the same thing break again. But something else could very well break. So a lot of people are thinking, you know, the Fed is going to tighten until something breaks, what that thing is going to be is uncertain. But the reason we bring it up is that it’s a very real possibility, that that this rapid tightening could cause some kind of unintended consequences and financial system. So these are things that we’re going to be watching and being aware of.

 

Rishi Daryanani 26:00

You have things that we’re going to be looking at one events, in particular that we’re very interested in is the announcement of June CPI data. As we all know, these numbers have been printing really high. We’ve had 8.6%, for me, has been constantly going up. If we see prints that are higher than 8.6%. As certain spokespeople or spokespeople in the White House are potentially suggesting, then that could mean that we’re more likely to be in a stagflation airy environment, which is really bad for all financial assets in general. But we’re also seeing the other side of the argument, which is related to predictions that were made by famous investor Michael Burry and predictions that Kathie would mean as well as a lot to do with the bullwhip effect. Earlier on, we mentioned that there was a sudden surge in demand in April, this sudden surge led to something known as a whip effect.

 

Rishi Daryanani 27:05

In essence, the spiking demand caused the supply chains to go up even even higher in the sense of distributors, manufacturers and factories ended up ordering, ordering the same.

As we mentioned previously, in April, we had a sudden surge in demand from the reopening, this triggered something known as the bullwhip effect. So in essence, we have customers placing large orders for goods and search for goods basically. And as a response with retailers, distributors, suppliers, manufacturers reacted by over ordering as a response to a sudden spike of goods. Now, this demand didn’t last too long. But the result was that the read the retailers and distributors all throughout the supply chain, order an excess amount of inventory, because the anticipated larger demand. But since that wasn’t the case, and this surge in demand was very short lived. Now we’re dealing with excess inventory amongst all the major retailers, amongst many of the players in supply chains. So what Cathy wood and Michael berry are suggesting is that CPI prints should go down because of this phenomena, I think it is a very optimistic view of what could happen. But nonetheless, they make some compelling points. We are seeing scenarios in which major retailers like Target are adjusting their refund policies, in the sense that whenever someone returns an unwanted item, they’re literally letting the client keep the item as they refund the money. This suggests that they have no desire to store this extra good, because they already have excess inventory. And the cost of storing gun inventory will add up too much for them. So there is potential for this for disinflation in the form of lower low, lower prices and goods in the retail sector. But it’s still too early to say and that’s why it’s important to look at the next upcoming CPI print to see if all this does play out.

 

Rishi Daryanani

Yeah, but I just wanted to add one little thing to that is one of the things Jerome Powell said in the most recent FOMC presser is that they’re looking for sequential declines in in CPI readings. So they’re really focused in on that month over month reading. And if this, you know this bullwhip effect might take some time to play out. But if it’s correct, then what we might see is these big retailers having this inventory glut too much, you know, too much stock compared to the demands, especially the weakening demand that we’re seeing as consumers are getting weaker, you’re, you know, negative real income growth and reduce spending. And if that happens, retailers will have no choice really, but to lower prices, and then that should be reflected in CPI. But something like that might take some some time to play out. But we will, we will be looking for those month over month readings for CPI. Next one.

 

Rishi Daryanani

So it’s one component that is important to look at within the United States. We also like to look at factors that could influence markets outside the US. One country in particular that we are deeply fascinated by is Japan. And we’re very interested in seeing what happens in the future with the Bank of Japan. Out of all the major central banks, they’re the only one that’s still dovish, and engaging in more accommodative monetary policy. They’re engaging in what is known as yield curve control, meaning that they’re trying to maintain their government bonds, particularly the 10 year Japanese government bond yield at 0.25%. So how do they do this, they do this by buying excess amounts of Japanese government bonds by printing, you know, and then buying these bonds to drive the yield lower and drive the price up. This is necessary for the Bank of Japan, particularly because Japan has the highest debt to GDP ratio. So to them, it’s crucial to maintain these yield levels at a certain limit point to 5%. Because increasing the yield for Japanese government bonds would increase the debt servicing costs and it could be quite damaging for the Japanese government that’s has a lot of debt in its balance sheet. Furthermore, if we look at it in a global frame and see what effect it has on financial markets, a lot of investors do benefit from a weaker yen. Whenever the yield is capped off and it since it’s low right now, investors use the yen, they borrow money in the end at a lower rate and then they sell that yen in order to fund their purchases of US financial assets that yield the higher return. So as a result, they’re able to pocket that money in return and pay back the The the low low interest rate from the from borrowing the cheap Dan. So this trade is called the yen carry trade. As we can see in this chart, the Yen is currently we can two levels, USD Yen is currently above 130. So that means that it’s a good thing. So that means that these conditions lead to more favorable that lead to more investors being able to do the yen carry trade. And because the Yen is cheaper, they’re able to do this. But what we have to keep in mind too, is that there’s a lot of pressure on both sides of the Bank of Japan, a weaker yen does lead to cheaper exports for Japan, making them more competitive. But there is political pressure on the other side. When you print a ton of yen to buy these Japanese government bonds, you do devalued again. And as we know, in Japan 60% Of all the food that they consume is important and 90% of their energy is imported as well. So with such a large component of these, these basic expenses being imports, this puts a strain on the Japanese everyday citizen, if their yen gets weakened, the price of their living expenses goes up. So the Bank of Japan is essentially in a bit of catch 22, if they raise the cap on the yield, that makes their debt more expensive to service, it hurts them in very it can damage them in the sense that it could lead them to a death spiral where they lose a lot of money. But if they keep that cap, it affects the regular people, the Japanese people. So as a result, there’s a lot of political tension there. Furthermore, written when we bring this back to the US and related to that the largest foreign holders of US Treasuries are Japanese investors. A rise in this in this cap of 0.25% could prompt a lot of these Japanese investors to sell their US assets and then go back to yen denominated. yen denominated securities. So This in essence is a very important sector look in the Bank of Japan, and paying close attention to what they do in the future is important when it comes to understanding the direction of US stock market outlook. So we’re going to move on and talk a bit about earnings compression, which is another thing we’re going to look out for for future stock market misbehavior. Vishal will go into more detail on this.

 

Rishi Daryanani

So this is the last slide we have for today. And it’s actually the most recent thread that we’ve written. So Michael Burry, came out with a pretty a tweet that went pretty viral recently, in which he said that he believes we’re about 50% of the way through this bear market. And the reason he cited for it is he said that the current sell off that we’ve seen in equities is mostly due to multiple compression, but the next leg down will be due to earnings compression. So what does that mean? So as far as multiple compression, we can look at the price to earnings ratio of the s&p 500. Essentially, this tells us what are investors willing to pay for a given amount of earnings. So like, what is the premium that investors are paying a high multiple would signal that there’s quite a bit of euphoria that investors are willing to pay a lot. So at the height of the s&p this year on January 3 2022, that was the peak of the s&p, the forward P E ratio, so the price over the forecasted earnings over the next 12 months was 21.4 times. Now this is a number that we haven’t seen since basically the.com bubble. So that goes to show that valuations were very elevated, the multiple was very rich, and we hadn’t seen these kinds of multiples for a long, long time. Now, by July 8, the multiple contracted to 16.3. And this was mainly due to the price going down. So the numerator, that price earnings multiple went down. But what’s very interesting is this if we want to figure out okay, well, you know, what, where earnings is going to go or earnings are going to be strong, are they are they going to be weakened due to inflation and rising input costs and, and we can do demand, demand destruction from the recession. It’s really important to know what is that outlook for earnings. So if we look at consensus estimates for the s&p 500 The estimates are actually still very high. So for 2022 The forecast is about 10% higher than it been the year Ps are earnings per share for 2021. And 2023 is about 9% higher than 2022. So the outlook is still quite optimistic and quite positive for court for corporate earnings. But what happens if earnings disappoint, as we mentioned, demand might be weaker due to a possible recession and input costs are higher from inflation. If we start to see earnings, you know, surprise negatively, and we start to see EPS estimates being revised downwards, then we’re likely to see price, you know, the price of the s&p go down as well, because earnings as the denominator, if that goes down, the multiple goes up, but expecting to have a high multiple in a bear market environment. I mean, that’s, that would be pretty surprising for context, the s&p bottomed in March 2020, out of 13 times forward multiple forward P E multiple, and for the great financial crisis at bottom that an eight times Ford multiple. So you know, the there is a risk of continued contraction of that multiple. But then there’s also the added risk of what if earnings surprises to the downside. So we’ll be looking very closely at earnings this quarter listening to for guidance across various sectors, because that will really give us a good idea of how you know how tighter policy and how supply chain issues are actually affecting corporate earnings. So those are things we’re looking at right now. I think that’s all we got for as far as the visuals and presentation.

 

Simon Erickson  11:38

Well, first of all, guys, that was fantastic. What an incredible presentation and incredible amount of work that you put into this, we’ll make sure that we make that PowerPoint available for anyone who follows your presentation here on 7investing. But anyone who wants to follow these two brothers, you know, Rishi and Vishal are both on Twitter, with the Twitter alias, the note taker, and that is at fin twit notes. They’re always posting really, really good analysis, a lot of the charts, you know, you’ve seen on theirs on their Twitter handle as well. So please follow them along as well. But first and foremost, excellent job, guys. Great presentation.

 

Vishal and Rishi Daryanani

Thank you so much. Thank you.

 

Simon Erickson  12:13

I did have a couple of questions that I wanted to ask about, you know, that you presented here. The first and foremost is it’s always interesting to see when there is a financial crisis to be able to have the chance to look back at everything in 2020 hindsight, right? You mentioned quite a lot of things with Paul Volcker back in the 70s in the 80s. But in more recent memory, we’ve kind of seen the Fed or the government as a whole react to external forces that kind of pushes its hands to take an action, right? It would be in fact, this is kind of what the crisis has become known as right, you have the 22,000 and one.com crisis in response to kind of out of control, internet advertising spending that caused a bubble from that. We have the housing crisis, from subprime mortgages of 2008. And it’s gonna be interesting to see what we name this crisis, or what this becomes named after, because there’s just so many influences. On right now the confluence of influences between the Fed’s expanding balance sheet, and the fiscal stimulus and the economic, you know, reopening after COVID. And then the supply chain issues there’s there’s a host of events going on. And it’s almost like you have to say every time is different. But that leads me to the question of do you think there are any comparisons to 2008 or 2001, that might give us some insight as to what Jerome Powell might do with his battle plan or his strategy going forward, depending on what we see in the June CPI numbers that could announce tomorrow. And as he obviously wants to get back down to 2%, inflation, any thoughts overall on what might guide him, and we can expect the Feds action to do going forward here.

 

Vishal Daryanani

I can start off. So I think it’s important to assess, you know, what is the health of the economy right now. So Jerome Powell, every time he’s spoken in, you know, the recent FOMC pressors. He has been very complimentary about the strength of the economy. He’s been very complimentary about the labor markets. But the economy consists of multiple parts, right? If we break it down, you know, maybe we can we can break it down into four components, we can think of income, we can think of spending, we can think of production and employment. So as far as income, real income is, is actually negative. So the rate of growth of wages isn’t matching up to inflation, and that can have a problem with consumption, right? Because people in general don’t have the same purchasing power as before. So if, if, if real incomes stay negative and spending declines and what we might see as a decrease in production, and that’s kind of where the argument with Michael Burry and Cathy wood comes into play that these retailers have excess inventory, but maybe the demand is not matching up. So if production has to scale down and what happens to employment employment, eventually will will come down as well. So it kind of seems like there’s, you know, there’s a bit of an order to this, where it’s first, incomes don’t match up to inflation, which leads to reduce spending, which would lead to reduce production, which therefore would lead to reduced employment, I feel if the labor market starts to take a hit because of that, that might be something that would cause alarm bells at the Fed. But But again, that these kinds of things could take some time to play out. I feel like when Jerome Powell talks about the strength of the economy, a lot of it is due to that labor market. But that labor market isn’t necessarily safe. If that trend plays out the way that that I think it might, it might play out, because it’s very, very difficult, because the situation’s highly unique, in the sense that it’s been, it’s been decades since we’ve had a such a destabilizing event, like a war between two nation states. So it’s hard to make comparisons to 2001 to 2018. Because we, we didn’t have really this scenario where all of our supply chains were being completely compromised. And this could potentially be a permanent change in the world, we have, we really wouldn’t understand the outcome. That’s how destabilizing this is. I think for the first time in decades to the strategy of having 60% bonds, 40% stocks is also falling apart, because not a correlation between these two assets are positive. So this hasn’t happened in years, which indicates that we’re now in a period where there’s less stability. We haven’t had persistent and rising inflation above 4% in a while. So I think we’re looking at really new territory. At this point. Maybe what I tried to do is look at the Japan’s era or in the 90s, when they had a financial bubble, and their housing prices went up and the Nikkei also shot up like crazy due to accommodative policy. But it would be hard to draw parallels between 2001 2008 based on as far as I’ve looked, looked upon it.

 

Rishi Daryanani

Yeah. And just one other thing I wanted to add was so so at the very beginning of the presentation, we noted that the bottom of the crash in for the great financial crisis in 2009, was when the Fed introduced quantitative easing. Now, we had mentioned that, that quantitative easing isn’t necessarily you know, as inflationary as most people think. But at the same time, we now have this problem with inflation. So if things do start to break in the market, will inflation get out of hand if we start to, you know, start to use more accommodative monetary policy, lower rates, things of that nature, we had that in the toolkit back then in 2009, because inflation wasn’t as big of an issue now, but now we have this inflation problem. So it does feel like the tools are more limited. Now. You know, we obviously don’t want to sound super bleak, but but it does feel like like it is a harder environment now than then back then.

 

Simon Erickson  

Do you guys both have the assumption that there are future 75 basis point Fed funds rate increases in the future? That was kind of a big statement when he came out of the video with such a high increase? Do you think there’s more on the in the hopper here?

 

Rishi Daryanani

I think it’s possible, because so at the main meeting, I believe Jerome Powell told us that 75 basis points wasn’t being actively discussed. But then, you know, in June, that’s, that’s sure enough, that’s what they did. I think it’s the inflation is enemy number one. And rightfully so one thing we did learn about the 1970s grade inflation period is that one of the assumptions back then was that there was a trade off between unemployment and inflation. So that was the Phillips Curve. So essentially, the idea was that you could reduce unemployment by having a little bit of inflation. There was this kind of trade off between the two. But what we came to find out during that period is that if you have persistent and elevated inflation, it will most likely lead to economic stagnation as well and lead to high unemployment. And one of the reasons for that is, is this idea of inflation expectations. So when the general populace when when you know, the average person starts to expect high inflation in the future, it affects their habits today, they might ask for a raise today, you know, which it’s called the wage price spiral, they might, you know, ask for a raise, which would cause companies to have to increase their prices, you know, now, which would then kind of kick off the inflationary spiral. So I think the Fed is really committed in bringing those inflation expectations down. I think that’s one One of the key things to look at, in fact, in the June FOMC meeting, Powell said that one of the reasons they did 75 basis points was that they saw long term inflation expectations at elevated levels, long term would mean five to 10 years, there’s many ways to measure that there’s the University of Michigan household survey, there’s a survey of Professional Forecasters. There’s market indicators, like breakeven rates. But what the Fed wants to see is they want to see those long term inflation expectations at around 2%. At the time of the June FOMC, meeting, I think there are over 3%, so that kind of causes, you know, some alarm bells. Because if those expectations stay high, then obviously you have that wage price spiral problem, and your actual inflation can get out of hand. Although I think lately, we’ve seen expectations since then kind of trend a little bit lower. I think they’ve headed they’re heading towards 2%. If those stay anchored around there, I think, you know, maybe we won’t see the 75 basis points hikes. But that is something that we’re paying attention to determine that.

Just the mere fact that Paul’s insisting that he doesn’t want to plan any moves ahead and just look at data means that anything can happen. He’s that’s what it means to be nimble means he can go for anything, depending on what CPI prints out, come out what job report comes up, what happens in the financial system. So he will be quick to respond. He can turn around in any minute if he sees that there any events that are catastrophic that come from tightening. So hopefully, that doesn’t happen. But the reality is that Powell will react right away to these events, and anything’s on the car to 75 basis point. Hike is his intention, because he does want to tackle inflation, inflation. But he doesn’t want to do so do so what’s causing any damage to the financial system? I think I believe there is a breakeven Fed funds rate. That kind of matches with economic output. Powell did say that he wanted to get to that level, I don’t entirely remember what the number was, I think it was 2.5%. And he said, after that, he would just go for small increases of 25 basis points. And I remember in that day, the stock market was rattling, because they saw that as very as kind of like more accommodative, like you can either kind of dispelled that fear to the power was going to raise rates to extreme levels. Because we don’t want that either. Since our economy is very, since the US economy is very dependent on leverage right now, as opposed to like, back in early 2000s. When that debt to GDP level was lower.

 

Simon Erickson 

It’s a good point that you know, you don’t want to break the entire system, you want to be nimble, and then look at what the data tells you. There’s certainly as a shock to the economy, when you do rise, we do allow rates to rise very quickly, right? We, we saw with this bump, just a couple of months ago, it actually caused a yield curve inversion on April 1. And in fact, I think, gentlemen, one of the first times that you and I actually spoke on Twitter was, was right after an interview that I had done with Peru Saksena, which we chatted about this and the implications of the yield curve inversion, it’s only happened four times in 35 years, both or I should say all four of those times resulted in an American recession, at least in terms of the kind of generally accepted terminology about two consecutive quarters of negative GDP growth. Right. But again, this is not terrible for investors. You know, I still want to stay on the, on the economic side of this, and we’ll chat about investing on the second side of it. But do you have any, any thoughts about the yield curve inversion, on April? The first, is that predictive of another recession for the US economy that’s upcoming within the next year and a half? Or is it just this time is different? And we can’t have a perfect analog of those four previous times the last three and a half decades?

 

Vishal Daryanani

And in fact, it’s a good point. And in fact, I believe that the curve you’re referring to right is the twos 10s curve, the two year Treasury and the 10. Year Treasury

 

Simon Erickson  

Yes. I should have clarified. The two year treasury was paying a higher interest rate than the 10 year treasury. Exactly.

 

Vishal Daryanani

And I actually believe that’s inverted again, just now very recently, in the last couple of days, and this time, even deeper than the last one. Well, one thing that was interesting in your conversation with Peru is that he said he looks for an inversion. That’s persistence. So generally about 90 days, that time on April 1 was just you know, one day and that was it. That was the inversion. So I think what will be interesting right now is seeing is this current inversion going to last? Because we’re getting it again. But it’s also important to break it down. Like why? Why is this inversion happening? We’ve seen the 10 year yields dropped down pretty significantly. I think it was at its high, I think around 3.2 3.3 Ever since. And now I believe it’s under 3%. So that’s telling us that investors are, you know, fleeing to safety, they’re buying these long term bonds, bidding up the price, which therefore drives down the yields. And you know that that is that is a signal for a potential recession is these this flight to safety towards long bonds and something we haven’t seen for a while. I mean, we saw the bond market really just get destroyed this year, as you know, yields went from sub 1%, on the 10, year to over 3%. That’s a really fast increase. And now, it seems like, I’m not sure if we’ve seen the top of the 10 year yield, but we have definitely seen a really sharp decline. So all I can say, as far as whether we’ll get a recession based on this indicator, I do agree with blue that it’ll be important to see if this one, this inversion lasts a little bit longer than the last one, because the last one was only a day, it would be very telling to us to see if investors want to keep buying bonds, 10 year bonds that you know, under 3% 2.9% 2.8%, if if they really are fleeing towards safety, even when equity valuations are so much more compressed, are they still choosing to buy long dated bonds versus buying riskier assets that have already come down a lot in valuation in price.

So based on what I’ve heard from the few experts I spoke to about this. They don’t tend to like the Treasury yield curve as much, because it’s it’s a bit of a lagging indicator compared to other curves. I think there’s one. One, I think, you know, there’s one page on Twitter, Alfonso thickset, LOD, he looks at the overnight index swap curve instead. And he says that’s more ahead than the Treasury curve. I think he believes that, looking at that curve, when you see the two and a 10 year maturity for that curve, invert, that tends to happen before the Treasury curve, which is a bit of a lagging one compared to that acid. So in in from the conversations that I’ve had based on that, a lot of times, it seems like a lot of economists can’t explain why this happens. But they can just make the US make the UPS observation that throughout history, the yield curve has always been inverted, every time there’s been a recession. So that’s the main logic behind falling the yield curve. But I do see a lot of people are trying to find other alternatives to the yield curve, that that’s a bit more, that’s a bit less lagging like the alias swap curve. So I mean, there are some importances to the yield curve, because everybody’s looking at it, it will dictate the market behavior. But I think there can be some other better indicators to look at as well, for in terms of yield curve.

 

Simon Erickson  28:02

I’ve got one final question, but it’s a big one, it’s going to be asking you all to read into your crystal ball, or read the tea leaves of what investors should expect with everything that we’ve talked about in this conversation. And it’s going to be a little bit of a long wind up here. So maybe I can go on my monologue first for a moment. And then I’ll ask you that question, which is ultimately coming. But the comments that I’d like to add is that the market does evolve based on what is going on, right, based on what’s going on in the economy based on the actions the Fed is taking based on the state of, of corporate earnings and everything else. And it’s been so interesting to see in the last couple of years, as you all pointed out in your presentation, the speculation that’s gone into the market, right, whether it was the Mercedes that has the Bitcoin license plates, and the speculation that’s gone into cryptocurrencies, even as a lot of investors didn’t even know what they were buying. At the time. There was no cash flow. Is there anything else to secure those mean stocks? You know, let’s not forget just a short time ago ago when AMC and Gamestop were shooting to the moon, based on you know, crowdsource research on Wall Street bets, specs, special purpose acquisition companies, you know, this was something that a flood of capital went into, even though a lot of these companies that were raising money either had had very little or even no revenue, but had hockey stick growth projections. This was the perfect euphoric, speculative storm that pulled of course, a lot of capital into it. It has been corrected quite a bit. It seems like the tone now is much more, at least from what I’ve seen, into hedge funds. You know, the read the Ray Dalio is of the world. Short selling and short interest is getting a lot more attention value investing is getting a lot more attention. The tone of the market is changing, certainly in response to what we’ve seen in the last couple of months. And part two of my windup, but the question that I’m ultimately asking you, which is you know, what do you guys think is due to come as we have very reputable, very smart investors with very divergent opinions of what they think is going to happen in the next year or even less next couple of months of 2022 and 2023. You’ve got Ray Dalio, you know, Bridgewater is taking a huge short bet on European stocks, ASML and others, it’s about a 10 billion US dollar short bet on a lot of companies over there. You showed that Michael Burry, you know, from Big Short fame is is kind of expecting that there could be like you said, an additional 50% Drop in equities due to the compression in valuation multiples. And then secondly, the fundamental multiples to go from there. I Kathy, would you showed Cathy wood who is kind of more of a bullish investor for a lot of a lot of Earth, her career, she’s really focused on disruptive innovation, that being a deflationary force, whether that’s cloud computing, lower storage costs, whatever it is, you know, genomic sequencing costs coming down, a lot of technology pushes down the cost of things over time, which can counteract a lot of the issues that we’re seeing today. And so all of this everything that we’ve discussed for the last hour, hour and a half here, and keeping in mind, there are different opinions from very famous, very smart investors out there. What do you believe is in store for investors in 2022, and 2023? And also do you believe there are pockets of the market that are better suited to handle everything? Or pockets pockets of the market that are still in for a lot of pain in the next couple of months? In years?

 

Rishi Daryanani

I do you see that? A lot of disruptive innovation has been beaten down your view, I look for companies that aren’t dependent on the cyclicals in the sense that they have to be secular. Based on what I’m hearing, it seems like there’s a lot of opportunities in biotech stocks, because they’re not really affected by the seasonality of of like demand or anything. They’re they’re just focused on the research and developing products that are ultimately going to help humanity in the end. So it really depends on like how much liquidity and cash flow these companies have. One important metric that I’ve heard is really good to assess. This is the cash burn rate. You want to see how much of that cash you’re gonna spend every year whether they have enough to weather this storm, which could last till 2023 and 2323. Even. So I think at the end of the day, it all has to do with like, observing the company’s balance sheet. And then first and foremost, also seeing whether their business model is going to provide a lot of value for the world. Simon, I know that you have a lot of interest in AI, I definitely believe that like AI and machine learning has come a long way. And it has a lot of potential to change the world. These are definitely some sectors in the economy, I think can be useful. But you still have to be very careful with like, what cash flow situation is for these companies, and how their business models get affected and recessionary environment. One example I was thinking about was upstart they have a fantastic product that assesses the credit rating better than FICO scores. There. It’s all AI based and it’s worked amazingly, so far, but they got destroyed this year, like their stock went down tremendously, because they were heavily affected by a higher interest rate environment, their business was dependent on banks being willing to buy off the loans that they offered to people, because they told investors we’re not going to hold on to loans in our balance sheet, we’re going to be a small, small company, we’re not going to get bloated. But since there weren’t any banks that were willing to take on their loans since financial conditions tightened up, so it had no choice but to load on these loans into their own balance sheet. And then that really made investors seem very wary. I mean, I think this quarter, they reported 24% less revenue, because they’re just not able to sell off their loans in this environment. So disruptive innovation is great, but you still have to always scrutinize every company. We can’t just like assign disruptive innovation as a label, because all these companies are different. They offer different services. They operate differently. So you have to scrutinize how they perform financially in this environment, which isn’t really friendly for business right now. It’s, it are gonna be some tough times in the next few years. So it’s always important to assess the company’s balance sheet, see how their business is going to operate in a period of recession.

 

Simon Erickson  34:42

Last Word is yours, Vishal. What do you think?

 

Vishal Daryanani

Okay, yeah, so absolutely. I think one thing that’s important for investors to keep in mind is that the stock is not the company right? I think Jeff Bezos said this after the.com bubble in that the you know, Amazon stock had crashed, I think around 93 sent maybe even more, but he was saying the company is doing better than ever. And I think there are probably a lot of opportunities like that in the market where, you know, valuations are being compressed just because correlations across equities, you know, is shooting towards one you’ll see on a red day, every company will be red on a green day, every company will be green. And so the movements going on and actual stock prices isn’t necessarily indicative of company performance. So I think that’s something that investors need to be aware of and, and those who really do their homework and study can actually find, you know, can find value within this, this bloodbath will find great opportunities that may provide life changing returns. The other thing that’s important is a lot of this is cyclical, right? We’ve got these cycles of euphoria and these cycles of gloom, right. And a lot of that is due to credit, but in the long run, what really matters, it’s its productivity, and its growth, its earnings. So I think despite market conditions, and despite us being in one of those gloom periods where maybe valuations stay compressed a little bit longer, maybe they don’t, that’s not going to change the fact that there’s actually companies out there solving real problems. And, and growing. And, you know, I think even you had some really great research on this, some companies were even able to benefit from the easy monetary conditions from before like Taiwan semiconductors take advantage of low rates, in this high rate environment. So investors really need to be prudent and in finding, which are those companies that are not only weathering the storm, but also had intelligent management that was able to take advantage of, of prior conditions and then therefore Thrive currently, and then have good growth outlook. So yeah, I think, you know, this, this has happened before these kinds of crashes have happened before in the.com. Bubble in Oh, eight. And while I think a lot of companies might not make it, I think many of them that really, truly do solve a problem and are growing will will reward investors so and I think that’ll always be the case fundamentals and earnings in the long run is what matters.

 

Rishi Daryanani

I personally love the company stride. I’m not sure if you’ve heard of them, but they’re an ad tech company, and they’re up this year, about 23%. And one thing I love about that company is their overhead is like practically non existent because they do a lot of virtual learning and direct sets is consists of like contracts with their teachers. So the CEO and his earnings call himself said that they would be able to manage this recessionary period well, because their costs are not that high. And their mission to is like, like amazingly, whatever they’re trying to achieve. Trying to remove revolutionize education through technology seems to be working out for them. Their price to sales is practically one. And they’re still performing really well when you’re today in the market. So that’s one company I’ve looked at the EdTech space where costs are low, they’re not dependent on cyclicals they won’t get affected too much. They don’t need to borrow as much. And yeah, that’s that’s one area I’d look at. But there are opportunities 100% Like, you can’t let fear, keep your eyes closed and then keep you from observing scrutinizing what can actually be valuable in the market.

 

Simon Erickson  38:34

Well, this was fantastic. Once again, Vishal and Rishi Daryanani, the two Panamanian brothers, you know, you can follow them on Twitter at the note taker, that is at fin twit notes for anyone who wants to follow along. This was a great conversation. Gentlemen, rock to have you back on again for the 7investing podcast. I really appreciate you both being a part of it.

 

Vishal Daryanani

Simon honestly, that was really fun. Thanks, everybody.

 

Simon Erickson  38:56

Oh, yeah, absolute. Thanks. Thanks, Rishi. Thanks, Vishal. Thanks, everyone for tuning into this episode of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing!

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The Digital Transformation is Underway with GigaOm CEO Ben Book

GigaOm CEO Ben Book describes how larger companies are embracing the digital transformation and deploying new technologies within their enterprise, as well as several...

Investing in the Final Frontier with Andrew Chanin and Micah Walter...

The commercial space economy is continuing its successful launch! Businesses are finding innovative new ways to set up shop in orbit, and Andrew Chanin and Micah Walter-Range...