VALUE: After Hours (S07 E22): David Collum on gold, inflation, the Fed, rates, valuation, Shiller PE, deficits, platinum

Transcript

Tobias: It’s always hard to tell whether we’re live or not because, Zoom tells me it’s still setting it up. But I think that we probably are live.

Jake: I think we’re live.

Tobias: There we go. Redirecting. Hey, I’m Tobias Carlisle. This is Value: After Hours. I’m joined, as always, by my cohost, Jake Taylor. Our special guest today is Professor Dr. David B. Collum, organic chemistry professor, notable Fintwit personality. And author of a Year in Review, which I’ve read every year to escape from the family at Christmas.

Jake: Yeah, I was going to say it. Almost breaks up my marriage every year when I’m [Tobias laughs] reading it on the couch and supposed to be participating with the family.

Tobias: How are you, Dave? Welcome to the podcast.

David: Wait a minute. What do you doing? My wife’s talking to me. You can’t talk to me while I’m on a podcast. [Jake laughs] Yeah, great. She wants me to open the window, so we can hear what she’s listening to out on the porch.

Jake: [laughs] Hey, how is that working?

Tobias: Are you on break, Dave? You are in your cabin?

David: Yeah, I’m in my cabin and then I go home in a couple days. But before that, Mike Ferris is coming up to visit me. And so, maybe we’ll do a podcast from here. Who knows?

Jake: Nice.

Tobias: It’s not just a backdrop.

Jake: Yeah. Dave, I was looking and I realized that you and I have been internet email friends for 12 years at this point, if you can imagine.

David: Is that right?

Jake: Yeah.

David: Is that right? I lose track of everything at this point. I think it’s a senior moment thing. But one time, I was searching a famous podcaster. Mark, what’s his name? God, I’m drawing blanks on everyone today. [Jake laughs] The famous international expert. Mark, come on, God damn it, very cantankerous. In any event, to see more. I found a podcast I’d done with him, and I go, “What? I don’t remember that.”

[laughter]

David: So, in any event. Yeah, so, how’s things? It’s hotter than shit here. You cannot believe how hot it is here. You guys are in California, right?

Tobias: I am, but JT is in New York. He’s struggling a little bit at the moment.

David: Yeah. And being in a cabin, no AC, that’s the problem I’m suffering from.

Jake: Oh, man. Brutal. The heat dome is in full effect right now.

David: That’s right. I feel like I’m in the middle of some nuclear weapons site in Iran right now.

[laughter]

Tobias: David, we had Rudy Havenstein a few weeks ago, and we had a–

David: I saw that. I saw that.

What’s Wrong with the Markets?

Tobias: We had a good podcast with him. We just threw it open at the start and said, “What’s wrong with the markets?” So, we might do the same thing with you. What is wrong with the markets?

David: [laughs] Besides the fact they’re all fucked up. [Jake laughs] They do not respond to anything. It’s like, they’re driving without shock absorbers. At some point, we’re going to break an axle, right? So, it’s like skyscrapers. They blow in the breeze to respond to the wind and things like that. They’re made too rigid. At some point, you just hear a snapping noise. And so, they don’t respond to anything. We started World War III a couple days ago and the markets went up. How does that work?

Tobias: It’s bullish.

Jake: Yeah.

David: And on top of it, they’re profoundly overvalued. So, any system displaced from equilibrium, when it’s way far from equilibrium, when it returns, it’s a violent return. So, that’s what a bomb is, that’s what an avalanche is, that’s where an earthquake is and that’s what a market problem is. And so, I think we’re going to see some violence, although I don’t think violent crashes fix anything. So, I think the dip buyers will show up and they’ll think, everything’s okay. It’ll be like Red in Pearl Harbor where he sticks his head up and he’s going to say, “Guys, it’s a dud” and then gets his redheaded ass blown to bits.

The Case-Shiller PE and Valuation Distortions

Tobias: What makes you think that it’s overvalued? What are you looking at to make that determination?

David: I watch 25 metrics. They all seem to tell the same story, unless it comes from some Wall Street sell side analyst who then makes up stuff. The one I like the best for some reason is the Case-Shiller PE. It goes back to 1880. If you look at the average Case-Shiller PE from 1880 to 1990, which I am willing to call a baseline. Okay, I’m willing to say, 110 years sets a baseline for historical returns. It was around 12 or 13, and it just moved in a channel, goes up in the 20s, goes down in the single digits, but it channeled for about 110 years, 1990s. Curiously, 1994, and I’ve been trying to figure out why it left the channel. All the metrics, all left the channel and really never looked back.

And so, it is now parked at a cozy 38. And so, if you’re sitting there with Case-Shiller PE of 38 when historical fair value, or should we say average value is 12 to 13, it means that your ballpark 200% over historical average valuation. So, people will say, “Now, we’re in a different era.” I’ve said, “Look, here’s the deal. If you want to let the markets be threefold over fair value, then you have to assume that you’re going to get a one-third of the cash flow out of these supposed stocks representing revenue flow. So, you can’t win.” People say, “Well, we’ll inflate our way out,” but you can inflate away valuations.

So, if you think about valuation price to book, price to revenue, price to earnings, price to you name it, it’s always a numerator, the stock market, and it’s always a denominator that ought to track it. Meaning, they both adjust for inflation. So, if you try to inflate your way out, you’ll inflate the numerator and the denominator, and you’ll still be 200% over historical average valuation. And so, inflation doesn’t solve the problem.

Tobias: Jake and I are sympathetic to that view, and I think that it’s backed up by Tobin’s Q and any other number of– [crosstalk]

David: Tobin’s Q is another. That’s exactly right. In fact, that was Mark Spitznagel’s favorite. I had dinner with him one night and he said, “Yeah, Tobin’s Q.”

Tobias: I just think that Case-Shiller is easier to calculate. It makes a more intuitive sense to me.

David: Mm-hmm.

Tobias: One of the criticisms of that though has been that we’ve never seen tech companies that are as consistently profitable and have margins like they do. Jeff Weniger posted a chart today that said that “The return on equity of tech is like nearing 30%,” which is more than two times the average for the rest of the S&P 500, which trades around 13 times, something like that. It’s showing no signs of mean reverting. It doesn’t seem to be cyclical. So, is it possible that we have entered a new regime and we’re not going to see that mean reversion that we have seen in the past?

David: Well, I’ve seen people smarter than me say that “The profit margins are the most mean reverting of all the metrics.” And so, the fact that it hasn’t mean reverted is back to the original statement that the markets aren’t responding to things.

Google. Here’s a good example. Google was a market that appeared to have a complete moat around it. Google looked insurmountable. One time a colleague said that to me and I said, “Well, what gives it a moat?” And he said “Well, they have two million servers.” I said, “Well, $2,000 per server, two million servers, $4 billion. That’s a hedge fund. So what? You could build another Google.”

What actually happened is is that AI showed up. Now, all of a sudden, Google scrambling to retain search. They’re at risk of being Yahoo, right? So, these things happen. Mean reversion is hoisted upon the market.

The other thing I like to point out, is that there’s not a single market in the history of markets that ever got way overvalued that didn’t eventually become cheap again. There isn’t one. They don’t do that. There’s a great statement in flight manual that says, you will have enough gas to get to the crash site.

[laughter]

Why the Bull Case Was So Powerful

David: And so, I really do believe that that a 30-year recency bias doesn’t mean that it’s not a bias. And so, for 30 years, we’ve had this luxury.

So, here’s the bull case that got us here and I’ll tell you the bear case that gets us out. The bull case was an 81 to that zone. Markets had a PE of six back when you might actually be able to believe the E-part. Now, I don’t believe the E-part so readily. So, they were dirt cheap. They were priced to return, what’s at, 15%. Now, inflation was scary, which is why they were so cheap, but they were priced return of 15% cash flow.

Russia was starved for cash and sold us resources cheaply. We helped them. ExxonMobil, these guys got in there and helped. China was coming out of the dark ages and sold slave labor for pennies on the dollar. They did it for decades. They sold us their wages and sent us their smartest people and everything was just perfect for us. When we paid them, they bought treasuries and things like that. So, these are phenomenal tailwinds.

The boomers hit the marketplace. Demographics are said by some economists to be important. I hesitate to say that, because within the next two minutes, I undoubtedly will insult the economists for being stupid. Quote them selectively as disingenuous, but they do believe demographics is important. They brought their wives. And so, we had a workforce participation rate that soared over those decades.

Warren Buffett wrote an article in 1999 saying that “The only thing that really matters is the direction of long-term rates.” He said from 1967 to 1981, when the markets treaded water for 14 years, which is a long time to wait, and lost 75% if you inflation correct, which is a long–

Jake: Yeah. Nominally treaded water.

David: That’s right. Nominally treaded water, which if it takes you 14 years– It’s one thing to take a beating. It’s not going to take a beating for 14 years. I’d rather lose my–

Jake: Yeah. Toby, how is that? [chuckles]

Tobias: I can tell you about that.

David: [laughs] Oh, there’s a story there. Look, during that period, the real GDP grew faster than from 1981 to 1999 when he wrote the article. He said, “The only thing that was different was rates were going up during the bear market, rates were going down during the bull market.” He says that’s it. That’s the entire story. So, it basically drives valuations is another way of putting it. If you’re competing against a 15% bond, you got to be cheap. The stocks have got to be cheap. And so, we drove interest rates from what, 17%, 18% down to zero, down to negative. Talk about negative, what kind of idiots were running in this operation, right? Negative.

The Swiss National Bank just dropped their yields to zero again without telling anyone like, “Oh, by the way, we just dropped them to zero.” Wall Street turned that into low rates– bullish. The average joker on the street, which includes me, concluded therefore that when the rates were low that equities are the buy. And I go, “No, when rates are low, essentially zero, it’s over. The rates have now dropped from 17 to 0. So, the party’s over. You got to sober up now. There’s only one direction to go and that’s up.” We started up.

I think the ultimate bear case is rising bond yields and dropping equity prices. I think that will be a bone crusher, because bonds always saved equity investors during the 30-year recency bias. And now, they can’t do it. We’ve got inflation problems now that are real to the extent that we always had them, but we somehow were able to pretend we didn’t. And now, they’re real to the point where I think when the Fed hints at doing some of their old playbook crap. The inflation expectations are going to take off and people are going to have a cow and Fed’s going to go, “Oh, we can’t do it now.” We’ve been called out. I think the bond vigilantes will eventually pull out of their grave and do something.

So, the gist is we had these unprecedented tailwinds. Never to be repeated. There’s no chance we’re going to get another China. There’s no chance we’re going to get another demographic like we got. Not in your lifetime, not in my lifetime. And so, what if the next– It turns out during that 30-year period from– well, 40-year period, from 1981 to the present, valuations, which should not move, they should wiggle around, but they should not trend compounded 4% a year for 40 years. What happens if the next 40 years, they compound negative 4% a year for 40 years to just undo that, and the answer is we’re hosed.

Now, you say, “Well, we’ll block and tackle our way out.” So, let’s say, the GDP grows 2.5%. Let’s say, stocks nominally do whatever they want to do, but inflation adjusted to zero. We’ll do a 1967-1981-ish. At 2.5% growth rate, it will take us 45 years to get out. And so, if you want to tread water for 45 years, you’re welcome to try. [Jake laughs]

There’s an old Bill Cosby skit where God’s trying to get him to build an ark and he doesn’t want to do it and God says, “Noah, how long can you tread water?” So, that’s the story. I think if we have a crash, the buyers will show up. So, that’s not going to fix it. I think we have another bad moment that the buyers will show up, but maybe with a little less enthusiasm. I think over the next 30 years, we’re probably going to have a lot of beatings in which, unlike the last 30 years, you will not be rewarded for jumping in on the dips.

The Bear Case: What Happens When the Tailwinds Reverse

David: There’s historical precedent for this. So, if you own the 06 top, it took you 40 years not to go up and down and get even, but rather it took 40 years to end up at exactly the same place for the last time. Not the first time, the last time.

Tobias: Which 06 top? The 06 top.

David: 1906.

Tobias: 1906. Yeah, thank you.

David: Anyone can do this at home. This is your assignment. Turn off this podcast briefly and boot up an inflation adjusted plot of the S&P. What you’ll see is if you draw a line across from the major peaks– Don’t extend the line to where you break even. Extend the line to where you get to that same value for the last time, not the first time. Because to me, that’s really relevant. It turns out that there are about four really bad looking lines that you can draw, one of which is 75 years long. If you’re on the 29 top, you broke even around 1984, I think something like that.

Tobias: There are several possible causes for this level of overvaluation. One, Michael Green has proposed that it’s the flows hammering the biggest companies. Demographics is another possibility. Rates being too low for too long. Although, now we’ve seen rates come back up again. We haven’t really seen– [crosstalk]

David: Too long for too low, too many times. I add the third parameter.

Tobias: Too many times.

David: Yeah.

Michael Green, Flows, and the Death of Price Discovery

Tobias: Or, deficits. Let’s just take those one at a time. What do you think of Michael Green’s flows thesis?

David: Well, at first, I thought his model was simple. The more I’ve gotten to know Michael and his model, the more I realize that he really does have a profoundly deep understanding of what the hell he’s talking about. Not that I thought he was wrong, but I thought that it was just a bumper sticker bit of thinking. And it’s not. Michael is really, really beyond sharp. And he’s correct. And so, it removed price discovery for a huge percentage of the buyers. That’s how the market becomes unresponsive, because there’s a steady flow.

Now, Michael used to talk– Maybe I didn’t like him in the earlier days his model, because he had this nothing’s going to stop it attitude. I didn’t buy that. But now, he’s starting to say, “Here, I can see things that are stopping it right now.” So, he’s gotten much more dire in his near-term warnings. Not some long-term, someday it’ll stop. But rather he’s saying, “Look, if you look at the flows, they’re rolling over right now.”

Tobias: Because the boomers are retiring. Is that the–

David: Well, I think so– [crosstalk]

Tobias: The boomers are drawing down?

David: It’s possible that there’s some smart people with big money who are going, “Holy shit, I got to get out of these markets,” like Buffett. Let’s start with Buffett. He is not only in cash equivalents, but he’s not long duration either. He doesn’t think the 30-year bond is the place to be.

Jake: He’s never like that.

David: But the 30-year bonds is stupider than a brick. I don’t want to name him. I can remember his name. This one I can remember. But I asked him, I said, “Okay, if I were going to sell you a 30-year bond, we’re going to put in some rules and some artificial rules, but here’s the rules. You got to buy it, you can’t sell it, you can’t hedge it. You’re just buying a revenue stream. It’s like annuity or something. And you got to put it away for 30 years. How much interest rate would you demand given where we’re at, what we know, what we don’t know?” No one has ever guessed 5%. Not a single person has ever said 5%. But people say “Well, you don’t buy them to own them.” I said, “Someone did. Someone’s going to own those all the way to the finish.”

So, if you think you’re a bond trader, have a nice day. But I’m not a bond trader. I bet you guys may not be bond traders too. So, someone’s going to own them. The answers that come up– A lot of people say eight or nine. It could be 12. I don’t know what it is. 30 years is a long time to commit given that we don’t even know if the dollar is going to exist in 30 years. We don’t know it’s going to be a reserve currency. You got to have a lot of risk premium in that thing. Therefore, it means that the bonds aren’t priced right.

Jake: Dave, what would that mean then if a lot of people say that equities are a 50-year bond equivalent?

David: Yeah. Paying 2%.

Jake: Right. [David laughs] Right. 3% of the [crosstalk] yield.

David: About every six months, I do this. It turns out Apple’s revenues in the last 10 years are up 65%. I used to refer to their stock price being much higher than that. And then, people say, “Oh, you’re ignoring buybacks.” So, I said, “Screw that.” So, now, I say market cap. I don’t care. The market cap is market cap. That’s the value of the company. Their market cap is up 900%. So, someone explained to me why that makes sense.

On Buybacks, Bonds, and Corporate Idiocy

Tobias: Yeah. Even [crosstalk] more, because they’ve taken on some debt to do those buybacks.

David: Right. Well, Apple, they burned down a fortress balance sheet. They had a phenomenal balance sheet and they did it– Here’s the low interest rate. The insidiousness of the low rates. First of all, it inspired people to use debt to do stupid stuff like buy bonds. You borrow cheap, you get some two-basis point spread and you think that’s a good idea.

The second thing, is that if you’re a company and you’re trying to maintain a balance sheet, let’s say, you want a fortress balance sheet, what do you put in it? If the best you can put in it safely is 2% return, you’re getting slaughtered. Relative to inflation, you’re losing money year after year after year. And so, the most responsible corporate execs could not take the pain of having a balance sheet. And so, what did they do? They bought–

I love it. They return capital to investors and I go, “Dude, the only guys you return capital to sold your equity. So, you didn’t really return capital to investors. You did get a nice bonus that year for cranking up the price, not giving a dividend, because that doesn’t help you any.” So, I’m not a big buyback fan.

If you’re Philip Morris, you got a ton of cash, you don’t want people to see the cash and you can crank out 9% a year, buy the stock. That’s a great idea. Buy the stock. But if you’re sitting at a price earnings ratio of 15, you’re buying your stock, you’re buying a 2% cash flow, you’re an idiot.

Tobias: This is a little bit of a non- sequitur I’m interested in what you think about– As a treasury strategy, what do you think about MicroStrategy buying bitcoin?

Jake: Yeah, the breakpoint strategy.

Tobias: This is starting [crosstalk] now.

Bitcoin, Gold, and the Lindy Test

David: You guys are trying to destroy my Twitter feed now. [Jakke laughs] I’m sympathetic to the bitcoiners. I believe in the Lindy effect. That is basically, it says the longer something’s been around, the more likely it is to be around for longer. Bitcoin fails that test pretty quickly, right?

Tobias: Yeah.

David: So, bitcoin is a fresh idea. It’s revolutionary. So, anyone who’s paid attention to revolutions know they’re not done by 50-year-old guys, they’re done by youngsters. And so, it is understandable that bitcoin got adopted by cell phone wielding kids who can type with their thumbs for some reason that I don’t understand. And so, in that sense, it all makes sense.

The problem is that it also means that the bitcoin community is loaded with people who don’t understand market structure, don’t understand history, don’t understand that things like this have happened in the past. This one might not be one of those. But they talk about how they’re undefeatable. The hubris is ridiculous.

Now, I know bitcoiners who are real smart guys and they’re much more circumspect. But would you be totally shocked if at some point the authorities in the world, who– Let’s say you’re a Rockefeller and you control the big chunk of the global net worth, and all of a sudden, bitcoin looks like it’s going to control.

[unintelligible [00:23:33] Saylor project the price of bitcoin. He went out, I don’t know, 10 years and had it at something like $4.5 million and then it ended up at $88 million some number of years out and I go, “That’s just horseshit, Michael.” That’s horseshit. That’s complete and utter horseshit. You could be dead right about bitcoin being a good idea, but you’re just blowing hot air, which means, by the way, you want to get anointed [unintelligible 00:24:02] of the year that would be it right there.

I’m much more sympathetic than someone like Max Keiser and Stacy Herbert who were humping bitcoin for pennies. So, they obviously saw the future way more than anyone else unless they sold. They must be stinking rich. But I don’t trust Saylor. I think he’s running a great scheme into that. I tip my hat to him. The idea of the president setting up a sovereign wealth fund with bitcoin, that is bananas. It’s bananas at several level, one, of which is, let’s start with you don’t set up a sovereign wealth fund unless you have excess earnings. To set up a sovereign wealth fund while being what, $37 trillion in debt, that’s what we call leverage.

Jake: Yeah.

David: Right. That’s just stupid. So, even at the top echelon of society, there’s a lot of dumbness. Again, guys who are bitcoiners, don’t give me shit. It’s not a game. I turn it down at 10 and you say, “Okay, well, then you should still get on it.” I go, “No.” I don’t regret it either because if I bought it at 10, I would have sold it at 50 and said, “Wow, I’m taking it. That’s it. I don’t believe it.” And then, spent the proceeds for therapy for the rest of my life.

Now, I don’t mind missing. You can’t lose sleep over what you missed. I should have bought bet black 35 at the roulette wheel too, but you just can’t do that. I looked at eBay as the only dotcom I considered buying. By the way, I made a fortune in the tech boom. People have trouble believing that, but I own Dell. I made 700% on WorldCom and got out.

Jake: Before it all went to pumpkins and mice?

David: That’s right. So, I’ve seen it. It was just dumb luck. It was the blind nut finding a squirrel. Well, I fell for another grift. I fell for the Y2K grift. I was convinced and I didn’t know the probability, but the risk was real. If you look at the COVID lockdown, we saw hints of what could have happened in 2000, not getting supplies and things like that. I went through all the gymnastics and understood the whole supply chain problem.

Now, the reason I call it a grift is because nothing happened. Nothing. I’m not talking they fixed it. I’m talking nothing. I’m talking there were not even computers and then as a whale of it stopped working. [Jake laughs] So, I am now convinced that Jaeger worked for Wall Street, and he screamed about the risk of Y2K and Wall Street loved it, because could sell software and hardware. Silicon Valley got rich, and then we had a recession because the whole thing blew off and that funded the dotcom and then that was the end of that. And so, bitcoin might win, bitcoin might lose. If I were the power structure, I’d be looking long-term for ways to put it into a shallow grave.

Jake: David, how do you contrast that with other than the– Lindy of call what now, 17 years for bitcoin versus 5,000 years for gold. How do you think about those two things, gold versus bitcoin?

David: Well, one of the great advantages of bitcoin is the ability to move it, right? So, if we end up in an authoritarian world– So, when I talk about what happens if they outlaws– I’ll say to someone, I’ll say, “Well what if they outlaw?” They say “Well I’ll move to blah blah.” And I go, “Why don’t I want to move to blah blah?” [chuckles] I don’t really want to have to move to someplace where they have snakes that can kill. [Tobias laughs] But that is a big advantage, the mobility. You don’t have to sew it into the seam of your clothes. You don’t have to–

Jake: It’s a lot easier to keister bitcoin, isn’t it?

David: It is a lot easier.

Jake: Thumb drive is a lot easier than the gold bar. [laughs]

David: How many times you’ve been told your password doesn’t work, right? I’m a luddite. So, I’ll go to log into something and they’ll say that, “Password’s not it.” And I go, “I know that password’s it.”

Jake: What is the number to call the bitcoin help desk?

David: That’s exactly right. That’s exactly right. So, I just don’t trust myself. When my password doesn’t work or I call some help desk, whatever, I just get so frustrated that the idea of tying a significant amount of my wealth into something that is so obtuse for me.

Again, I don’t understand why I’m such a luddite. I had DOS 1.0.1. I was at ground zero of this thing. There’s thing called ChemDraw, which is probably sold 20 million copies for drawing chemical structures. My copy of ChemDraw serial number is 376. So, I’m not averse to being early into the tech. But no, the bitcoin doesn’t do it. I do believe the authorities are–

It should trouble people that the first paper written about it was by three NSA guys that should bother you. That should really get into your head and say, “Wait a minute. Wait a minute. Who’s Satoshi?” The mystery of Satoshi. If I wanted to set up a central bank digital currency, which we all agree is a disaster. Putting out bitcoin, letting the smartest guys in the world debug it and set up networks and acclimate and stuff, that’d be a great way to do it.

Jake: Trojan horse.

David: Trojan horse. Yeah.

Tobias: Let me just digress for a moment, go back to the overvaluation of the stock market.

David: Okay.

Tobias: One of the possibilities was this direction of rates from 1982 to whatever it was, call it, early 2020s. Went in one direction, stock market went in the other direction. We’ve now kind of–

David: Reversed.

Tobias: After Bernanke and Yellen have moved on, we’ve now got Powell who seems to be we’re trending back towards long-term rates of let’s call it 6% or something like that. We’re not there yet, but we’re directionally going there. Stock markets, all-time highs. Real estate market, all-time highs. How do you reconcile those two ideas?

David: Well, the real estate market is breaking. You can hear it shattering right now. The real estate market has a terrible lag effect, because the buyers and sellers– When the buyers and sellers can’t meet, that means there’s no price discovery there. But there has to be price discovery there.

My great source of plots and cackles is from Darth Powell, who just constantly posting [Tobias laughs] real estate plots. The real estate market’s really breaking in front of our eyes. And so, the fact that the real estate market appears to be okay to some people, I think is– It’s commercial real estate is a disaster. A complete disaster.

We’re going to have another crisis, of course, because we always do. The next crisis, every article written, 99.9% of the articles are going to have the word private in it, okay? So, the private is going to show up in terms of private capital, where– By the way, you’re addicted to that. You see that, Jake? You’re addicted, aren’t you? I was addicted.

Jake: I love ChapStick. Yeah. I didn’t break that addiction.

David: Yeah. You know why? Because you are addicted. Yeah, I like crack too so. You break it, you cold turkey. So, private capital is what bought up all the housing inventory after 2008, 2009. So, they built all these houses where the inventory go? Private capital. So, I heard BlackRock was buying housing at 0.15% leverage the rates. That’s how they scooped up all the house.

Single family dwellings are a lousy business, but if you can buy them for almost no cost of capital, raise within margin and leverage the shit out of it, you can make money. And that’s what they’ve done. Well, that’s not going to work forever.

Then you got the private debt market, where when you buy that Barcalounger and you get four easy payments– Or, you get the DoorDash. That’s the one that’s got the most [crosstalk] DoorDash.

Jake: Buying a burrito on layaway.

David: Buying a burrito on layaway and I’m going, “You know, maybe you should skip the burrito and eat a hot dog, buddy,” if you got to pay four easy payments. So, the private debt market is considered completely opaque. Who is it? William White the other day said that “The shadow banking system is now bigger than the banking system.” The shadow banking system is a disaster waiting to happen.

So, let’s say there’s $5 trillion in the private debt market, which is where that debt’s being held. So, Metro Mattress sells you a mattress and you pay over a year, they don’t hold on to that cost. They sell it off into the market just bill collectors. If you’re looking at paying your heating bill, or your car insurance or your Barcalounger payment, which one are you going to skip? And so, the private debt market, which serves the great role of getting it off your 27% credit card. So, now, your credit card–

So, obvious to use the private debt market, to use the layaways instead of putting it on a credit card and letting that grow, build. It’d be $5 trillion of really zeroing out a ton of stuff. And then, on top of that, you got private equity. Private equity is probably the worst invention in the history of mankind right there.

And so, you got all these guys who were charging huge fees, and buying bad shit and buying other private equities. There’re fees upon fees and fees. Offloading the entire risk onto the Kentucky pension plan where a bunch of Hatfields and McCoys are running it. So, Wall Street knows how–

Jake: Yeah. How [crosstalk] are we going to be when we have to bail out Blackstone and Apollo and–?

David: It’s going to piss me off, right?

Jake: Yeah. [laughs]

David: We don’t have to bail them out, but we will bail them out and then we’ll have an inflation problem, because now people are aware of the inflation problem. Inflation expectations are no longer a hidden by recency bias, because now, recency bias shows that inflation can pop up very quickly.

So, I think the Fed’s cornered. I think the Fed’s not going to be able to use its old tricks. I think they’re going to be cornered. I think the bond market’s going to corner them. I think rates are going to go up against their will. I would not want to be the next Fed chair. I’d take a pass. I’m already hearing the people who want to be the next Fed chair, because they’re the ones spouting off about how we should drop rates today. They’re the ones who are trying to get into Trump’s head and say, “Make me your Fed chair and I will lick your balls.”

[laughter]

Jake: Financial balls.

David: Yeah. Them too.

Tobias: I tend to agree. I’m playing devil’s advocate a little bit here, because rates were zero and now rates are– They’re not 6%, but they’re fat. The 30 years coming in on five, the tens at four, the three months is a little bit north of that.

Jake: It’s still below average, if you look at any history.

David: Oh, yeah.

Tobias: Bernanke and Yellen at zero for a very long period of time. The rest of the world negative. And here we are. We do have–

David: Are we talking their IQs, or are we talking about the interest rates now?

Tobias: I think they’re smart. I think they’re–

David: Too smart for their own– [crosstalk]

Tobias: I think it’s a different failing-

David: Right.

Tobias: -which I’ll probably be too polite to mention on this. How do we reconcile? Rates are up now. I think that you’re probably right about the real estate market too. But the fact of the matter is that Case-Shiller just printed its highest number ever. The stock market topped out in February 2025, but we’re within– You get a big enough rally– Someone drops a big enough bomb somewhere, we’ll probably rally to new all-time highs, like it’s well within spitting distance.

David: Well, so, that’s an interesting point you make. Here’s what happens. We get a crisis. We get some little mini thing that ought to move the markets. The last three guys willing to try to short it try to short it. They tiptoe their way in, and then the crisis subsides and gazillions of people try to catch the bounce.

Tobias: Yeah.

David: So, there’s a total asymmetry. So, it doesn’t just recover. It soars. Because it was just, “Oh, we’re not going to have World War III. Oh, buy these markets.” But they didn’t get sold when we were heading into World War III. And so, every crisis seems to be a reason to buy and not a reason to sell, because the guys who sold every time there was a crisis are dead. Jim Chanos, who’s basically on Twitter just telling us, he’s a broken man at this point.

Tobias: He’s a family office.

David: Yeah, family office. That means he’s retired. I’m not being critical of Jim. He’s the guy who sat there with the standard and fought off the last of the marauding, the vandals, and then he lost. And so, you listen to somebody– David Einhorn, get interviewed and he says, “It just doesn’t work anymore.”

Now, he sounds like he’s conceded it’s not going to work. That’s not what he’s saying. He’s just saying, “I’m working right now.” He knows, he knows, he knows. I guarantee you he knows. I had dinner with him and a bunch of hedge fund managers one night. I’m sitting there thinking, first and foremost, I don’t remember starting a hedge fund, so I’m not sure why I’m sitting at this table. We went around the table– [crosstalk]

This is a real funny story. This is right before the Ukraine war really kicked into gear. We went around the table at one point and said, “What do you want to buy?” Some techie was ranting and raving about tech, and Einhorn lost his shit. He doesn’t do that often. He says, “Do you know what it’s like to ride something down 95%?” He says, “You know what 95% down is?” He says, “It’s a 90% loss that then cuts in half.” He says, “You ever been one of those? You ever seen one of those?”

Einhorn’s top choice, his choice was gold. He and I talked about gold for many years. He talked about his grandfather’s up. I didn’t go with my top choice. In fact, it was trivial. He said, “You’re supposed to actually say something that you’ve sized it well.” I said, “Well, I didn’t know that. I didn’t know that was the rule.” I said RSX. I was watching RSX get sold out off– [crosstalk]

Jake: The Russian ETF, right?

David: Yeah, the Russian ETF. The thing selling at bargain basement price, I’ve been watching it, I owned a little bit of it for years, thinking, these Russian oil companies are printing money somehow. Grant Williams actually said that too. So, you can’t be a contrarian to the point where the only guy in the world who believes something, because then you go psychotic fast. But if there’s a couple other smart guys saying, “No, Dave, I agree with you.” I went long–

I was watching platinum for several years and I ran into Boockvar in the fall and I said, “I’m watching platinum.” And he said, “I just bought platinum for the first time.” Einhorn, I know, is looking at platinum. So, I reached out to Peter Brandt, who’s a trader, and I said, “Peter, here’s the plot of platinum. Well, what would you consider a breakout?” He did some quick squiggling on the page and he said, “Here’s the breakout I’d look for.”

And so, in platinum, which has been dead, money flatlined as though someone was pegging the price. So, maybe a month ago, it reached what I considered to be my breakout. Now, I was buying gold at 290 and 280 and 270, and then I’m going, I can’t take the pain and I waited. Then it climbed back up past those and I started buying again, up to around 450 or something.

Jake: Just like early 2000s?

David: 1999 up through 2000. Oh, boy, so long ago. Maybe 2003 or something.

Jake: Yeah.

David: That’s four years. But in these markets, if platinum becomes a good buy, it’s going to last 15 minutes because of the speed with which people jump in. And so, I started hitting the buy button. There’s no way I’m going to get a full position of platinum on the timescales that I work. I face a boomer dilemma where I’ve got enough wealth where to take what I’d call a decent size position in terms of percentage allocation. When I look at how much I have to invest to do that, I go, “That’s too much goddamn money.”

Jake: [chuckles] Yeah.

David: And so, I’ve got this paradox where I go, “This many thousand dollars is a lot of money.” And I go, “But it’s 0.1% of my net worth. Okay, how do I deal with this problem?” So, I started hitting the buy button from about 1995, 1996, somewhere up and I’ve hit it about four or five times. The way I’ll get up to a full position is if I’m right and platinum ends up in some meme phase and I’ll be up to a full position. There’s no I’m going to buy my way up.

Tobias: I’m surprised to see the run that gold has had. Gold has now outperformed the S&P 500 since some data. I forget which one it is, but it’s 20, 25 years.

David: Year 2000. Yeah.

Tobias: Is it 2000? Yeah.

David: Yeah. It’s outperformed it by 2% and annualized.

Tobias: That’s very material. [chuckles]

David: So, again, I was in all bonds in the 1980s. And then in 1987, the crash occurred. I was sitting in the faculty lounge with one of my older colleagues said, “Dave, you really should own some equities.” I wasn’t paying attention. I wanted to go to Wall Street when I was high school, but I completely lost that thread and went my own way and didn’t pay attention. And I said, “Maybe you’re right.” So, I started going aggressively into equities.

By the mid-1990s, I was the guy at the cocktail party saying, “Oh, I just bought this, I just bought that.” The complete idiot. So, the bubble was fully intact at that point. I had been suckered in. I owned Dell. I made a ton of Dell. Weird companies that were just– If you couldn’t make money in the 1990s, you really were an idiot or a short seller, which I repeat myself maybe.

And then, Y2K got me out of everything. In 1998, I jumped out and the market. Cut way, way back and I thought, okay, your half smart, half stupid. If it comes back, I’m getting the rest out. I got the rest out. I went into the year 2000 with zero equities. 0.0. I had gold, cash. You’re not going to believe this, a short fund, David Tice’s short fund. I made 30% on the short. And then, to try to hedge inflation, I talked to Jimmy Rogers partner, guy named Clyde Harrison. I was trying to buy commodities. I couldn’t figure out how to do it, because they were not popular. I didn’t like what I was hearing. I talked to one of the market makers and I didn’t like what he told me and so, I said, “Screw this, I’m not touching this shit.”

And so, I bought six Fidelity funds that were basically commodity benefits. So, Fidelity Energy and Materials and things like that. So, I bought six of them. I started buying them pretty aggressively around 2001. And so, it turns out the nots– When people were getting their butts kicked, I made 13% a year compounded, which was extraordinary. And then, that continued until around 2013 and then the teens just kicked my ass.

So, the teens, I compounded around 4%, while most people were hired in kites making double digit returns. So, the teens were the decade I’d like to forget. We’ll see what happens going forward. I need one good decade. I’m looking for one more good decade.

Tobias: Me too, Dave.

Jake: [laughs]

David: Yeah, yeah. Yeah, yeah. So, year to date, total assets at risk. Ignoring fixed income, I’m up 28%.

Tobias: Is that gold driving?

Jake: That’s a lot.

David: A lot of gold. Yeah. A lot of gold. Not a lot of gold miners. The miners, I don’t trust. Those guys don’t know how to make money. I’m convinced.

Tobias: Yeah. The salaries go up in the buyouts. The takeovers go up at the same time. [crosstalk]

David: Yeah, they just get stupid. And then, if it really gets good, some banana republic dictator takes the mines from you and it’s just– I buy some stuff Fleckenstein says to buy. My entire mining portfolio could go to zero and I wouldn’t lose a lot of sleep. So, it’s really not big.

Tobias: What do you think about the possibility that its deficits driving the overvaluation? We’ve seemed– [crosstalk]

David: Yeah, I think it is. And then, the question is, what does that mean? So, it’s just inflation. So, I argued with Milton Friedman. Takes some balls to do that, right? I have a superpower. It comes from my chemistry career where I went into a field that was complicated. Some said, you couldn’t figure it out, and others thought they understood it, neither was correct, but it was really complicated. And for 45 years, almost every paper ever published showed someone was full of shit.

I realized these are experts who were trying to get it right, who got it wrong, some case profoundly. It developed the ability to look at say a dozen experts just to pick a random Fed number who all agree and say, “I think you’re all full of shit.” My superpower is to not to have no problems looking right into the face of the crowd and saying, “I think you’re all bullshit.” Now, sometimes being contrarian is just being wrong. But if you can’t do that, you will never be contrarian. So, that’s a minimum requirement.

I was laughing with Chris Martenson one day when we were buying gold. We were buying gold about the same time. I’ve known Chris for 25 years. He was at David Tice’s chat board and his Prudent Bear Fund along with Adam Taggart, some guy from Fidelity and Goldman.

Tobias: Oh. @menlobear.

David: Yeah, @menlobear. That’s where the name come from. There were some guys there who were really quite prominent who had stupid names. [chuckles] We were laughing where someone said to Chris, when they said, “Well, it was easy to buy gold back then because it was so cheap.” It was cheap, because there were five of us who wanted it. That was it. There was five of us. Yeah, one was Bill, one was Chris Martenson. No one wanted gold. When gold hit $300, all the guys on the Prudent Bear Chat Board said, “Sell.” That’s how bad it was. And I held on. I just somehow white knuckled it all the way to $3,400. And that worked out well.

It really is blind not finding squirrels and avoiding the real. I wrote about the subprime crisis. I know the date, May 6, 2002, where I got an email from a friend of mine named Rick Sherlund at Goldman, prompted by an email I sent him. He said, “We have problems all the time. What’s got you especially jumpy?” I wrote about the subprime crisis coming. And I nailed it. I really nailed it. It wasn’t because I was seeing it myself. I was just reading guys like Bill Gross and stuff who were talking about.

Josh Rosner was talking about the subprime crisis in the late 1990s, and how General Electric was supposedly cleaning up their balance sheet, but then was using the derivatives market to take the risk back on and stuff like that. So, I wrote all about that. Then I got dead wrong was I thought JPMorgan would become a smudge, and that was wrong. But I said, GM, GE, they were all going to get crushed. It took five years.

Tobias: Yeah.

David: So, the fact that it hasn’t happened doesn’t mean it’s not going to happen. It just means that it takes– I saw Gundlach the other day just say that, “It just takes so much longer.” He said the valuations are ridiculous. When Jeff Gundlach says the valuations are ridiculous, you ought to sit up and say, “Hmm. Maybe I shouldn’t be 90% equities right now.”

The Fed, Inflation, and the Coming Reckoning

Tobias: What do you think is the problem with the Federal Reserve? Is it the fact that the PhDs are all teaching the PhDs, and so it’s one school of thought becomes predominant or is there something else going on?

David: Well, it’s part of the problem. The echo chamber is very big. The other problem, they’re all academics in many ways. They’re all using just theoretical constructs. They said, Powell is supposed to be good. I can’t say he’s been terrible.

I remember when he finally flinched. He was on stage and he made some reference. They were watching the markets carefully. I remember Danielle DiMartino Booth in a couple of DMs on Twitter was just catatonic. She had so much hope for Powell, and then she said, “I can’t believe it.” She’s almost in tears.

He hasn’t been horrible. He got handed a bad hand to play. So, he was not yelling or I called the– I was on Daniela Cambone’s podcast I referred to as the Flat Headed Hobbit,” which I’m not sure whether she understood the flat head where you put your beer joke. Bernanke is the unforgivable one. Bernanke talks about the Great Depression like it was a failure in the 1930s. But it was a failure in the 1920s. I think he must know that, and therefore, it must just be a pathological liar. Because the 1920s was this huge credit bubble. It was a consumer credit bubble. It was all sorts of credit bubbles. The Roaring Twenties, right?

Roaring Twenties was foreshadowing. The name, The Roaring Twenties tells you that it was a problem. And in the 1930s, they might have been able to mitigate some of the damage, intervene, but they forgot to– All these bailouts, they forget Bagehot’s rule about basically punishing people who have to be bailed out. I’d like to steal law that basically says that if your bank has to get bailed out, the C-suiters all lose five years of their compensation. They would pay attention more carefully.

Now, here’s what would happen is, they would actually start acting like bankers and we’d go into a deep recession immediately, because there’s too much leverage in the system. And so, in any case, the next one will be a complete brain-dead person in my opinion. My fearsome like Brainard– Although, the one that would cause me to just slice my wrists and down some valium would be someone like Stephanie Kelton. It wouldn’t that be just beyond comprehension funny?

Jake: Small MMT test.

Tobias: It’s MMT.

David: Yeah. Yeah, exactly. So, Milton Friedman talks about how inflation is always monetary. I think he’s not looking at the cause. I think he’s looking at the effects. I think inflation is always government spending, and that produces the monetary expansion. The Fed supposedly has some mandates. It used to be stable currency. Stable banking system. And so, those two are not necessarily inclined.

Tobias: Full employment– [crosstalk]

David: No. No. See, I don’t agree with that. I don’t think that’s a problem.

Tobias: It is one of their mandates, but I agree.

David: Well, it’s a mandate they asked for.

Tobias: Okay.

David: So, it’s their own personal mandate. You can’t have full employment and stable currency. Those two fly in each other’s face. Look, they should encourage full employment, but it’s not a mandate. I like Rudy. Rudy says, “Mandate is– He’s got something where he talks about their mandate being to bail out the banks. That is their mandate. That’s realistically what their mandate is to just make sure the banks never suffer.

Tobias: When they were first created, it was supposed to be– If you can’t have someone showing up to a bank and pulling all the assets out and causing the panic in that sense, so you have a collection of banks together and they all bail each other out. But it’s turned into this, like it’s crazy giving them the currency. It’s crazy giving them that second full employment. You can find some data series that’ll show you that full employment’s the other side of inflation or something like that.

David: Yeah. I just don’t think it’s their job. I think the business cycle’s in charge of– We haven’t had a downturn in the business cycle that the Fed didn’t treat as an emergency for 30 years.

Tobias: Yeah.

David: And so, that’s keeping rates too low for too long, too many times. That’s why I offered too many times.

Tobias: Yeah.

David: So, Greenspan got addicted to the results from 1987. He really liked it. He went from being an Austrian economist to a narcissist real fast. And then, he just decided every chance he could gone, he would just be the hero and ride in on the white stallion and then that became the norm. So, then the question is how did it go on for so long? And I go, “Well, how do you define long?” 30 years, the blink of an eye. 100 years from now, the textbooks will– How long was the Great Depression?

I’ve argued with a Berkeley economist on this one. He said it, “World War II got us out of the Great Depression.” I said, “No, it didn’t.” I said, “We’re still austere. We’re on rations the economy,” blah, blah, blah. And he says, “No, the GDP numbers show that the GDP grew.” And I said, “Yeah.”

Jake: Yeah. That’s tank, though. Let’s not–

David: Well, that’s what I thought about and then I wrote about this some number of years later where I said, “When you build something and then blow it up in a microsecond, I wouldn’t call that GDP.” Just like now, we’re about to see the boomers. We are seeing the boomers. How many healthcare buildings have been built in your hometown? You can’t drive anywhere without the word health being on the front of some building.

Jake: Memory care centers everywhere.

David: The healthcare in this form is not GDP. It is the cost of a rapidly depreciating asset. If we were all healthy and not needing healthcare, wouldn’t we better off? It’s not like building computers.

Tobias: Yeah.

Jake: Right.

David: So, GDP is just like you’re driving a 20-year-old Corvair. It’s in the shop every week.

Jake: [laughs]

Timing the Collapse

Tobias: Dave, we’ve got a couple of minutes left. Do you want to speculate on what causes the house of cards to come down? You want to give us a date?

David: No. Yeah, date.

[laughter]

David: Yeah. I will give you a date. 2026 to 2046.

Tobias: Okay.

Jake: There you go.

David: I think we’re going to whips on– If you bought the Nikkei, if you own the Nikkei in 1989, you’re still underwater without adjusting for inflation. If you started buying the Nikkei at zero, no commitment in 1989. So, you graduate from Tokyo University, and you get your job and you put the equivalent of $1,000 a month in the Nikkei.

I was in podcast with a Twitter space with George Noble and I said, “You couldn’t invest in the Nikkei.” He said, “Oh, you could do this.” I said, “No, it took too long. You couldn’t have done that. If you bought the Nikkei all the way down, it took you 18 years to break even. 18 years, if you just started averaging in as it went down.” That’s an un-investable market, and I believe that’s where we’re headed.

Tobias: What about the catalyst?

David: Richard Russell, someone said to him, “Why can’t this go on forever?” And he said, go into your kid’s room, start stacking their blocks, keep stacking, what happens? What you end up with is the taller the stack, which is displacement from equilibrium, which I talked about. The more shock sensitive and the more destructive the return trip to equilibrium, which is a pile of blocks on the floor. So, you reach a height where the tiniest little shock, like a Russian bond default, remember that one, will trigger a cascading failure and the markets will go emergent.

Tobias: We’ve had a few of that. We had that Silicon Valley Bank. We’ve had– [crosstalk]

David: And how many trillion did we put in to bail that one?

Tobias: Yeah. Yeah. Well, that’s true.

David: I don’t even know. That was done quietly in my opinion. We didn’t bail them out by someone marching out in front of a microphone and saying, “We’re going to do everything that it takes.” That one, I think they realized it was embarrassing. They were able to stem that, but you got all these insolvent regional banks that have commercial real estate on their books.

Silicon Valley bank goes down. If I had told you 10 years ago that a bank would go down and become insolvent, because we bought too many treasuries, what’s wrong with that picture?

Tobias: Yeah.

David: That means that the treasury market is broken. So, now, you’ve got commercial real estate that was priced at $200 million, which is now priced at $6 million. That was one I just saw the other day. It’s on some private equity balance sheet at $200 million, because they don’t have to mark the market. Like, Harvard and its $50 billion endowment, which everyone has been focusing on lately.

Let’s start with the what if it’s worth only 20 billion? Let’s start with that. And then, people say, “I still don’t care.” I understand that too. But you’ve got pension funds that are underfunded and not mark to market. Big time underfunded, and not mark to market. Kentucky pension fund was down, I don’t know, 20% funded. You got to figure those Kentucky boys own some dog shit in there too.

Tobias: Dave, on that note, that’s full time. Thanks so much for joining us today. If folks want to follow along with what you’re doing– You’re on Twitter. What’s your Twitter handle?

David: @davidbcollum. C-O-L-L-U-M.

Tobias: And?

David: I write the most poorly marketed blog in history, [Jake laughs] A Year in Review. I publish it once a year at the end of the year. I was told recently it got this year, 500,000 clicks, which is pretty good for a 300-page review now. Could be it got 490,000 clicked and said, “Fuck this, I’m out of here.” But I know it’s been read by some very important people, so I’ll take that. They’re the only ones who matter. Well, everyone matters.

Tobias: I’ve read it every year. I’ve read it since 2015.

David: Really?

Tobias: But it’s just not– [crosstalk]

David: It’s being bound by Bob Moriarty. They’re all being bound by Bob Moriarty right now. We’re up to 2015 I think. We’ve done 2022, 2023, and 2024. I’m going to have this anthology, which I’ll probably sell, I don’t know, 40 or 50 of them at least.

Jake: [laughs]

Tobias: How long have you been writing that for?

David: Since 2009.

Tobias: Okay. Okay.

David: Yeah. That’s what put me on the map.

Tobias: Yeah. That’s how I found you.

David: Yeah.

Tobias: Well, thank you very much for joining us. We appreciate it. We’ll get you back in the future if you’re willing.

David: Oh, yeah. It’s always fun. I can talk.

Jake: Thanks.

Tobias: Thanks, JT. JT’s got a run. He’s got an early tea time today. I’m joking. Jake’s moderating a panel for the CFA, that’s why we’re a little bit early today, folks. We’re an hour early. We’ll be back next week same bat time, same bat channel.

David: Send me a link to this when it goes up.

Tobias: We will.

VALUE: After Hours (S07 E22): David Collum on gold, inflation, the Fed, rates, valuation, Shiller PE, deficits, platinum

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