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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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“James, let's now return to your core investment thesis, how to invest so that you benefit from inflation. You want companies that can pass on the cost of inflation, but companies that aren't capital intensive, so they don't have to have other people pass the cost on to them. Tell us about the different types of companies that you invest in. I guess we could start with the direct and indirect, and then we'll get into the sectors.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Not getting any returns at all in a lumber and timber thesis for close to a decade saying, look, we work through all the inventory in the housing crisis, we basically built, you know, maybe a tenth or twenty percent of what we needed for natural demand for a few years. Eventually we were going to have to basically match natural housing demand growth with supply. And it never happened. So again, similar to oil and gas, similar to copper, similar to gold and silver, we've got seven, eight, ten years of a backlog of underinvesting in new housing supply, and now all of a sudden people say, hey, I want these houses.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“And ran to the suburbs like everybody else. And in all of these cities just north of New York City and west of New York City, New Jersey, New York, Connecticut, basically if there is a rental available, and this has been the dynamic for years, you're basically willing to pay one and a half to twice what it would cost you in a mortgage to rent that house because of basically you don't have to tie up that capital and there's that much more demand. Obviously New York City is a very unique market where you're very dense living in the suburban kind of market was a little bit different, but I'm hearing very similar stories in Chicago, Boston, Atlanta, Dallas, LA. So I think the housing variable is going to really be a big factor coming up. Another thing, a lot of really brilliant investors have been basically”
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 going to, the two big stress points that are still coming down the pipe for CPI. So energy, you're coming off a higher base. You're not going to continue at this rate. Used cars, you're coming off a higher base, you're not going to keep at this rate. Agriculture and food, I'm not so convinced we're going to slow down on, and we can kind of go into that a little bit later. But the areas where we still have yet to see the full impact are wages and housing. So as you mentioned, the CPI uses owner equivalent rent. And I've looked at the formulas. I can't figure out how they're getting a number so low because I moved out of New York City during COVID because I had a”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“The energy transition and how copper intensive it's going to be, saying that to get a new copper mine online, and this is a greenfield expansion from scratch, not a brownfield expansion, will take 15 years, so you need permitting, planning, assuming you can get government approvals with everything that's going on with ESG, infrastructure, financing, basically all of that, you're 15 years away from getting first ore. So if we have trillions of dollars chasing copper, iron, nickel, zinc, oil, gas, all these things to do all these infrastructure projects in the physical economy, but we needed to start this CapEx 15 years ago. That's something that's going to take a heck of a long time to filter through the system.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“A new large scale greenfield meaning from scratch, not a brownfield expansion project in copper takes fifteen years. When you look at the past fifteen years or so, you've seen just under and malinvestment really highlighted in the last four to five years in energy. And a lot of these projects, it's not shale, which is very short cycle. You can get a shale well online fairly quickly. Infrastructure is a bit longer dynamic, but when you look at the big projects that add a lot of barrels very long term, offshore platforms North Sea, ultra deepwater Gulf of Mexico, off of South America, the CapEx just isn't there, and so when you look at the plug factor, what's OPEC's max production, what's US shale max production, there's a huge plug variable that just isn't there, and these projects take years, if not decades, to come online. Similarly, the IEA released a report about”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So I think there are things that will be worked out. So used cars are not going to go up 30% a year. Microprocessors, they're going to basically build more of those. Things like that are going to basically balance itself out because it's a market that can add supply pretty quickly. There's plenty of fabs that can go up in Southeast Asia and build microprocessors. The cars are sitting on the lots that basically just need a couple parts to come back into the market. But then that's a very different dynamic than adding ten million barrels of oil supply a day. Because yes, shale can come online very quickly. But if you look outside of US and OPEC investment, we're basically we're down seventy, eighty percent from peak levels of capital expenditures in a lot of these other types of projects. Copper is another good example. The IEA released a port or report saying”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Policy is going to be oriented towards infrastructure, which is very intensive in all of these markets. So I think that this is going to take a very, very long time for itself to sort itself out. And that's why it puts me firmly in the secular or structural, not transitory camp.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“I think that looking at historical inflation analogues is dangerous because even Now you have an already fragile structure because of monetary policy, expensive assets, scarce assets, and now you're basically putting all this money in the system to go out and go into productive uses and buy it. So money supply is 40% higher than it was going into COVID. The final variable, which really the trifecta of why I think inflation is going to be such an issue, is that now you've got this perfect harmony of monetary at the lower bound meeting unprecedented fiscal, but we also have supply shortages from ten, fifteen, twenty years of underinvestment or malinvestment in a lot of the critical supply materials for the physical economy, so copper, iron, oil, gas, gold, silver, all of these areas you just haven't seen the requisite investment, especially if a lot of this fiscal policy.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Businesses might do fine. I think a lot of them are cheap enough, and we can talk about this later why, that you'll probably do okay. But we want to focus on businesses that are capital light so the revenue goes up without a commensurate rise in expenses. Ideally, you want revenue going up with virtually no variable expense structure. So we call this operating leverage or scale. And I think that that's going to be the critical differentiator in this inflation cycle to make money in equities versus stand still or do just fine.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Again, this is really important. I think a commodity company. So obviously oil is in the news today, gas is in the news today. We had an SPR release yesterday and lo and behold, energy prices went up. So everybody who went to the gas tank a year ago versus today is paying a lot more money. All else equal you would say energy companies can pass on that expense which they can. And I agree with that. The problem is oil field service costs or the cost to drill, complete and service wells have not really gone up yet. Labor costs have not really gone up yet, so their margins are probably at all time high in these capital intensive businesses. So you need to look at the revenue side and the expense side and then also, as I mentioned before, the CapEx side. If you are a CFO of an oil company a year ago looking at forty dollars oil, you were tickled thinking about the different acquisitions you could make. Today, if you're pricing in eighty plus for oil, it's a lot trickier.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Is part and parcel of investing in some of kind of the old economy type of upstream investments in these types of sectors.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So I think the first thing we do is we try to identify what are tangible, finite, high quality assets. We call them hard assets because you really need something that can inflate in value as a function of inflation. So historically this would be everything from different types of commodities, real estate, infrastructure, something that you can pick up or kick. But the problem with a lot of those businesses is that they're very capital intensive. So you spend a lot of money to make money, but then also you have a lot of debt financing. So we identify these assets that we think will go up in value, but then we overlay a critical business analysis, which is called capital light, meaning these companies give you access to these inflationary markets, but in a capital like business model. So you don't have, you're not subject to a lot of the volatility and the risk.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Right. So if the rate of debasement is higher than the money in the future is not worth what it is now. So if that's the assets that are bad for, that hurt from inflation is bonds and long-duration stocks. What are companies that benefit from that? You're with the portfolio manager of INFL, inflation beneficiaries fund, where you're not just trying to hedge inflation, you're actually trying to benefit from inflation. So how do you do that? What is the motivating principle for your fund?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So you're that much more sensitive to that discount rate. So $100 today might be worth $100, depending on your discount rate, $100, 10, 20 years in the future could be worth as little as fifteen dollars.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So, I mean, let's just give a really easy example. Let's say you own a company that is an apartment building and you're getting all of your rent every month. So you have less of a discounting factor on that rent because it's upfront. It's fully loaded up front. You're getting money in your pocket every month. So if you're discounting that, let's say, let's use a really high discount rate, 15%. You're not as sensitive. I mean, of course you are, but you're not as sensitive because you have cash coming in every day as you go out a month, a year, five years, ten years. If you have one of these platform, I'd say extremely optimistically valued long duration tech stocks, you have zero or negative cash flow to put in your pocket for maybe as much as 10, 15, 20 years. So by definition, all of the value is out twenty years, ten years, whatever it may be.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So, yeah, inflation is essentially kryptonite to long bonds because bonds have a fixed coupon over the next 30 years. And if what you're being paid in in the coupon is itself being debased via inflation, if the value is being eroded, then the value of that bond is going to be much, much less. Why is it that these technology companies or let's say these growth stocks where it's sort of pie in the sky, companies that are really focused on revenue in 10 years rather than companies that are focused on profit now? How come those are most susceptible to inflation?”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“Enough is their CapEx. So investing two years ago, you can earn a much higher return on invested capital than buying in at prices in some industries twenty, thirty, forty percent higher. So where do profit margins go? Now to address the latter item, which is interest rates, let's assume your profit margin, so your free cash flow is compressed or even declining at the very least your growth rate is stunted due to these inflationary factors. Now add in the fact that your multiple on your stock goes down because of higher interest rates. So this could be a really tricky environment for all financial assets. I mean, the most sensitive, it would be really long duration bonds, so 30 plus year bonds. But if you look at the cash flow profile of these profitless tech stocks and then kind of sensitize that to interest rates, they're as much or more.”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT
“So, I think you need to really break it down into two different areas that it affects. It affects the fundamentals of the companies and their profit margins, but also it affects all financial assets because if inflation results in higher interest rates, that's effectively gravity on all financial assets. So I'll approach the former first, which is that it's pretty easy to just analyze a company in terms of inflation and say, hey, this is a great product, great business. They can push on three, four, five percent cost to their customers, no problem, great company. The problem is they then also have two main expense items, one being cost of goods sold, so do their chips cost more, do their materials cost more, do their facilities cost more? The other blind item that is probably just about to start hitting CPI is labor, so your SGNA expenses. But then the other one that people really don't talk about near”
2021-11-30 · Forward Guidance · Investment Strategies to PROFIT From Inflation (Not Just Hedge) | James Davolos · IDENTIFIED FROM THE TRANSCRIPT