TDI Podcast: Don’t Buy the Label (#990)

30:34Because often, And, you know, when I've tried or I've experimented with the writing elements of it, I find it a little bit stilted. I find that it's kind of missing something. It is, you know, somewhat, you know, it is not necessarily inaccurate, although that happens at times. But it's more if you and I'm going back to date myself, the movie The Fly in 1986. Oh, Jeff Goldblum's character cooks two steaks. Brindlefly was his name. Brindlefly, yes. And he he cooks a pair of steaks for the Geena Davis character and sends one through his machine. And she judges the first one, just a regular steak to be fine.

31:11But the one that he sends through his machine, she spits it out and says it tastes synthetic. There's a certain way in which some of the things that it writes may not be inaccurate, but it comes across as synthetic to me. And it's sort of something that I can kind of pick out. And and that's more an alchemy that comes from being in journalism for a very, very long time. When it comes to, say, putting together bulleted point summaries, those tend to be relatively straightforward. It can pick out errors, that kind of thing. It can help distill documents. I have had success with that. I can give you an example.

31:45During this entire Iran war that's been going on, we've seen – Conflict, sir. It's a conflict. It's not a war. Please. It's a conflict. Well, then, there has been a you've seen the inventories of various fuel related products decline. And one thing we noticed is that a number of months ago that California's gasoline inventories were near five year lows based on a chart that's on their state's energy regulator website. Now, they have an Excel spreadsheet of all of their data going back about 23 or 24 years. And I wanted to find out if this was the lowest ever. The problem, of course, is that California gasoline inventories refers actually to three things.

32:26It's blended gasoline because California blends its gasoline so that you don't have the smog in the air. The components it uses to blend that gasoline and then the raw gasoline. Those three things are its broader inventories. And before this year, it used to divide it up between North California and Southern California. So now you have six lines in one Excel spreadsheet to create one line. I was able to upload it into, you know, one of our AI related tools and it crunched the numbers very, very quickly in a way that I could have done but would have been scrolling through Excel, hitting return, scroll, return, scroll, return.

33:04Yeah. That proved to be very useful. And using some spot checks, because I did check the numbers to make sure it was correct. I did verify that this was correct. And it took what would have been an hour and a half to two hours of labor and turned it into, you know, five minutes of labor. That struck me as a very good and useful use of AI. The story was still written by a reporter of mine, but, you know, just the same. That was a valuable effect. And we are finding valuable effects from, you know, the ability of AI to, you know, sift through databases, to crunch numbers, to find things like that.

33:40But it will not always do what we want. It often, perhaps your hunches are still something that are intuitive and better. It cannot call sources up on the phone. It cannot track down people. It cannot pound the pavement. But it can sort of help kind of flesh out ideas and thoughts kind of in your head in a little bit of a dialogue, as long as you understand that it is working with the limitations of previously published material. And we have notable prompts that say, please only use verified news sources like Reuters and some of our competitors and that kind of thing. So those things, and if it sifts through that or official government data or government statistics, has had valuable uses.

34:27And so I'm not going to be some sort of ambassador for AI here, but I'm not going to be a Luddite and an obvious detractor. And so, you know, it has much that it can do that will streamline some things. And then there are its pitfalls as well, which I'm sure that you've, you know, noticed as well. So that is a bit of an overview. There's some great things that it can do. And don't forget, it stole most of this data from us anyway, right? Yes. It stole all this. This is not like new stuff that's being generated. It's just being taken apart. Well, it's kind of like Brindlefly. It's being taken apart and then put back together on the other side is exactly what's happening.

35:07And by the way, I can't now get the images of his fingernails falling off and his fingerprints all coming off right now during one of the scenes as he was morphing into the fly that he will become at the end. Yes, exactly. What a great movie. That's what I'm here for. Metamorphosis and what kind of – it is a metamorphosis book put into a movie. So let's talk about polling though for a second. We have midterms coming up and polling is a big issue. There has been this idea that polling, well, that the whole election process, let's start with this, that the whole election process is a problem. That's the first of all.

35:46I think that's the first issue that from the start to the finish of what people say, what they do, what they do is not what they say. And then in the end, if the parties that are talking, the people that are talking, that are on the wrong side of the actual eventual election are just going to say that something bad happened, it was rigged and all that. Is there any value in the polling these days for you? You know, it's a tough call from what we have on our elections team. You know, the polls make you give you a sense of broader trends. You know, the question is, is, you know, how willing people are to answer polls these days.

36:28And as people become less and less willing, you risk in polling to over indexing to people more willing to pick up a phone or more willing to do answer these things online. And whether that skews you towards a populace that tends to be more urban and more educated and overstating then some of the opposition that exists to the president at this particular time. That's not to say that he's popular. Our polls continuously find that he is not, and most others would seem to agree. The question is whether his approval rating really is around where we have it, which at Reuters Ipsos was the most recent, I think 34 % or so, which is not a very high number.

37:12And then there are others who have come up with the range of 40 percent or so, which isn't what you would call good, but it is certainly something that suggests a potentially different outcome in the midterm elections or at least a less dire one for the Republican Party, which is currently in power than a polling result of a popularity level of 33 percent, which is much more dire, as you would imagine. And I do agree with you as far as people, the discourse now is a lot around this was rigged and that was rigged. And my fear of that, of course, goes to the point where if after a time you have for years people determining or saying predetermining that something is rigged, at what point do people in power decide to take steps to actually do things that are on the level of actual rigging?

38:03And you run the risk of going from a place where, you know, associate, you know, excuse me, assorted cranks would say things to it being the broader, you know, feeling amongst people. And then you lose trust and then you open yourself up to a lot of very bad outcomes that we have seen throughout history. Listen, the bottom line of all this is that all of our, I think our political system, our economic system, our financial system, and you go on down the list is all based. I've said this a thousand times. It's all based on confidence. You know, the full faith and trust in something, nothing is backed anymore.

38:39It's all backed by the theoretical confidence factor. And you lose that in any linchpin area of the bigger picture, right? The economy, the politics. If you lose that in a place totally, then the whole thing starts imploding upon itself. The weight of the confidence factor becomes so one huge or maybe one or two sides of the house pulled out, it is not going to stand any longer. That's a big problem. That's my two cents on it. That is a big problem. I mean, the more one of the, well, somewhat recent examples, of course, would have been the financial crisis when, you know, banks no longer became confident that they were going to get their money back, that they were lending overnight.

39:27Right. You know, which was the absolute then collapse of, you know, the overnight lending system. And then, you know, everything that ensued from there, you know, and you're right. I mean, and the financial system in some ways is always based on confidence, but there are a lot of other things that are based on certain levels of confidence and trust that have to be considered. Yeah. Let's talk about market valuations for a second. That's another thing that we trust and that we like to look at. And you are, you know, a lot of stories, right? By the way, if you don't know this, I'm a big Reuters fan.

39:56Thank you. That is my, on my, I can show you my apps on my phone. It's right there. That's the first thing. Seriously, right? I'll show you right here.

40:04David Gaffen:Maybe if I could open up my phone. So right here in my financial section, the first thing is, there's Reuters. Excellent. I don't know if you can see that right there. Yeah, I can see it. But that's the first place that I go to. And then I try to fill in around and see what else is going on. But basically, that's the first place, you know, along the top, along the side, along looking at whether it's market-based, whether it's a world-based, whether it's, you know, health-based, whatever it is, whatever I'm looking at. But clearly, the number one place I go to. Because, by the way, this is not a plug for you guys.

40:38You're not paying me and everything. But I'm just going to tell you, it seems to be one of, there's probably two or three others I can mention, but one of the least affected by outside influence and trying to get to the news. That's as I see it. Appreciate it. Thank you. We work on that. We work hard on that. So anyway, we're talking about valuations. We're talking about market valuations. We're talking about pricing. You talk to a lot of people. Well, I guess the question with this very hot topic on Wall Street that's being asked is, are markets expensive? Or is it like, well, no, because look at the forward earnings on what's happening.

41:17So is the expectations, what you're hearing to what's actually happening, is there a lineup or is there a major chasm between the two? You know, it's a hard thing to say right now because there are a lot of things that would say to you that there are real things to be concerned about. And the price of diesel at$6 a gallon and oil at$107 right now it is on the international Brent benchmark. With bond yields where they are, with mortgage rates going up, once again, you have to look at those things that are directly – that affect the earnings and the costs for companies and the borrowing ability for both, again, companies and for individuals and say to yourself, well, does the market really belong at this level, which is just a shade or two below an all time record.

42:11And yet then at the same time, consumer spending seems to continue to kind of roll along. And that may be the result of the fact that about half of US consumer spending now all comes from the top 10 % of earners who are a little bit more buffeted from the likes of higher energy costs than some other people are. And, you know, you do see a substantial spend right now that is going on throughout the technology industry that is part of this AI build out. Substantial, may I interrupt? Substantial is a kind where it is epic. It is historic. It is never going to be matched at this level before this, at this compressed time period, right?

42:48You know, it's like all of a sudden everybody said, okay, this is what we were waiting for. We had this money sitting on the balance sheet for all this time. We didn't know what to do with it. We were buying companies here and there. We were paying dividends. We were buying back our stocks. This is what we were waiting for. And it's like we're going. Not only are they doing that, but they're issuing massive amounts of debt on top of all that. And it's pretty much an upside down market from what it used to have, which was a cash cow, a la Apple, a la Google, and then name the rest, Microsoft, et cetera, with a good amount of shareholder benefits, dividends, buybacks, et cetera, and clean balance sheets to let's go.

43:32Yeah. You know? That's for sure. It's pretty amazing what that's happened. And that, to me, is good and bad, right? It's good because if, in fact, this whole thing plays out, they need to do so. They need to spend this kind of money. Well, I don't think they need to spend this kind of money. This is absurd about some money, but OK, let's go with it. You know, but at the same time, when this deflates a bit, when all of a sudden we have the infrastructure built and there's no longer any further money going in from the massive hoard of cash that they had, what's going to fill that in? That's a question I have.

44:14Yeah, that's a really good question. And I think that's the question that's kind of remained on everybody's mind during the entirety of this build out is kind of the, are they giving us a return on investment that we expect? Is the spend turning into something that's just not just a spend, but something that realizes actual returns, that realizes revenues to these companies in particular? There are, of course, those who look at the likes of the NVIDIAs of the world and sort of see them as the, you know, the pickaxes and shovels of this entire thing, which may be they very well may be. Obviously, their valuation has gone into the stratosphere, as has some of the other gigantic hyperscalers, as you would put it.

44:54And so certainly, you know, there are a lot of people that look at this and they say structures whereupon, yes, they're taking on a lot of debt, but they don't believe it has reached a level that is as concerning just yet. And the market just sort of rolls along as it were because of this heavy, heavy directed tech and business spending. And then, you know, the reasonable performance from the consumer. And then that's just all enough, even though, as said, you do have some real concerns that people have with the rise in interest rates. Borrowing costs cannot just be sort of waved away. And the impairment that we see in the energy markets that also now looks somewhat, well, not permanent, obviously, but it's definitely more than just, you know, ending tomorrow.

45:42You know, it's not no longer a tentative kind of, you know, this will be over soon sort of thing. The market is rethinking that now. Yeah, we have, you know, this is adding to the inflationary story. There's a lot of money being pushed in. There's a lot of building going on. It's creating residential housing is a big problem. We see interest rates hitting above the, right at the 5.5 % level on the 10-year. The 30-year and mortgages are the highest they've been since forever, or a long time, not ever, but a long, long, many, many, many, many, many years. Not reaching the levels we saw in the 1980s, but still constraining us because housing prices are so much higher.

46:21That's causing a drawdown. If you haven't looked at some of these companies in the building area, it's kind of a little bit shocking where they've been and where they are now. Inflation has come down a bit, but yet not as much as we would have thought. We saw a PPI print of 5.4 % year of a year. That was high. This week? That recent one. Yeah. The idea that inflation has been defeated, I don't see it. It's still there. And it's not because of any particular regime. But how much of this particular inflation story right now is linked to, I guess, two things, right? It's really – isn't it really just energy and food are the two major plays in this right now?

47:09They seem to be the two major plays in addition to what you've already said about housing. And then I have not looked lately, but I don't get the sense that medical costs are declining in any kind of real way either. You know, those are the ones those and education seem to be kind of sitting out there as kind of the big ones. You know, certainly, though, the day to day on food prices, some of which had come down, but then there are still, you know, high prices for things like cattle and other other related agricultural commodities definitely are sitting out there. The energy costs continue to rise and are ending up somewhat embedded in U.S.

47:47costs right now, specifically around the likes of travel, the cost of things like harvesting and planting because of the fact that diesel prices are as high as they are. And they are at a record and right near about$6 a gallon, which is the most ever. And that is a real pinch in terms of cost. Right. We are not as energy. I don't. What's the term? I think energy intense in terms of the economy and that people don't spend as much on their budget on energy as they used to. I mean, you know, that 1970s energy shock was such a thing because people spent more on gasoline as a percentage of what they could spend.

48:25That's not the case as much anymore, but just the same. There is a pain threshold and we are well above four dollars a gallon on retail gasoline. That's not nothing. And a lot of people commute and they commute long, you know, long routes to get to work. And people will be forced back to work. And we also have the most expensive gasoline prices in history on Labor Day. Yes, that is correct. And we have cars like the F-350 that have 60 gallon tanks. And that means that if you're going to fill up to quick calculation,$6 diesel, throw that into an F-350. That's$360. That's what it costs to fill up a little bit.

49:01Well, my boat's a bit more expensive, but nonetheless, it's like filling up a boat. And the only thing you could do with that, there is something, you know, it's funny. What can you do with that? You can plead with your place of work and say, you know, listen, it's out of control, this cost. And instead of that, can we just do a remote, can I work remote? They may say yes. That is a possibility. you know but I guess this this energy thing what's really troubling me is that I look and I hear the commentary about the Straits of Hormuz or not they say they're open but they say they're under our control by the way if I can make a quick announcement and plead with the people in charge if in fact the Straits of Hormuz are under our control can you let boats go through them because they're not all you have to do and you've done this I'm sure is look at the AIS tracker I've told people about this before, but do it.

49:53You just have to do this. Go look at, look up in Google, look up AIS tracker, uh, straight of Hormuz. And you'll see what's happening there is there is boats, a lot of boats over here. There's a lot of boats over here, but over here, there's no boats going through. Not so much. Not so much boats going through. And, um, that the problem is, and we talked about this at length on the last show, and I have a lot of detail in this, But the salt caverns in Texas and in Louisiana are starting to show a real problem with the low inventories that we have right now. Yes. And that may be something that does create – well, I'll ask you.

50:32Are we in for an energy shock? You know, we're still sort of sitting around waiting for it in a lot of ways. I mean certainly, as I've said, the costs have gone up to the point that it's a real pain point for a lot of people. Hormuz is not open. and one of the things I've been saying within the length of this whole thing, because it takes time to refill inventories, both government and commercial inventories, and this has been a drawdown that's going for months now. The thing I say is that every day the Strait of Hormuz is closed is a day the Strait of Hormuz is closed, and we are roughly 10 million barrels below the normal of what used to go through there, and now the Saudis have rerouted a bit to the other side, which is now being threatened as well.

51:17There's been some demand destruction. The Chinese are notably using less. And there's been a bit more production than expected out of the America's hemisphere. Those things have offset things a little bit. But just the same, the market, I think, for a long time had this kind of ongoing assumption of this is the worst it's going to be and in a few months it's going to be better. That was kind of JP Morgan's recent take on it. And the market at this moment is rethinking that. And you see where futures prices are going, because they see the tightness that has existed in some of the products markets.

51:50And, you know, you've had these refineries shut down or attacked in, you know, Russia and Ukraine, which is refining supply and, of course, in the Middle East. And that has caused, you know, some of the reason that we see high diesel prices and high jet fuel and high gasoline prices. We want to refill the petroleum reserve, but that takes time too. That requires we have enough to use. And I think, by the way, one of the things that's happening right now is the amount of reserves that we've used for things like refining and shipping over to Europe, which was pretty much out of fuel about two months ago.

52:31And all the things are being used to suppress it so it looks better. I don't know. It looks to me like there's a lot of shenanigans going on, which is not unusual for our government. but shenanigans going on to try to cover up a giant pile of crap with some, some, some fine chocolate. Let me ask you this in closing. Sure. What, what do you think is one of the most, over the next six months, what is, what is your team? What are you focusing on? What is, you know, I know you focus on the here and now and what's happening right now. That's important of course, But I know this somewhere on a whiteboard or something or in a Slack conversation internally.

53:14It's like, you know, these are the priorities we need to be watching for. What are those? You know, there's always quite a few things that are being bounced around in terms of ideas in the newsroom. Obviously, you know, AI remains of great importance. And, you know, the big societal changes that are being brought through, not just, you know, the use of it as a technology, but, you know, as a use, you know, and a, excuse me, a user of the likes of water, of power, of land, of resources as well. And, you know, the way in which, you know, that technology is kind of shaping, you know, the landscape politically and the landscape, you know, societally as well.

53:53You know, people may not necessarily be opposed to it. And, you know, certainly they're trying to hope that their kids don't use just to cheat on tests. But, you know, there are questions of, you know, where is all of this being situated? What is the, you know, the resources that is using that is sucking up? And is that, you know, disadvantaging some people? And do you feel like that's, you know, advantaging only a very small group of people that that remains of paramount importance? And then the ongoing political dynamics with the sort of slow emergence of China as a more recognized world and economic power and how the United States deals with that too.

54:38I mean, the United States has a lot of advantages still as an economy and as a structure and as a republic. And certainly with a lot of the businesses that are located here, you know, the number of largest companies in question. But there's that whole AI race that we see that is becoming, you know, paramount because of what China is doing to try to, you know, take advantage and to try to gather a leading position there. You know, those things remain, you know, that at the top of the list, along with other technologies that are, you know, remain, of course, of great importance, be it electronic, you know, electric vehicles, self-driving, you know, the proliferation of weight loss drugs.

55:20And now I'm getting into a little bit of a laundry list, so I won't do that. But those are some of the things on our minds. So just to restate, there's no shortage of stuff that's going to be happening. Absolutely not. We didn't reach the end of the news, did we? No, no, no. There's no webpage that says the news is finished. Please go outside. Thank you. We are closed. We are closed. Yeah, exactly. Great stuff. David Gaffin, Reuters. Appreciate you coming on as always, man. It's good to be here again, Andrew. It's always good to talk to you. All right, thanks. That was pretty good. I like that.

55:51Good discussion with my good friend, David Gaffin. That's going to wrap it up for this edition of the Disciplined Investor Podcast. Make sure to listen to DH Unplugged each Tuesday. we put that out. We're live actually at 9 p.m. on Tuesday nights. I stay in the office late in the studio that night. Also, if you have any questions towards the end of the year, you want to discuss, for example, how do I figure out if my mutual funds, if my ETFs, if my portfolio has overlap and it actually is doing what it should be doing? Well, you can contact us. Go over to thedisciplinedinvestor.com. That's a good way to do it.

56:30Plenty of ways to contact us over there as well. You can also check out our long, short strategy. I sometimes bring this up and really mention this because right now with some of the things that are going on with the market, the TDI managed growth strategy, you could see a video on the website. There's a full walkthrough behind the scenes. Look at the TDI MG managed growth strategy, the disciplined investor managed growth strategy over on the disciplinedinvestor.com. Go there, click on the strategies button on the top navigation bar, and then you'll be able to go through and answer a couple of questions.

57:03It will then direct you over to the virtual tour where you can see about a four or five minute video on this. Make sure to take a look at that. Other than that, I'll see you next week. Have a good one. This podcast is intended for informational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principal and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowitz and Company, Inc., an investment advisor registered with the U.S.

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