VALUE: After Hours (S07 E22): The Bear Case: What Happens When the Tailwinds Reverse?

During their recent episode, Taylor, Carlisle, and Dave Collum discussed The Bear Case: What Happens When the Tailwinds Reverse. Here’s an excerpt from the episode:

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.

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.”

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

VALUE: After Hours (S07 E22): The Bear Case: What Happens When the Tailwinds Reverse?

Read next