GARY BRODE | Deep Knowledge Investing

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Printing dollars to pay for the interest on dollars printed last year. Gary Brode  Deep Knowledge Investing
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In this episode I'm joined by friend of the podcast Gary Brode for a rollercoaster ride through the whimsical world of finance, economics and monetary policy.

Let's face it, the economy can be dry and complicated. But Gary manages to inject humor into the discussion while unraveling the intricacies of the Federal Reserve's decisions, Congressional spending habits, and the ever-complex global influences of bond markets. There's even some laughs around the potential disaster brewing in Japan's interest rate policy and commercial real estate.


Gary highlights the absurdity of the Bank of Japan's negligible interest rate increase after nearly a decade of negative rates. He explains how this seemingly minor move left the market in stitches and the yen in a dive.And there's even more laughs as we discuss the US Treasury Department's debt monetization and the impact of Congressional spending, which Gary likens to a Ponzi scheme. The inflation numbers, he argues, are understated, and the real picture is much grimmer.

"We are now printing dollars to pay for the interest on dollars we printed last year. If you think that sounds like a Ponzi scheme, congratulations. That's the definition of a Ponzi scheme."

We focus on two stocks talking about Nvidia's dominance and Shockwave Medical's acquisition talks. Gary shares his insights on Nvidia's valuation and the competition that might be on the horizon for this tech giant.

Tune in and prepare to be enlightened, entertained, apalled and perhaps a bit concerned about the financial future.


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Chloe: Shares for beginners. Phil Muscatello and fin pods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Gary Brode: The Treasury Department is monetizing that, and that's just a fancy finance way of saying that they're selling debt and creating more units of dollars to fund Congress's spending. So what we have is Powell and the Fed trying to get inflation down and Congress and the Treasury Department doing everything they can to stimulate the economy, which is creating inflation, creating an increase in GDP without improving people's lives, and really just pulling demand forward. It's an election year. This is not going to stop.

Phil: G'day and welcome back to shares for beginners. I'm Phil Muscatello.

Phil: What's so, uh, funny about the Federal Reserve interest rates in Japan and the disaster brewing in commercial real estate? It's rib tickling economic data that we're exploring today as we welcome back Gary Broad from deep knowledge investing. Hi, Gary.

Gary Brode: Hey, Phil. Thanks for having me. Always great to be speaking with you and your audience.

Phil: It's great to have you back again. It's been too long now. Economics, as we all know, is known as the dismal science, but you find it to be a constant source of amusement. Why is that?

Gary Brode: Uh, you know, I don't know that it's always so funny. But last week, we did get some very funny news. Part of it. The Federal Reserve concluded their March meeting, and they kept rates the same, which is what people were expecting. But if you took a look at the details in the release, there was one place in the release where they're saying, we'll look at reducing interest rates as inflation approaches the 2% target, which tells you that they're willing to lower rates before we get to 2%. That's the mistake that Arthur Burns, former Federal Reserve chairman, made in the 1970s that led to the massive inflation in the late seventies, early eighties. But then two sentences later, they said, we're firmly committed to getting inflation down to the 2% target, which is the Paul Volcker response. Right. He's the one who took interest rates up to almost 20%, killed the economy, and killed inflation. So, you know, we get sort of this double speak, and then, you know, Powell goes to press conferences, and there, you know, as far as economics goes, they are super entertaining, because 15 members of the press all ask him some version of the exact same question, which is, when are you going to lower interest rates? And Powell keeps saying, I'll let you know we're data driven. We haven't made a decision to do that yet. We're going to follow the data. And as he's doing this, he gets increasingly annoyed. And you can see him trying to hide. He just desperately wants to say to these people, hey, idiot, I've answered that question ten times in this press conference. Cut it out. But, you know, Powell tends to be gentlemanly in his conduct and he didn't do that.

In my opinion, the funniest thing that happened last week was the bank of Japan after nine years of negative interest rates. Imagine that, Phil. Almost a decade of keeping your interest rates negative, that caused the yen to fall from 102 to the dollar to 151 to the dollar. So weve had horrible inflation here in the United States. I know it hasnt been great there in Australia. Now try to imagine whatever inflation youve experienced with a 50% decrease in the purchasing power of your currency. And the bank of Japan, they spent the whole week saying were going to get above zero, going to get above to zero. We're really going to do it. We're going to do it, guys. We're going to do it. We're going to do it this time. They were so excited. And the reason they were doing it was to support the yen. The reason the yen has fallen is because the bank of Japan was at negative 0.1% while the US Federal Reserve is at 5.3%. Right. So money was flowing from the yen to the dollar. And after a week of this huge buildup, they changed the reference rate from negative 0.1% to ready for this, fill a range of zero to 0.1%. So an average of 0.05%.

Phil: I, uh, saw that. It was a highly amazing figure.

Gary Brode: Yeah. And the funniest thing of all of this is the reason they did it was to protect the yen. You want to guess what happened to the yen that day? It went down. The market basically laughed at them. The market said, okay, if you're not going to take this seriously, we're not going to take you seriously. And the whole point of the exercise and all of the ink spilled and the press releases was to support the yen. And when they took the action, it was such a weak action. Uh, imagine the market laughing and saying, you know what? We're taking your currency in the other direction. We see you're not serious people. We're not taking you seriously. So listen, I'm cheering for Japan. I don't want anything bad to happen to them, although I do think with interest rates they're at 0.05% and their debt running at 260% of GDP, they are in trouble. I think a disaster is baked in. I really hope they pull it out. I'm a fan of the japanese people, the japanese culture. I'd love to see a, uh, good ending for them, but it's not going to happen, given the direction the bank of Japan is heading. And so we have two options. We can laugh or cry. And the market thought this one was pretty funny.

Phil: You mentioned about how markets basically laugh at what central banks do. In the case in Japan, in the USA, of course, the Federal Reserve, Jerome Powell, is saying that there is a possibility of further rate cuts this year. The market, in turn, seems to be laughing at him because here we are recording on March 26, the US treasury yield is going up, which means that markets are selling off. Is that the correct way of looking at it? I mean, I'm not an expert here in macroeconomics, but it seems to be that the market is saying we're not expecting any interest rate reductions anytime soon.

Gary Brode: Well, so, Phil, for somebody who's not an expert, I think you got the situation nailed. Right. Good for you. You understand it? So let's unravel it a little bit, though, and go through some of the details for people. Here's what I think is happening in the treasury market. First, uh, of all, the Fed is having a hard time getting inflation under control, and GDP has been relatively high. We've had GDP growth. Now, what's going on? Those are all things that would keep the Fed from reducing interest rates.

And so let's talk about what's going on. There is, and I've been writing about this for months, there is a quiet war going on right now between Powell and the Fed on one hand, and Congress and the treasury on the other. And what's happening is Powell and the Fed are desperately trying to get rates up and cool the economy and get inflation under control. And one of the reasons why they've been unsuccessful in getting that last mile, getting inflation down. And by the way, some people will say, hey, the inflation is 2.5%, 2.7% looks pretty good. Yeah, but the CPI is hugely, unintentionally understated. The real inflation is much higher, and these guys know that. But what's happening on the other side is the US Congress is overspending somewhere in the range of $2 trillion a year in excess over tax receipts. But it gets worse, because a couple of years ago, interest expense for the US government was about $400 billion. And in the next year, I think that's going to be heading for somewhere in the neighborhood of 1.6 trillion. So we're looking at roughly another trillion dollars of interest expense. And the government is adding a trillion dollars of debt every hundred days. So we're looking at annual increases of more than $3 trillion of debt. And this is massive amounts of stimulus. Now, I'll, uh, remind you that government spending is additive to GDP, whether it creates value or not. And so, you know, the example that everybody likes to give, and it's the one that I've used because it illustrates it for people. But, uh, let's say the government says, okay, hey, you million unemployed people, we're going to pay you to dig ditches. We're going to grab another million unemployed people, we're going to pay you to fill in those ditches. Now, that creates zero economic benefit, but it is 2 million people that are now employed instead of unemployed. And all the money they spend, they could spend a trillion dollars paying people to dig and fill in ditches. That actually adds to GDP. And the Treasury Department is monetizing that. And that's just a fancy finance way of saying that they're selling debt and creating more units of dollars to fund Congress's spending. So what we have is Powell and the Fed trying to get inflation down and, uh, Congress and the Treasury Department doing everything they can to stimulate the economy, which is creating inflation, creating an increase in GDP without improving people's lives and really just pulling demand forward. It's an election year. This is not going to stop. And so what's happening is because GDP is high and inflation is high and going to rise, you can't have a government issuing a trillion dollars of debt every hundred days and not have more inflation. And again, the CPI is understated. What you have is circumstances that make it very hard for Powell and the Fed to lower rates. And for anyone who's really paying attention, the only conclusion you can come to is Congress is going to keep doing this. They will not stop. We are now printing dollars to pay for the interest on dollars we printed last year. If you think that sounds like a Ponzi scheme, congratulations. That's the definition of a Ponzi scheme. So we are now in the full Ponzi part of, you know, today's circus. And all of this means we're going to have a high level of future inflation. Now, you know, the Fed funds rate, does that matter so much? Not so much. But if you own a ten year government bond, part of the reason that that price is coming down is, you realize, oh, wait a minute, we're going to have inflation and higher interest rates now. Will that happen this year? No idea. But over the next ten years, you better bet on it, that is 100% coming. Higher inflation, higher bond yields. And so that's why people are selling. And even though standing on 1ft, the elevator pitch for this is if the government is going to keep printing dollars, that's going to reduce the value of the dollars that the government owes you in ten years. You sell that bond.

Phil: I mean, in more sensible times, central banks and governments would work together for a common goal. But that just seems to be, you know, complete sensors left the room. I mean, I was just reading another article today about the build back, better and buy America plans that were implemented a couple of years ago. And that's basically put up the price of infrastructure projects because the definition of infrastructure has been so widened that now there's suddenly there's requirements to buy american products that actually even made in America. So, you know, it's a circus on so many levels.

Gary Brode: Yeah, that's right. Yeah. You force people to go buy products that don't exist. Of course that's not going to work. You know, there's also more happening. Phil, Washington has played games with the definition of infrastructure. I know we took a look at the last infrastructure bill and something like 7% of the spending was on anything that a reasonable person would consider infrastructure, roads, bridges, things like that. Most of it actually involved transfer payments. And so people are now referring to things like food stamps and welfare as infrastructure spending, as investments. Now listen for the people listening to this. Maybe you think that's a good idea, okay? You're entitled to your opinion. People are entitled to the opinion that government should be big and should provide for people. Okay, maybe you agree, maybe you disagree, but that is consumption. That's not investment. The other thing is, in the United States, we are hamstrung by regulations. So remember when we had the TARP plan and the financial crisis in 2008? Obama came out and he said, hey, give me a trillion dollars for stimulus. We have a trillion dollars of shovel ready infrastructure plans ready to go. Go find me something that got built. Nothing got built. Uh, tiny, tiny projects. But we didn't improve our bridge infrastructure. We didn't fix stuff. Now, eight years later, President Trump ran for office saying, hey, everybody, like, our airports are terrible. I travel all over the world and other countries. They have beautiful airports, beautiful infrastructure, great roads, great bridges. I'm a builder. I've built huge private projects and gigantic buildings. And I know how to get these projects done right. Elect me. I'm going to get it done. Well, I said at the time that won't happen, but for a different reason than people expect. Now, I know President Trump is a controversial person, and people love to call him a liar.

Phil: Okay, I hadn't noticed that, Gary.

Gary Brode: Yeah, right. Congratulations. You found a politician who didn't tell the truth. Right. He's a politician. Okay. But the real issue and the reason I said this isn't going to happen isn't because President Trump is the messiah or because he's a liar. It has nothing to do with his character. How do you get an airport built in the United States?

In four years, you'll be in environmental review alone for four years. Good luck getting the community plans and the approvals and the environmental approvals and the funding and the spending. And it'll take you years to get to decide which architect is going to come up with the plans that you'll spend years considering. Nothing in the United States, particularly things that are as large and loud as airports get built in. For years, it wasn't going to be possible. And then, you know, we end up with this current White House which said, okay, great, give us, you know, a trillion dollars, we'll do more infrastructure. But that wasn't infrastructure. It was consumption spending. Now, you know, again, people can think that's good spending or bad spending, but it is not investment, it's consumption. So, you know, we're no longer serious about getting any of this done. And we don't have a governmental or regulatory process or approval process that allows anything to get done on a reasonable time frame.

Phil: I came in today expecting laughs. Gary, I'm getting more and more depressed.

Gary Brode: I'm sorry. We can laugh about it.

Phil: Well, we can. I mean, you gotta laugh really, don't you?

Gary Brode: You know what? I'll tell you a great story. A few years ago, I was in, uh, LaGuardia airport, which is not the nicest place in the world, and they had all of these people coming up to me, and they were taking surveys. And I said, hey, do you have a minute for a survey? I'm sitting in a chair. Where was I going to go? And so they said, we'd like to know about your experience in terminal B today and help us understand why did you choose to travel through terminal B today? I'm like, what? Are you kidding me? Because this is where Delta told me the gate was. I bought a ticket on Delta and they said, you know, you're in gate b 17. That's why I'm here. I didn't choose terminal B. I mean, these people don't even understand how to figure out what their customers want. We don't choose terminal B at LaGuardia. Uh, those are assigned. So, you know, I don't think anybody's really serious about this, but, you know, I at least can get a laugh out of this kind of nonsense.

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Phil: Well, what seems to be even funnier is that financial markets, the stock market, we're going through a bull market. I mean, this is a serious bull market. And there seem to be all these storm clouds gathering. And as you say, the money that the government is spending, it's not only the money that they're spending, but spending on the interest bills to pay for what they've spent in the past as well. How can markets be so sanguine?

Gary Brode: Yeah, you're right. I told you, we hit the bread and circus as part of the show. Look, I would suggest two things. One, we're not really in a bull market. I promise I will explain that. And two, we are not going to have a recession this year. And I will explain that. When people say we're in a bull market, it's because they're looking at the market indexes, like the S and P 500 or the Nasdaq 100, the QQQ. And look, technically, that is 100% true. The stock market was up huge last year. It's up really big in the first quarter of this year. Certainly looks like a bull market. And I believe it had a pretty good run, closing 2022 as well. So for about a year and a half, we had a market that's gone straight up, but that's the indexes. And those indexes are market cap weighted. And in the United States, we have, uh, half a dozen or so. People were calling them the magnificent seven. We're really down to the terrific two at this point. But we have a few companies, tech companies, that are high growth companies that produce a lot of earnings and cash flow, that have massive market share and multi trillion dollar valuations. And so you take a look, some of these companies are at or approaching $3 trillion of valuation, which is more than the entire oil and gas sector. We don't really have a bull market. We have a few companies, mostly Nvidia, that are just up huge. And because they are an outsized percentage of the index, they drive the whole index. And in fact, one thing that I thought was both funny, ridiculous and true is people said Nvidia's last earnings call was the most important earnings call in market history. And that's a ridiculous notion. And it's also true. Right. You have a company closing in on $3 trillion of market cap with unbelievable expectations. And because it's Nvidia, they beat those expectations. The stock goes up, the entire market index goes up. But we've seen those charts. And what we've had is depending on the year, two, five, seven stocks that have been the source of at times more than 100% of market gains. And if you look at the returns of the S and P seven versus the S and P 493, it's not the same market. So the indexes are up, but most companies are not anywhere near all time highs. But the other side of it is, I don't think we're going to have a recession. And that's, again, because government spending, no matter how wasteful, adds to GDP. And there is no way anyone in Washington wants to stop spending and run for office in what would be considered a bad economy. So they are just going to run the printing presses. And basically everybody has decided to take over the Ben Bernanke approach. Right? They called them helicopter Ben, a former chairman of the Federal Reserve who said, you know, if we need to stimulate the economy, you can throw $100 bills out of the helicopter. That's pretty much where we are right now.

Phil: Do you buy the Nvidia story? I mean, I'm talking to analysts all the time who are still saying this is going to be a great buy. It's got plenty of room to move upwards. What are your thoughts?

Gary Brode: Yeah, you know, it's a tough one. First, let's just start with the company is a fantastic company that makes incredible products in the hottest area in the world. Right? Nvidia makes the best GPU's, graphics processing units, their graphics chips, which are better for AI, artificial intelligence applications than anyone else on the planet. And so when you make the best products for the hottest area of the market, you are in really great shape and people have trying to come.

Phil: You're in momentum territory there, aren't you? Serious?

Gary Brode: Momentum? Yeah, very much so. Although, you know, in fairness to Nvidia, take a look. You know what happens. These guys, you know, they project $8 billion of revenue and then they end up doing $12 billion of revenue and raise guidance to $16 billion of revenue. I mean, they beat and raise the fundamentals there are really incredible. And, you know, people have been negative on the company, have tried to compare it to Cisco about 25 years ago, right. And they view Nvidia as kind of like a picks and shovel play. And that's a reference to the California gold rush, you know, the 1840s, the 1850s. Most of the gold miners didn't make any money, but the people who sold them pick shovels and blue jeans made a lot of money. And so, you know, Cisco, back in the early days of the Internet boom in the late nineties, you know, they were selling servers to everyone. But here's the difference. Cisco was selling servers to and other money losing web businesses that never had a business plan or a business model. Nvidia is selling billions of dollars of gpu's to Apple and Microsoft and Google. That's not the same thing. They're now selling to massive companies that have huge earnings and enormous amounts of cash flow and can afford this. Thats not exactly the same. Nvidia is a, uh, fantastic company, I think, where I would maybe advise people to exercise a little bit of caution. Is the stock isnt cheap? You have to pay up. And theres a question, or is the stock worth $3 trillion? Is it worth 6 trillion? Is it worth $10 trillion? Its very easy, as you say, for the momentum players to say its going up, its going to keep going up. There is a point where valuation might matter. The other thing is, and I actually was tweeting about this just yesterday, Nvidia is the best in the market right now. I think its unrealistic to expect the competition isnt coming. And in fact, Samsung just did a deal worth three quarters of a billion dollars with an alternative supplier. This got announced yesterday, and I posted it on X formally Twitter yesterday. And there were two stated reasons for choosing this non Nvidia player. One is they thought for some of their specific AI applications, this other company actually had a better solution. Nobody's saying that their chips were better than Nvidia's chips. They're saying there are circumstances where these guys really stand out. More importantly, nobody wants to have one supplier anymore for anything. And Samsung's so careful about that in their Galaxy phones. In some of their phones, they use Samsung processors, and other ones they use Qualcomm processors. Samsung doesn't even rely on themselves to be a sole supplier. And so I think people are realizing that a lot of their business now depends on getting supply in the future from Nvidia.

Right now Nvidia is running effectively a monopoly, but others will enter

And they would love to have a second supplier. And there will be other companies coming to enter that market. You know, whether they'll be able to do so at Nvidia's prices or margins, I have no idea. But there's a price where others will enter. And, you know, right now Nvidia is running effectively a monopoly. That won't be the case forever, despite how amazing their chips are. And I say that as somebody who has Nvidia GPU's in both of my computers.

Phil: I just wanted to say at this point that I was basing this interview on your latest newsletter. But of course, we always end up in these freewheeling conversations that go in a lot of directions, which is great, I do enjoy that. But I just wanted to come back because I, uh, do have to have a little bit of structure in this because I want to sort of show what you said in the newsletter and how these kind of things are going to be affecting markets and the way we can look at it.

There is a danger to the US market that a lot of people aren't thinking about

And so let's get back to Japan. What's the knock on effect of Japan? Inverted commas around normalizing interest rates.

Gary Brode: Yeah, so there is a huge danger to the US market that a lot of people aren't thinking about. And let's talk about what's happened in the currency market. And don't worry, I'm going to explain this, I promise. It's not as complicated as it sounds.

Phil: Yeah, I mean, we've done currency markets, we've done bond markets, done a bit of high tv.

Gary Brode: I know.

Phil: It's good, I know, good to know that these are forces that are bearing on everything that we need to think about when we're choosing our investments.

Gary Brode: Bill, that's a great point. And one of the great differences between professional and amateur investors is just scope. When youve been doing this all day, every day for decades, you get a sense of the interrelation of things, and youre just looking at more data and more things and more correlations, and it can help in decision making. And it doesnt mean that amateur investors dont make phenomenal decisions themselves. There are certain advantages to having a, uh, deeper and wider scope and being able to make more connections. And that's not, you know, I would never discourage individuals from investing. You can have a great thesis and make money from it, but if you're going to wade into the currency markets and the sovereign debt market, you might want to have a wider view of the world. I think I'm pretty safe saying that. At any rate, what we've had for years is something called the carry trade. And, uh, it sounds complicated, but it's actually really simple. So Japan had insanely low interest rates. We talked about their version of the Fed funds rate. It's called the immediate rate was negative. And for many years the ten year japanese government bond traded at something like 25 basis points, which is 0.25%. And so that was really, really cheap. At the same time, the US treasury might have been trading at three, four, 5%. Right. And now we have an inverted yield curve. But I haven't looked at where the ten year is right now. Actually, let me just take a quick look. Yeah. So the ten year in the US.

Phil: Hang on, let me guess, let me guess. 4.35.

Gary Brode: You nailed that. 4.23%.

Phil: Okay. Class close? Yeah.

Gary Brode: All right. And so that's against the japanese government ten year bond, which is trading at well under 1%. Right. So what people would do is they would short the low yielding japanese treasury, uh, and they would buy the US treasury and capture that difference in yield. Now what that did was that drove the yen down and the dollar up. And the beauty of that is you were short the thing that had a low yield and what you owed in dollars, not in yen. What you owed in yen would be consistent, but what you owed in dollars would come down. So the thing that you are short was going down and you were getting paid a higher rate of return on the US Treasuries. And there were just huge amounts of capital chasing that trade. And that's the primary reason the yen fell from 102 to the dollar to 151 to the dollar, is because of this carry trade. Now what can happen is if the bank of Japan ever gets serious and decides to raise rates, what wed have is a reversal of that carry trade. And you would have huge amounts of money flowing out of us treasuries and into japanese government bonds. And what that would do, first of all, it would knock the dollar down a bit in terms of competition with other currencies. If any of you hear people talking about Dixie DXY, thats the dollar index, the strength of the dollar against other fiat currencies. So theres your finance term for the day. And what will happen is if everybody or all of the people who are reversing the carry trade start selling us treasury securities, the yield on that will increase and that increases the borrowing costs for the US government. Well, one of the things we talked about earlier is we're in full Ponzi scheme right now. We are already printing dollars to pay for the interest on dollars we printed last year. Again, the increase this year alone is going to be more than a trillion dollars. Uh, like I said, I think next year we're looking at $1.6 trillion of interest expense. If that goes up, the only way we can finance that, and by we, I mean the United States, is to print more dollars and run more debt. Well, guess what we get for that? We get more inflation, which is a fancy way of saying a dollar with lower purchasing power. So basically everything that happened to Japan over the last few years, if they raise rates, they can reverse that and put that same kind of pressure on the United States. And that is a potential disaster baked into the system, which is not being reflected in either equity prices or the VIX. And I will explain that. The Vix is a measure of forward expected volatility. And it's typically, and uh, volatility is.

Phil: Just up and down movement in the price of any asset, right.

Gary Brode: And it's typically referred to as a risk gauge. And so right now the VIX is very, very low, indicating people are very, as you said, sanguine and not at all bothered and oh, everythings good, were all fine. But if the bank of Japan starts to raise rates and the carry trade starts to unwind, youre looking at a decline in the dollar, an increase in borrowing costs for the US government. And that VIX number, that volatility number, that sense of oh my God, what risk are we taking now? Starts to reverse. And that will be a problem for markets that I think professional investors are aware it exists, but everybody seems to be pretending that this isn't a thing and it won't happen. They seem very unconcerned. And in fairness to those people, they have been right so far. And when the bank of Japan raises from negative 0.1 to an average of 0.05, it's very clear they're not taking this very seriously. And so the people in the US are saying, yeah, this isn't a big deal, they have been right so far, and the people on the other side of the trade don't seem to be indicating a great level of seriousness of getting it fixed. So, you know, as much as I love to point out, hey, there's risk in the system that people aren't paying attention to. So far, the people on the other side of that have had history on their side and um, you know, their analysis has proven to be correct so far. So, you know, I don't have any money up on this trade. I don't have a position in this, I don't have anything in the yen. I don't have the carry trade on. I don't have a dog in this fight. But, you know, round of applause for the people who've gotten it right so far.

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Your newsletter focuses on commercial real estate, and do you think markets are wrong

Phil: So the other side, the first subject in the newsletter that you address was commercial real estate. And I think this is a pretty obvious one. Businesses are finding it very difficult to get people to come back to work at the moment, and, um, everyone's enjoyed the work from home thing that came about during the COVID era. Tell us about commercial real estate, and do you think the markets are getting it wrong again on this sector?

Gary Brode: I think people are starting to pay attention to it correctly, and they should be. There are a lot of issues with commercial real estate. I would illustrate two in particular. One is in retail space. So, first of all, the United States, if you take a look at the statistics, we have an insane amount of square footage devoted to retail space, to selling stuff compared to every other country on the planet. It's just a ridiculous number. We have enormous shopping malls and huge stores, and, you know, we're just the world's best place to go buy stuff, I guess.

Phil: I also love that, the concept of mall walkers, people who go and exercise by walking around malls.

Gary Brode: Yeah, you know, the malls here in the United States are enormous, and there are some of them that for years, they would actually open early for elderly people who would come in because it was safe, it was lit, and it was climate controlled. And so you'd have, like, elderly people who'd show up and, you know, the security guard would let them in at 05:00 a.m. Or 06:00 a.m. And they'd walk a few miles around the mall and then have themselves a coffee and leave. And the malls did that as a public service and to bring people in. It was a win win. But there were a couple of trends here. The obvious one is we just have too much retail space and it was never sustainable. Right? Our gigantic department stores. Nobody wants to shop in a department store. It's just not appealing. But more than that, we've had a 25, 30 year trend of people realizing they can buy online. And that trend was going on for a really long time. But it was accelerated during the worst of COVID when people had this fear that if you went to the supermarket and walked the wrong way down an aisle, right, we had the arrows pointing in different directions. If you walk the wrong way down an aisle and you passed somebody, you were going to get sick and die. And look, I understand those fears that, uh, people were told horrible things about COVID Those fears weren't unfounded. And there were people who did get sick and die. I get it. I'm not making fun of anybody in any way. But what that did was made people say, I really don't want to go out. I don't want to be in crowds, I don't want to be in malls, I don't want to be in big stores, I don't want to be passing people, I don't want to be near people. And so what do they do? They accelerated that already existing trend of ordering online. While, guess what? Now we have basically three problems coinciding. One, we have too much retail space. Two, the financing costs as interest rates have gone up, are going up, right? These commercial real estate mortgage holders, they don't have 30 year paper. You know, they often will have five year debt that they're going to need to refinance at much higher rates. It's going to be more expensive. And the trend toward online shopping, just click from home. It shows up in a box at your place the next day. That's accelerating. And it was already an issue. So retail is the first place that we'd be looking for problems. And people are already trying to figure out, what do we convert shopping malls into? Do we convert them into universities or education centers or gyms? Uh, people are desperately trying to figure out what to do with that space.

50% of Pittsburgh office space will be vacant within four years, study projects

The second place, where we're seeing huge issues is in the office space market. And this shouldn't be a surprise to anyone. I was reading last week in the Pittsburgh Post gazette that they are projecting that within four years, 50% of Pittsburgh office space will be vacant. And at that level, what happens is people start closing office buildings, they start telling their existing tenants, it's just not worth it to keep the building open, you're out of your lease, and you're out of here and go find another place, and you end up with gigantic, uh, empty buildings, millions of square feet. That's not good for your economy. And remember, it's easy to say, oh, uh, well, those are high paid corporate workers. Who cares? Okay, great. But what about the people who sell them lunch or coffee or the janitors or custodial staff or elevator repair people? You know, there are a lot of support people who need those jobs. And so having vacant space in the middle of your city is a gigantic problem for the city. Now, some people will say, hey, just convert them into apartments. We need more housing. And that is sometimes possible, but it is technically very difficult and very expensive just to get light, ventilation, egress for people to be able to get out in case of a fire. Once youve subdivided stuff just to have light and windows to the outside, there are all kinds of building codes. Those kinds of transitions are often not possible without gutting the entire building. Theyre always very, very expensive. I was at a real estate conference in Newport last summer, about nine months ago, and I was talking to people who are professional commercial real estate investors, and they kept telling me the same thing. They kept telling me, work from anywhere, work from home is dead. Everybody's going to be returning to the office. And I listened to them, and internally, I'm thinking to myself, this can't be right. There is no way in the world. Nobody, people do not want to go back to the office. Nobody wants to commute. No one wants to get in the car and sit and rush hour traffic and deal with this nonsense. I didn't think it was going to happen, but I was very cautious, and I listened, and I didn't say a lot because I recognized these people invest in commercial real estate for a living. They knew more about this than I did. I just thought they were wrong. But here we are almost a year later, and office buildings are emptying out. And when you're heading for 50% vacancy rates and people are talking about closing buildings, that's horrible for the economy. I don't think this trend reverses the two groups of people who have had minimal success in this area, the California tech market and the New York finance market. They have succeeded in forcing people back into the office. I will just point out that that is a workforce that has an insane work ethic. It's pretty normal for people in those positions. And I've done it to work 80 to 100 hours a week. There's just a level of dedication and insanity. And again, I raised my hand. I've done this. That doesnt exist in people who want a balance in their life. And im not making fun of it. Its normal. Its fine. Its healthy to want a balance in your life, but this is why these firms have been able to do it. The other thing is, theyre dealing with a very highly paid workforce. And when youre paying people mid to high six figures, low to mid seven figures, you, uh, can swing a much larger stick and say, yeah, in the office if you want your giant paycheck, they've had success. The rest of the country has basically said, no, not a chance. We're not interested. We don't want to do it. We're effective from home. And I don't, you know, I don't want to sit in rush hour traffic. And, you know, with the exception of those two examples I gave, people have done a, uh, very good job holding the line and resisting. Not that my opinion matters, but I refuse to have an office. When I bring in new people or I have an intern, they ask me, do I need to be in the office? I'm like, not only do you not need to be in the office, you can't be in the office. I refuse to have an office. I refuse to have anybody working at deep knowledge investing who requires me to physically supervise them and kick them in the butt to get work done. And I've told them that if they need me to look over their shoulder to ensure that they're getting their work done, that they are in the wrong place. And there are plenty of places, you know, where they can go. But come to me if you want to work and learn. And so I refuse to have an office. I refuse to work from an office. I refuse to go to an office. So I've set up deep knowledge investing as a permanently virtual firm. I intend to never have an office. I intend to never make anybody go to an office. And that works for us, and that's the culture that I'm invested in growing and nurturing.

Gary Broad: Deep knowledge investing helps people get better returns in the stock market

Phil: So tell us about deep knowledge investing. Just remind listeners about you, because you haven't been on for a little while about the services that you offer, and, of course, that you're always looking through, through all of this macroeconomic data and noise, but you always try and look on the bright side and say, well, there's always an opportunity there.

Gary Brode: Well, thanks, Phil. And I think that's the key thing. So with, uh, deep knowledge investing, we work with hedge funds, family offices, registered investment advisors, and individuals. Individuals, like people listening to this, and we help them get better returns in the stock market. We do that two different ways. One, I think we do a really good job explaining the macro situation to people. And I tend to have a different view of things like inflation and the Federal Reserve than what youll see in the mainstream media. And weve been right on it. I mean, in the fourth quarter of 2021, we were telling people, inflation is a giant problem. Its going to get big, and its not transitory. Like Janet Yellen, the secretary of the treasury, was saying at the time, Jerome Powell, the chairman of the Federal Reserve, was saying that. We said absolutely not. So weve tended to be right on that. But the key thing is, I take that macro overlay, and really what we do at the core is bottom up, well researched stock picking, and that's where we've done really well. We were actually just taking a look at statistics the other day. It turns out that a deep knowledge investing stock pick is more likely to go up 100% or more than to lose money. And that's a pretty hard track record to maintain. In fact, today we got a, uh, great news on Shockwave Medical. I had deep knowledge investing subscribers buying Shockwave Medical. We recommended it in December at $190. And the thesis was that they would be acquired by a larger competitor, perhaps Boston Scientific or Johnson and Johnson, for more than $300. Stock closed today at $323, up 69% in four months on ready takeover talks from Johnson and Johnson. This is the kind of stuff that we have done successfully. I think, you know, one area where we're a little bit different from other people is you'll hear people using, oh, it was a bad market for bad performance. We do not believe in good markets or bad markets. If you need the Federal Reserve to have rates at 0% and blow up an asset bubble to make money, you are not a money manager. Our view is, regardless of how good or how bad things are, regardless of what the Federal Reserve does, what inflation does, there are ways to preserve value and to make money in all kinds of markets. So we never allow ourselves to say it was a bad market. Whatever conditions are, it's our job to find a way to make money in that market and help people get great returns. And I'm happy to say, so far, we've succeeded in doing it. And that's what drives me every single day. I got a great note from a hedge fund manager today who knew about the shockwave call. And he's like, congratulations, great call. And I responded. Yeah, thank you. I really appreciate the note. And now I'm already thinking, oh no, I need to find the next one.

Phil: And that's, where listeners can find out more. And of course, X. How long do we have to say, formally known as Twitter? Yeah, it's a great follow. I really enjoy your posts on X as well.

Gary Brode: Thanks, Phil.

Phil: And that's Gary Broad, is that the case?

Gary Brode: That's right. Yeah. You can find me on Twitter or X at Gary Brode. And, uh, you know, if anyone listening to this, if you have specific questions or want to reach out to me personally, just feel free to dot I read everything that comes to that email address. I read everything that comes from our subscribers. And you know, we do engage with people.

Phil: Gary Broad, it's been great catching up again. See you next time very soon.

Gary Brode: Thanks for having me, Phil. Always great speaking with you.

Chloe: Thanks for listening to shares for beginners. You can find if you enjoy listening please to take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

TONY KYNASTON is a multi-millionaire professional investor thanks to the QAV checklist he developed . Tony's knowledge and calm analysis takes the guesswork out of share market investing.

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