Avoid S&P + bonds, buy gold + energy - George Noble

0:10Welcome to Investing Experts, George Noble, the man, the myth, the legend. Very, very grateful to have you on the show. Thanks for making the time and taking the time. Thanks for joining us today. Thanks, Rena. Long time listener. First time participant. First time caller. It's really great to have you. I'm going to let you introduce yourself because I feel like you could probably do a better job than I can as opposed to listing the extraordinary things you've already accomplished. I know you recently had a conference with one of our friends, Don Durrett, much to the moment in the zeitgeist. It was called the Best Stock Ideas Online Summit, which I think is a perfectly titled conference for these times and these days.

0:55Maybe share with us where you've been, what you're doing now, what you're focused on, why you're throwing these conferences, why you're still talking to people and sharing so much when you may not have to. I'd love a brief introduction into your journey to investing. Brief is difficult. It's also relative. So I'll try to wing it and get through this quickly. So it's not my first story. I've got gray hair. I've been in the industry 45 years, grew up at Fidelity, paid lunch assistant, ran the number of mutual funds in the country, had a couple of hedge funds, blah, blah, blah, blah, blah. Had a spectacularly failed ETF in 2023.

1:30Happy to talk about that. Lessons learned. Always learn more in failure than in success. But what am I doing now? Why am I here? Now, I've got a pretty good presence in social media. I've got 94 ,000 followers on X. And I've done hundreds of podcasts and spaces. And I'm really big on investor education. And you graciously mentioned the conference we had the other day. We had a best ideas online stock conference, 15 speakers, 15 ideas, the best of the best. This is the varsity team. You mentioned Don Durrett and Toby Costa also spoke to me at Gold Stocks. So we had buy side guys who were eating their own cooking, hedge fund guys, pitching the best ideas.

2:12I don't mind saying a former employee of CK Alpha and a good mutual friend, Zachary Marks, appeared. Zach was on fire. He pitched a Goldstock, as I remember. So in any event, it's the best of the best, really high-end buy-side guys. And there's some third-party independent research fellows as well, many of whom actually are on CK Alpha, not this conference, but when I did last summer, Jay Mincemeyer showed up. Jay's a good friend. So the whole idea really is to democratize finance. I hate that term, but I identify with what it stands for. And this is kind of as a lie to what CK Alpha also does.

2:48You're trying to help investors, educate investors. And so what we did is we had online conference, 15 speakers, 15 ideas, no fireside chats, no fluff, just 20 minutes a piece, bang, bang, bang. The conference was last Wednesday. You can still get the replays. These are longer-term ideas. It doesn't matter. The conference was a few days ago. $99, 15 ideas if you're not satisfied, satisfaction guaranteed. So I do these conferences. There will be another one coming up in a couple of months. I'm on X a lot with Spaces. I have a sub stack. Basically trying to help investors. I was very fortunate to grow up in the 80s at Fidelity to benefit from the folks like Peter Lynch, Bruce Johnstone, George Vander Heiden.

3:32And, you know, standing on the shoulders of giants. And I'm just trying to pass on what I learned. So I think there's really a need for investor education out there. And I think the community writ large is very poorly served by a lot of the folks you see in the public square, say on X, the FUUs as they call them. And you go and look at the mainstream financial press, CNBC, not to name names, but I will. You know, the information is compromised. There's conflicts of interest. It's infotainment as much as anything. But people want the truth. They want to know. They've lost trust in markets. There's a lot of bad stuff that goes on and loss of integrity, trust, markets, governments, education, everywhere.

4:18But so people know, people know in the same way that, you know, political parties aren't really serving them. I don't think Wall Street's serving them very well either. And so what I'm trying to do, it's similar to what CK Alpha does, just doing it my own way, trying to help educate investors. And I'm bringing the best of the best. I mean, these are guys I've known 20, 30, 40 years. These are guys who, you know, be common to pay$20 ,000,$30 ,000,$40 ,000 a pop to get their research. I'm trying to share this with the public. So that's really my mission, Adriana. You talked about, you know, your history in the markets.

4:51And I feel like there are so many changes afoot and paradigm shifts that we've seen in the past few years that we have yet to see most likely. And yet so much has been priced into the market. What would you say about this market that you're looking at today? and how are you encouraging investors to think about it? I think we're going through a regime change. I entered this business in 1981. It had four decades of declining interest rates, rising PE ratios. All financial assets went up in price. The bond yields were 14 % back in the early 80s. So as the risk-free rate has come down, it's caused the price of everything to levitate.

5:31And then beyond that, you've had the role of central banks and governments trying to do everything they can to push up asset prices. And you go back to the peak of the madness in 2001, 2002, when we had the wake of COVID, where they threw so much money at the system. And, you know, they were buying mortgage-backed securities, even when tenure was 60 basis points. It was craziness. And so we've come to a very unusual period of time. And it's a very challenging environment, both for novices as well as veterans, such as myself. Well, when you distort the risk-free rate, when you flood the system with liquidity, things happen.

6:09And so to put a maybe in terms people can understand, think about real estate. Think about housing. Everyone knows about houses.

6:17George Noble:That's easy enough to understand. Prices kind of went to crazy levels. But, you know, there's no sellers. The price is low and mortgage rates are really low. Well, now that's all reversing. And so I think the whole system has been turbocharged with extraordinary budget deficits and I would say reckless monetary policy. And we're in the process of unwinding all of that. And so the only thing I can offer really is I've seen a lot. I've got gray hair. At least I've got hair. We've been through unusual times. And we should not extrapolate what's been happening. History doesn't repeat itself. It rhymes.

6:55you know there's a temptation many people want to say is this here right here right now how's this compared to the nasdaq bust is it better is it worse it's different actually it's much worse but leave that aside for a second so i think if you've only been in the market say since the post-covid era for the last 10 years post gfc era you know it's been easy life's been good But this is not normal. This is not normal. And it's in the process of shifting now. You have, you know, I think whereas previously we were in a disinflationary environment, and the market consistently was underestimating, sorry, overestimating inflation.

7:35I think that's flipped post-COVID. I think we're in an inflationary environment. Inflation, depending on how you want to measure, it's two, three, whatever. When you have a 10-year at 420, can you stop and consider that the U.S. government is running, what, a$2 trillion deficit,$5 trillion in revenues, ballpark,$5 trillion in revenues,$7 trillion in spending,$38 trillion in debt, $100 trillion in off-balance sheet liabilities. I mean, Raina, think about it for a second. If you walked into a bank with those numbers and you said, lend me money for 10 years or 4.2%, I don't think the bank would give you the money.

8:10That's basically what's going on right now. And the Fed and the authorities are forcing the issue. They're easing already. They dare to contemplate easing even in the face of sticky inflation and now escalating oil prices. We'll get to that later. I think if they do cut rates, I think it may backfire on them. I think long bond yields actually may go up, not down. So the long and short of it is, I think it's a very difficult time. I think, as they always say, ran out, you know, past, was it past returns, past four months, no guarantee future results, not indicative of future results. I think that's very much the case here.

8:45I think looking out over the next few years, you know, what the market's going to do, who knows? As an eminent philosopher Yogi Berra once said, predictions are difficult, especially about the future. But certainly within the market, there's a lot to do. There's a lot of dispersion. There's a lot of rotation. That's really my big story. I'm not here to call when the market's going to crash or go to the moon. I just think there's a lot to do. The first shall be last and the last shall be first. So I think a lot of the truths that we hold to be self-evident, you know, indexation has become very popular.

9:16People believe in the 60-40 portfolio. I think these are very simple things the average investor can do to improve their performance. So that can be too crazy. Get out of the S &P. If you still want to be broadly exposed to equities, buy the RSP, the equal weight instead of the S &P because S &P's got so much tech in it. I think bonds are a disaster. the 60-foot portfolio. Historically, bonds were designed, the bond component was to hedge yourself against deflationary risks in a recession. The risk we face right now, in my opinion, is not a recession. It is of inflation. And so bonds are not going to protect you against that, which you need to protect yourself against reckless spending and sticky and rising inflation.

10:01That's before you can get into the recent current events, with the oil price in the Mideast. You need gold, you need oil. So I would sell all my bonds and I'd buy gold and oil with that instead. So a lot of things there. So I guess what I'd say is, a lot of people fixate, they result on the index levels. I think that completely misses the point. Just as the last few years, if you own MAG-7, you did great. If you didn't own MAG-7, you didn't do so great. I think going forward, it's going to be the opposite. So there's a lot to do. There's a lot of dispersion. And that's really what people should focus on.

10:35One of the best strategists I know, Michael Kantoritz, Viper Jaffrey, he doesn't even make it in this forecast anymore. This is a waste of time. I agree with him. So, you know, I could be bullish on energy stocks, gold stocks, and I could hate tech stocks. But that doesn't inform me what the index is going to do. Sorry, I wasn't too brief. Brief is all relative. When you say gold and oil and we're in inflationary times, do you have a timeline for that? How long you think or you see that lasting? I don't engage in, I don't undertake very short-term forecasts as a fool's errand. But equally, if you make five and 10-year forecasts, it's a waste of time.

11:11Can't invest in five or 10 years. I mean, it's hard to figure out what's going to happen next year or two. Forget about five years. People think they know. But what I see right now is, you know, fiscal policy is out of control, sticky inflation. And now we introduce the oil shock. so it gets really interesting. There is a clear and present danger right now that we could get thrown into recession if the oil price stays high enough or long enough. What I'm worried about right now in particular is the market has kind of shrugged off the idea that oil prices will stay high for any sustained period of time.

11:56And the story goes along the lines of, well, hey, you know, fade geopolitical shocks. Look at what's happened every time in the last few years one of these things has come up. Fade it. And we go back to a regularly scheduled program of a bull market.

12:10I don't think that's a wise thing to do this time. You know, people, again, are fading that, want to fade that. And so I would say, even if the situation gets resolved reasonably quickly, you're not going to make any money because the downside was never discounted. So heads, you don't win. Tails, you can lose a lot. So if you had sustained high oil prices a period of time, we'll put a real break on the economy, squeeze a lot of corporate profit margins, and credit spreads, which have started to move up, albeit from very low levels, would explode. and, you know, equity prices pretty tied to credit spreads.

13:00So I think the table is set potentially for pretty nasty decline. But again, the way I'm looking at it, I'm not betting on that. I mean, yeah, the last stocks are short, the last stocks are small. I just feel that regardless of what the market does, the higher Sharpe ratio trade, the higher conviction trade is the rotation. Ours for rotation, not for recession. I'll give you an example. fourth quarter last year. I had to do one of these year ahead things, which I hate. But some people said, well, what do you like? I've been on the gold and silver trade for a long time. I was like, you know what?

13:35Let me come up with something else. Not because I don't believe it, I still do. I just want to give me something different. You have Momentum Bro and Crypto Bro and everybody else in Silverstock. SLB became the new favorite meme stock. So I came up with energy. And the reasoning was, and this is all you can call my Twitter feed, GNoble79 on Twitter, gave an interview, and I was like, look, price of oil is depressed. It was like in the 50s. I don't see much downside. So number one, risk or reward, what's the margin of safety?

14:08George Noble:Not a lot of downside. Positioning was very bearish. It's rare to see speculative money be as short as it was or as little long as it was. and equally looking at the hedgers, rare to see them as long as they were. So positioning was wrong. So valuation is cheap. Positioning is all very bared up. Fundamentals are very positive. You look at oil consumption, it's been expanding nicely year over year. And you look at the drivers of it, I mean, fundamentals look pretty good and the charts look good. So I was like, you know, buy a few energy stocks. I just buy Schlumberger, buy Volaris. Volaris will have 80 % I got taken over.

14:49but here's the crazy thing. You don't have to be that creative. Simple trade. I seized on this trade. Longchamp-Bergé, which is the most well-known oil service company. Longchamp-Bergé as a representative energy stock. Short, Microsoft, just pick on that one. It's representative of Mac 7. Rena, that trade's up like 130 % since like November. This is in the context of the market, up a little bit, down a little bit, whatever. So, again, it's sort of like, you know, you're looking at the surface of DuPont or the surface of the ocean and it seems that there's not a lot going on. What's really interesting is what's going on beneath the surface.

15:30And as my former mentor, Mr. Lynch, would always say, it's a market of stocks. So there's a lot to do. As you mentioned, you seized DuPont. I like energy stocks. I just gave you the reasons why. I think that trade has years to run. Years to run. in the tech, particularly the MAG-7, I think that's going to be in a world of hurt for a long time. And I like to draw the analogy, actually, to the Japanese stock market back in the 80s. These are fine companies, by the way, the MAG-7 companies. Take nothing away from them. As we all know, for quite a long period of time, from around 2015 to present, U.S.

16:13exceptionalism, the S &P beat everything by a wide margin. Tech stocks beat everything by a wide margin. It wasn't random. I mean, it was justified. Sales went up, earnings went up. Peter Lynch would always say, and you take the example of Coca-Cola. Coca-Cola went up 30x over 30 years. Well, guess what? The earnings went up 30x over 30 years. It's not a random number. Stock price is not a random number generator. It's based on fundamentals. But what I see now of MAG7, the whole business model changing with the hyperscalers, the whole AI project, which I'm very skeptical about. It's not that I'm bearish on AI.

16:54I mean, AI will change our lives. I just don't think it's going to change our lives, except people think. And I don't think there's a revenue stream to support the trillions of dollars of investments that's going to be called upon. So I actually interviewed someone, Julian Guerin, out of MicroStrategy in the UK, a really smart guy. And he'd done some work. And you can find this on my sub stack. He made the calculation that the misallocation of capital that's occurring now with AI is 17 times, 17 times what we saw in the dot-com bust. And the issue isn't, oh, well, AI is going to, you know, be fine.

17:37I can be so bearish. No, no, no, no, no. You go back to the internet. You go back to year 2000. I remember like it was yesterday. I was running a hedge fund. The internet eventually did what people said they were going to do. I saw a statistic the other day. I think data usage on the internet is compounded by like 43 % over 25 years. It's like about 10 million percent. It's a crazy number. So all the people who said, yeah, the internet's going to be a big thing, they were right. They were right. However, however, if you bought the shares of the companies that people were investing at that time, Lucent, Nortel, AOL, go down the list, Amazon, get obliterated down 90%.

18:20Eventually, it came right. Amazon went down 90 % before it went up 200x. So I think this is not like AI is useless. No, I'm not saying that. I think its benefits are greatly exaggerated. But more importantly, I don't think the payoff, the return on invested capital is going to materialize in a way that will justify the share prices. And so I think the stocks are all huge shorts. I mentioned the Japanese market. I want to come back on that. In the 80s when I was at Fidelity, I was managing a fund, the Fidelity Overseas Fund. I was lucky. I mean, yeah, I work hard, fine. But the first day I was managing money, it was the number one fund in the country.

19:02It was big in Europe and Japan and all these places. And we all remember the stories about how overpriced Japan became. But if your benchmark was a non-US S &P, the IFA index, Europe, Australia, Far East, Japan got up to the point where it was 66%, 66 % of the IFA index. Japanese stock market was in 60 times earnings, led by financials, the banks were on 10 times book and 100 times earnings. And fundamentally based investors like Jeremy Grantham or John Templeton would cry out the overvaluation of the Japanese stock market. but big money, big liquidity needs big stocks. And these are the stocks that went up their asset plays.

19:45So it got to the point where if you didn't own any of these stocks, you tried to outperform the index, you had no shot. And I would submit to you, that's where we are with tech stocks in the U S the last few years. It's not that these aren't good companies or great companies, they're great companies, but their business model is changing. Previously, they were accorded premium valuations because fortress balance sheets, highly cashflow generative, big moats, it's all changing now. And so it's deserving, given the cashflow characteristics of these companies is changing so much, look at Oracle, what's happening in their debt ratings, all the rest, these stocks deserve to get derated.

20:23And I think ultimately, it's going to be a real problem because they're going to overspend. It's the way it works. and I think there's some great shorts in the tech area. So the easiest way, in my opinion, to outperform the U.S. market this year, and I actually think it is an age for it, I'm not shilling for CK Alpha, but I think we're in a golden age for stock picking right now. Because in my view, if you just avoid tech, avoid the MAG-7 and index everything else, you'll outperform. This is a year when, and you've already seen this happening, look at the year-to-date numbers. um so my favorites are things like commodities gold stocks mining stocks um and stay away from things high value high evaluated things um selective growth stocks max seven i think credit spreads are a problem i think private credits is a disaster private equity is a disaster so it's gonna be a lot of dispersion a lot to do and again i think this really for the do-it-yourself Alfred at home was a standard CK Alpha customer.

21:27And I, by the way, subscribe to CK Alpha. I think he can do really well. He can do really well. I'm not even sure what the question was, random, but there's my answer. But you answered it. What would you say about the non-Mag7 tech players? Is there any room for Alpha within, you know, as you mentioned, AI may, the benefits may have been exaggerated, but there's definitely change coming, if not already present. Is there any part of tech that you like or would encourage investors to look at differently? I would be very circumspect because I think where I sit, and this is one country to a lot of people, trying to buy tech stocks or trying to identify attractive tech stocks, that's like trying to find the best house in a bad neighborhood.

22:17I don't want to be there. There'll be winners, I'm sure, but I'm not expert enough to tell you what they are. I think software is a no-fly zone. They're going to be winners and losers. Yeah, but one of the problems I have is valuation. At the top of the hour, you asked, what's different? What should investors be aware of? Take software as an example. So I'm in a couple chat rooms with some folks who are pretty expert in software. And they're all looking at how much stocks have gone down. XYZ software, you know, down 40%, whatever. the igv's gotten destroyed and they go oh it's oversold it's oversold well that doesn't take anything just with the prices it's a brain relationship fundamentals the resulting on price on okay again they know the price of everything and then i have nothing um but the problem was said stock they were pushing i can't remember what it was maybe it had gone from like you know 20 times sales and 200 times earnings to 12 times sales and 120 times earnings.

23:16And I'm like, wait a second, wait a second. Yeah, I get that's cheap to where it was compared to a few months ago, but in what universe is 12 times book and 120 times earnings like normal? And I said, you know, they said, wow, this is as cheap as it's been since COVID. I was like, yeah, well, how convenient that is. You're picking a very narrow time frame. Let's send the clock back. Let's go back to 2011 post-GFC. these stocks could fall a hell of a long way from here and the problem really with the software is it's it's it's it's this weird type of situation where people don't really understand i don't understand um who the winners and the losers are going to be it's going to take a while before that becomes clear and as long as that uncertainty is lingering it's going to put a top on prices Now, of course, day-to-day, week-to-week, prices can and will bounce.

24:11But, all right, one stock I've done a fair bit of work on, Adobe. I think Adobe's having its Kodak moment. Will Adobe go bankrupt? I don't know. But it's hard to point to too many products Adobe has with any moat. And, you know, I think the backward-looking analysis that a lot of people do, and Raina, I was going to say this politely, I'm reminded that one should praise specifically, but only criticize generally. So I'm not going to mention names. But I've seen articles on Seeking Alpha and elsewhere written by Houshwe Zay, some people who don't have a lot of experience, saying, oh, look at Adobe.

24:53It's only on 12 times earnings. The multiple used to be 30 or 40. It's only 12 PE. Forgetting the fact that valuations are a laggy indicator. multiples expand and contract with respect to growth rates. And maybe Adobe's not really on 12 times earnings. Maybe the E is wrong. Maybe it's really on 40 times earnings. So I think Adobe's having its Kodak moment. It's going to go bankrupt. I'm not saying that, but am I remotely tempted to buy that stock? No way. No way. Charts horrible. Earnings estimates are coming down. They have no moat. So it's going to take a while to figure out how bad the situation is.

25:30Or put it the other way, if you're bullish, Adobe, it's going to take a while before you're going to be able to convince yourself or Mr. Market's going to be convinced that things are looking decent. So Adobe's trouble. Flip side, I'm getting into details, this is the general question about tech. You know, there's some more niche software companies where some of the more expensive ones actually where the valuations are still pretty, they've come down, they still look pretty expensive in absolute sense. Those guys may emerge unscathed because AI can't replace what they do. So software isn't too hard pile.

26:02Semiconductors, I think, is very dangerous. Very dangerous. They've been spectacular performers. They've done nothing wrong other than the fact they've overachieved. And I've had this discussion with many a folk. You look at the semiconductor industry and people say, well, it's an Al Goplin. Yeah, it's different. You don't understand George. You're a boomer. Blah, blah, blah, blah, blah. Okay, fine. But the thing is, it's a capital intensive industry, which goes through cycles. You're already starting to see the capacity announcements, new ads, even though it's an oligopoly. Koreans are furiously adding capacity, much of which, some of which will not come about until 2028.