YouSaid · the spoken record

James Davolos

lines on the record: 69
first: 2021-11-30
most recent: 2021-11-30
sittings or episodes: 1
sources: podcast

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“And I thought I was like, yeah, you're right. If inflation is going to be that pernicious, debt is basically going to be washed away. And that's kind of what the global governments need. But if it's not going to be that aggressive, debt could actually be really damaging, especially if inflation causes kind of this rate backup and has economic consequences if the economy then kind of stumbles or sputters, then debt can become a really big problem. So again, what's your risk profile? What's your timeline? What's your liquidity like to see something through? That kind of depends on do you go with a loaf of bread thesis or the quality kind of inflation compounder thesis.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and it all depends on the degree of inflation. So if we have really intense inflation, I'm talking sustained 6% plus. Go with the lowest quality because that debt is eventually going to get debased. And I was joking the other day. I had a meeting with an extremely wealthy family office in Europe and one of the proprietors said, look, I'm thinking about buying this twenty”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Resource from somebody who's just such an original, unique thinker. So I'd say I'll give you a bit of an interesting side answer there.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“There's so many good books. I'm trying to think in terms of inflation. You know, let me actually give a little bit of a different answer. Someone that I just have followed for years and is fascinating is Russell Napier. I think you might have even interviewed him, but he's just fascinating. He was a deflationist. And one of the things I respect so much about Russell is that he changed his mind. And that's so hard to do because people, especially of that esteemed career and intelligence, the ability to change your mind is so important. I really respect how he's done it and a lot of the reasons why he's done it, the things that I've talked about, and he gets really into the weeds about central bank intelligence, but he offers a free class online. So you can just Google it. And it is invaluable kind of what he teaches about the history of financial markets. And if you really want to understand some of the things that we just glossed over today, that's an incredible free read.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“And if you notice kind of the orientation of the internet fund today, it's getting more into these companies that benefit from the blockchain, crypto, Bitcoin ecosystem, whether it's mining or other types of intermediaries. And it's something I'm looking at very closely for the INFL fund. But again, I really want to understand the economics, the asset light, and the valuations as things like back to recently come public, Coinbase coming public, a lot of mining names coming public. I'd love to see Kraken get public and things like that, but it's a really exciting time. And the internet fund's doing a lot of interesting things within that mandate. And I'm looking at it very closely for both products.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Banks would basically, I mean, their heads would spin if you even talked about Bitcoin back when he started investing in Bitcoin in the Internet Fund. So the only way to do it is to get a QSIP. So a QSIP is basically an identifier where you can put it into a public mutual fund like the Internet Fund. And it's such a large position today because the cost basis was under a percent, if I believe correctly. And so that's all appreciation.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So let me give you a little bit of history with the internet fund. So Horizon value, eclectic firm that was started in 1994 by people that I would really consider Buffett and Munger-esque and how they think about the world. I think they've created their own framework that is based in that fundamental philosophy. So it's like how in the heck would these guys start an internet fund in the late 90s? But they saw the potential of the internet and they saw what it could enable and they really invested in companies that benefited from the internet, not your pets.com of nineteen ninety eight. So that was really the first iteration of the internet. And I have to give 100% of the credit here to the lead PM Murray Stall for recognizing the next iteration of the internet could very well be blockchain and the technologies that it enables. And back when he first invested, there was no such thing as custody.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So INFL does not own any Bitcoin because that's not what it's set out to do as a portfolio, but you're a co-portfolio manager of another internet fund for Horizon Kinetics, and there the biggest holding by a considerable margin is the grayscale Bitcoin trust. Can you talk about why you own the Grayscale Bitcoin trust as opposed to, let's say, physical Bitcoin? Maybe you can't do that, or the new Bitcoin ETFs like BITO. Do you like the fact that it's trading at such a large discount to its net asset value?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“where their costs have gone down for decades, and they're still charging intercharge fees to merchants in some cases upwards of three percent, and I think people are going to start pushing back against that because all of their expense structure has gone down, but they're pushing higher and higher prices, and it's either hurting small merchants or you can argue it's pushed on to consumers. And I hate the argument where people say, oh, well, the credit card holders benefit because of their rewards program. That's patently false. Chase is the one who gives me my rewards for my chase credit card because they're the ones that benefit if I basically have to pay them interest and basically holding all the collateral. It's not visa and master card who are just government sanctioned monopolies that were spun off out of the financial institutions back during the financial crisis. So very different dynamic and I kind of went off on a tangent there, but the thing I want to focus on.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“No, you know, those are a great example. And I think something that we haven't really touched on that I'm glad that we've kind of found our way here is valuation. So it's great. Find a hard asset that you think is going to be inflationary. Find a great business model that's going to benefit. But if you pay through the nose for that business, that interest rate sensitivity can do a lot more harm than any inflation beneficiary. And you can lose a lot of money just throwing darts at good businesses in inflationary sectors. And I think people are learning that the hard way, particularly the past two days in throwing darts at digital economy stocks over the past two years trading at a hundred times revenue. So Visa and MasterCard in particular, I've been wrong. I thought they've been really expensive for a long time. But something happened the other day where Amazon is going to stop accepting, I believe it's Visa. It could be MasterCard payments in the UK. And I think this could be a shot across the back.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Insurance policy. So my homeowner's insurance is a hedge on something happening to my house. To find a parallel of that for inflation is almost impossible.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“That's tough again because you're getting back into that world where in the textbook definition, you want something that is going to have a payout scenario that goes up with inflation. So think about it in the stock market. If you were to hedge the market, you buy a put. So you spend X amount of money buying a put where if the S&P goes down below this level, your payout scenario begins. So in that classic sense, again, you have to go back to some sort of a derivative that's linked to CPI because tips aren't going to do it. I don't think a ten too steepener is going to do it. So now you're getting into kind of the asset eclectica world of derivatives and swaps where you really need to know what you're doing and understand how to do it because it's not a one for one to bet on rates or to bet on other types of variables. So it's tricky. And that's why I want to be so careful about a hedge because when I think of a hedge,”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“All of these currencies, whether it be gold or bitcoin. I think particularly today there's a lot of really fascinating aspects about Bitcoin that make it very attractive if we do continue down this path of debasement. And there's equally compelling arguments for some people with gold. I think they serve different purposes. And I think there's a lot of nuances between them. I hate the comparison of calling Bitcoin digital gold, but I see a lot of merit in both as a beneficiary, not so much a hedge.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“I would call them both beneficiaries because again, what are you basing inflation on? All of inflation is relative to the purchasing power of a certain currency. Let's just use now the dollar as the reserve currency for the world, but for all intents and purposes we can use all big developed market currencies. So basically that's the euro, the dollar, the yen, the pound. Probably those are the only big liquid enough names. The franc isn't really liquid enough and nobody trades the ruble or the yuan outside of the domestic markets. But I think all of these have the same structural issues where they're being debased. The US is not unique. In some sense, the US is better off than a lot of those countries. But I think all, again, going back to my example before about elastic versus inelastic demand, finite assets are going to appreciate relative to”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“A lot of these business models don't really exist or they're highly nuanced in emerging markets. So to be fair, there are exchanges that are publicly traded in EM markets. So there's URSA in Brazil, in Malaysia, in a lot of markets like that. And there are a little bit too segmented in what products they trade. But generally, I don't want to sacrifice quality. So I want really high quality compounding businesses that give me exposure to the inflationary areas that I've identified. And going to Brazil, very intensive in iron ore production and minerals and agriculture, I think I can get more efficient, less risky exposure going and develop market stocks that access those same variables, which isn't to say that I don't think that Brazil's going to be a good investment or there's good companies there just kind of based on what I'm trying to accomplish in my fund. I just haven't found anything that.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“The dynamic with passive investing that you alluded to earlier, that as I understand it from the co-founder of Horizon Kinetic, Steve Bregman, is that funds like iShares that have these huge ETFs, they need stocks that have certain qualities, like a minimum level of trading, a minimum level of volume so that they can easily go in and out of the ETF when people buy the ETF. And so that companies that don't match that requirement will seriously be undervalued. I actually think I'm hopefully I'm lucky enough to be interviewing Steve Bregman in December. So viewers definitely stay out for that. James, you talked about non-OECD countries. What I'm noticing is absent from your portfolio is really any emerging markets, United States, Canada, Australia, but close to 80% of your holdings are in the United States and Canada. Why is that the case?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“On all of these things for their daily lives, the third factor is that if you don't take the time to understand the businesses and just look at gig sectors, an exchange is a far different business than a financial which was traditionally looked at as a money center bank or an insurance company. An energy royalty company is a step change difference from an upstream oil and gas company. So again, fewer people looking at these opportunities understanding the difference, but I think this is also the opportunity is that if we're even remotely right in our thesis, ultimately more and more people are going to pay attention and take a look at these businesses, understand them for what they are, and I think they're just far too cheap. But then also multiples that do properly reflect the quality and growth of these companies.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“I would argue, and my colleague Steve Bregman, Murray Stahl, have done far more work in this than I have, but based on their work, I would argue there is a free lunch because of passive and index strategies. So thank you iShares and State Street for my free lunch because with passive investing, everybody's ignoring these types of companies. So I'm able to buy higher quality, less risky, better businesses that are cheaper than the market because of that dynamic. And so the way that indices are constructed, they ignore a lot of these businesses. Also, you can throw in the fact that there's ESG so people don't necessarily want to invest in some of these minerals companies and these metals companies. But again, I would posit we've enjoyed a great standard of living and why are we going to basically take these away from people in non-OECD countries that basically still rely on.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So that logic, which I've seen a lot of people use, I think is missing a critical variable. A lot of the people leaving the labor force, as I mentioned before, are sixty, sixty five plus. They're not big consumers, by definition. They're basically living the rest of their life off of a fixed number. Obviously the really wealthy are going to basically distribute that to future generations. But again, that's not where you're worried about consumption. But to the extent a medium wage job”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Infinitely higher than a household that's in the top 1% of the income bracket. So empowering these people, putting money in their pockets, that's what goes into the real economy. That's where consumption is. That's where the propensity to spend is. And so you can have this self-fulfilling cycle where, again, in the 70s, you had this huge rise of standard of living through the labor force and through people where they were kind of marginalized and weren't able to have these higher incomes. And that's what has this self-reinforcing dynamic.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“You haven't really seen, but you've seen more and more companies every quarter with earnings reports. You can kind of do a word search for inflation, cost a good sold, but then also labor costs. And right now all of the leverage is with labor. So hourly workers from chains like CVS to McDonald's to Amazon to basically across the gamut are able to extract higher and higher wages and quite frankly in many cases they deserve it where these companies are earning huge profit margins. But if they can actually just get a big reset. So they've basically been marginalized for, as you mentioned, 40 years. If this low tier, this lower income bucket can just get a one-time catch up. That's going to be really inflationary. And when labor has that negotiating dynamic, that money, the propensity to spend of a household that's below median income is”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“I'm done. The other is households with dual work with dual both parents working. So can you get childcare? Is child care inordinately expensive? Are you comfortable with the safety protocols? Are you going into a workplace where you're comfortable with kind of where safety is as this thing continues to evolve? So losing all this labor from the labor force is actually shifting the power back to the labor. And I think that you've seen a lot of this political and social unrest worldwide. I think that's a big part of it is this battle between capital and labor. And labor seems like it's starting to get their day. And that's going to be, you know, a tricky dynamic because it's pro-inflationary, but it's also negative for profit margins.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I think that's the biggest argument, at least that has merit from the transitory or disinflation crowd is just technology is inherently somewhat disinflationary. I think you can argue to what extent. And that's really manifested itself where labor, unskilled manual labor in particular has not kept pace anywhere remotely close with CPI, PPI, cost of living types of measures. And I think COVID actually is going to tilt that back into balance where you see more job openings than there are unemployed right now. And a big part of that is people walking away from the labor force. A big part of that are, I think there's two big dynamics here and there's a lot of data to support this. One, people in their 60s just walking away and retiring early saying I'll make it work. I'll go to Florida. I'll stretch my money a little bit longer. My 401k is looking great. My pension's looking great.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“You're fortunate enough to kind of use these things on a regular basis that a lot of people, they say, hey, I'm going to pay my mortgage, I'm going to pay my cell phone bill, I'm going to heat my house, and I'm going to eat, then whatever's left over is what's left over. Maybe you'll buy some clothes if there's nothing left over. Can you justify an iPhone for $1,200? Can you justify going to a nice restaurant for $100? Can you justify going on a plane for $400? That's where inflation gets tricky, especially if the wage inflation continues to not keep up with CPI inflation.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“You know, the biggest pressure point is always in consumer discretionary. So how strong is your brand? How great is your pricing power? And you're starting to see it with some of these COVID darling stocks where I think some people confuse what the business models really were, but something like Peloton. Obviously at different price points, how many people have enough money to buy the bike and then pay the subscription? So very elastic demand there, especially in a recession, I would imagine you're going to see huge churn, meaning a lot of people that are turning off that subscription. Hospitality. What is the demand both of business and leisure travel restaurants? It's for a lot of Americans. It's an extravagance to go out for a meal at a restaurant, especially kind of a sit-down not quick-service restaurant. So hotels, obviously. So airlines. A lot of these are the areas where you take for granted if”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So I take it that all of the companies in INFL are on that side of the spectrum where they can, as you perceive it, pass on those prices, without naming any names, what are some companies or sectors where you think their ability to pass on prices is very weak because demand is very elastic. So it's not chickens. Everyone has to eat. Everyone has to live somewhere. But what are some things that people just don't need to do?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“The real dynamic that you're trying to capture with companies that can truly benefit from inflation is first you want to basically have a product that is finite and high quality but with inelastic demand. So is it capacity constrained? Will you have pricing power? Will the pricing power go up with inflation? But then also if there's basically if lower demand offsets your higher price, then you're basically in the same place. So you need something with fairly inelastic demand, meaning you're still going to eat chicken, you're still going to drive your car, you're still going to eat your home, excuse me, heat your home.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Let me rephrase the legacy business that the platform was built on is what they call research models. That's politically correct 2021 language for highly engineered genetically modified rodent models. And like it or not, it's absolutely critical to saving human lives worldwide. And again, I mentioned it's a very profitable but increasingly small business that Charles River has. But again, that database and that network of basically having these research models, it's taken them decades to create these. The amount of iterations that they have. It's almost impossible to compete with them, and their pricing power is incredibly strong because you basically have to use them. So again, I'm not really focused on that business because it's not as scalable. The other sides of the business are what drive the thesis, but again, that is part of the business.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So it's the biggest holding as a function of performance. So there's probably seven or ten positions that were initiated between a four and a five percent weight. Charles River's done extremely well this year. A lot of it's been through performance. The main business that they have, and I'll get to the business you're alluding to, is again this safety assessment and discovery. Believe it or not, Charles River at some stage of the product of drug discovery therapeutic biologics at some point of this of the life cycle, eighty percent of FDA approvals over the last three years, Charles River has touched. And this is not a huge company. It's about a $20 billion company, so a lot of room for them to run both through kind of bolt-on acquisitions, but also market checks. Again, I said, they do this early stage and critical function cheaper and faster. The core business actually”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“I'm amused that you use the term mousetrap because I actually believe your largest holding Charles Rivatory Labs, they do have some mice for testing purposes, right? Can you talk about what Charles River Labs does and why is it the biggest holding in your ETF?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Really, there. Some other data companies might have access to automotives, industrials, metals and mining, credit markets, where again databases with thirty, fifty, eighty, a hundred years of data, so you're subscribing to that database. So the company flicks a switch, you get the data, their incremental cost, they might have to pay a salesman a little bit more money. And then they have the research team and the analytics team just updating the database continuously. So again, really scalable to the extent that those markets kind of get inflationary trends and there's a lot more interest and there's a lot more demand in those markets. And that's why I really like the indirect beneficiary is because they allow us to really broaden our net and capture a lot of the unique facets of inflation that you don't get in traditional funds that are allocated purely towards real estate, commodities, infrastructure, so on and so forth.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Sure, so the financial exchanges, the brokerages, but then some other good examples would be things like data and research companies. And the beauty of these is they really allow you to get access to sectors that are inflationary, but you never see in a quote hard asset or real asset portfolio or commodity portfolio. in healthcare, contract research where you're doing all the early stage safety assessment and discovery. So basically through their lab work, they have a network of databases of information of throughput in those labs where they can do it cheaper and faster than all of the incumbents. So to the extent there's inflation in the healthcare sector, it's a really nice mouse trap to capture inflationary pressures where the volume can really go through that can go up a lot, pricing can go up, but your variable expenses aren't.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. And look, I think that's the one thing that people just have to realize today is you have to accept equity market risk. In the world of finance kind of looks at risk in terms of volatility. But in order to actually benefit from inflation, you need to accept that type of volatility because there just are no answers in the fixed income world. And all of these different types of derivatives have their own flaws. And so if you have a view on inflation being secular, you want to find what is going to have inflationary pressure, but then find a high quality business where you can be comfortable owning it for one, three, five, seven, ten years. And that's really what we're trying to accomplish here.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So you're saying you have, INFL has equity beta as well. You're investing in high quality companies. So even if your inflation thesis doesn't play out, it still will prove okay. Whereas if you buy tips or if you buy a 10 to steepener or CPI swap, a long-term put on a treasury bond or something, that only pays out unless a certain series of things happen, which may not happen.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“And where inflation break evens are today relative to nominal yields. So anyway, all those areas of kind of conventional hedges, if you will, have huge detriments. But the biggest problem is they're all a binary bet. Either your writer, you're wrong. If you're right, you make a little bit of money in most cases. If you're wrong, you lose everything or most of your money. Where we want something where it's not a binary bet, and you can do just fine if there's not runaway inflation or you have status quo type of macro backdrop. So, you know, you kind of need to, based on your level of conviction, based on where you kind of believe things are and where your risk tolerance is, decide, do you want to make that big levered binary bet or do you want something where you can kind of own it throughout a cycle and get this complementary exposure that positively correlates to inflation?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“They're all imperfect. I mean, a bond is a put if you have a real yield. But obviously right now, the 10-year, you're four and a half some odd percent of negative real yields. So that's going to be a really tricky environment if you, that's not really a put because you're actually spending a lot of money each year to carry that trade in real terms. Other things people have looked at is doing like a CPI swap or a 10.2 steepener where you bet on basically the 10-year rising relative to the two-year bond yield, which in inflation all else equal that should happen. Consequently, right now you're seeing the two year rise more than the ten even though we're experiencing inflation because the market saying it's going to be worse for two years and then moderate. So the reason I went through all these, and then obviously there's tips which are pretty heavily flawed in my opinion, just kind of given the payout nature, the way that they're structured.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“6040 is 60% stocks, 40% bonds, and they hedge each other. Since I think 1987, the correlation between stocks and bonds has been negative. Correlation between rates is positive. So when rates go up, which are just the attributes of bonds, stocks go up too, and rates go down, stocks go down as well. But that might change. And investment strategies like 60-40 and risk parity, which is essentially a levered version of 60-40, have done very well. But bonds may no longer fill that role. In this new world of inflationary, what is a natural hedge? People talked glowingly of bonds as deposits of carry put. It's essentially a put, a hedge that pays me money because it's a bond. What do you see, if any, a hedge? I know NFL doesn't really do a lot of hedging, but what about hedging?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Caused huge capital gains in the bond side of the portfolio. Meanwhile, equities of soared on lower discount rates and risk embracing. So obviously if they can suddenly go up together, they can also suddenly go down together. And I'm not sure that everybody fully appreciates that, especially in the asset allocation world. So going forward, I think people really need to think through what could happen to their portfolio if rates go up, what could cause rates to go up, what could cause inflation to go up, and how is that going to impact on a bottom up all of my companies and allocations, but also on a top-down level? So the difficulty level is going up exponentially from basically just riding a rising tide in basically all financial assets when correlations were up to the right.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So I think this is a really interesting point here because when I was in undergrad, when I was in business school, basically Finance 101 is that you hedge your stocks with your bonds and vice versa. So rising rates, good economy, stocks should do fairly well, but your bonds are going to get hit. Risk off, bonds go up, stocks go down. This cycle, everything goes up. So your correlations are incredibly high. So you're not actually taking risk off the table. You're doubling down on that declining interest rate, disinflationary environment that you just mentioned. And so a lot of people have had these huge outsized returns in sixty forty because the 10 year going from five or six pre-exit, let's go back to the global financial crisis when the 10-year was around six down to earlier in 2020 you were well below one. That just was”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and the attraction of investing into gold mining company at the bottom and then having it go 60x, that can be very alluring. But of course, the Mark Twain saying that a gold mine is just a hole in the ground with a liar at the top. That is a saying for a reason. And often investors can get burned. As you can see, if you look at the GDX or GDXJ, in fact, I know people who actually invest in gold miners for a living, often what they do is invest in the ones they like and then short the GDX because there's so many not so high quality companies in there. James, let's now zoom out a little bit and talk about the disinflationary world that we've been in over the past 40 years, how we've been in a bull market in bonds, particularly long-term bonds over the past 40, over the same time period. That in turn has fueled a speculative frenzy in stock, has performed very well. And to what degree would you say that low inflation was responsible?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“going into a new expensive project. So you really benefit from that optionality on that side of the portfolio, on that side of the business.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“perpetrated gold royalty company you're up over two hundred fifty percent. So in a flat market you're doing incredibly well in the royalty, you're flat in the commodity, and you're cut in half in the miners. And it's all about risk. So the miners added CapEx at the top of the cycle. They had debt, they had higher break-evens, they had to deal ever, they had to sell assets at the bottom. By the way, I should mention gold went from two thousand to one thousand on its way back to 2000 today. So it wasn't just going nowhere for a decade. The royalties used no leverage, so they were able to buy assets on the cheap, but then they also benefit from this optionality whereby their existing portfolio you have a royalty on a big mine, let's say in Peru. Instead of that mining company spending a lot of money to look for a speculative mine, let's say in some emerging market country, they're just going to expand their existing mine plan instead of”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I think there's a really good example why this logic holds. So let's go back to the last peek in the gold spot market. It was about almost 10 years ago to the day in 2011. We were going back into QE in the US. There was all the peripheral European concerns with the Portugal, Italy, Greece, Spain bonds, and basically it was a risk-off trade, get into gold, and it was up near 2,000 an ounce. So through today, let's say you're down five or six percent in gold over the last decade. So pretty crummy experience in absolute terms, throw in two percent inflation. It's a pretty miserable experience in real terms. But if you bought the large cap gold miners index, so the ETF is GDX, you're down over $55%. Flat gold, you're down fifty five percent in the miners. If you bought the largest publicly”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“James, in inflationary times, the prices of commodities go up, oil, gold, and the like. So a lot of people say, I want to own oil, own futures on oil, own futures on gold, or I want to hold the gold miners. I want to own oil drillers. How come you want to focus instead on the royalty company? Goal itself.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“A lot more transactions certainly on the exchange side. In terms of brokerages, right now in real estate, you're basically releasing half the country. So again, there's a lot more turnover. And people have basically been really happy to kind of just sit and collect checks and watch their property values go up. So I think there's going to be a lot more incentive to basically do dynamic things and transact. And so, again, I think a more uncertain world with as long as there's all this money flowing through the system, it all points towards just more and more money flowing through the system.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So I think that in an inflationary market, there's uncertainty. And another thing other than being in a deflate disinflationary decade, we've been in a wildly suppressed volatility where I remember when 20 VIX, the volatility index on the CBOE was normal. And for a lot of the past decade, we were fifteen, sixteen, or even less. And with more uncertainty, there's more transactions, certainly on financial exchanges, because let's say you're a corporate treasurer, or you're running an endowment or a foundation, or even a large family office, you have to worry all of a sudden you have to worry about hedging out interest rates. You have to worry about hedging out your euros and pounds and yen, where you could kind of be complacent about that and all of that volume. Similar with your cost of goods sold, do you want to hedge out your exposure to oil if you're a plastics manufacturer or a petrochemical company? So again, a more uncertainty need.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“The volatility both from speculators and hedging in both of those markets, the volume is going to explode. Plus you don't get CPI at those levels without a heck of a lot of commodity movement. So how does an exchange make money? They're basically the toll booth on matching buyers and sellers, so more volume, more revenue once you cover that fixed cost which today is basically a computer mainframe, it's all free cash flow. Similar with brokerages. So the capital intensity of shipping, of insurance, or commercial real estate. Great businesses probably inflationary, but really capital intensive. Brokerages are such a great business because they're just volume times price, so a strong underwriting cycle, a strong shipping cycle, a strong leasing and real estate sales cycle, they're basically getting a revenue function of volume times price. Again, the brokers get paid.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So, for example, with energy royalties, fifty, sixty, seventy years of drilling inventory is ideal because you don't want to have to go out there and compete, let's say, in a big scenario, oils at 150. It's going to be pretty tough to recycle your capital and go out and buy new land at $150 oil when we just came from twenty dollars oil. So we really focus on that really long-lived asset base there. The indirect beneficiary is a lot of commonality with the first group, but the exposure to the inflationary areas are indirect. So I think two really good examples. One would be a financial exchange. The Chicago Mercantile Exchange is the largest derivatives exchange in the world. Their main products are interest rates, currencies, commodities, and equity futures. So now just imagine CPI prints four, five, or six next year, hard to imagine that ten years is going to stay at 160.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“owner and you're just selling raw or slightly developed land, again, all of these examples your margins can be upwards of ninety percent, gross margins that is. And so that's what we really want to capture here, but something you need to be careful with is you want a long duration, or let me actually rephrase that. I don't want people to confuse that with interest rate sensitivity. A long-lived asset base.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Sure, so that the two primary categories in the fund are direct inflation beneficiaries and indirect inflation beneficiaries. There's a third bucket that's opportunistic, which is going to be a lot smaller because it's a bit higher risk profile. But the commonality here is there's a lot of operating leverage in a lot of scale, minimal capital intensity, both working capital and balance sheet. But the direct beneficiaries have that direct pecuniary or financial interest in the hard asset. So think in oil royalty company or a precious metal streaming company or a land bank. Basically they have a financial interest in the underlying asset but with little to no variable expense with a royalty you're basically just cashing a check relative to the production and capex of other energy companies. Similar dynamic in gold and silver streams.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT