5 days agomanaged futuresCryptographyI'm botheringPoints of view:2.6k
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In this episode, I speak with Tobias Carlisle, founder and CEO ofAcquirer Funds, LLC. He serves as a portfolio manager for the company's deep value strategy.
Tobias is the creator ofDas Acquirer’s Multiple®. He is also the author of the booksThe multiple of the acquirer(2017),focused investment(2016),Low value(2014) yquantitative value(2012).
Tobias has extensive experience in investment management, company valuation, corporate governance of public companies and corporate law.
We are arguing:
- SVB
- what is money
- invincible company
- history as a guide
- behavior is water
- Ergodicity in all things and more!
I hope you enjoyed this conversation with Tobias as much as I did!
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Transcript of episode 49:
Taylor Pearson:
Hello and welcome. This is Mutiny's investment podcast. This podcast features lengthy talks on topics related to investing, markets, risk, volatility, and complex systems.
Disclaimer:
This podcast is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. All opinions expressed by Podcast participants are their own and do not necessarily reflect the views of the Mutiny Fund, its affiliates or the companies featured. Due to industry regulations, participants in this podcast are instructed not to make specific business recommendations or refer to past or potential earnings. Listeners are reminded that managed assets, commodity trading, forex trading and other alternative investments are complex and carry the risk of significant loss. Therefore, they are not suitable for all investors and you should not rely on the information as a substitute for exercising your own skill and judgment in determining the suitability of such investments. Visit mutinyfund.com/disclaimer for more information.
jason buck:
Tobias Carlisle just plug in at the top, for people watching, we see the acquirer's funds on the layer and repeat behind you, but plug in at the top. Where can I find you? What is the best place for her?
Tobias Carlise:
My large-cap mid-cap fund is the Zig Acquirers Deep Value Fund and my small and micro-fund is the Deep Roundhill Acquirers Deep Value Fund. I have a website adquirsmultiple.com. I'm on Twitter at Greenbackd, G-R-E-E-N-B-A-C-K-D, and I have several books on Amazon under my name Tobias Carlisle. Acquiring multiples is the last one.
jason buck:
Wow, there are so many things I want to find out, but I also brought Toby with me today because the breaking news is SVB. Here we have a kind of Silicon Valley bank failure and Toby is an expert in bank failures. So no, I'm just kidding with you. I just want to see your face when I started this. Usually-
Tobias Carlise:
i have an answer
jason buck:
Yes all ok. Yeah well we planned this weeks in advance so we didn't know it was going to happen but at the same time guys I don't usually like to talk about current affairs and everyone comes out of the woods like an expert but you guys are a value . investor with legal background. I'm curious to know what your hot opinion is.
Tobias Carlise:
The reason why I have an answer is because I was watching it, I subscribed to some channels on YouTube and Meb Faber appeared on one of them and Meb's explanation is what I'm going to give you. Then Meb said that I told everyone who asked, my wife, etc. Meb said Silicon Valley Bank invested a lot of money in assets that went down when interest rates went up, and when interest rates went up, its assets traded well below its liabilities. And then some of those losses crystallize when you have a little direct debit and then you're gone. I guess it's like, I'm not an expert, but this is all an investment, right? Match your assets with your liabilities.
jason buck:
Well, yes, that sparked an interesting conversation at my house the weekend my girlfriend was there, now explain it to me in a simpler way. Now explain it to me easier. Now explain it to me easier.
Tobias Carlise:
I can not, I can not
jason buck:
I know. I thought I kept trying.
Tobias Carlise:
This is my understanding.
jason buck:
But I thought it was interesting because I think she's a millennial and she said my whole life I've been told to just put my money in banks. Banks are safe. Don't put it under your mattress after you make some money from your minimum wage job, put it in a bank and all. And she said that nobody really taught us in school or anything that banks aren't necessarily sure that our deposits are liabilities and they're going to lend against them, and it's a fractional reserve on those loans.
Tobias Carlise:
Well, he's insured up to 250,000. I mean, how successful are you outside of school?
jason buck:
That would have been a fair answer. I wish I had thought of that because I think like most things we're taught in school, this applies to most people who have nine to five jobs. And that would be, yeah, to be fair, who actually has a quarter million in cash in the bank? So most people-
Tobias Carlise:
First of all, congratulations if you have more than a quarter of a million to lose, but presumably by the time you get to that kind of money, you'll have other assets as well. That represents part of his wealth, but not all. Yeah, I don't know. I always thought, I guess, that everything shakes all the time. I just think everything has a chance to blow up, but I'm talking about Volcker so you're probably next then...
jason buck:
That's why we like to go out. And then she said yes, most of the conversation over the weekend was that we have roaches for exactly that reason. So we can sleep at night when these things happen. But he also sent it to me this morning, I like Meb's description but he even sent it to me this morning, I think it was a TikTok congressman who basically talked about the emergency overnight. But he said in his statement that Silicon Valley Bank lost a lot of money. And I think, yeah, I think we just need to explain things, but I think if people could understand a duration mismatch, they would take short-term deposits as a liability and then lend out long-term assets. And it's not that they lost money on mark-to-market and also mark-up to model, but at the same time it was more of a mismatch in terms of duration. And if they haven't gone bankrupt, they're usually fine. And, to his point, it's like we're all living under this fiction that banks are fine as long as normal withdrawal rates are within a normal range of expectations. And once we do a run on the bank, you'll find out they're using leverage. It is so-
Tobias Carlise:
But it's not that banks are perpetually insolvent by definition. You can't liquidate all the money you've put in default, so the Fed's only role should be to create a window where if they do get that execution, they can access liquidity from the other side. Restore confidence, avoid the need to run. But I think the interesting thing to think about is the implications, so template markup has become a more pressing issue now. So if you're a director of a small regional bank or anything else that has that kind of exposure, now you need to think about whether we need to raise more capital. Do we need a pillow here?
And I think that's why you don't see bank runs very often. You don't see credit crises very often, but when you do, they tend to cluster because all the banks are starting to think now, anyone with that kind of exposure needs to start thinking about this. And that is going to soak up some liquidity, which I think is one of the other classic phases in this long term. This is a long, slow train wreck. But I don't think this is complete, I think this is absolutely expected in the context of what we've been through in the last few years, it's been almost two years now.
jason buck:
And we haven't really seen that since the collapse of SNL. I mean, it's been a long time since people have seen-
Tobias Carlise:
Well I don't think GFC was, that was a big deal. I don't think it's the GFC. I think the banks are much more capitalized today than they were then. Could be a regional bank thing, could be the regional
jason buck:
How do you feel about this contagion? How do you feel about this contagion? Because we're Californians here and all our friends think they've heard some horror stories, people just lock up their houses. Silicon Valley Bank, where they had all their savings. Now it's all gone. I mean, it's just some nightmare scenarios I heard over the weekend. But how do you feel about it? Is this a regional issue in California or is this contagion happening because you just said that most people and experts much better than me have said that the banks are well capitalized? But then, how much does this contagion mean? How do you say that banks are technically insolvent at any given time? So how would you feel about the contagion effect?
Tobias Carlise:
I think it will be contagious. I don't think it's as bad as 2007. I think every dip always has a small credit component. Something has to be there, liquidity has to dry up, for the collapse to continue. And it always happens. It's hard to know where that will come from. I don't think it's like 2007, when there was a systemic credit crisis that hit the biggest banks. But I think it's more of a valuation story where it's not surprising that the Silicon Valley part of Silicon Valley Bank is more important to the story than the fact that it's a bank. It's just that in an area where they had a lot of fun until February 2000... Was it 2020? 2021? When did the ARC peak, February 2021?
jason buck:
and and
Tobias Carlise:
So now they have more than two years in their relegation. And if you go back and look at one of those classic stock market crashes, because the credit crunch is pretty much secondary to my interest in that. I want to know how the credit crunch is affecting the stock market. Because that's what I focus on. So if you look at, say, one of the earlier crashes, they all seem to follow rating type collapses rather than credit type collapse, which is 2007, 2008. This was a real credit event. 2000, 2002 was further overvalued by the stock speculation that created it. It's a bit self-reinforcing, I think it's a bit of that Soros reflexivity where the market crashes, people leverage, force them to sell. Create that sales waterfall.
So I think ARF peaked in February 2021. Two years have passed since its decline. The rest of the exchange didn't really find out about this until early last year. On the first day of last year we started selling and since then we have basically sold, although we have had small rallies. But you would always say a year after the liquidation, you can go back and look at 2007, 2009, 2000, 2002. Not much has happened at this point because the market is going down a bit. But it tends to follow this pattern where two-thirds of the time is about one-third of the sell-off and the last third of the time is two-thirds of the sell-off depth.
I think we are getting to that now and combining it with other things like the ten to three reversal and general weakness in terms of supply side inflation issues. I think we're getting to the end of the deal now. It's from March to August I think if you see the action. If it doesn't happen in that time, then I don't know exactly where. It's not that kind of atmosphere. I think it's going to be half a year full of fireworks.
jason buck:
Since we track the VIX and all that, I think Russel Rhodes also said that we don't really bottom out for the session and pull back until the VIX peaks above 45. But only because it's just a handful of data points , I would not do it. take it seriously. It could be a slow recession to start slowly going up. I mean, it's possible. But it's interesting how you say final surrender generally has to take effect and how much is behavior or people and there's so many things you said there. One that I want to use is the idea from 2000-2002 that was Silicon Valley and the stock bubble. There was no actual debt involved and it was really just an implosion of capital into the VC and startup space. What's interesting is how you said that the Bank of Silicon Valley is really a Rorschach stain on people's political views. And everyone that we discovered, I like a few things on Twitter, it's like we found out how much everyone hates Silicon Valley and basically wants it to burn.
But at the same time, all this speculation is like, oh, they took out seed loans, they bought MBS. It could be as simple as, no, they actually had great long-term sovereign wealth. It's just a duration mismatch and they've had a run on the bank. I mean, I'll admit, I'm sure when we finally dig in and we don't even have a perfect view in hindsight, I'm sure there's some MBS in there that's data for startups. But it was interesting that they gave loans to new companies. But what I really want to emphasize, what you're talking about, is with ARC and all that, it's like the VC world and the PE world just dialed in the model and just played that game and kept dialing it, dialing it. And many people, many people, said that volatility is not destroyed, transformed or transferred. And he just got out of Silicon Valley Bank. They're basically saying, hey, these startups are broke and we're in trouble here. And then finally someone had to admit that these notes are wrong. Is that a fair view?
Tobias Carlise:
Well I guess that's my understanding of what happened to the bank. To the best of my knowledge, it does not invest in excessively risky assets. It's just an investment in them, they got this big rush of money to make them the 16th largest bank in the United States out of practically nothing. They put this in Treasuries when Treasuries were trading very, very close to 0% interest rates, very, very tight in Treasuries and only interest rates were moving against them. And then they were bitten in their book. So that's very fair, but you could be in almost any asset. It didn't really matter where you were. I don't know why they were the first hit they probably had, they have problems too, they may have some problems, the people they lent to must have some problems too.
jason buck:
Can you think of so many interesting things to me that, as you said, it looks like they supposedly haven't hedged their Treasury interest rate exposure against rising interest rates? So, I don't know how many startup loans there are, but it's amazing that they do well, but then they get collateral. I think so, this is basically a VC. There is no reason for banks to do this.
Tobias Carlise:
I mean, it looks like stocks, it looks like stocks have some value when the warrants offer upside potential, that's not negative protection. That's only a positive answer if it works.
jason buck:
The other part is, I don't know if you've done this, but maybe a decade ago, I spent years trying to figure out if it's possible to start a bank that doesn't make loans, basically just holds them all. deposits and basically, I mean, you can make some money, you can take some risk, maybe overnight interest, bank to bank, something like that, maybe to try to make the business profitable. Of course, you would have to run it as a non-profit or community bank or cooperative. But the other part is that I think the only way to make it work is for people to have to pay a monthly fee. It's like when we buy physical gold, you have to pay.
Tobias Carlise:
We did.
jason buck:
To the right. But that's what I'm saying. They don't like it, people don't know that everyone wants everything for free and it's like it's not free. To the right? That is my point. Have you ever thought about trying to start a bank or what would a bank look like if it was really safe and if there was a viable option to do it in the modern economy?
Tobias Carlise:
Well, I don't know, but I think it's a good question. I think the problem with these banks, the problem with regional banks, is that loans are a big part of their portfolio, while the larger banks have many other sources of income. For regional banks, it's all the loans they give, that's how they earn their money. As you pointed out, there isn't a lot of money with the cash on deposit that they have to borrow to get a decent return. So they're really subject to the business cycle. We haven't seen a business cycle in a long time. I think there are things like Silicon Valley Bank where they don't think about what happens when rates change. They did, they had another issue where they had a chief risk officer, they lost their chief risk officer 12 months ago or something. I didn't follow him that closely. This is an informal conversation between you and in the context of a stock investor talking to a volcker, not a banking expert.
jason buck:
Yes, we are not experts. NO.
Tobias Carlise:
I normally maintain few banks. I have more than 130 positions in two funds, 30 large and 100 small. That's why I have very few financial stocks, they're just little black boxes. They are not good at reading what is going on inside them. Banking experts are constantly taken by surprise. The bank's specialized funds delve into all of these things. Therefore, it is difficult to invest in banks.
jason buck:
That was part of trying to figure it out for myself. It's like this is a terrible deal. Why would you? Everyone thinks they want to be a banker and banker. In times of risk, this is a great deal, but if you don't take risks, you don't have much leverage to pull. What was interesting, the other interesting part of doing things well as a nonprofit, is a credit union, and it's like the little anecdotes that are interesting, that you have to have a meeting of reasonably related members . So I thought about people with Facebook accounts, that's before, or Twitter accounts. So you can have this assembly loose like that. And the interesting thing is that cooperatives can also access their entire network of ATMs. So you can access 60,000 ATMs and offer free ATM withdrawals if you are part of the credit union network. Those are just some random things I found interesting.
Tobias Carlise:
It's old technology, money.
jason buck:
and and
Tobias Carlise:
You will no longer need to withdraw money in the future.
jason buck:
Well, that was the problem when people wanted to withdraw money from bank accounts in Silicon Valley.
Tobias Carlise:
Take it off, this is the future. There is no money.
jason buck:
Exactly.
Tobias Carlise:
Welcome to the future.
jason buck:
So part of that, then go to the side effects. I found the weekend interesting. Well, I want to reiterate that we're not experts, but what I love about our industry is that this is my global deep level macro. Everyone has a good view of everything and suddenly they are experts. It's like they're such incredible experts on a variety of subjects that they never seem to have looked up the word dilator. It is wonderful. They all come from the carpentry. He is incredible in Ukraine, in banking, in everything. So you and I are just two more in the picture, except you know a lot more than me.
Tobias Carlise:
I don't know if this is true.
jason buck:
Let's make a warning there. Or at least in general in life in general.
Tobias Carlise:
Again, I don't know if this is true.
jason buck:
So this is where I find the riddle. So here we are on Monday the 13th and the government is going to back Silicon Valley Bank. Depending on what your political beliefs are and whatever is vacillating between my libertarianism and socialism, what do you do in that situation? Everyone says their libertarianism, just let them fail. Let the dust settle. We have to do this. This is risk taking. And people will find out when you're over 250,000, that's the risk you're taking and you need to be aware of those risks. That's what a libertarian would say. And then the other side is like, well, there's a cascade of consequences here, not just for Silicon Valley companies, but for all of their vendors and their vendors, vendors. And the cascade of consequences is such that the person on Main Street gets hurt, but then comes the bailout, comes from the FDIC insurance, but then comes from the taxpayer? See what I'm saying? I'm curious how you would solve this conundrum in your own head, whether in your industry or not, versus a bailout versus saving the actual system.
Tobias Carlise:
Yeah, that's a sickening thought. I have seen many paychecks there that would not have been sent if they were not. So it's a shame when little people who didn't take a chance are trying to do the right thing and put their money in the bank and get hurt in the process. I don't know. The banks are, it seems to me, hardcore capitalism on the rise and they pay you as much as you can in terms of remuneration and when the opposite is the case, you just get the bail. Anyway, there has to be a decision if we decide to rescue these guys every time, which we do because it seems like you don't want the little ones to get hurt. The big boys need to eat some of the pain. The people on the inside also need to eat the pain. You have to go first. It can't be, you get all the rewards you've had all those other years, it's in a closet somewhere. You can't touch it.
jason buck:
We continue to increase moral hazard, but we have not set any parameters on how to correct moral hazard. Are you saying that because you're in dire straits, we're obviously going to keep bailing you out? Do you want people to learn their lesson, or like you said, these people can't pay the payroll? By the way, people don't even know that Silicon Valley Bank has a wine department. There are 400 wineries around me that use the Silicon Valley bank that just had their assets frozen and can't make payroll. And some of those people are the janitors who clean the warehouse. So it's like a tough decision. I don't, so do you have any idea how you maintain that moral hazard? Are you claiming your salary or how would you feel about it?
Tobias Carlise:
Well, I'm talking about the top executives who are most directly responsible for this. Yes, I think you should do something like this. Your comp needs to be paid over a period of time, five years or so. You can't have it. It's just asymmetrical where its benefits are unlimited and its drawbacks... Its benefit is that you become Jamie Diamond and you're a billionaire without having founded a company, but just being an employee in an industry who's saving up when something bad happens. I mean, I don't know if it works. I think this will encourage bad behavior every step of the way. I don't know about bailouts, that's a question for politicians, but I hate to see little people get hurt, but there's got to be a way to end the problem before we get to that point, right?
jason buck:
But it's a puzzle that I've been thinking about in general, yeah, it's like, what do you do? Because your heart wants to save the people not necessarily involved, those are tertiary shrapnel consequences of that. But how can you claim that people just don't take these excessive risks and we take that moral hazard over and over again?
Tobias Carlise:
I think it is a system problem. The system doesn't work like the system where you can borrow from the Fed and the Lens and get multiple loans. It does not work. We need a different system for that.
jason buck:
So I say cash register, cash only.
Tobias Carlise:
Bitcoin. Bitcoin sources. What are bitcoin guys?
jason buck:
oh man
Tobias Carlise:
encryption sources.
jason buck:
Oh God. To the right. Well, in hindsight, we could go back to the Silver Gate crash that led to the Silicon crash, that was the camel that broke the glass of crypto, it was actually the crypto banks that caused it.
Tobias Carlise:
Crypto broke.
jason buck:
Yes, cryptocurrency broke the banks. God there are so many. Alone, and then I move on, yeah, I don't know what we're doing. Yeah, I'm really struggling with this, really, this is really confusing me on the issue of moral hazard versus bailout and how to set up this system. But part of this is also, don't you think? Okay, that's a good question, so what steps can you take? It's a bit arbitrary that the FDIC insurance is up to 250,000, isn't it?
Tobias Carlise:
MI.
jason buck:
That's just an arbitrary number. But like you said, as an individual...
Tobias Carlise:
250 have been there for a long time. So of course it should be related to inflation or something.
jason buck:
But even for an individual, this is a significant number. But what if you have a business? What do you do with your money
Tobias Carlise:
Yeah, that's [unintelligible 00:22:41].
jason buck:
So let's start with that. What do you think? Of course, we buy T-Bills and we can use T-Bills as collateral. We are also buying physical gold in case things like this happen. This is not someone else's responsibility. We have different banks that we use. But when you have a banking system collapse, it's really hard to think about that, because that's a problem for me that I've been thinking about for two decades: what is money?
Tobias Carlise:
It does not become a totally abstract philosophical problem. It is a very concrete political issue how you manage the banks. Banks are not, there is no reason to create banks like you can at the Federal Reserve, the Federal Reserve has two terms, both dumb. They were supposed to maintain the money supply, control inflation. So we have a stable money supply and full employment. There is nothing the Fed can do about employment. Rising interest rates have a sort of statistical connection to falling employment because they stifle liquidity and that leads to lower growth and vice versa. But I don't think they should have both terms. I think this is nonsense. I think they were supposed to be what they were created for, which was in 1913, and there were examples before that where they were the last port of call for liquidity in a run on the bank.
And liquidity is considered expensive. It must be like visiting Warren Buffet. You can get their money, but it is very, very expensive money. And considering that, you always think, well, I should run more buffers. You should be aiming for less optimized gain and more survivability and durability. You know what I mean? Security measures must be installed for the company. Safety precautions must be incorporated into each phase. And the problem is that you don't get paid to do this on a regular basis. I mean, that's why the roach fund exists. That's why volatility strategies exist, because there are people who ignore all risk all the time, and they're the guys who play the riskier stuff at the top of the market and seem smart for 12 or 18 months or two. years.
Everyone has had it before, backing off a bit and trying not to blow up. And these are the guys who are lost. And the volatility guys who took that 5 cents of money from VIX calls get paid once pretty regularly, but it's every seven years. So it's not that common that if you've only been in business for five years, you've never seen them. And I think that's unusual, because it took a long time for the market to plummet in 2021. I think we had 2020, we had some type of dip, but every dip was a very quick recovery. Until 2009 it was a year, we got funds for Shilap in the long term. And you could say Shilap is a flawed measure, but it wasn't like we were cheap. You can go back in history and see that we are much, much cheaper than...
jason buck:
At least you can look at the trend line, the Shilap, you can argue about the actual values if the multiples are correct, but at least the trend gives you an idea.
Tobias Carlise:
We are expensive, aren't we? We are very expensive and then we are expensive. Therefore, I think there is a reasonable risk that if you enter the market too often, you will miss out on that trading cycle. I think the business cycle is almost a natural phenomenon, it's not something that's an emergent property of a dynamical system, it's just one of those things that happens where people get really excited.
If you go back before the Federal Reserve and look at any intervention, there were many, many other short-term recessions and depressions that happened with some frequency. And since we introduced the Federal Reserve and they're running them, they're getting much rarer, but much larger in terms of scale. So I think, as Corey would say, we haven't eliminated that risk. We just turn it into this other shape that looks more disturbing and requires more intervention. So maybe we'd better go back to one where we have little hiccups from time to time, but everyone knows how to get by with enough fluid and no solvents. When that happens, look at the other side.
jason buck:
That is a perfect question for you. So part of the discussion with my girlfriend over the weekend was like, yeah, that's why I've been yelling from the ceiling about roach butts for years to these very scenarios, which we can't predict, but you can prepare for. But at the same time, you also mean March 2020, we thought it was one of those events, but you said we're recovering in a V or K shape so people don't freak out fast enough. And then the same with Silicon Valley, I thought, look, everyone here is scared of Friday, but now Monday, nobody cares. And that's right, yes, you may have been worried about where your money is over the weekend, but now you don't care that the government is protecting you. And as a person of deep worth, so to speak, you can feel my pain. It's like you just drag along when no one seems to care, I'm sure you've been pulling your hair out for a decade. Only call value is really important, but only no one, or not at risk as long as it's not at risk. How do you go through these phases?
Tobias Carlise:
I think the answer is that it's always important and you just don't know when it's important. Therefore, you should always be prepared for when it matters. There is the idea of ergodicity. There is a book on ergodicity, very well written. Basically, it's either path dependency or it's the idea that whatever your returns are in the long run, if they get truncated in the meantime, you won't get those returns in the long run. So if you understand when you're in the market and you have a small advantage, which we all think, but we have so little, I think I have this small statistical advantage in the market for many reasons. Some of them are very simple and boring and some of them are a bit more esoteric. But I believe it. Since I think so, the main thing I'm trying to do is avoid losing everything.
Because if I do that, I won't be able to show that small advantage over time. Then I have to run, so I look at each position and make sure that each position can survive. I make sure that I'm not over-investing in any one position because even with that analysis, things happen that have black swans, things happen that you just can't predict.
So I think at each stage of the process, how can I be sure that I'm looking at the long term? So I'm always thinking, do they have money on their balance sheets? I have enough money. Can the business survive? Can the funds survive? Will the economy survive? Are there other existential risks you need to think about? And I think it's healthy for everyone to think in those terms. But people definitely not. And there are times in the market when hurtful thoughts hurt. And we have, the more bullish the market becomes and the more there seems to be no risk in the market, the more that type of position hurts you because you lose assets. People don't want to be with the guy who always complains, he always says that nobody likes the guy at the party, who says the hangover will be bad the next day.
jason buck:
Nobody likes Cassandra at the party, but also...
Tobias Carlise:
Nobody likes this guy.
jason buck:
But there are so many things about it. One is that the goal of ergodicity economics, as I try to simplify, is simply time. And when we think about time, your investments over time, that's compounding, isn't it? And that's what it's all about, is it the volatility tax or losing it all means you can't play anymore. But I also talked about this over the weekend, think about the banks in this scenario. For this reason, Ole Peters of ergodic economics would say that modern economics is flawed because it does not take time into account. And to your point, the banks, we are solvent, if we do not take into account the imbalances of time and duration, if people want their money today, they have a problem. But in general, most people today don't want their money. Otherwise, they have no problems. They are solvent, they have a lot of wealth. But that's why ergodicity has to do with time and path dependency. And that's what we find in a bank run, it changes the path dependency. They just don't have enough time to realize or liquidate these assets.
Tobias Carlise:
To be fair, it came. The big change in interest rates has clearly impacted assets. I mean, it must affect. This is most clearly seen in bonds because there is some kind of math, a bit of speculation, or a bit of trading built into the price. But it's mostly a math calculation of what you're going to do, there are risks and other factors, but it's math. With actions, it's like you can just ignore it for a while. It is absolutely essential. It matters with both bonds and stocks. It's a bit more abstract. And then the extra steps seem to be just that, meaning people can seriously argue that it doesn't matter, when it finally does.
So all of these assets are going to be worth much, much less as interest rates go up, all assets that were very, very poorly performing in a higher-yielding environment. And that's what happens when the assets happen, when the assets happen, when you have a corresponding liability, you have a little bit of difficulty, because you have this liability, which is much greater than your assets, and you have to resolve it at any time. You can stay mature if you can, but that's the ergodicity that if you're called in the middle, you're in real trouble. And all the banks have been lending long, lending long, lending short, lending long, and that's what's happening.
jason buck:
Yes, I believe-
Tobias Carlise:
That means.
jason buck:
Mike Green describes it well, I think with titles it's like a football, you know what your reward is in the end, but the ups and downs of getting there, it's like you said, that road to addiction Where you can smoke Silicon The Valley Bank did. The other thing you mentioned is some kind of risk-taking behavior and risk-taking moments. And I'm curious because hey Corey, we just talked about this on our last episode of Pirates of Finance. It's like thinking that behavioral finance is so interesting and I sympathize with people who use behavioral finance because it's not possible to replicate it. But at the same time, behavior is everything because they are people interacting in a market. So to me it's almost like water. It is everything and nothing at the same time. How do you feel about behavior related to value investing?
Tobias Carlise:
This is the opportunity for value investors. I believe behavior patterns affect everything, but ultimately it's the underlying economics of the business that determines what you earn. Then use behavioral thinking to get the quantitative performance of the other side. The big risk for value investors is that the future will not look like the past. And this is true of almost all human endeavours. All of our philosophy, science, and medicine are built to make the future look like the past. So this is a risk that I recognize is real. And it may be more real in terms of some companies, manufacturers like Buggy Whip. I invested in CD companies, CD manufacturers, because they had a lot of cash on their balance sheets. You can make money on companies that are in decline, as long as you pay a cheap enough price for them. So it's not necessarily what the company does, it's what you pay the company to do. But leave a question here. Is it more presumptuous to say finance or finance?
jason buck:
All good. Good question. You obviously don't understand why we call them financial pirates, and you're-
Tobias Carlise:
Well, because it's Pirates of Penzance. I take the part
jason buck:
Exactly. And then you remember that part of Pretty Woman?
Tobias Carlise:
No no. Give me the role of Pretty Woman.
jason buck:
She leaves, then they're at the opera, and she's like, oh my God, I liked it so much I peed my pants. And the old lady's style, what did she say? And she will, she said she liked her better than Pirates of Penzance. So it's like remembering, it's like a double. Yeah, it's like a double. That just makes Corey and me laugh. So it's not ostentation, on the contrary.
Tobias Carlise:
I think the name is awesome. But I'm worried because I say finance and from time to time there's a poll on Twitter, how do you say it's finance or finance and I don't know if it's a regional thing, you think?
jason buck:
I don't think so, I think in this country it's finance, but we only say finance because it reminds us of Penzance and I think it's fun.
Tobias Carlise:
It is funny. It's optimal. This is very funny.
jason buck:
That's the only thing, yeah, because every time someone asks me about it, it makes me think of a beautiful woman. So she makes me laugh and piss my pants. That's the other reason but.
Tobias Carlise:
I almost peed my pants.
jason buck:
I want to come back to this idea, okay, let's say you're lucky, you're in business, and you have over 250,000 cash. What do you think should be done with it?
Tobias Carlise:
I don't think so, I mean doing a $250,000 payroll deal is not a big deal. You know what I mean? This is medium size.
jason buck:
Okay, so what are you doing?
Tobias Carlise:
Payroll, I mean, what's that for $4 million? I'm crazy here Is this correct? 3 millions?
jason buck:
MI.
Tobias Carlise:
of the year of salary. That's not so much on the payroll. I don't know. That is a difficult question. I don't know. The good answer is that you invest in the biggest banks, but that doesn't provide any protection either. You are up against bigger banks. I think, from a political standpoint, it's probably a good thing for regional banks to bail out Silicon Valley Bank or its depositors, because if they don't, there's no reason to put their money in a regional bank.
jason buck:
To the right.
Tobias Carlise:
We only take a downside risk. So the fact that they've done that means it probably saves all the regional banks, at least for this cycle.
jason buck:
[illegible 00:36:08] now the biggest banks are what are they? They're basically government-backed banks, right? This would wipe out the entire regional banking sector.
Tobias Carlise:
To the right.
jason buck:
So what do you think? Yes, there are other companies I've researched before that algorithmically cascade your deposits to dozens of banks so you have less than 250,000 at dozens of banks. I will try to find it.
Tobias Carlise:
That would be the solution.
jason buck:
Yeah, I'll try to find one of those for the show notes. But it can only be so much size. Look at some of these tech companies that are sitting on these war chests. You probably only need to buy 90-day Treasuries. But then, even on 90-day Treasuries, people don't realize that you're still lending to the US government, and the US government will be the first in history to trigger a non-monetary collapse when it does. I mean, we just don't know when it's going to happen. It will eventually happen.
Tobias Carlise:
I mean, I think it's interesting, who knows if Jay Powell really means what he says, but he was asked how much more expensive it would be for the Treasury to borrow money if it raised these interest rates. To what extent is this reflected in your account? And he didn't say anything. We don't think so at all. This is not our concern. And I thought this is the correct answer. This is the correct political response. I mean, it's in his documents. That same. This is the case. But the Bank of Japan was in exactly the same position and that was the big catalyst a few years ago, I don't know if you remember this, but there would come a point where there just weren't enough JGB buyers and that would lead to someone stepping in and doing the question: is it the BHA? And they all said no, it's not their job, they're not going to do that, it's not their job. Of course. You're not independent if you look into oblivion, I guess. You don't look at anything, you are no longer independent. So is Powell blinking too? Blinking Powell, that's my question, are we getting to that point?
jason buck:
I like that everywhere too, I can't tell if everyone says that about the Federal Reserve as well. It's like it's not in his mandate. And when I studied the history of the statutes and everything else, how the stroke of a pen immediately changes, I just love people, they can't do that. It is illegal. Oh watch out, they'll just change it now that it's legal. You are welcome.
Tobias Carlise:
It's true, yes it's true. They don't have permission, but they do it anyway.
jason buck:
It's fine like that...
Tobias Carlise:
If it's the end of the world, what are you going to do? Are you following what your papers say, nerd, or are you going to save the world? you will save the world
jason buck:
Advance-
Tobias Carlise:
Everyone is watching, everyone wants to write Bernanke's book, The Courage to Act.
jason buck:
Yeah. Yeah, they all think they're Volcker too. Yeah, it's just, and people forget how many times this was tried before Volcker, and Volcker is only one of four people who tried it. No, it's the coincidence of that.
Tobias Carlise:
He just let them roll. He didn't even intervene that much. He just let them mature. And that absorbed a lot of liquidity.
jason buck:
Well, many people think that it aggravated inflation and went away on its own. But that is another story that is above both your salary and mine. But I still thought I'd move on, sorry.
Tobias Carlise:
Oh, I was about to say that macros are great. There is nothing scientific about it. Oh, it's just politics. You can argue about politics all day.
jason buck:
Just shoot my absurd hot shots all day. But I thought if I put on the Tony Deden hat for a second, Tony Deden might be interesting in Switzerland and I think it's Edelweiss or whatever they have, he keeps most of his money in gold. I think his gold positions make up 50-60% of his fund. And then he just tries to find those disused family businesses around the world that he thinks will be around forever. Almost like a semi-buffet model. But what I wanted to know is beyond having gold, this is not someone else's responsibility, rather you have to deal with gold fluctuations. And that's hard to deal with that big position size of maybe 50, 60% when it's that big. But the second part is, I wonder, if you're actually getting the company's stock certificates, is that a better form of security than, say, most deep value algorithms that trade value stocks? Does this really stay like this in the bank? Who do you work with is the best? Or can you get the actual stock certificates and this is a more primitive form of security, for lack of a better word?
Tobias Carlise:
100% it is. I was surprised that it's hard to get their certificates out of the system, but that's not the case, in Australia where I'm from, that's not the case. They just don't have it, I would never deposit your certificates with the main broker. That's crazy. Because what if something happens to the lead broker and it doesn't?
jason buck:
To the right.
Tobias Carlise:
What do you call it? You refunded your certificates. Do you remember that word?
jason buck:
MI.
Tobias Carlise:
Let's learn this word again. I think sometimes soon. pay.
jason buck:
So is he going through that process or is it like the system is set up to be really difficult?
Tobias Carlise:
Yes, it's very heavy. It is very difficult. This is very strange. In that case, I don't know what will happen to gold in the next five or ten years. It could be halved or doubled or tripled or three or whatever, I have no idea. But it's also true that a thousand years from now they're going to unearth a Roman treasure chest in Britain from the time of the Romans and it's full of gold that's still being cast, you can actually use this material in the future. I don't know. I really like Deden's approach and I've read all these letters and he's gotten a few, it's very similar. Think a bit like Buffett. He has been criticizing Buffet lately for some of Buffett's inconsistencies. I like the way he thinks. I don't know if gold is where he would do this, but I understand the reasons for doing it this way. I can't blame them. I cannot disagree with them.
jason buck:
To be honest, I still don't understand gold. I think, as you said, you can go back millennia and it seems to preserve purchasing power, but it's variable. Not in the transition period, if you need it in a specific year. You all may have sold the baby with the bath water like you did in March 2020 and it doesn't offer the value you need. So it's like long term, yeah.
Tobias Carlise:
Very long term.
jason buck:
So, it's just Lindy Effects and you're wondering how that will work in the future. I don't know. But it worked in the past. You mentioned that rear view mirror aspect earlier and then I talked about the weekend, for me it's more for those liquidity transition periods or when the system shakes up a little bit because it's not like we have physical gold with our money but I go to the vault and then scrape the gold through it? No, it's like having something someone else isn't responsible for. And then the price should go up in consideration. And I hope you continue with your parody of purchasing power. That's all I'd expect, and right during the middle question of who has the collateral, it's like we have this other thing that could be used as collateral. However, you don't use it to pay for anything.
Tobias Carlise:
The long-term argument for gold is like a gold story that doesn't seem to expire, it's infinitely divisible. It is not used in many commercial applications. So it's not like silver, where there's a constant supply and demand for silver, which makes it a lot less like money. Gold is useless except as jewelry, so I think it's useful as money and for other reasons. I wouldn't do it like that. But if I were Tony Deden and I was in Switzerland and I wanted to keep a family business and run it for a thousand years, maybe that's what I would do. I think it might be a good idea. I don't know. But then you have to. There's no point in having it in a vault somewhere. Now you must have it, you must keep it in your own ancient vault. There's a lot, there are real costs associated with something like this.
jason buck:
Yes. And I've talked to everyone in the industry, and Brent Johnson has gone down that rabbit hole that we talked about at the beginning. We looked at the global diversification of the vault, but nobody noticed that in March 2020 gold will not move. And during COVID
Tobias Carlise:
It's still there. It's still there.
jason buck:
It's still there. But she couldn't put it off.
Tobias Carlise:
But I could give you a note. I can have a note saying that I am the owner. I can give you a note and tell you that we transferred ownership of this remotely.
jason buck:
Well, that's what I'm saying. I think it's just security intact in transition periods, when markets get unbalanced or shut down or there's a bank run, that's what it's there for.
Tobias Carlise:
You understand there's a big queue at the end of the Great Depression when John Maynard was Kanes, he was running these two funds and one was an insurance company and the other was a foundation and when the market went that low, everybody said we had to get it. they ran out of stock and he said you can't sell stock right now because that means if we stay here and it all ends it doesn't matter that we continue to hold it. But if we're exhausted and there's a rally, we'll miss that big rally. And I think gold is a bit like that too.
You're going to need physical gold after Master Blaster runs Barter Town and it's Mad Max and you get a motorcycle and a shotgun and stuff. But there comes a point where, as you point out, a lot is good up to that point, you could have a gold ETF, at least get the return on your portfolio. You will not be able to take it to the other world.
jason buck:
MI.
Tobias Carlise:
You must become a warlord in the other world to gain access. But it will happen anyway. The guy with the guns in the biggest gang will take all the gold.
jason buck:
But. Like Tony Deden, we've been thinking about how to manage money for hundreds of years. And I think you probably only need that physical gold for something once every hundred years. And like you said, it's a transition period. I think it's when you have these wobbles and shakes in the global market in times of risk that all of a sudden people start to wonder what's cash and what's collateral, if he's any good for that. But like you said, we're on the Mad Max side, you want guns and butter, or I always say I just want to be friends with the CEO of Blackwater. Because also the idea of people keeping all their stuff is like-
Tobias Carlise:
He has an army, yes.
jason buck:
Every time a militia comes through your town, they take away all your sources of protein and water. So I'm like that, I'm comfortable enough, I'm going to be the jester of Blackwater. But you, Blackwater, also changed your name. I can't keep up with all this stuff either.
Tobias Karlisl