George Noble on bonds, private credit, consumer stocks (& Tesla) falling apart

0:08The man, the myth, the legend. It's George Noble. Thanks for coming on. Thanks, Serena. Thanks for putting up with me. Put up with you very happily. We're happy to have you on Talking Markets and Analysis, but we also have very something special to share with our audience and with investors in general. You are putting on the absolute best conference that's ever been seen to man, Machine. It's May 20th. We have Steve Kress and some other familiar names from Seeking Alpha, but also some big hitters from outside the Seeking Alpha world. Talk to us about this conference that's coming next week. Share with us some of the main insights that will be gleaned and given and some of the biggest hitters that are going to be speaking, please.

0:52Thank you, Rena. We've had three conferences so far, stock picking ideas. This conference is going to be dedicated to income investing, which I know is a topic that's near and dear to many Seeking Alpha subscribers. In a world of runaway fiscal deficits, irresponsible policy, bond markets, which are in disarray. I think we've had four consecutive down years in bonds. We're looking at a fifth one now. What are you supposed to do with your income portfolio? You take the traditional 60-40 portfolio, what are you supposed to do? And so bonds historically, look at the 60-40 portfolio, their inclusion has really been designed to hedge your equity exposure, i.e.

1:33if we had a recession and profits went down and markets went down, the bonds, the appreciation in bonds would offset that. Historically, that's worked. Stocks and bonds have been negatively correlated. Now they're positively correlated. And the real risk is not one of recession and depression, but inflation. We have fiscal dominance. We're running, you know, budget deficits, 7, 8 % of GDP as far as the eye can see. We're not, the dollar's not the safe haven it once was. And so bonds are, and we talked about this in our last time we were together, Rena, bonds are a very dangerous place to be. So what's an investor supposed to do?

2:15And so we're trying to answer that question. There are other ways to generate income. We have on the one hand from Seeking Alpha, Steve Kress, who I understand is coming out with an income product next month. Steve's going to speak about that and what he sees in the way of income. And then we have a very nice array of other well-known Seeking Alpha group leaders. I can't recall all of them, but people like Hoya Capo, Alex Petty, Leo Nellison, I think is how you pronounce his name, Kirk Spano, Sam Kovacs. You go down the list, it really is some of the most popular and best essay authors. They're going to come with a lot of great individual ideas.

2:58In conjunction with an array of speakers who are coming from outside SA, these are some of the best thought leaders out there. People like Michael Howell, who's the world's leading expert in liquidity. Luke Gromlin, who needs no introduction. He's been in the vanguard advocating gold and Bitcoin as a replacement for bonds. David Hay of Evergreen GavCal. Jay Pulaski, formerly head of Emerging Works at Morgan Stanley. And then finally, John Roque, who is my favorite technician on the street, is going to talk about the technical outlook for interest rates and bonds. So you're going to have a combination of macro and micro thinkers to try to make sense of the very challenged income environment that we're in.

3:40All in one day, on Wednesday, May 20, for only$99. This is crazy. You take someone like Michael Howe, you know, charges tens of thousands of dollars a year for its institutional clients. You can get all of this in one place for$99. This is unprecedented. I hate the term democratization of finance, but we really are democratizing finance. We are bringing the best intellectual capital we know to investors, and it's only$99. I couldn't be more excited about this. Hopefully, many of your viewers will attend. We'll leave a link to sign up for that in the show notes. And it also runs from 10 a.m. to 6 p.m.

4:19Eastern. it'll also have a full replay access to a full replay correct correct replays should be available immediately i don't expect anyone to sit through 10 hours eight hours except me because i have to interview everybody but the replays will be available so you can listen to them in bite-sized portions appreciate that jay mensmeyer by the way one of the friends of the podcast will also be in the conference i forgot jay i just i just was emailing with jay this morning we're trying to I forgot when he's going to talk. Jay's one of my favorites. And, you know, it takes shipping, which is related to energy.

4:50It's one of the most topical things right now. So I'm really excited to have Jay. And I should also mention Michael Boyd, who works with Jay, as an energy authority, whatever it's called. He's going to be appearing. So in the show notes, in the flyer for the program, you'll see everyone. I think we have eight people. I think we have 14 speakers. And I believe eight or nine of them are from SA. It's kind of like the SA All-Star team in combination with the best minds that I know, guys I've known for decades coming from the outside. So I don't know. I think it's fantastic, but advice is worth what you pay for it, which is nothing.

5:23It sounds like an embarrassment of riches. That's what it sounds like. Last time you were on, you were talking about avoiding the S &P, avoiding bonds, as you mentioned, buying gold. Where are you at these days? Prices are fluctuating, to put it mildly. You look smart. You look stupid. I think all those trades worked until they didn't work. I think they're about to work again. So, you know, people like to result on performance. And you can only, you know, there's lies, damn lies statistics. You always can adjust your starting point from wherever you want. You know, into May 30, I look like a genius.

5:57The last five, six weeks, not so much. But I think the big trends are still in play. So forget about what, pass this prologue. Forget about where we were. Let's talk about where we are. but I will reference where we were, this context where we're going. You know, we made a call on energy in December. We got, I just looked at it. I was like, you know what? If I'm wrong, we're not going to lose much money. The sector was forgotten. If I'm right, you can kill it. It had nothing to do with the Straits of Ramos, all right? We killed it. Energy sector was on fire before the extracurricular activities of February 28th.

6:35And now that oil, you know, crude's gone crazy. energy's up, energy's down. My crystal ball isn't any better than anybody else's in terms of how high oil prices are going to go, how long this is going to continue. My own personal view, though, for what it's worth is I think this is rather take longer instead of sooner. It's going to be later rather than sooner in terms of when this gets resolved. Each side is dug in. The Iranians have never had more leverage than they have now. And each side is asking of the other set of demands, which I don't think the other sides will want to accept. So in the for what it's worth category, I think this is going to take quite a while to resolve.

7:14However, even if we were to wave a magic wand today and the whole thing was resolved, it's going to take months for this to get resolved and be until 2027 until the situation gets back to normal. But what I want to point out to people is normal, again, think about what the energy patch looked like prior to February 28. hey, prices were going up, demand was inflecting, consumption was at record highs. So use that as a baseline. But then on top of it, consider the over a billion barrels of crude by which global inventories have come down, and all things being equal, which they never are, oil prices inversely correlate to level of inventory.

8:01inventory. So whatever you thought was going to be the baseline for oil prices previously, it's that much higher now. And so I look at the stocks that don't in any way, shape, or form reflect current oil prices. More importantly, you should look at deferred prices, looking at the longer-term contracts, December crude or whatever. Those have gone up a mere fraction of what the front has gone up. And I think as, you know, listen, the day this thing gets resolved and I hope it gets resolved. I have no idea when it's going to get resolved. I'd fully expect oil prices to go down. That's Captain Obvious 101 thinking.

8:37That's not what's important. What's important is what comes afterwards. And I think we're in a world where, you know, you go back and you look at consumption at record highs and growing. You've got 5 % depletion roundabout, give or take. We're not drilling for enough oil. I think the outlook for the energy patch is terrific. You know, over time i was trained to fidelity back in the day you want to invest in industries or you've had under investment and avoid industries you had over investment tech investors please call your office um and so you know uh i was just i did a just did a great interview last week with one fellow points out to me that um you know you look at like friends of the drilling sector you look at rigs day rates have to the price you look at the replacement cost of rigs like 50 million bucks you can buy them through publicly traded companies at like 10 or 20 million bucks like prices have to go up a lot in order for a drilling activity to increase and i think we are entering a period of drill baby drill so i like the energy sector a lot in particular the drillers um you know we had we had a couple great calls on the offshore guys energy guys early turn of the year at valaris at synovas uh ensign looks interesting i think all the land drillers look really interesting um so i like the energy stocks a lot i'd stay away from the etfs from exxon and chevron they're great companies but they're pretty expensive they can do a lot better so i like energy gold um gold was doing fantastically uh until the midi situation erupted um a lot of theories as to why gold sold off some people say well you know the the midi nations are having to sell some of their gold who the heck knows i mean just to review the go to the videotape gold and silver were doing great until um in the fall momentum bro and tech bro discovered gld and slv as their new favorite mean stocks and the thing went totally crazy so it got to be a zillion percent over above the movie averages we had a correction that's fine that was in in january february and then along came the mid-east so gold and silver kind of got sideways for a while i think they're now starting to go again silver's poke its head up more importantly and i'm gonna give a big shout out to sa alum zachary marks who is now managing money he's been he's been a champion everyone should go look at some of the stuff zack's put out i've had on the podcast a couple times um he's no most notably been recommending ssrm which is a stock we've written up um you know it's stocks on 35 i think give or take it's like on six or seven times earnings i didn't say cash flow i said earnings i think the stock should double just to be just to start the conversation then we can debate what happens from there in other words and zach made the point i totally agree i think the gold miners the gdx is the etf for the gold miners gdxj the gold miners and silver miners are going to do incredibly well even if the metals prices just stay where they are so and god forbid if gold goes up the way I think it's going to go up, then no price is too high.

11:42So I really like the gold miners. If you're too lazy to pick stocks, just buy the GDX or GDXJ. I think inflation, generally speaking, and this gets back to the conference, is sticky and rising. The 10-year, I think we're at 440, 445 today. I mean, Rena, I think we discussed this last time, but if I came to you, I said, Rena, I have income of$5 trillion and I'm spending$7 trillion. I'm running a$2 trillion deficit. Oh, and oh, by the way, I owe the bank already$40 trillion. And oh, by the way, there's$125 trillion of off-balance sheet liabilities. Rena, would you please lend me money for 10 years at 4.4 %?

12:19I don't think you would do that, right? That's the bond market today. So I would run, not walk from the bond market. And you're starting to see bond yields in the U.S. drift up. And again, don't just look at the U.S. You have to look at context. Look at what's happening on a global basis. U.S. yields have been relatively, remarkably quiescent. You have Japanese bond yields at 30-year highs and breaking higher. You have European bond yields at 20-year highs and breaking higher. And so I think the direction of yields is up. I don't know at what point, we'll get to the market now, at what point rising bond yields and rising oil prices finally pressure the stock market.

13:03You asked a simple question. I'm on a roll, so let me keep going as well as I'm making sense. If you told me two months ago when this stuff, we told most people when these extra crook activities broke out, that the S &P would go straight up and the semis would go up 100%, whatever, in three weeks, whatever it was. I certainly didn't predict that. Most people did. To be fair, people like to point out that earnings estimates have continued to rise at a very healthy clip the last couple of months. And that's really the reason why the market's been going up, despite all the negative news. I'm fearful that we're approaching a point that once oil gets to a certain level or bond yields break to a certain level, I think it's going to really hit the economy and hit the market.

13:52What that number is, I don't know. Many times people say it's not the level, it's the rate of change. But I think the equity market writ large is in a very dangerous place right now. I don't want to be hyperbolic, but I'm sure you follow all these things. The market breadth has been terrible. There's been an increasingly small number of stocks that are driving the indices, most notably technology, the semis. I'm very negative on the AI trade. I'm not negative on AI itself. I think AI will be adopted. but you know right now um you know show me the money i mean they're spending hundreds of billions about trillions of dollars on ai on hyperscalers and i don't see a path to monetization or one that's going to going to justify the card valuations so and then you look at the the cash flow profile for the hyperscalers this is a disaster i mean you look these stocks 2020 why they do so well over for a long period of time?

14:51Deservedly so. Rising earnings, rising sales, rising earnings, strong cash flows, pristine balance sheets, buying back stock, moats, all good. What's changed? What's changed is these companies have now become very capital intensive and their free cash flow is going out the window. They are spending money on data centers at such a prodigious pace, the cash flow profile is a freaking disaster. And that has big implications for what the valuations should be. So in one of the trades I think we talked about last time, it worked and it didn't work, but I think it's going to work again. You want to own the equal weighted S &P.

15:34Keep in mind, tech is 40 % broadly defined. Tech is 40 % of the S &P. So it's a very tech-centric index. And I think that's a big risk that maybe investors don't realize. So it's all come down to tech. It's all tech all the time. And the market has an inability to focus on more than one thing at a time. And it's been focusing on tech, focusing on home moves. We put out a list of stocks late March, March 25th, I believe. I put out like eight buys and eight sells, eight shorts and eight longs. I wasn't making a market call. I just said, here are the stocks that are going to outperform and here are the stocks that are going to The buys are up 14, the market's up 13.

16:18It outperformed even though it had no tech stocks, which is freaking amazing. But the really interesting thing is the shorts are only up four. So you look at the spread between the longs and the shorts, it's like 9%, 10%, which gets to, as I mentioned earlier, the market can only focus on one thing at a time. You look at our shorts, there are a lot of consumer stocks in there. In fairness to my paying subscribers, I don't want to give away all the secrets, but I'll just mention one that we have been public on, Fresh Pet, which, by the way, was mentioned is an idea at our last conference by Tom Chano's brother, Jim Chano's.

16:48Everyone knows Fresh Pet. Those are the guys who are refrigerated dog food in the coolers in Costco and Walmart. Fresh Pet has been a great growth stock. They pretty much have exhausted all their white space. Growth is slowing. Stock is still egregiously expensive. And here comes the good part. The week after Tom recommended it, it is a shortened to 80. I think the stock's 52 now. It's down like, I don't know, 30%, 40%, whatever, since he recommended it. Costco came out and said they're coming out with their own competing product. Costco, by the way, is 10 % of revenues. And Walmart also made a similar announcement at 35 % of revenues, not to mention the fact that General Mills is also a big competitor.

17:32So Ernie's estimates have been collapsing for Fresh Pet. The stock's still extremely competitive, really expensive. and you have two huge competitors entering their space. So even though it's gone from 80 to 52, that's what, down 35 %? I expect it's going to go down another 35%. This is an investment short, all right? This is pure alpha. This is collapsed, down 35%. It gets the backdrop of a market that's up 10%. This is pure alpha, all right? So it's longs and shorts. I mean, and so this list, as I said, the longs are up 14, the shorts are only up four. What's really interesting, the shorts, largely I'm concentrating on the consumer area.

18:13I didn't put any tech names in the shorts. I put consumer names in. So it's stocks like Fresh Pet. I'll give away one other name, which I've made it public before. But Kava, the salad guys everybody knows, that thing's done all right so far. But it's something like a stupid valuation. And you're starting to see with the K-shaped economy, we all know this, the low-end consumers are starting to get pressured. and I suspect like a lot of other consumer companies, they're going to get hit as well. And by the way, it's not just a low-end consumer that's getting hit. You're starting to see even the high-end starting to get hit.

18:44So I think consumer stocks, again, it's a market of stocks. Everyone likes to always ask, so what are you going to get in the market? I don't know. It's a market of stocks. I could find a lot of things I like in the sectors I mentioned, broadly speaking, resources, commodities, metals, gold, energy, all that kind of stuff. Things that Dennis Gartman would describe as if you dropped them on your foot, it would hurt. And the flip side is there are a lot of things I would short. A lot of consumer names. I think Tesla, you might want to ask me about Tesla. I went into Jihad the other day against Elon Musk and SpaceX, which I think is going to be an epic disaster.

19:18And I think the semis are totally overcooked. I think data centers are overcooked. And so there's a lot to do here. So I don't even know what the question was. I know I answered it and then some, but that's my story. I'm sticking to it. About the miners, you said you could just get into the ETFs, but there's upside to be had in the minors. How are you thinking about the minors? Like what is a minor that would make you bullish on them? What is the difference between a minor that you're bullish on and a minor that you're less bullish on slash bearish on? So I'm going to, again, I want you to follow Zach.

19:51He's so good. He points out that, you know, not only is SSRM selling on whatever, seven times earnings, it's got three times cash flow. They sold their biggest asset, the Turkish mine. They took in a billion five in cash for that. Plus, they're generating hundreds of millions of dollars in cash flow per year. It's on three times cash flow. They have announced buyback. I can't even remember now. It's for 10 % of the stock, 20 % of the stock. One of the great points he makes is, he says, George, why were the hyperscalers, why were the MAG7 such great stocks for so many years? It's not just they had rising earnings and all that kind of good stuff.

20:25It points out they had huge share buybacks in place. They were de-equitizing. It was a constant bid under the stocks, okay? You're seeing that now in the mining sector. SSR is on three times cash flow, and they're buying back some absurd amount of the market cap, okay? Barrick had knockout numbers earlier this week. And on top of that, he announced a huge stock buyback. You look at the whole mining sector, they're taking all this cash flow, and they're buying back stock. So miners, you know, their costs are largely fixed. Yeah, they go up with inflation a little bit. But the costs don't go up anywhere remotely as much as the gold and silver prices.

21:07You know, Zach made the point. I think he's right. A few weeks ago, he's like, gold could go down 10 % and the stocks are still double this year. And I believe that. You know, the new jerk reaction, of course, is, oh, well, metals price goes down and sympathy, they'll sell the stocks. Yeah. But when you're at these cheap valuations and they're buying back stock, kind of hard to see how they're going to go down very much. The flip side is, again, I think these stocks can go up even if metals prices don't do anything. But I actually firmly believe that gold's going a lot higher. And they always say, give people a price, give them a date, but never give them the two together.

21:43The price is higher, all right? Whether gold is 6 ,000 at the end of this year, 8 ,000 next year, I don't know. People ask me, I say, George, when will you turn bearish on gold? Real simple. I'll turn bearish on gold when I turn bullish on the value of money. In other words, those those little green paper bills in your pocket, they're going down in value every day, okay? Every day. So anything denominated in those American paces is going up in value. So I'll turn bearish on gold when the price, when the value of money starts going up. I'll turn bearish on gold when we start pursuing sensible monetary policy and stock printing money.

22:17I'll turn bearish on gold when we stop spending money with reckless abandon, expansive fiscal, irresponsible fiscal policy. None of those factors seem to be in evidence right now. To the contrary, to the contrary. I almost think like it's pure, Dan, almost guaranteed you're going to have a bond market collapse. There's only one way it's not going to happen. The reason I think you're going to have a bond market collapse is, you know, you almost would believe by what's happened so far that the MMT guys were right. In other words, you could spend as much money as you want. It wouldn't matter. Okay.

22:55Today, yields are 440, 450. Last couple of years, they had an epic crash in the last year or so. They really haven't done much. Yields are up, yields are down, yields are up, yields are down. I think one of the cusp of yields is going up in a big way. I think it's almost a definite, but it's identity. They will keep spending more money as long as they're allowed to. In other words, as long as Mr. Market, the bond market vigilantes allow them to. They'll keep doing more and more and more. I don't want to make this political. It's not political. Both parties do it. Particularly Trump, though, he believes in debt.

23:27So as long as they can keep running irresponsible deficits, they'll keep doing it. They'll keep doing it and doing it and doing it until one day the market says no mas. And I think we're on the cusp of that. And I would say by reference, people say, well, George, you know, the Cassandras have been worried about the bomb market for years. That's true. That's true. But not all circumstances are different. So if I say to you, Raina, you know what? Watch out. We have global warming. Or, you know, you're in a room. You're in a sauna or whatever. I say, watch out, Raina. The temperature's going up. Okay, it goes from 50 to 60.

24:02Watch out, Raina. The temperature's going up. It's going from 60 to 70, 70, 80, 80, 90. And then for like the fifth time, I say, Raina, watch out. The temperature's going up. Now we've gone from 90 to 100. Now you're like, George, this doesn't feel too good. You know, or it's like you're filling up a bathtub of water. Oh, George, the water level is getting higher and higher and higher. Yeah, but it doesn't matter. But you eventually get to the point where it doesn't matter. And that's where I think we are with the bond market right now. So I expect yields to go higher, which is a threat to the economy and to markets.

24:37Keep in mind, interest expense is the biggest, most rapidly growing component of the deficit. At this pace, it's destined to surpass Social Security relatively soon. So in foreign investors, they're noticing this. And so especially you throw in now the cocktail of what's going on in the Mideast and what is the value of US protection anymore, US defense. Mideast nations want to pay for US protection, keep recycling their surpluses here. But now all of a sudden, you know, if some guys can blow up a$10 billion battleship with a few drones, what's the value of that protection? I would note, you probably saw this the other day, Raina, the UAE, which people misread this, but the UAE, which I think owns$95 billion in treasuries, if I got this correctly,$95 billion in treasuries.

25:28There was discussion about how to look into borrow money from the U.S. Borrow money from the U.S.? Why are you doing that? You got$95 billion in treasuries. Why don't you just sell some of your treasuries? Ooh, wait a second, wait a second. Scott Best is not going to like that. You're going to start selling our treasuries? Because the model has been all these last few decades with this globalization thing. Our trading partners earn surpluses, and they recycle those surpluses into dollar assets. Historically, U.S. Treasury's got a lot of it. Equities are getting a lot right now. Well, if all of a sudden these economies abroad aren't doing so great, and the whole oil thing is hitting Europe and the Mideast, these other places, Asia, and what it's hurting us.

26:06And they're like, hey, you know what? Not only our surplus is going away or we can't recycle them in the same volume as we did before, but we need some of that money because we have some fiscal problems. We want to sell some of our bonds. What does that do with our bond market? And so what happened? It was announced, respected that instead of having those guys sell our bonds, we're going to lend them money against their bonds. What's the matter, Scotty? You don't want them selling our bonds? Nice bond market you got there. I'd be ashamed if something happened to it. All right? So I think we got a real problem here.

26:39I think you got pressure on rising. Oh, and by the way, by the way, the way I'm going to be wrong in my bottom market forecast, equity holders ain't going to like that. The most obvious likely way I'm going to be wrong is if we get a recession. And how's that going to work after your corporate profit? So in other words, I guess what I'm saying is Goldilocks is dead. Dead, dead, dead. You can't have your gold. She hasn't been seen in quite a long time. She ain't coming back. And that's what equities need. That's what equities want. And so, yeah, right here, right now, it's intoxicating. George, you're a boomer.

27:09Go back to the retirement home. I get all that, okay? But I think we're in a very dangerous situation. The valuations on technology in particular are incredibly stretched. They don't matter until they matter. But, you know, buying semiconductor stocks at eight times book value in a sickle industry? Are you kidding me? Now, you want to do the Chuck Prince shuffle and say, hey, George, I got this.

27:31George Noble:Okay, fine. Momentum, but keep going. okay fine but you know if you're so sure you can be if you want to invest and not speculate this is not for you i know people tell these stories about some new cycle all this kind of stuff no i'm not a buyer of that story what was the question rainer give us 20 minutes i did want to ask last time you were on you were part of the chorus of voices calling private credit an unmitigated disaster. We had Samuel Smith on recently giving the opposite view of that and why he's still a fan of Blue Owl Capital. What would you say about that part of the market? So Samuel, by the way, who I have a lot of respect for, he's going to be at our conference next week.