Every single Friday we host a live discussion in our Discord Channel at 12:00pm EST. This gives you the opportunity to ask us questions and hear our thoughts on the things you want answers to!
Here are the 4 key things we went over for this week:
- What it means now that every major index has fallen back into bear territory
- How we should shift our thinking on investments when the dollar is strengthening rapidly
- Why this market can start having a real effect on the political situation in America
- Where inflation can head in the next month
If you’d like to listen live and ask us questions throughout the next live session, just join the weekly Thursday afternoon session at 5:00pm EST.
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Check out a broader summary & transcript below!
From Moby.co, this is the Flagship Pod, a weekly podcast about the stock market, the economy, and the various market forces powering the world around you. As always, I’m your host, Peter Starr, bringing you this time. It’s Bear City, y’all. Jerome Powell has set the markets into a bit of a tizzy, as Wall Street is now beginning to wonder if the Fed is overdoing all these interest rate rises, as the rest of the world kind of reacts to an increasingly intense situation in Russia, Eastern Europe, and Ukraine, amongst so many other things.
It’s kind of a wild time, and it’s very macroeconomic-heavy conversation today, folks, unfortunately.
To get me through that, of course as always, we’re joined by CEO, Co-Founder, and Chief Analyst here at Moby.co, Justin Kramer. Justin Kramer, dude, what’s up, man? How’s it going today?
Good, good. Everything’s good. Excited to chat through this week’s episode. People are back from the summer. Everyone’s getting back involved in the markets. Obviously, this week has not been kind, and this year at that, as well. So there’s a lot to talk through.
We might sound like broken records at times, but this stuff’s important, and it’s going to really dictate what the world looks like over the next, not only a few months, but the next few years. I think we’re fundamentally seeing a massive change in how the world works, how the economy works, with bringing things back on shore. There are just a lot of changes — so just excited to talk through all the details today.
And the important thing about being a long-term investor, audience, is within just a constant reiterating of the same sort of echoing market cycles, you begin to see nuances happening throughout all of them, that can help you better understand and better plan what you’re trying to do, for you and for your investments.
So let’s get into the classic thing. We’ve almost been talking about it for a year straight, Justin. This week, the Fed raised basis points 0.75%, by 75 basis points. Again, the market hated it. I mean, simultaneously priced it in, and hated it. Dow was down 400 points, right now, and just continuing to go down.
How do we feel about this? Is the Fed getting a little bit too hawkish now? Or is this just a symptom of too little, too late? We got to go through this pain right now.
Yes, unfortunately, the Fed did a little bit too little, too late. After saying inflation was transitory for an entire year, ended up not being transitory, and ended up now being north of 8%, they’re scrambling to really pick up the pieces.
So it’s going to be interesting to see how this plays out, but ultimately they’re going to probably be forced to put us in a recession, and then from there, they can get accommodative. But right now, they’re trying to bring down prices, and ultimately it’s really hurting the economy.
And it’s still, at the same time, it kind of tail of two downturns, right? Because what we’re seeing is a lot of downturns in tech. We’re seeing potentially, even more, lay offs coming in the big tech space, whereas people on the bottom, 50% of the economy just getting hammered by inflation. So it’s one of those things where the middle’s kind of doing okay, whereas certain sectors in the economy are getting hurt worse than others. Right?
We’re live right now, while Google in a very heated, all-hands meeting is saying, “Do not equate fun with money.” So everyone’s signaling more pain to come, basically. A lot of us were anticipating inflation to go a little bit more down than it did. And everything kind of is aiming at the next CPI, which comes out right about just before the middle of October. So two weeks out from basically the market’s full on reckoning.
So Justin, as we look forward to this, tell me how do we think about the markets, and how do we think about the way that inflation can play out, if the CPI manages to get a little bit more under control? The fuel prices keep going down, and the supply side issues start resolving a little bit faster. Are we looking at potentially a complete bounce back, if the CPI comes in a little bit lower, in October? Or how are we thinking about that, since we’re seeing the market just completely give up on that kind of hope, right here, right now?
Yeah. So right now we’re going to have to look towards the inflation report that comes out next month. Everything is just going to revolve around that. The Fed has obviously gotten very aggressive with its interest rate policy. They’ve made it very clear what their intentions are.
So from there, we’re going to see how quickly the effects of their policy ultimately affect the market. So in a month from now, if things are actually starting to slow down, the Fed doesn’t have to increase as quickly. Things can gradually get better. If it’s continuing to be bad, ultimately they’re going to continue raising. So it’s impossible to say. We have to react in real-time. Typically, if the Fed is pushing out interest rate increases, it can’t be felt by the market that quickly. So ultimately, what we’ll need to see is, if it’s not now, hopefully by the end of Q4, things are getting better. The Fed’s slowing down their interest rate increases, and that’s when the outlook can change. But everything in the market right now revolves around that, and that’s why so many sectors have been beaten down.
And so that’s the thing we’re going to be looking at as investors right now, audience. We’re going to be thinking about, “Okay, how do we play this game, both in the short term and the long term?” We’re not going to be talking about sort of really high-intensity options strategy, ever, because that requires a minute-by-minute, if not day-by-day, kind of update. And that’s how the resolution at which you can of effectively manage your portfolio, if you’re a normal person. Day trading’s super exciting, but it’s also insane, especially in periods of high volatility like right now. The premiums are just too high on most of these options, contracts.
So let’s think about more of the sort long term and short term narratives that we can play right now, to make sure that we are allocating our incremental investments as best as possible. So Justin Kramer, main question for you right now, since we’re just living in Bear Land right now, a cold front just moved through on the East Coast, everything’s cold, frigid, it’s really windy.
Autumn came in like a hammer today, as well as the bear sentiment on the market, as the Dow was basically as down as it was back in June. S&P’s way back into bear territory. What industries is going to get hit the hardest by this moment, though? My main question is, when we’re looking at this bear period, what should we be avoiding right now? What should we would be buying up? Is now the time to buy biotech and semiconductors?
Yeah. So a lot of newer investors, people who typically are going to be listening to this podcast, they see these. I mean, it’s nine months of weakness now, and they’re thinking, “All my investments, or all the companies we’re looking at are getting crushed. They’re never going to rebound. I’ve lost so much money.” But that is not the way to think about investing. What you need to be thinking about is, “Okay, things are really cheap right now, or they’ve been beaten down so much. What are good names I can enter now, and so that maybe not in three months, maybe not in six, maybe not even in two years, but in three years, they’re rebounding.”
And so, when we’re looking at a five year time horizon, they’re compounding and beating the market. So there’s a lot of sectors right now that are down massively. Semiconductors are down huge, for a lot of reasons, due to supply chain shortages, international relations with China, and some other countries. I mean, it’s impossible to say when it’ll rebound, but when it does rebound, it’s such a fundamental piece of the world. We need them to operate so many things, that the upside potential, relative to the risk, is insane. But they are likely going to experience a ton of volatility for the foreseeable future.
Biotech’s another area. It is an integral part of the way we live now, making people healthier, making people less sick, rolling out different types of healthcare, medicine, and other types of just pharmaceutical enhancements. And those are things that are fundamental to what we needed. By nature, biotech is very volatile, but any name that comes with high risk cash flows are, many years down the line, are just getting indiscriminately sold off. This really does create once-in-a-generation buying opportunities.
Outside of those two sectors, specifically just really high growth tech stocks, regardless of sector. Opendoor, other names like this are great examples. They’re down 80, 90%. I mean, they are very risky businesses, but the valuations at which they’re trading on now, relative to only a few years ago, is so discounted that even if it regains half the ground, the upside potential for a lot of these very high growth names, like Opendoor, Twilio and others, the potential is insane.
If you even hit on one and lose on nine, like a VC model, you’re ultimately going to make a ton of money on the upside. So right now, there are good opportunities, but just know that if you are investing in these opportunities, over the next few months, maybe even the next year, they’re going to probably continue to slide further. And that’s just how you need to think about investing, is getting more and more cheaper prices, so when it does appreciate, we ultimately can capture the most on the upside.
Exactly. But there’s still a lot of money on the table right now, audience. It’s not all bad news. The whole economy is not on fire right now. It’s just the typical drivers that sort of drive bull sentiment are experiencing these selloffs, because our economy is becoming more defensive.
So if you look at other sides of where we’re thinking about, in terms of long term narratives, one area that we’re absolutely killing it, props to Moby pharma guy, but our pharma portfolio, while riding some inflation waves, we’ve managed to pick the two biggest winners in the pharma space, Merck and Eli Lilly, along with a huge gamble in Biogen, which maybe we’ll get into later. Super boring. Nobody cares.
But Eli Lilly’s type two diabetes drug is showing more and more promise to fight obesity as well, and it’s just absolutely popping off the stock, and Merck just staved off some really stupid patent issues with another company. And both of those stocks are absolutely rocketing right now. So there is always going to be short term opportunity there as well. You just have to find those sectors, audience, where you’re going to see most of that upside. So really excited to see-
That’s really the problem right now, is everyone is scared about this inflation leading to higher interest rates, then ultimately some sort of depression coming. So exactly to your point, there are opportunities, and there are companies that are doing well. We’re not really in a recession. We have super high employment. The numbers are all strong. Inflation is the biggest scare.
So people are just scared of what’s to come, and that’s why the market is crashing. Until interest rates get to the point that it tanks the market, and when I say the market, I really mean the economy, that’s when we’ll be in more of a recessionary period. But the market and economy has shown to actually been pretty resilient, so there are still companies that are doing really well, even if their stocks are getting thrown off a cliff right now. And to your point, healthcare is there. There’s a ton of opportunity there.
And I guess the biggest opportunity then there, Justin, is the sort of huge battle that’s happening at the top of the healthcare industry. I mean, with actual healthcare providers and insurance providers. Over the past year, Justin, you and I have been going back and forth on various picks throughout the healthcare space. I’ve been kind of team Amazon for a hot second. You’ve been team United Healthcare, and CVS. And those three companies are now emerging as the three sort of Titans who are going to battle it out for the future, of what is ultimately going to be a several trillion disruption of the healthcare space.
United Healthcare is doing a really good job of advancing its profit lines, and as well as owning the entire patient journey from stem to stern, throughout the healthcare process. CVS is expanding on its regional success, and making sure that they have digital success as well, and are becoming very important in terms of the health tech space. And of course, Amazon is trying to leverage, it being the best data warehouse of all time, by also becoming a very strong healthcare provider.
So, Justin, when you look at this healthcare space, obviously all of these stocks are down bad. United is actually a little bit positive right now, positive to sideways, because for whatever reason, after a year of basically threatening a very hawkish stance and antitrust, the Biden administration kind of threw up it’s hands and said, “You know what? [inaudible 00:11:26] healthcare. You can buy a gigantic health tech company, and become one of the biggest healthcare providers of all time.” Like an actual juggernaut in this space.
When you look at this, Justin, you look at this healthcare space, and you look at these three Titans, United Healthcare, Amazon, and CVS, getting ready to fight it out. How are we going to keep playing it? We basically made positive calls in all three. Do you see any one of them with particular advantages, or is it one of those things where our audience should hold onto all three, and just ride the wave of what is ultimately going to be a huge battle for the future of healthcare, and healthcare providers?
Yeah, it’s a good question. I mean, the US healthcare industry is so massive, and I know people know it’s big, but the numbers are insane. The US has the largest GDP in the world. As of recently, 2022 estimates should have it around 25 trillion. Of that, healthcare is a top five sector. Alone, there’s over a billion dollars in revenue contributed every single year.
The size of the industry cannot be understated, so when we look at CVS, we look at United Healthcare, we look at Merck, we look at Amazon, I mean, it is not a winner take all scenario. There has to be multiple providers, and so in the case of United Healthcare, yes, they have the insurance side, which is half their revenue, and is absolutely massive. They’re the largest healthcare insurance provider in the US. They also have a massive side of doing the provider side, getting large practices around the country, and rolling that up. And they’ve shown they can be extremely successful doing that so far, through Optum, which is their subsidiary on the provider side.
Amazon, exactly to your point, has made a lot of acquisitions. It’s still a little early to see how they’ll play out, but that’s clear that is a future direction, and if Amazon’s operating history shows us anything, there’s a really good chance they’ll be successful there as well. Although, it does get muddled with the other parts of their businesses.
And then CVS is another great example. They have a massive physical footprint in the US, with all of their pharmacy locations. Coupling that up with other healthcare providers in the same brick and mortar locations is a great strategy that other people don’t have the fortunate ability to pair together.
So it’s a long winded way of saying all three of them have their unique advantages and disadvantages, and they can continue to do extremely well. We’re making bets on all three of them. We think they can all do very well. A lot of these names have either been sold off, or have been at relatively deflated levels over the last year. Amazon is getting hit more so from the tech side and the healthcare side, but CVS and United Healthcare are up marginally, and think we have really stable room for growth. They’re not going to be the five, 10x-er here in your portfolio, but they’re going to give you a good place to diversify, take on low risk, but also getting really strong upside over the next decade.
And that’s the most important thing too. Everything’s just on sale right now, audience. So it’s one of those things that they’ve been kind of classics in the space. The only big, big investment that I used to make in the past decade, that I’m not really making anymore, is Meta. I mean, I’m just holding, right? I’m not selling Meta. I’m not buying Meta. I have no idea how Mark Zuckerberg’s going to make the Metaverse happen. That’s the only fundamental business I sort of do not have faith in anymore. Right?
So when you’re looking at across the board for good investments, everything’s just on sale right now. And so it’s just a matter of increasing your risk appetite, and increasing your time horizon, while making sure your emergency fund is also in lockstep, making sure that’s the most important base layer you have, and then adding in a lot of these extremely on sale products right now. Products, by that I mean stocks. The biggest one right now, for me, is Rocket Lab. We’re going to be having an analysis come out later today about just the long term price target.
We’re seeing software company level vertical integration happen, at a space services company. So we’re getting second place for 90% off, basically. So I’m really excited to watch Rocket Lab stock 5x, over the next, what is it? Five years, basically? But it’s one of those things where, again, it looks really scary in the short term, because Rocket Lab is also down 20% now, probably 22% since the start of this recording.
So when you’re looking at this, just understand, if you believe in the fundamentals, and if you believe in the business practices that have made other companies in that same area, or across the whole economy successful, then jump on it. The fact that somebody could figure out vertical integration for a space services company is absolutely insane, especially in a very crowded space [inaudible 00:15:42] market. The management over at Rocket Lab has been absolutely astoundingly brilliant.
But it’s not just about these on sales stocks, ’cause that’s kind of a cop out. Over a five year time scale, every single one of our stock picks is going to do well. Even hair brained picks we made in the height of the bull market, like Desktop Metal, which will haunt me till my dying day, audience. At least until 2025, when they actually take over the additive manufacturing industry, and become what our first YouTube video said they would be. Right?
But that’s what happens in stocks. You never can predict the sort of inflationary cycles in the market, not buying big deal acquisitions. The exact opposite is happening with Rocket Lab right now, where the market is largely on board with how acquisition heavy Rocket Lab got, and is excited for them to move forward. It’s just that everybody wants really quick, short term updates, in a sort of down turning market, and is bailing on the stock of the short term, just waiting for that bottom and jumping on then. We’re going to keep averaging down through that, though.
Moving on though, Justin, the other thing we need to be doing then is finding these long term narratives, to find these moments where we can at least get some positive growth, some positive wins, during an ultimate period of downturn. And for us, one thing we’re looking at a lot is this strengthening dollar. We rank on Jerome Powell a lot. We’ve been yelling at him to take care of inflation for over a year now, and he did it way too late, and now the economy is blowing up an overreaction to it. But when we look at the Fed’s reaction to inflation, we kind of were the starting gun. We are still the currency of last resort, and we are still the currency that’s super strong, compared to how everyone else worldwide has managed what was a worldwide supply inflation issue.
That’s not a good thing though, because we’re still the currency of last resort, so the dollar is now up 20% over other currencies. The Japanese Yen had to have an emergency intervention yesterday, just to make sure that the Yen didn’t collapse under the weight of how strong the dollar is. Justin, when you look at this, and you look at sort of a very strong dollar, what are sort the investments you can play to make sure that you’re getting at least some upside, from an issue where multinational corporations are going to have their revenues absolutely smashed by their chief currency, being the USD, when they have business everywhere else in the world?
Yeah. I mean, we talked about this with our stock pick that came out yesterday, via PNC. We need to look for companies that have a large portion of their business on shore. We’ve talked about this theme before, but basically long story short, a lot of companies are going to start bringing a lot of their production and revenues back on shore, because they’re subject to a lot of risk when they’re overseas. Currency risk, geopolitical risks, a handful of other risks that they can’t really manage effectively, unless it’s within their border control.
So PNC is a great example of that. They are one of the largest domestic bank providers in the US. When you look at a JP Morgan Chase, and you’re looking at these other large institutions at Barclays, they have such exposure to clients, revenues, currencies, overseas, that ultimately it’s going to hurt a lot of their operations. And so PNC being mostly US based, insulated from a lot of that.
And so while a lot of companies will transition and take a similar business model over the next decade, which is a major theme we’re watching, PNC is one of the companies now that’s mitigating a lot of that risk, and doesn’t have to worry about foreign currency translation issues, any debt denominated in other currencies, their clients assets denominated in other currencies, and just overall being shut down, or any issues due to supply chain outside the US.
So that’s a massive theme we’re watching, and for companies that can take advantage of it now, it’s very advantageous. But again, so many companies right now are just not going to be able to grow, given how they’re being valued, even if the company themselves are doing well.
No, that makes a lot of sense too, and it’s just one of those things where we have to find those onshore opportunities. And again, audience, if you’re looking for those, we’re talking PNC Bank, who A, is making a lot of their money only in America, B, is not being held down by some very onerous financial restrictions that the US is imposing on larger banks. So they’re more agile. They’re making the better kind of money right now, and they’re expanding in just the right way. So we’re really excited to see how PNC really pops off with that.
We’re also excited about Rockwell Automation, which is sort of a local provider for automation services for factories and industrial processes, specifically within agriculture. If you’re going to bring manufacturing back to America, you’re going to try to cut costs as much as possible. So automation is going to absolutely pop off in the next five years. So watch stocks like that, and we’re going to continue trying to find moments where this re-shoring that’s currently happening is going to have benefits for the economy.
Justin, we’re near very end here. And you and I, before this podcast, decided we were going to take a little bit of a risk with this recording, and we’re going to talk about something that our audience has asked us about, but is typically kind of outside of our wheelhouse, as calling balls and strikes in the finance industry. And that’s talking about politics, real fast.
From Moby.co, we got a really big diversity of political opinions within the Moby organization itself, and we try to be as apolitical as possible. However, the market is a political tool, used by politics, and so as we watch the momentum of where the economy is going, our audience is wondering, “Well, how’s that going to affect the political situation, here in America?”
Right now the political landscape seems pretty clear cut. Republicans in America doubled down on popular social issues, whereas Democrats made some progress towards a lot of what they were promising. Student debt relief, tackling climate change, however milk-toast you think that is, whatever. Again, when we’re calling balls and strikes here. We’re not going to make any actual political statements here.
But Justin, when you look at this, the main question our audience has is did the Democrats kind of peak too early here? Can the Democrats maintain the kind of momentum they have, with the way the economy is? Or can the CPI and a couple of bad earnings calls really tank their chances? You look at how the economy’s going. How do you think that’s going to work out for November? Again, hot takes only, but I’m just curious where your perspective is on this.
Yeah. I mean, with it coming up, it really does impact what’s going on, because during a lot of these political runs for President, they point towards the economy saying, “Republicans helped. They hurt. Democrats helped, and hurt,” and ultimately try and convince voters that if they’re in, the economy will be better, and then ultimately all of the US’s citizens in other countries will make more money, which at the end of the day, most people care about.
So right now, with Biden in office, whether it is or isn’t his fault, we’re not going to talk about that. All we can say is that when we look at the economy, and we see that the numbers are not coming where they should be, the inflation numbers are not doing well, the market’s falling off a cliff, that does not help the Democrat’s case, even if it has nothing to do with whether it’s their fault or not.
Ultimately voters are going to see that and say, “Hey, maybe when Trump was in office, he was better at stimulating the economy. The market was doing better. We should maybe get a Republican back in there,” whether it’s him or somebody else. That’s just how the voter mindset thinks, and then Republicans or Democrats will push that issue further.
So to answer your question, right now, if the market continues to tank for the next 12 months, earnings falls off quickly, we fall into a real recession, that’s going to a severely impact Biden’s ability to be reelected. Outside of everything else that he’s doing, strictly from a financial perspective, that’s going to hurt a lot. We’ll see how it plays out, but ultimately that could be what changes the political atmosphere and landscape in the United States. And if that does happen, and Trump runs, or we get DeSantis running, or whoever looks to be the likely representative from the Republican side, that’s going to severely impact also how the economy is run.
We’re investing in a lot of green initiatives because it’s very Democrat right now, but if a Republican comes in, that could easily impact everything that’s happening there. I mean, you look at every issue on the Republican versus Democrat side, they feel very differently, and ultimately where the money goes and what companies receive it, and what industries flourish over a five, 10 year period is heavily impacted by that. So that’s something we need to watch very, very closely, and then it will ultimately change how we think about a lot of the investments in our portfolio.
Exactly. And to take a little edge out of that statement, audience, just to keep in mind that as investors, you will always have the opportunity to make money in whatever political party is in charge. Just changes where you’re allocating your money, based off which party is in charge.
Republicans typically are a little bit more short-term. Democrats are a little bit, either more long-term or a little bit more “expensive” or whatever. And also keep one thing in mind too. We only had two terms of Bill Clinton, because in 1992 there was this tiny little hiccup recession that completely tanked George H.W. Bush, for essentially kind of no reason. So it’s one of those things where these situations kind of turn on the dime, right now. So we appreciate you letting us speculate a little bit here, audience. We’re in a very, very interesting political situation, going into our midterm elections.
Justin, now we have a hard stop for this recording. So just real quick, we have 30 seconds. Final thoughts from you, man. Again, as always, it’s been an awesome conversation.
Yeah. We covered a lot today. We typically don’t touch on the political side, but with midterms coming up, it is something to be very aware of. This on-shoring trend we’ve talked about before, and I don’t want to harp too much on it right now, but basically, companies aren’t comfortable with what was globalization over the last decade. Outsourcing your entire supply chain, your entire labor, all of your materials to other countries goes to show you that if there’s a pandemic, there’s a war, you’re really at risk, whether it’s the government or companies. And so everyone is trying to bring it on shore.
That’ll cause inflation to go up even further because labor is more expensive here. Parts are more expensive here than they are in other countries. It’s why we outsource it in the first place, but that’s something that’s going to fundamentally change the way companies are run.
The next decade is really not going to look like the prior one, and how companies grow, how they scale the numbers they look like are going to be fundamentally different. So it would be a massive mistake to just think the markets are going to react the exact way they have over the last 10, 20 years. We’re entering a new political and geopolitical climate right now, so something to really pay attention to.
I think outside of that, this inflation stuff is definitely scary. We think it potentially is going to get worse before it gets better. But again, investors need to have a multi-year time horizon.
They can invest over the short term. So if your portfolio’s down, and you’re investing in smart stuff, it’s going to be painful looking, but just know things will rebound. You can get more names at cheaper valuations now, and so when they do rebound, you’ll be able to make a significant amount of money. And if you don’t do it now, at least take it as a learning experience, and when it does happen in 5, 10, 15, 20 years, again, because this stuff works in cycles, you’ll be able to capitalize then, because you were in now. So just pay attention, stay educated, and make smart financial decisions.
The main sentiment is right there. Buy, hold, forget. That’s the main thing you have to be doing, especially right now. Just make sure you’re incrementally adding to your portfolio, and then just don’t look at it. Do you need it right now? It’s for 30 years from now. What are you doing looking at it right now?
Either way, audience, thank you much for all your awesome questions. We will be addressing more of the Eastern European situation in next week’s episode. We didn’t touch on it this week because it’s way too dynamic right now. We need to see exactly how this mobilization is going in Russia, before we can make any comments. Of course, our hearts go out to everyone in Ukraine, everyone who’s sort of protesting in Moscow, as well as the folks protesting in Iran as well.
Really interesting time to be an enemy of America, it looks like sick. But otherwise, audience, really appreciate your time, really appreciate all of your questions, and as always, audience, we like to leave you with peace, love, and incremental gains. Everyone be well. Thank you so much.