The fifth most important takeaway from Howard Marks Mastering the Market Cycle is to understand “Tendencies” Brian has been investing in the stock market for a few years now Ultimately, he wants to be able to live on his investment income, so that he can spend more time with family and friends and less on his tedious nine-to-five Lately, it seems like he will have to work forever though, as his timing in the stock market has been well … let’s say less than optimal His portfolio took a serious hit in late 2018, apparently due to some trade war between the US and China, which made him sell most of his stocks He just couldn’t stand looking at those red figures every morning – watching his hard-earned money just slip away But apparently, he should have stayed with his stocks, or even invested more money because just a few months later, the market was hitting new highs Brian is now investing again but he feels confused about whether to put more of a savings into the market or to take some of it out What if his portfolio loses 20% again? Or worse, what if something like the financial crisis is knocking on the door, but he doesn’t know about it? Brian wants to be able to tell with certainty if we are heading for a bull or bear market and act accordingly In other words, he wants to “Master the Market Cycle Luckily for Brian, there is a way When market swings can become friend rather than foe But first and foremost, some of his wording must be examined In investing, no one can ever tell with certainty “what will happen” But it is possible to talk about what is “more likely to happen”. And that makes all the difference Let me show an example Brian gets the opportunity to participate in one of three different lotteries The three lotteries follow the same rules – at the cost of $1,000, he gets to draw one marble from a bag filled with ten marbles. If he draws a green one, he gets $3,000. If he draws a yellow one, he gets his money back (or $1,000) and if he draws a red one he gets nothing Which lottery should he participate in? Lottery A has an expected payoff of $500 per marble drawn Lottery B is a zero-sum game and lottery C has a -$500 payoff So picking lottery a would be the correct answer However Notice that even if Brian identifies that lottery A is the superior one is in no way guaranteed to win money, but there is a “tendency” for it He could draw a red marble, but it’s not very likely It’s the same in investing The superior investor is able to tell which stock that has a higher probability of returning a profit, or in other words, he is able to tell which marbles the bags hold The mediocre investor, on the other hand, just picks a bag at random There are times when choosing a bag becomes quite simple though, when even stocks of mediocre companies can be expected to yield high returns And then there are times when pretty much all bags should be avoided – when even stocks of superior companies are expected to yield negative returns Brian must now learn when the tendencies are in his favor, and when they are turned against him Number 4: Introducing: Cycles When Brian saw his portfolio crash by 20% in late 2018, only for it to regain more than that in the coming months (well, hadn’t he sold that is) he witnessed a stock market cycle in action But thinking back, he has seen this behavior before He has a vague memory about how a friend of his father made millions of dollars in dot-com companies, only to lose it all in a later market crash And he remembers the boom of new homeowners that was later followed by newspaper headlines about how the financial system might implode The stock market isn’t the only system that shows this type of cyclical behavior Seasonality and the weather works like this, many phenomena in physics behave this way, and even success in one’s life can be argued to follow this pattern A cycle oscillates around a so-called “secular trend”, a “midpoint” or something which can be viewed as “reasonable” In the stock market, the secular trend is rising, and it’s made up of the underlying growth in profits of businesses plus their dividends Most cycles show the following behavior: A: a reversion to the mean from an excessive low B: the continuation past midpoint towards an extreme high C: reaching a high D: a reversion to the mean again, this time from an excessive high E: The continuation past the midpoint towards an extreme low F: reaching a low G: and then, once again, a reversion to the mean An Important remark here is that these events aren’t just following each other. They are causing each other. The stock market is like a pendulum It swings from optimism, greed and high prices, to pessimism, fear and low prices – and then back again Greed and optimism cannot continue ad infinitum. It cannot deviate forever from the secular trend. Stocks become too expensive relative to their earnings and when investors turn more risk-averse, the next crash or correction comes knocking Warren Buffett, probably the greatest investor of all time, concludes that: “What the wise do in the beginning, fools do in the end” It won’t always look as neat as in the illustration I’ve made here, but, to keep stealing from others who know how to express themselves better than me, Mark Twain said: “History doesn’t repeat itself, but it does rhyme” At the extreme highs, most stocks are represented by bags of marbles like these. While, at the extreme lows, most are represented by bags like these. Brian wants to learn how to identify these excessive highs and excessive lows in the market cycle, but first, he must learn that the stock market does not function in isolation Number 3: What influences the market cycle? The pattern of ups and downs in the stock market is a very dependable one, much like another cyclical phenomenon But it does not work in isolation Rather, it’s influenced by four other major cycles The economic cycle The main measurement here is the GDP, or gross domestic product of a country It can be determined by multiplying two variables: number of hours worked and productivity per hour The GDP of the USA has been growing by about 2% per year during the last decade, and, as an investor Brian should be particularly aware of deviations from this Swings in the economic cycle are caused by: demographic movements, the unemployment rate, and globalization, among other things The cycle in profits The profits of businesses are one of the main components determining prices in the stock market Brian knows about the most commonly used indicator to determine if prices are high or low – the price-earnings ratio The total sales of all companies in a country is per definition equal to the GDP of that same country, but profits fluctuate more than sales The reason for this is because of leverage – both in operations and in the financing of a company The credit cycle Why is credit so important to companies in the stock market? A: because it could be used to speed up growth, and B: because it is necessary to roll over old credit Not having access to new debt can cause some companies to default, when they are required to fulfill their old obligations I think it is both a bit funny and bit frightening that most people and companies don’t plan to repay their debts. I was at a lecture with one of Sweden’s greatest real estate investors, Erik Selin, when he said: “28 years ago, I borrowed two million dollars from the bank to pay for my first real estate property. Little did they know that, 28 years later, not only would the loan not have been repaid – but increased – to about a billion dollars instead. At times, it’s easy for companies to get financing. But at other times, the credit doors are slammed shut Howard Marks explains: “Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity and on and on” The cycle in psychology/attitude towards risk “Buy before you miss out!” is replaced by “Sell before it goes to zero!” and vice versa Psychology is the main reason for swings in the stock market. When the financial community is euphoric, it becomes risk tolerant and overlooks bad news When it is depressed, it becomes risk-averse and expects that the world could end Assessing where attitudes towards risk currently are is probably the most important part for Brian to recognize where we currently stand in the market cycle Okay, so prices in the market cycle are determined by two: First – fundamentals – such as the swings in the economic profit and credit cycles Second – psychology – through the cycle in attitude towards risk [Brian:] “But how does this help me in identifying the excessive highs and lows of the market?” Let’s check it out Number 2: Taking the temperature of the market The key steps in determining where in the market cycle we stand can be divided into two: First, Brian should look at the valuations of the stock market and see if they are out of line compared to what they’ve been historically This is a pre-requisite – if there are no deviations, the market is probably not excessively high or low. And in that case, there’s no need for the second step Second, Brian must establish an awareness of what goes on around him in the investing community How do other investors feel about risk? The first step is quite simple The most commonly used metric for valuations in the stock market is the price-earnings ratio, or, how much investors currently are willing to pay for $1 in yearly earnings Brian finds this information at multpl.com and recognizes that the p/e of today is at 22.9, which could be argued to be in excessive territory Next, he examines this table: For each pair, he checks the one which he thinks best describes the current market If most of his checks are in the left-hand column, we are probably at an excessive high and vice-versa These points are non quantifiable and non-scientific, which is a good thing, because otherwise the skill to identify highs and lows wouldn’t be as profitable as it is A key insight here is that Bryan needs no forecasting to do this. No guesses about the future, only observations of the here and now Sweet. Now that Bryan knows how to identify highs and lows, it’s time for him to learn how to respond properly to that information and Finally – number 1: Aggressiveness vs defensiveness This graph shows quite well what the stock market is typically expected to return If Brain has a good reason to believe that we are currently in an excessively low market, he could tilt his portfolio to be more aggressive He could: – Risk more of his capital – Hold lower quality companies – Make investments that are highly dependable on a good macroeconomic outcome; or – Use financial leverage With an aggressive portfolio like this, he has made both very profitable swings and very costly swings more likely Luckily, as he now knows how to take the temperature of the market, he’s assured that there’s a tendency for positive outcome The difference between the two curves is how much extra Bryan can make by favoring this aggressive play, rather than a passive one, should he turn out to be right But what if Bryan believes that we are currently in an excessively high market? Then he could tilt this portfolio to be more defensive instead. He could: – Hold cash instead of stocks – Invest in safer assets, such as high-quality corporate bonds and Treasury bills – Buy strong companies that aren’t cyclical; and – Stay away from financial leverage With this defensive portfolio, he has made both very profitable swings and very costly swings less likely As he knows that there’s a tendency for a negative development, this is how much he can earn (or perhaps save is the better word?) should he turn out to be proven right Brian now knows how to master the market cycle, and, going forward, he will be able to profit from market swings, rather than crashing and quitting from them But mastering the market cycle is only one of the most important things when fishing for stocks, according to Howard Marks Check out my summary of Marks’ other book, The Most Important Thing, to learn about other ones, that are just as important Like … contrarianism, for instance Cheers guys!
The Stock Market seems like a complicated
beast. It’s a place where it
seems like money is made or lost from nothing. What’s strange is that there is actually
nothing physical that happens in the stock market. When a stock gains or loses value nothing
visible is happening – but the effect of such a change in valuation can have a great
impact on the world. Every single day at the New York Stock Exchange
over $169 billion dollars’ worth of securities are traded. This is only one of the stock exchanges around
the world, not to mention all the other kind of exchanges that exist as well. How though does such a market work. Just like any market, the stock market involves
buying and selling. However, unlike the farmers market where you
are buying and selling actual goods, in the stock market something called securities are
being bought and sold. Securities are basically financial assets
like stocks and bonds. When you buy a security like
a stock you are actually purchasing part of the company that that stock is part of. In the old days you would get an actual piece
of paper that shows you how much you own. These days however, all that information is
digital. So for example let’s say you want to invest
your money in Google. One way of doing that is to buy a share of
Google stock. By buying that share you are purchasing a
part of Google. You can think of it as being a part owner
of the company – whether you own one share or multiple shares. When you want to sell a security for example,
you have to find a buyer. You would do this through a registered stock
broker. These guys take your stock and look for a
buyer who is willing to buy your stock at a certain price. When they find another person willing to buy
they sell your stock. They then charge you a fee for the transaction. The same basic operation happens when you
want to buy a stock. Millions of transactions like these happen
every day all around the world. This is why the prices of stocks go up and
down. The price of a stock generally goes down because
sellers are willing to sell at a lower and lower price or when a buyer is only willing
to buy at lower and lower prices. This could happen when there is bad news about
the company or the market as a whole. People get scared and try to protect their
losses by selling their stocks. The price of a stock goes up when buyers become
willing to buy stocks at higher and higher prices – pushing the price up. That’s the basics of
the stock market. Money is made from the speculation of money. It’s that simple.
Hi! Welcome to
The Bottom Line! In this video, we’re going to take a look
at how movies make money and why box office numbers are often misleading. There was a time, not all that many years ago,
when the public didn’t know how much money a movie earned at
the box office on its opening weekend. That made it possible for a film to start slowly,
and if it had good word of mouth, become a hit over time.
Now, box office totals are widely reported. It’s important to remember that box office
totals reflect how much people have paid theaters for tickets for a movie, and that a film becomes
profitable after the movie company has recouped all the money it spent not only making the
movie, but marketing it. Let’s take a hypothetical superhero movie
based on the character Marvelous Man. Due to the success of Aquaman, Marvelous Man:
The Movie gets a greenlight and a budget of $100 million, a relatively
small amount for a superhero film. Let’s further assume that the movie
actually comes in exactly on budget. At this point, the studio is $100 million in the red.
It then has to let the public know the movie coming. It does this by advertising promotional tie-ins,
like a Marvelous Man Happy Meal toy and media junkets with the film stars. That all costs money, too, and has to be recouped
well before the movie can be considered profitable. Let’s pretend that another $50 million
was spent on marketing Marvelous Man. There’s no hard and fast rule for marketing budgets,
but half of the production budget isn’t uncommon. Now that the movie has been made
and promoted, it’s time for opening weekend. Say Marvelous Man: The Movie sells
$100 million in tickets on opening weekend. It’s a big number, but it’s very important
to remember that the studio does not receive all that money.
The theaters get a cut, too. How much is that cut? Well, it varies. For a huge film like a new Star Wars
or Avengers movie, Disney has leverage. It can negotiate a bigger cut and demand that
the theater show the film on multiple screens. They can also ask for a higher percentage
of the gross ticket sales in succeeding weekends. In general, the studio’s percentage gets lower
the longer a film has been in theaters. That’s done to entice
theaters to keep films playing longer. In the first week of a film that’s not a sure
thing, the company producing the film might get 60% of the box office. That means that, on the shocking $100 million
in tickets sold by Marvelous Man: The Movie at the domestic box office, the company that
made that film gets paid $60 million, meaning it’s still $90 million in the red. The foreign box office is even more complicated,
but it’s all based on theaters getting a cut and the movie producers getting a cut. The math varies, but in a very broad sense,
movies haven’t made any money until their box office roughly equals twice
the money spent on production. Of course, a movie isn’t
done once it leaves theaters. Money is paid for streaming rights, a number
that can be challenging to actually apply to any one movie, since deals tend
to be studio-based for multiple films. There’s also DVD sales, rentals, an eventual
pay cable window, and then maybe a free cable or broadcast deal. And don’t forget about the
licensing opportunities with merchandise. But in general, the bulk of the film’s
revenue comes from its theatrical run. Let’s take a look at a real example to break
down how fixating on just the gross box office figures warps the
picture of a movie’s profitability. The much-maligned films Solo: A Star Wars
Story made $392 million globally at the box, but the studio only got a cut of that total. The film had a reported production budget of
$275 million and a big marketing campaign behind it. We don’t know the exact number, but it’s safe
to assume promotion cost $100 million, maybe even $150 million. So, it’s entirely possible that Solo lost
a decent chunk of money even on the nearly $400 million it posted in ticket sales. Unfortunately, running the numbers on the
movie industry involves a lot of guesswork because the cuts on the ticket sales aren’t
always reported, and marketing spend often isn’t made public. The bottom line, however, is that most movies
make the bulk of their money from the revenue split with theaters, and there’s no clear
way for the public to know exactly how much money any given film makes or loses. So, the next time you see a big box office number,
you’ll know there’s a lot more to the story. Thanks for watching this video! Which movies do you think
were the biggest box office flops? Sound off in the comment section below. If you liked the video, be sure to give us
a thumbs up and subscribe. It helps us reach more people, which lets
us make more awesome content.
Chris Hill: It’s the Motley Fool Money radio
show! I’m Chris Hill. Joining me in studio this week, senior analysts Matt Argersinger
and Aaron Bush. Happy new year, gentlemen! It’s our 2019 preview. We’ve got stocks to
watch, stocks to avoid, CEOs on the hot seat, and more. And, of course,
a few reckless predictions, as always. Before we get to the 2019 preview,
though, I think we have to talk about Apple. Shares of Apple falling 10% on Thursday after CEO
Tim Cook warned investors first quarter revenue was going to be about $5-$8 billion lower
than previously expected. Several reasons for that, Matty. The trade war in China, the economic
slowdown in China, the battery replacement program that they had last fall. This was
still pretty shocking development. Matt Argersinger: Lots of moving parts,
but you’re right. This was pretty bad. If you look back to their guidance in early November,
looking for between $89-$93 billion in revenue. To come in, then, at $84 billion, $5 billion
below the low end of your guided range, that’s a problem. CEO Tim Cook said that really 100%
of the miss was due to China and a contraction in the smartphone market there.
That’s a good excuse. It’s probably the right excuse. Investors have been questioning whether or not the
iPhone, especially the latest versions of the iPhones with the high price tags, could really penetrate
the highly competitive smartphone market in China. I think we’re starting to see the fact
that no, that’s not really the case. Aaron Bush: I don’t think it’s that surprising,
actually, that Apple has China issues. I was just thinking back, four years ago, when Matt
and I were talking about China in the context of our Supernova portfolio, talking about
opportunities and concerns, China was a big thing we were talking about. At the time,
we realized that China is a big opportunity simply because how many people are in that
country, but we didn’t necessarily expect it to play out the same way as it did in the
U.S. Since then, the stock is about roughly flat with the market, which is interesting.
I think we started to see the cracks in the foundation about two years ago. About that
time is when I started studying Tencent, which owns WeChat. It made me realize that iOS is
far less important in China because WeChat is an in-app operating system that people
do everything in. So, the same type of competitive advantage that Apple would have in the U.S.
with iMessage, Notes, various services, that doesn’t exist in China. It showed in the data.
At the time, the retention rate, people who would have an iPhone that would buy another
iPhone, outside of China it was over 80%. In China, it was 50%,
which is essentially a coin flip. I think now, because of the economic turbulence
that’s starting to happen, trade wars, slowdown, we’re starting to see that play out at an
accelerated rate. People who would be the Apple buyers either already own them or did
own them. Upgrade cycles are longer, and retention is still sub-optimal. Apple just has mediocre
market share, and I think that’s not necessarily going to change.
Argersinger: I agree. As long as the iPhone is such a large part of Apple’s core business,
they can talk about Services all they want, but this is still a product that’s about 70%
of revenue and the majority of operating profits. Now, I will say this, because we’re positive
people here at The Fool. Coming into this report, Apple was already down about 40% from
its high. Granted, it had a horrible day this week that took it down even further. But even
at the reduced earnings estimates now, you’re looking at a stock that’s only trading about
11X-12X earnings. Certainly below the average market multiple. Now, if earnings come down
further, the stock could certainly follow suit. But it’s hard not to call
it cheap right now. Hill: That’s the thing. Tim Cook talked
about how he hadn’t seen the December numbers, therefore there’s no way he’s seen the
January numbers, because they’re not in yet. Their first quarter report comes out in early February.
If you’re looking at this stock, and you’re thinking, “Boy, it looks cheap,” do you buy here?
Or you want to see what the actual numbers are before you put down a little
money to buy some stock? Bush: Oh, I don’t know. It sounds like another
coin flip to me. We don’t really know. I do think that the valuation is somewhat compelling.
You’re betting that iPhone sales stabilize, and you’re betting that the Services segment
can become much more than 15% of revenue, which it is now. I think that most people
think that is the case. Or, at least around here, that’s the bullish stance. Personally,
I have some more questions. When you have a monopoly taking 30% of
every single transaction that goes on your ecosystem, regulatory issues will one day be a concern. The same
thing that we’ve seen with Alphabet, the same thing we see with Facebook. One day,
those same headlines are going to be going on with Apple, too. And then the Services narrative
will slowly not seem so amazing anymore. Hill: Alright, let’s get to our 2019 preview.
Aaron, I’m going to start with you. What is one industry you’re
going to be watching this year? Bush: I’m really interested to be watching
the ride sharing industry. With Uber and Lyft, and maybe even DiDi, which is in China,
IPO-ing in 2019, it’s really exciting that public market investors will finally have access
to this new, massive, quickly growing industry. I’m excited to see what the numbers
look like. They probably won’t be great from a profitability perspective. But thinking about
transportation as a service, and what that means beyond just ride sharing, what it means
for logistics with food, and are they going to buy more bike and scooter companies?
That type of thing. I’m really interested to hear more about that longer-term game plan.
We’ll learn a lot about that in 2019. Hill: Matty, what about you?
Argersinger: It’s always interesting, but I think especially so this year,
I’m going to be watching the social network, social media space. We’re already seeing for the
first time ever a real, legitimate slowdown in user growth and usage rates,
especially if you look at the core Facebook platform. My questions are, how does Facebook,
how does Twitter, how do these companies solve for all the privacy risks that people seem to
be somehow aware of these days that they weren’t aware of years before? How do they prevent
all the vile and deceptive behavior without damaging free speech and freedom of expression
on the platforms? These are big challenges. Throwing money and bodies as we’ve seen
Facebook do, I’m not sure that’s going to solve it. It’s going to take a lot of innovation.
I don’t doubt Facebook and Twitter can do it, but I think there’s a real chance we actually
see a tipping point in 2019 where the powerful network effect that has sucked in so many
users over the years to these platforms starts to weaken, and we start to see meaningful
declines in time spent on the platforms. I think it’ll cause a reset of the businesses.
Hill: In terms of trends, Aaron, what’s got you excited in 2019?
Bush: Augmented reality. I think it’s been a long time since we’ve had a big new
consumer-facing technology to invest in. I have a hunch that AR, and probably VR associated with it,
is going to be one of the next big waves, even though some of the hype around it seems to
have fizzled out. I might be off by one year, but 2019 could be the year in which good AR
products are revealed by at least one major tech company, probably Apple. For Apple,
it makes sense. They’ve been acquiring companies with AR tech since 2013. They released their
AR kit, their developer toolkit in late 2017. They have all the pieces in place, controlling
the hardware and the software, plus the developer community to make it happen. They probably
recognize that winning over the AR market might be as big of a deal one
day as winning the smartphone wars was. I’m a bit iffy on timing, but I’m really
excited to see the pieces start to come together. You never know, Apple might have a big AR
glasses or something announcement and late 2019. Argersinger: So, you’re saying Apple has a chance?
Bush: I’m saying that they need to do this. Technology is going to shift past smartphones.
Services won’t be enough. Fingers crossed. Hill: The cash that Apple has on the balance sheet,
that probably also helps them sleep at night. Argersinger: It helps a little bit.
Hill: In terms of trends, Matty, what about you? Argersinger: Big trend this year, the past
year already but even bigger now this year, sports betting taking off. I’ve been known
to place a bet or two in my time. I think there are broader implications for the economy.
The world is far more efficient, far more innovative when it becomes gamified. A competitive
marketplace of ideas and dollars that are wagered, inefficiencies tend to get streamlined out. It’s interesting. If you go back to this fall,
you could place real money on which party was going to lead the House of Representatives
after the November election. You could have placed money on where Amazon was going to
open its second headquarters. We talked about that on the show. Imagine betting on things
like what the weather is going to be like tomorrow, who’s going to succeed Warren Buffett
as CEO of Berkshire Hathaway, what’s the over and under on the minutes it’s going to take
for Domino’s to deliver my pizza. These might seem like silly things to bet on,
but when you’re wagering real dollars at scale, it tends to be incredibly informative to the
marketplace. It makes the economy more efficient. I’m excited about all the innovations that
I think are going to come out of sports betting, especially when it becomes
so much more of a mobile application. Hill: One of the ripple effects that we saw
in 2018 in terms of sports betting and the legalization played out in media. In the subsequent
months, pretty much every major network, both on the regional level and on the national
level, started to roll out programming aimed specifically at betting.
Argersinger: Absolutely. You see it all the time now. Hill: Aaron Bush, what is a stock — or an industry; you can go broad if you want —
in terms of upside for investors? Let’s face it, it’s been a volatile couple of months
here. We’re looking for some upside. What do you have?
Bush: I’m going to go big and then narrow down. Software-as-a-service. The past two years have
been huge for emerging software companies. But I do think this is an instance
in which winners will keep on winning, and a lot of these stocks have
been beaten down in the recent turmoil, too. Unlike the consumer-facing innovation, which is occurring mainly in startups
and the massive tech companies, there are tons of great options to invest in small
and mid-cap software companies with lots of room to multiply. Some of these will turn into
the next Oracle or Salesforce. A basket of three stocks that I have super high conviction
in that I think will do well in 2019, definitely beyond: Twilio, which is a leading communications
platform; Alteryx, which is a leading data blending and analytics platform; and MongoDB,
which is a next-gen database services company. All of these companies are growing super-fast, are
dominant in what they do, have very little competition. At scale, they’re going to be
producing ridiculous amounts of cash flow. I’m super excited to see what these companies do,
even though they’ve already been hyped in the past years.
Hill: Also, a fun basket of names. It’s fun to say Twilio. What about you, Matt?
Argersinger: I’m going to jump way out and talk about an entire sector. Real estate
has really underperformed recently thanks to, as you’d expect, higher interest rates.
Homebuilders especially have been really hit hard. But the sector itself is what you want
to have some exposure to over the next few years. Despite what the conventional thinking
might be, real estate actually does quite well in periods of higher interest rates,
higher inflation. One safe, cheap way to play it is to buy the Vanguard Real Estate ETF,
ticker VNQ. It pays a nice 4% dividend yield, gives you a broad exposure to a bunch of publicly
traded real estate companies and REITs. I think it has a real chance of
outperforming the S&P over the next few years. Hill: On the other side of the spectrum,
it can be a stock to avoid, or maybe just one to have on a really short leash. In terms
of that category, Aaron, where are you? Bush: I think the marijuana industry is
super interesting, but it was so hyped in 2018, I think 2019 is going to bring disaster to
investors investing for the most part in that industry, but especially in the companies
that were the most hyped, like Canopy Growth, Tilray, Aurora Cannabis. If you’re investing
in those, watch out, 2019 is almost definitely going to be a rough year.
Argersinger: It was funny, Aaron and I talked back in the fall. We both said, watch out.
As soon as cannabis gets legalized in Canada, which was mid-October, you could almost draw
a straight line from that point on. That was the peak of a lot of these stocks.
They’re down huge since then, even more so than the market we’ve seen. It’s funny, it was one
of the easiest calls I think you could have made. And it still has more to go.
Hill: It was interesting in part because it wasn’t just individual investors who were
excited about this. We saw major companies, consumer brands that everybody knows,
investing hundreds of millions, and in some cases billions of dollars.
Argersinger: Coke, Philip Morris. Amazing. Hill: What do you have on a short leash?
Argersinger: You can probably guess. I’m going to say Facebook needs to be kept on
a short leash, if not avoided altogether. All the problems I mentioned regarding the social
networking space… the stock price looks cheap. You can call it that. If you assume
that they’re going to continue to grow their advertising revenue at a similar pace,
or even slightly slower pace, yes, the stock looks very, very compelling. I just think
there’s going to be a big reset in expectations across the space. I have big questions about
whether Facebook can effectively monetize Instagram and WhatsApp without damaging
user experience. And I’m not even getting into the leadership questions you have to have right now
around Mark Zuckerberg and Sheryl Sandberg. I just think you can do better elsewhere.
Don’t try to catch Facebook, even though it’s a snazzy name with now a cheap valuation.
Hill: This happens at this time every year: investors and particularly the business media
start to look ahead in terms of private companies going public. Despite the volatility that
we’ve seen recently, you’ve got executives on Wall Street saying, “Actually, that might
accelerate plans for private companies to go public.” In 2019, some of the best-known
names, Aaron — Uber, Slack, Airbnb, Lyft. Is there one that you’re either really hoping
goes public, or you’re just eager to get your hands on the S-1 filing?
Bush: I hope Stripe goes public sooner or later. It might not IPO this year.
They’re a payment platform that makes it super easy for companies to sell things online.
Their developer tools are known to be excellent. They continue to roll out new solutions.
The founder and CEO, Patrick Collison, seems to be a super thoughtful. It wouldn’t surprise
me if one day, because this market is so big, buying things online, that Stripe becomes
a larger payments company than PayPal. I think that’s super fascinating. Right now,
they have a market cap of about $20 billion, so I would love for them to go public sooner
than later, [laughs] before they start hitting the upper tens of billions in their valuation.
Hill: Do you think they’re at the point now where they’re way past the acquisition standpoint?
Bush: It would be a big acquisition. I doubt it would happen, at least from another
payments company. I bet they’ll go solo public. Hill: Matty, what are you eager
to get your hands on? Argersinger: You mentioned it, Airbnb.
My wife and I have actually been Airbnb hosts for over a decade now. What you have is essentially the
world’s largest, most expansive hotel company that really doesn’t own any of its rooms.
It’s fascinating to me. It has somewhere on the order of five million listings,
150 million users in close to 200 countries. It has a profound network effect, maybe
actually the strongest in the world. I think we’re going to realize that. I don’t know what the
market cap is going to be when it becomes public, but just in terms of room count and
customer count, it’s bigger than all the major publicly traded hotel companies combined.
Hill: OK, I really wasn’t expecting that at the end. I’m assuming the answer is yes. Do you
have a good rating? What kind of rating do you have. Argersinger: We have
almost a five-star rating across our listings.
Hill: Nice! I’m not surprised, but I’m very pleased for you. Alright, we’ve got just
a couple of minutes left before we wrap up. We do this every year, reckless predictions.
Make them reckless. They don’t have to be about business, although they can be about
business. You can go off the board to sports, pop culture, whatever.
Aaron, what do you have? Bush: Even though the Chinese trade wars and economic
slowdowns will continue to generate headlines, I predict that in 2019, we’ll see the
largest technology acquisition in which a Chinese company buys a U.S. company.
I don’t know if that’s Tencent buying one of the big three video game companies, maybe Alibaba
acquires eBay as a way to get into U.S. e-commerce. Maybe DiDi, which is larger than Uber at their
last valuation, acquires Lyft as a way to get to the U.S. markets and get a partnership with
Waymo. I don’t know. There are interesting possibilities. Hill: That would be fascinating! Matty, what about you?
Argersinger: I think Warren Buffett’s going to buy an airline.
Hill: [laughs] Really? Argersinger: Berkshire Hathaway already
owns major stakes in all the major U.S. airlines. The industry has changed. Consolidation has
made this much more a value creator than a value destroyer. You have a strong airline
like Delta that’s actually been assigned an investment grade credit rating. It’s buying
back shares and paying a dividend, and the valuation is very cheap. This is a different
industry now. Much like how Buffett viewed the railroads 10 or 15 years ago, I think
he views the same with airlines today. Hill: That would be maybe the greatest example
of someone taking emotion out of investing, when you think back on how much Buffett used
to openly hate the airlines as an industry. Argersinger: Oh, absolutely!
Hill: Alright, Matt Argersinger, Aaron Bush, guys, thanks for being here! Happy New Year!
Coming up: our 2019 preview rolls on with Ron Gross and Jason Moser.
Thanks for being here, gents! Ron Gross: How are you doing, Chris?
Hill: I’m doing well! The 2019 preview rolls on. Real quick, though. We talked about Apple
at the top of the show. Jason, any thoughts in terms of one of the largest companies
in America and where it is right now? Jason Moser: As Aaron was saying, I’m really
surprised that people are surprised by this. It’s not something that I’m all that taken
back by. In November, we were talking about Apple’s chip suppliers ratcheting back
their guidance, which was more or less implying that there may be some weakness in iPhone
performance like we’re seeing. Granted, they seem to be holding China accountable for
most of this. But it all makes total sense. As iPhones get better, they last longer,
you don’t have to upgrade as much. They can only raise prices so far until consumers become
a little bit more sensitive. Everybody wants to just get on Apple’s case here and predict
that this may be the beginning of the end. But let’s be clear, it’s still Apple.
They’re still selling millions upon millions of devices. They lost control of the conversation a little
bit because they’re not going to be announcing those unit sales anymore. But there are a
number of different ways they can win. It’s not going to be just Services. Services will
have to be part of it. But when you look at Services, other devices, the portfolio of
wearables, you can’t discount the potential big acquisition at some point or another,
either, with that balance sheet. iT’s all like just take a step back here…
Gross: I’m all for the take-a-step-back approach. I think that makes good sense.
I’m going to be really curious to see if Warren Buffett and Berkshire Hathaway are buying
stock during this period of weakness. I would be one of those analysts that would recommend
that investors take a position at these levels. 11X-12X forward earnings, there’s not a lot
of growth built into the stock at this price, and they’ve got a lot of ways they can win.
Moser: And let’s remember, too, we have a whole generation of smartphone users that
haven’t bought smartphones yet. There are going to be plenty of opportunities to get
new smartphones in new consumers’ hands, and there’s a brand loyalty
there that’s quite impressive. Hill: Ron, let’s get to the preview.
When you think about 2019, what’s your biggest question as an investor?
Gross: My biggest question is, will value investing rise from the dead? As most of us
are aware, growth has nicely outperformed value over the last, let’s call it a decade.
Not just a few months here and there, but quite a few years. FAANG stocks are perhaps
the most obvious examples of growth stocks that have led the way. Obviously, we’ve had
an extended bull market. That tends to favor growth stocks. So, my big question is,
do we see a resurgence of interest in stocks that are considered value? Growth often does
underperform in bear markets. If, perhaps, we are entering a bear market, are we going
to see a sustained bear market, then one would expect value to come back into vogue.
But, you know what? We haven’t seen it anytime in recent past.
Hill: What about you, Jason? Moser: We’ve talked a lot about Disney and
their move to over-the-top distribution. They own part of Hulu, which I think they’ve done
a good job building out, especially with that live Hulu offering. ESPN+ seems like it’s
gaining some traction. And now, Disney+ is going to be their service that launches sometime
in 2019. We talked before on the shows, they really need to make sure they execute there.
I do think that’s a compelling product. It’s going to take a lot of content away from other
streaming partners, namely Netflix. I find it interesting to see that the shows on Netflix
that garner the most views as a percentage are all shows that are not Netflix shows.
I think that’s telling. Netflix is still having to put up a lot of money to get content that
people want to see, and Netflix is not the one producing that content. They still, have
a little ways to go in succeeding on that original content front to justify all of that
money that they’re spending. I think that Disney+ is going to re-emphasize the
competitive advantage that they have there in that intellectual property. I’m excited to see how that product
arrives. I’m certain that we will at least be testing it in our house, if not becoming
full-fledged subscribers, unless they really drop the ball.
Hill: Wasn’t there a minor freak-out in the Netflix universe when they said they weren’t
going to renew the show Friends? Moser: Yeah.
Gross: In my household, for sure. Moser: That is something that they need to
pay attention to. As a percentage of views, Friends is No. 2 on the list just behind
The Office. When you look at that list of the shows that are garnering the most views
on Netflix, it takes you back, not a lot of their original content is on that list. It just
tells you they still have a little ways to go. Hill: What’s a trend you’re excited about this year, Ron?
Gross: It piggybacks off of what Jason was just discussing. 5G technology, fifth generation
wireless cellular technology, is coming, and it’s coming pretty quickly. It’s going to
be pretty exciting. It’s going to make devices more capable of accessing the internet,
it’s going to deliver much faster speed than 4G, some say 20X-100X faster than 4G.
Lots of companies are going to benefit here. The most common names would be AT&T, Verizon,
T-Mobile. But I think Nokia, even Apple will benefit as people upgrade to 5G-enabled phones.
It’s going to be a really exciting trend to watch from an investment perspective, but also from
a consumer perspective, because I think we’ll all benefit. Moser: I’m glad you mentioned Apple there. That’s another point with 5G. I think they’re
going to be a little bit behind others in getting their devices up to speed. But once
that does happen, that’s going to be another catalyst there in the upgrading.
For me, I’m excited about podcasts and where podcasts are heading.
Gross: Shameless plug! Moser: I’m not going to just pat ourselves
on the back here too much, but it’s worth noting that you and Mac and our partners here,
you had the senses to make some early bets in this market back in 2010 and 2011.
And lo and behold, now, in 2019, we’ve got a full-fledged family of podcasts. They’re doing
very well. We’ve seen Sirius XM acquire Pandora, noting in their call that, to their dismay,
they passed on podcasts for a while. They admitted that mistake, and they’re going to
start putting some resources into podcasts and building out that environment.
I think we’re in a day and age now where Netflix really changed the game for content for people
being able to watch what they want, when they want, and where they want. Now, we’re seeing
the same thing play out on the audio side. We’re able to give people what they want,
where they want it, when they want it. It’s nice to be a part of it.
Hill: Let’s talk stocks. Ron, whether it’s an industry or a specific stock,
what do you think is poised for upside this year? Gross: An industry I’m looking at,
it’s a sector/ industry. I’m not ready to call the big r-word yet, recession.
I’m not freaking people out yet. Hill: You are a little bit, by saying that.
Gross: I think it’s important to have some allocation to some defensive stocks in the
environment that we may be approaching. So, when I think of companies in those sectors,
I would say some utilities might be a good bet right here. Some of the discounters,
in fact, discount retailers. Costco, Dollar Tree, Walmart would be some nice stocks, defensive
stocks to have as we enter an economy that might not be as robust as it has been.
Hill: What about you, Jason? Moser: I don’t want to time when a recession
might hit, because really, that’s bad for everybody, but I do think we are entering
a period where banks are going to have some opportunities to boost their earnings a little
bit as interest rates continue to nudge upward. In particular, I’m looking more at small banks,
and one we’ve talked about before, Ameris Bancorp. This stock has a tremendous
risk-reward scenario playing out here. The stock is now trading around 15X earnings.
They recently announced this merger with Fidelity Bank in Georgia. It’s about a $750 million deal.
Given that Ameris is about a $1.5 billion company, you can see, it means a lot.
The market rightly sold the stock off. There’s some skepticism there. That’s rolling in a
big acquisition. But they’re two very similar cultures. It gives Ameris tremendous exposure
to the valuable Atlanta market. It’s also going to help grow that asset and
deposit base, particularly in a period where a lot of these banks are competing for getting those
deposit bases. So, to me, this could play out like the McCormick thing. Remember when
McCormick acquired RB Foods? The market thought, “Whoa, this is a big one to digest here,”
and they held off for a couple of quarters to see how things worked out. Lo and behold,
it worked out pretty well. The stock recovered nicely. I think we could be looking at the
same thing here with Ameris if they execute this acquisition well.
Hill: Ron, if defensive stocks have you interested, what’s at the other end of the spectrum?
What are you avoiding this year? Gross: Specifically, I have one stock
in mind. I come back to it often. It’s Fitbit. I’ve really never been excited and probably
will never be excited about this one. They entered the smartwatch market in 2018.
I give it to them, they’ve done pretty well. But this is a formidably competitive market,
with the likes of Apple, for one, right there behind them. You even have some Chinese upstarts
that could be a problem, as well. I don’t see Fitbit being the company that is constantly
able to innovate, either take market share or defend market share.
I’d be really careful about this one. Hill: What about you, Jason?
Moser: Zillow. I’ve changed my tone on this company over the past year. I used to be excited
about the potential there. I feel like they’ve failed to convince me of the sustainability here.
They’re yet to become meaningfully profitable at all. Now, in this most recent quarter,
they put in their shareholder letter that Zillow Group has entered a period of
transformational innovation. To me, that’s code for, “We’re not going to be profitable any time soon.”
For a company like this, a company that’s been around for a while in such a big market
opportunity as our housing market, they should not be entering this period. They should be
coming out of this period. I think that’s what they were trying to do over these past
few years. This instant offers business, it’s not up their alley. Buying homes and renovating
them and selling them, it’s not scalable. There are a lot of people out there doing it.
I don’t know that they have any real advantage there. Good will now represents essentially
half of the total assets on the balance sheet. It’s not a bad company. I’m just disappointed
in the way they’ve executed. They still have a ways to go before they
get to meaningful profitability. Hill: One of the things that ties these two
businesses together, Fitbit and Zillow, is the word “optionality” has been used in connection
to both of these businesses. They were seen as, “They have options, in terms of where
they can go.” Optionality is something we like to see as investors, but Ron, it almost
seems like optionality works better if you’ve got one dependable cash cow in your portfolio.
Gross: You nailed it. Optionality is great for additional upside. Maybe you can’t even
see the different options that a company might have three to five years down the road.
But if they don’t have that profitable cash flow producing segment of the company, then you’re
relying on all of the value of that company being in the optionality category,
and that’s just too much risk for me. Hill: Guys, 2019 has just begun,
but The Motley Fool is already looking for summer interns in investing, editorial, software development,
and much more. Come, spend the summer! Gross: Join us!
Hill: Join us here at Fool global headquarters this summer. Go to careers.fool.com for all
the information and to apply to be a summer intern here. That’s careers.fool.com.
Happens every year, Jason. There are a few CEOs who are on the hot seat. We’re long-term
investors, but let’s face it: over the long-term, if you’re not delivering, that means in the
short-term, you’re on the hot seat. What do you have? Moser: In 2018, I certainly had Kevin Plank of Under Armour on the hot seat.
He’s not off yet. I’m calling him out again. While we are seeing signs that he is embracing relying
more on his team, particularly the CFO and COO of the company, Frisk and Bergman,
when you look at the expectations we’ve had for this business over the course of the last
several years, as it’s been a recommendation in a number of our services, this has been a phenomenal
disappointment. The real disappointing part there is, they were essentially self-inflicted.
They just made some dumb investments for the sake of growing as opposed to making good
strategic decisions and letting the growth come from making good decisions.
I think he’s on the right track. We need to make sure that team stays intact here.
If we see that CFO or COO leave, we have a really big problem. But at this point, with the market
seeming like it wants to recover, if we don’t have a recession, this is a company that should
be performing a lot better than it is today. Hill: What about you, Ron?
Gross: I think Wells Fargo’s CEO, Timothy Sloan, probably should go. He was probably
the wrong choice from the get go, as he’s been at the company during all of the controversies.
Having taken over the CEO role in 2016, he’s really not done anything to turn the tide.
From an operations perspective, the company’s not really doing very well. From a controversy
perspective, as well, things don’t seem to be getting better. I think it’s time for some
outside blood to come in and right the ship. Hill: I think back to last year’s show.
I mentioned that John Flannery, who was CEO of General Electric at the time, I mentioned
that he was certainly a CEO to watch because I thought he was laying all his cards on
the table. I thought, “Boy, this is going to be a really interesting company to watch.”
In hindsight, I probably should have said he was on the hot seat. I didn’t think he was
on the hot seat! Then he didn’t make it to the end of the year.
Gross: That’s how it goes! Hill: As I talked about with Matt Argersinger
and Aaron Bush, it’s interesting to see not only the companies being named in the private
market as potential IPOs this year, but the possibility that the recent volatility we’ve
seen might accelerate those IPOs in the first six months of 2019. Whether it’s the S-1 that
you’re eager to look at, or a company where you just think, “I want this thing to go public
now so I can get a few shares,” what’s on your radar, Jason?
Moser: One that probably a lot of people are thinking won’t end up by IPO-ing. I hope
it does. SpaceX, Elon Musk’s rocket company. They’re set to raise $500 million at a
$30.5 billion valuation shortly. To me, space is one of these markets, one of these trends
that’s going to open up a lot of fascinating investment opportunities over the course of
the next decade and beyond. I think SpaceX is going to be a part of that.
One thing that SpaceX is doing today is this project called Starlink. Essentially,
the idea is looking to build out a constellation of satellites all over the globe in low orbit
that will basically be able to beam high speed internet connection to every corner of
the globe. It seems like he’s getting buy-in from all the regulators. We’ve seen what he’s been
able to do here in the rocket launches that have taken place thus far.
I think this is a fascinating company. It’s going to offer a lot of opportunities.
If we do get a chance to see it go public, I more than likely would want to own a few shares
just to be a part of it. But, I’d really want to read that S-1. Hill: Do you think Tesla shareholders are eager for the prospect of Elon Musk at the
helm of yet another public company? Moser: Maybe we save
that for another show. [laughs] Hill: Ron, what about you?
Gross: A favorite company in my household is fast casual Mediterranean restaurant Cava.
They recently acquired publicly traded Zoës Kitchen. I’ll give them a little time to digest
that acquisition, decide what they want to do with all the Zoës locations. But then,
let’s take the whole darn thing public. Some great capital that they can use for growth
to take the world by storm and expand the concept. Hill: Have they given any more color on what they plan to do with those locations? I remember,
we talked about that acquisition on this show. The only thing that surprised me was the fact
that they seem like, “No, we’re not necessarily going to turn these all into Cavas.”
I think our general reaction was, why not? Gross: I’ve seen more along the lines of
making some menu changes, changes to the way the kitchen operates to be more efficient
and have offerings that are more appealing to the consumer.
Hill: Alright, just a couple of minutes left. Reckless predictions for 2019.
What do you have, Jason? Moser: I was thinking about going with the
Red Sox repeating as World Series champions. Then I thought about it, that’s not that
far-fetched, really. I’m calling it, they’re going to repeat. That’s not my reckless prediction.
I’ll go with a more business-related story here. I was talking earlier about the potential
acquisitions that Apple could be looking at here. What would stop them from wanting to
acquire Square. You want to look at expanding your business and becoming a little bit more
of an integral part of the commerce scene here, not only domestically, but globally.
I think Square and Apple have a lot in common. They’re both in the business of developing
sleek hardware that people like to use, generating some pretty strong brand loyalty there.
Then, we know, of course, the payments space is one that’s growing very quickly.
I’m not saying it’ll happen, but it’s certainly an acquisition that Apple would
be capable of executing. Maybe it will happen. Hill: Ron?
Gross: I went a little off the rails here. There’s going to be more definitive signs
of previous life discovered on Mars in 2019. That’s going to build off of the work done
by the Mars Curiosity Rover that, earlier in 2018, found some organic molecules.
We’ll figure out where those actually came from and build on that. There aren’t going to be
any signs of actual Martians running around Hill: Or will there?
Gross: — but I think we’re going to see signs of some previous life. Moser: Alright, reckless prediction No. 2:
Ron Gross and Jason Moser will be heading up the new Motley Fool Space Investing
service to launch either late 2019 or 2020. Gross: [laughs] Sell that short.
Hill: I’m just going to say that regardless of where free agent Bryce Harper ends up,
the Washington Nationals are going to the World Series. Moser: Wow! That is reckless! Gross: I’ll take that bet.
Hill: Ron Gross, Jason Moser, guys, thanks for being here! That’s going to do it for
this week’s edition of Motley Fool Money. Our engineer is Dan Boyd. Producer Mac Greer
on a well-deserved vacation this week. I’m Chris Hill. Thanks for listening!
We’ll see you next week!
Chris Hill: Hey, everyone!
Thanks for joining us! We’re coming to you from Fool
global headquarters in Alexandria, Virginia. I’m Chris Hill, joined by Matt Argersinger
and Austin Smith. Thanks for being here, guys! We’re going to be talking real
estate investing. We have a lot to cover. But speaking of a lot of information about real
estate investing, we have a free 40-page e-book. It covers everything. Whether you’re a newbie or you’re an experienced
investor, there’s a lot of great stuff. I know you guys put a lot
of work into that. It’s free. You can get it by going to real.fool.com. We’ll take your questions in
a little bit about real estate investing. But Matty, let me just start with you.
We talk a lot in this studio about stock investing. Real estate investing,
why is it so appealing to you right now? Matt Argersinger: It’s been
appealing to me for a long time, Chris. I’m so excited at The Motley Fool,
we’ve really taken a big step into the asset class. I think a lot of investors who’ve been following
The Fool for years probably think of real estate, they immediately think of REITs,
or maybe they think of buying a rental property, a home, renting out part
of their home, maybe through Airbnb. And that’s the extent of
what they think about real estate. They don’t think about the idea;
can I own a piece of an office building? Could I own a self-storage facility?
Could I do those types of things? What’s remarkable is, yes. The answer more
than ever before today is yes, you can. The individual investor has more options today
— we’re going to talk about lots of them — to get into real estate investing and to
do it in a way that really was only available to very wealthy, very connected
investors as little as five years ago. That’s what Austin and
I have been working on. I’m trying to expand the investor set
within the marketplace. It’s really exciting. Hill: It’s a great point! Austin, obviously, stock
investing has revolutionized over the last 25 years. But I think, to Matt’s point, a lot of people
don’t think about real estate in the same way. And the fact of the matter is,
there are tremendous opportunities. Austin Smith: Technology is really
a tidal wave in this industry right now. We keep saying to ourselves, this feels like
where equity investing was 25 years ago. The door’s cracking open. Individual investors are really getting unprecedented
access and benefits in real estate that have been a challenge to access before. With things like crowdfunding, the advent
of technology that supports so many investors, really unique tax benefits like opportunity
zones, are really making this space so compelling, even beyond what people
have been used to. We’re really excited to cover all of
the ways that you can profit from real estate, which is more than just buying
a rental property or renting on Airbnb. Hill: Let’s talk about a few of the ways
that you can play the real estate market. Obviously, to Austin’s point, buying a home,
right off the bat, for a lot of people, if you do that the right way, let that expand
over decades, that can work out well for you. Argersinger: Absolutely! Buying a home, I think, is how
almost all of us get started in real estate. We don’t think of ourselves as real estate
investors when we maybe buy our primary home. But it can become that. You can think about, instead of buying a single-family
home, maybe you buy a duplex; you live in one, you rent out the other. Or, you could have
an accessory apartment attached to it. Or, you just buy your first home, buy another
home later on that you move to, and continue to rent your first home. I think that’s a lot of ways
we become landlords, in a small way. That’s our introduction into real estate investing. Beyond
that, the world gets a lot, lot bigger. It’s interesting. We’ll talk about REITs.
REITs came about in the 1960s. They’re mutual funds of real estate. It’s a great way, today and back then,
for investors, in a single investment, to own a piece of many,
many properties around the country. You get diversification instantly
through investment. We have a chart. If you look at investing in REITs over the
last 20 years, if you just invested in equity REITs vs. the S&P 500,
they’ve massively outperformed. I think $100,000 in REITs has more
than doubled, it’s grown almost to $700,000. That’s done much than the stock market. And that’s probably surprising to a lot of
people, given the fact that we had a pretty big financial crisis in 2007 to 2009,
which was driven in part by a housing crisis. REITs suffered during that period
of time. But they bounced back. And over that period, they’ve done
substantially better than the stock market. So, starting with your primary home, but then
maybe moving up to REITs, and then, of course, even beyond that, we can talk about. Hill: You think, Austin, about the individual
stocks out there, whether it’s home builders, or even companies that are in the home
improvement business like Home Depot and Lowe’s. I think for people who are stock investors,
who maybe don’t want to jump immediately into a REIT — we can get to some of the pitfalls
with REITs in a second — there are obviously stocks that they can go
to right off the bat. Smith: Absolutely.
You mentioned homebuilders. We think NVR is an
exceptional operator in this space. There’s also tech-powered real estate companies
like Redfin and Zillow that are really interesting to watch right now. Redfin in particular is a company that we
feel like has really strong leadership. Zillow just had a change of leadership.
There’s a lot of changes occurring there. Both are tech-powered real estate, but also
the advent of i-buyer programs being a really interesting addition
to these companies. There’s a lot of different ways to get access
to the real estate space in equities or REITs. If you want a microcosm of what Matt was talking
about, about the potential strength of REITs, today in the market, we were looking at a REIT
portfolio, eight or nine REITs that we follow. They were all in the green,
the market was in the red. I think there was one that
was just slightly below the line. But nice to see on a day that, when the market is zigging,
the real estate sector as a proxy is zagging. Argersinger: That’s another great point. If you look at just REITs, for example,
REITs tend to have a correlation to the rest of stock market between 0.4 and 0.7, which means
there’s some correlation to the stock market, but it’s a weak correlation. On a day like this, the market’s
down, REITs tend to hold up better. We saw in, I think it was May,
when the S&P had a really tough month. I think the S&P 500 was
down between 6% and 7%. The real estate sector and REITs were
the only part of the market in the green. If you’re looking at your portfolio and saying
to yourself, “Gosh, I love my stocks, I love the companies I’m invested in, but I’m pretty
heavily weighted in tech and maybe some other places,” maybe real estate’s
a place to look at. Hill: Let’s go back to something you
mentioned earlier, Matt — office buildings. That’s something I think a lot of investors,
myself included, don’t really think of when we’re looking for
opportunities to invest. But those are the types of deals that you
guys are working on in the service you run. Argersinger: That’s right. Austin mentioned the technology
that’s come about in the last five years. Really, it’s crowdfunding.
You have a lot of platforms out there. We’re working with several of them. Now, from the convenience of your laptop,
you can make real investments in single-asset commercial property, in institutional-quality
property, from around the country. One of the first investments we made when
we opened our service — we’ll talk about our service — we invested in a class A office
building in Tampa, Florida. Wonderful investment. Probably going to do about 17% annual returns
for us. It’s a signature building,
a signature asset in a great location. That really wasn’t even
possible more than five years ago. The passage of the JOBS Act, new regulations,
new technology, have enabled a lot investors with few clicks of a button
to make real investments in real properties. Hill: Well, and it’s a good reminder that,
just as investors, if we have a consumer experience at a store, whether it’s good or bad,
that’s not necessarily a reason to go out and buy shares of that retailer.
You mentioned Tampa. There are a lot of people who may be watching
and are thinking, “Well, where I live, it feels a little bit like a real estate bubble,
maybe it’s not a great market.” Tampa is one of the best markets in
the country right now, in terms of real estate. Argersinger: Absolutely! The whole state of Florida
has seen a huge influx of population. A lot of people think that’s because
a lot of seniors move down there. That’s actually not the case.
They’re seeing rapid employment growth. A lot of younger people are moving to
places like Tampa, St. Petersburg, Jacksonville. There’s a big trend, kind of a lot of the
Northeast cities — places like New York City, New Jersey, Pennsylvania, are seeing a lot of outflows.
Population is going South and Southwest. One of the places we look as we’re making
these commercial real estate investments is states like North Carolina,
South Carolina, Atlanta, Georgia, Florida. Texas is obviously seeing a big boom
in places like Austin and Dallas. And those are some of the locations
that we’re finding a lot of opportunities in. Hill: What are a couple of the metrics
people should be looking at when they’re looking to invest in real estate?
Whether it’s REITs or something else. Smith: Real estate’s going to have its own lingo,
just like any investing sphere. We focus on IRR. That tends to be one of the master metrics of real
estate investing. It stands for internal rate of return. It’s a total return you realize over
a period of owning an investment property. It includes distributions, or dividends, for our
equity investors out there, plus any appreciation when it comes time to
sell that property at the end. There’s also the capitalization or cap rate for short,
which is the inverse of the price to earnings ratio. This is a very quick way to look
at how affordable or expensive a property is. Hill: We’re going to get to a couple of REITs
for anyone looking to put REITs on their watch list. Matty, there are pitfalls. Despite what Austin was saying about what’s
happening in the market today, no one should just blindly go into REITs, just as they shouldn’t
blindly go into an entire industry worth of stock. Argersinger: Absolutely.
All REITs are not equal. First, there are REITs
for every part of the market. There’s hotel REITs, office REITs — we talked
about officers — retail REITs, senior housing REITs, self-storage REITs… there’s all kinds. Not all those sectors are going
to be performing well at the same time. For example, hospitality REITs are for the most part
trading at really bargain valuations right now. That’s because the
hospitality market hasn’t done so well. There’s been new competition that’s come
into the space, between Airbnb and others. There’s also fears that we’re at a cycle
peak for the stock market and the economy. Hospitality REITs tend to be the most
sensitive to changes in the economy. So, there’s that situation. Also, when investors start to look at REITs,
they’re always attracted by the dividends. REITs are required to pay out 90% of their pre-tax
income, so the dividends are usually pretty juicy. But just because you find a REIT that has
an 8% dividend doesn’t necessarily mean it could be a good investment. Usually, that’s a sign that it’s
paying out more than it should be. It’s probably not covering its dividend
obligations through its funds from operations. Plenty of pitfalls to follow. I would say, look for REITs that have been
around for a long time, that have consistently grown their funds from operations over time,
good managers with long track records. All the things we tend to look for in stocks
and good companies apply to REITs as well. Hill: Let’s get to some
of your questions in just one second. But, first, Austin,
I’m going to hit you first. What is a REIT that you’ve got your eyes on right
now that maybe people can put on their watch list? Smith: Sure. I have my eyes on it
and my hands, since it’s in my portfolio. Physicians Realty Trust, DOC, is really
interesting. It’s a relatively young REIT. It’s only been on the market for a few years.
It’s also still relatively small at $3.3 billion market cap. Pays a really enticing 5.3% yield. I hope,
to mass caution, I’m not yield-chasing there. We like this one a lot. It’s a really recession-resistant
industry in the healthcare sector. If you are believing that we’re late-cycle
and you want something that is going to be more durable in that volatile
environment, this is the sector to be in. And, there’s a really favorable macroeconomic
trend where a really large portion of the population is aging into a really
high healthcare need point in their life. We expect this REIT will see really high occupancy,
and we are seeing that today at above 93% occupancy across their portfolio.
Hill: Matty, what about you? Argersinger: Urban Land Institute
does this major survey every year. They’re an institute that has
tens of thousands of real estate professionals. They monitor and report
on the real estate industry. For two years running now, the No. 1 area
where their members are seeing the best prospects and the best opportunities
is warehouse fulfillment. That probably seems obvious, right? The rise of Amazon, even Walmart and
Target really required to have distribution within one mile of major urban centers.
It’s a huge trend, it’s been a huge trend. As consumers, of course, we’re used to the
idea of two-day shipping, one-day shipping, now same-day shipping.
That’s not going to change. These major companies need that. So,
the company I like is STAG Industrial, ticker STAG. It’s been around for a long time.
Really conservative management. They own major warehouse and distribution
facilities in nearly 40 states. Really broad. And, they have some of the best locations,
right outside major cities like Charlotte, North Carolina,
that’s growing, outside Dallas. Tenants include FedEx, DHL, companies that
need those types of facilities to process goods, distribute goods.
Pays almost a 5% dividend. I own the company.
I’ve owned it for a long time. It’s a recommendation for us in our service,
and it’s one I’m really excited about. Hill: A lot of great information.
Even more information in the 40-page eboo I mentioned. It’s free. Go to real.fool.com to get that.
Just type in your e-mail address. Let’s get to the questions.
A lot of great questions coming in from the viewers. Sandeep asks, “Can shopping mall
REITs survive the retail apocalypse? Will the retail bankruptcies
take the REITs down too?” That’s a great question because it gets that
a trend — Austin, we’ve been seeing these headlines for a few years now. Sports Authority, Toys R Us, more and more
well-known retailers that are either closing hundreds of locations or just
going out of business altogether. Smith: Sure. I’ll reference the oft-attributed quote here,
“Statements of my death were overly exaggerated.” That seems to be the case
with the retail space right now. We look at REITs like Simon Property Group
or Retail Opportunity Investment Corporation, ROIC, have been beaten
down on this downbeat perception. Now, I think you have to be choosy in this space. Let’s be
very clear, physical retail is under a lot of pressure. But when you look at some of these really
good operators, they might have central anchor tenants in grocery stores, which are going
to be a lot more durable in a tough retail environment. I’d say, can retail survive? Absolutely.
Is there pressure in the retail space? Absolutely. We’re going to be looking for retailers [REITs]
who have deeply undervalued assets in their portfolio, or maybe have exposure to tenants
who are going to be a lot more durable in a retail apocalypse.
Argersinger: Yeah, I agree. I think those are all good points. If you look at the retail segment of the REIT market,
it’s amazing to see the cap rates in that space. Cap rate, capitalization rate,
also mentioned earlier, it’s the net operating income of the property divided by
the value of the property. Usually, the higher that number, the quote-unquote
cheaper in most cases the property is. Some of the cap rates in the retail space
are in the 7-9% range; whereas, when I talked about warehouse and fulfillment earlier,
we’re talking the 4-5% range. That’s a huge spread. There are definitely going to be opportunities
in retail REITs. Simon Property Group is interesting. They actually own
some really quality properties. They’ve been divesting
a lot of their lower-tier malls. I think at some point, they might
be a good turnaround candidate. One we’ve actually recommended
recently is STORE Capital. The interesting thing about them is, think
of Wawas, or gas stations, or convenience store REITs, that’s what they focus on —
places where there’s high customer traffic, or generally a pretty captive audience. Single tenants, triple net lease,
pretty conservative management team. Berkshire Hathaway actually
owns a percentage of STORE Capital. That’s one in the REIT category that
I would say, if you’re looking for opportunities, might be one to look at. Smith: Chris, if I may, real quick,
we’ve been spending a lot of time on REITs. There’s a lot of value to be had there. But let’s talk about one philosophy we have
as we approach real estate that we believe permeates REITs, fix and flip, crowdfunded real
estate, multifamily properties — dollars follow people. We look at migration patterns really heavily. We believe that if you’re going to be making
a real estate investment, let’s make sure that the geography makes sense. Going back to the retail REIT question, if
there are really strong geographies that have really great inflow — maybe in Atlanta, maybe
a Denver, some of these more affordable emerging 18-hour cities — they stand a much greater
chance of surviving a tough retail environment. If you have the opportunity to acquire REITs
or properties that have exposures to these cities, we think that’s a much
safer pond to be operating in. Hill: Several people asking, “You’ve talked
about REITs, are there some non-REIT stocks you like to play the housing market as well?”
Smith: Interesting. I have two. Interested in Redfin and Zillow
right now. Two we mentioned earlier. I wouldn’t say that I have a favorite between the two.
I really love the leadership team at both. Glenn Kelman over at Redfin, Rich Barton over
at Zillow, recently re-assuming the helm as CEO. You have i-buyer programs at both. I think
either company could really be a runaway winner. In fact, the real estate industry is such that you
could see both be runaway winners. I own both. Really interested to
see how they both develop. Argersinger: One that comes to mind immediately
— I think Austin might have mentioned earlier — is NVR. It’s a home builder.
The track record is tremendous. They have a really unique business
model, too detailed to go into right now. Again, one of those home builders that for
a long time focused in the Mid-Atlantic region. They really expanded down to the Southeast.
A lot of those stronger markets we were talking about. If you like the homebuilding space, and it
looks pretty interesting right now on a cycle basis, that might be one to take a look at. Hill: JR asks, “Would you consider REITs to
be defensive stocks in case of a recession?” Argersinger: Absolutely, I think so. You have
to remember, even in a recession, REITs will suffer. Everything’s going to suffer. But the advantage that a lot of REITs have, especially
in the office categories or industrial categories, is that you have tenants
who have signed multi-year leases. Five-year, 10-year, even 15 or 20-year leases. As long as those REITs have strong tenants,
creditworthy tenants, tenants that are large and have good balance
sheets, they’re going to hold up. In a stock market downturn,
we’ve seen that REITs tend to hold up better. Hopefully, there’s not another housing crash
or something like that around the corner, because everything will do badly. But REITs tend to have less
correlation to the overall stock market. If you’re looking for a little balanced in
your portfolio, I think REITs can be a great option. Smith: In the real estate space as a whole, a triple
net lease is another great way to approach that. Matt’s actually provided investment
recommendations to our premium members. I believe they’re assuming
17 years of a 20-year triple net lease. What this means is, you have a lease that
is guaranteed, there’s an agreed-upon rate. The tenant on the property pays
all taxes and maintenance on it. So, your floor is guaranteed.
You know what you’re going to be making. And then, typically, the way these leases are written
is that there is some upside if they outperform. You get to capture some of the upside
without locking yourself into a downside. If you believe we’re late in the market cycle,
which many people believe, a triple net lease investment could be a really interesting way
to approach investing over the next few years. Hill: If you think about all the headlines
over the last year about interest rates, and how often that is the dominant business story
of the day, how do you guys think about macroeconomic stuff like interest rates
affecting the housing market? Argersinger: It’s a good question.
I tend to weigh macro less than other factors. Interest rates are important. REITs and real estate stocks in general, financial
stocks in general, tend to be a little more sensitive to changes in interest rates.
Again, I always think that’s a short-term phenomenon. I think the best operators, the companies
with the best balance sheets, no matter what happens to interest rates,
they’ll do just fine. Also, I do feel like money tends to fall back
to REITs, actually, when interest rates go down, just because there
becomes a real chase for yield. So, if you can find a really great REIT or
operator that’s paying 4%, 5%, 6%, and you’re confident in that dividend yield, as interest
rates plummet, you’re going to get 1.5% to 2% on Treasuries,
they become very attractive. But then overall, looking at the economic
picture, I think Austin said it right. If you find REITs that have long-term leases,
where there’s even built in price escalators, usually — most leases include 2% to 3% increases in
rents every year from great tenants — you’ll do just fine. Hill: You guys have talked a little bit
about industry-specific REITs. We’re getting a couple of questions
about that. You mentioned warehouses. Someone asked me about
data center REITs like Digital Realty. Are there industries at one end of the spectrum
or the other where you just think that this is looking particularly attractive right now? Or, like, “Ooh, boy, I can cross this off
my list because this industry REIT is just not going to be as good an opportunity as
anything else I see on the spectrum”? Smith: There’s going to be opportunities and
challenges at every end of the spectrum. So we don’t want to make any blanket statements
that data centers are 100% certain and retail REITs are 100% doomed to failure. There’s going to be some fabulous opportunities
in the retail category, I promise you; but it might be more challenging.
Be careful where you step. Maybe something like senior housing has really
good favorable macroeconomic trends behind it; but if you are acquiring either an individual
property or a REIT that has exposure to the wrong geographies, maybe where that local population
isn’t aging as quickly, that could be challenged. I don’t want to make any blanket statements
and write off any category, or have people migrate their money
to one category wholesale. Hill: Paul asks, “Are there tax considerations
with REITs that would make them more or less suited for tax-advantaged accounts like IRAs?”
Great nuts and bolts question there. Argersinger: Generally, I’d say REITs are
very favorable for tax-advantaged accounts. That’s where you love to have them.
They’re paying dividends. A lot of REITs pay monthly dividends. By the way, because of the way REITs are
structured, most of their dividends and distributions are considered
ordinary income distributions. So you’re usually going to pay your ordinary
income tax rate on those if they’re not treated as qualified dividends,
as we’d expect from a normal dividend company. They’re disadvantaged in that way if
you’re having them in a taxable account. So, if you’re able, putting them in a tax-advantaged
account like an IRA is a great option. Hill: Are there any
international REITs that you guys like? We’ve talked about different markets with
in the U.S., what about outside of the U.S.? Smith: I don’t have any
international REITs on my radar right now. Doesn’t mean there’s not a lot of great opportunities.
I just haven’t brought that into my recent analysis. Argersinger: Actually, because the
United States has the real estate investment trust, REIT, structure, it doesn’t really
exist the same way in other countries. You will find U.S.-based REITs like American
Tower, funny that it’s named that, that has significant overseas assets.
You can invest in them. Most of their assets
are still the United States. But that’s one example, where a U.S.-
based REIT is doing things internationally. You can play it that way a little bit. Hill: For somebody new to the space, would you
recommend investing in individual REITs or an ETF? Smith: I think The Motley Fool’s had a really
great track record and wonderful experience buying individual companies with the caveat of,
don’t put all your eggs in one basket. Whatever diversification can afford yourself
while buying individual REITs or individual companies, that’s generally the
way that we like to approach investing. Hill: Vince asks, “Is it better to invest
in a REIT or for you to take the money you’ve saved and own a property yourself?” We talk all the time about stock
investing coming down to temperament. There’s a different type of temperament
that comes with being a landlord. Argersinger: Certainly, Vince. As a person who owns rental properties —
I know, Austin, you do as well — obviously comes with a whole host of headaches. REITs are certainly the easy and nice and efficient
way, and low-cost way to invest in real estate. We haven’t talked a lot about
crowdfunding as another option. There are certainly ways
beyond REITs to invest in real estate. It just depends on appetite
for risk, appetite for time. If you’re willing to invest the time and the sweat,
in a lot of cases, you can go those routes as well. Hill: One viewer asks, “I’ve heard the term
house hacking get thrown around a lot lately. What in the heck is house hacking?” Smith: This is a really great rebranding of
renting out a spare bedroom in your house to help pay down your mortgage. Hill: OK. Another viewer asks, “How does
the whole accredited investor thing work? What is or is not
restricted to accredited investors?” Argersinger: Let’s talk about
commercial real estate crowdfunding investing. We talked about earlier, this rise
of crowdfunding platforms out there. Most of the opportunities you see today are
reg D opportunities, which means you have to be an accredited investor
to take advantage of them. A lot of the recommendations we’ve made in
the service, the real estate properties we’re investing in, you’ve had to be accredited,
which means, if you’re a single person, you have to have at least $200,000 in gross income
per year; if you’re married, that’s $300,000. Or, you can have a net worth of greater than
$1 million, less your primary residence. Those are the qualifications. If you meet those, you’re an accredited investor,
and you’re able to invest on these platforms. But we’ve also seen the rise of reg A and
reg A plus offerings, which are also private real estate opportunities that are
available to non-accredited investors. It’s still a very small part of the market. There aren’t a lot of platforms out there
that are doing that right now. But it’s growing. There will be opportunities, even if you’re not accredited.
Smith: We’ve talked a lot about these platforms. Let’s put a name to them so the
viewers know what we’re referencing. There’s many crowdfunding
platforms out there. We’ve interacted with
some of the largest ones. We see a lot of great opportunities on platforms
like RealtyMogul, RealCrowd, CrowdStreet. They tend to bias
towards accredited investors. RealtyMogul does have an option available
for non-accredited investors who don’t meet that threshold, as well as Fundrise. They specialize in what’s called regulation
A access, which is for non-accredited investors. Hill: Let’s talk for just a second,
before we wrap up, about Millionacres. This is a new venture from The Motley Fool.
What got you interested in this in the first place? It seems like, among other things, one of
the themes that we’ve hit here today is how it really seems like we’re just
getting started with real estate investing. The opportunity, as you said, Austin,
it’s a little bit like the late 1990s for stock investing, when you saw the rise, not just
of companies like The Motley Fool, but of brokerages going online, and discount
brokers like Schwab and Ameritrade and E-Trade, etc. Smith: I can’t speak for both of us,
but certainly what got me interested in Millionacres, and why we’re here today, is that this
space is larger than the equity space. There’s so much money to be made. But also, up until very recently,
it’s been obfuscated and challenging. It’s really intimidating to people. The Motley Fool’s mission is to help demystify
these spaces, to shine a light on these opportunities and say, “Hey, there’s a really fabulous way
to make money here and improve your wealth and your lifestyle. Let’s educate you to get there, help you figure
out how to navigate these waters, understand where the good and bad opportunities are.”
Penny stocks? No, thanks. Great, well-run companies? Yes. Really derelict properties
down the street? Maybe not. But, a really great
crowdfunded deal? Yes. We’re here to play that same role that
The Motley Fool did in equities for real estate, and shine a light on all the ways that
people can invest in it. It’s really exciting. It feels like where The Motley Fool started. Especially with the emergence of technology
in the space, there’s so many great ways for people to invest all across the country,
either be it through REITs, crowdfunding, and half a dozen other excellent avenues.
Argersinger: Couldn’t have said it better. I would just add this one little piece. Earlier this week, we all went to Nobu, famous
Japanese restaurant right here in D.C. We dined with a lot of our members. We also dined with the folks who
managed that property, who we’re invested in. That’s an example of a recommendation that
we recently made to invest in a restaurant in one of D.C.’s hottest neighborhoods,
in a beautiful luxury condominium building. That was a real recommendation that
we’ve made, that our members are invested in. Just imagine the idea of investing in a property
just like you do if you bought shares in Starbucks. You go there, you order your coffee every
day, you feel like you’re contributing to the Starbucks brand. Well, imagine owning a property, investing
in a property, and going to visit that property, and dining at the restaurant that
is the main tenant of that property. That’s the experience Austin
and I want people, investors, Fools, members around the world, to get used to.
That’s what’s happening. These real estate markets and properties that
were only available for the very wealthy or the well connected, your rich uncle at the
golf club, that’s no longer the case. These platforms are out there for you to
make these investments and do it yourself. Hill: And we’re just getting started.
Argersinger: Just getting started! Hill: Go to real.fool.com to learn more.
Get that 40-page ebook, it’s free. Check it out at real.fool.com.
Thanks for giving us a thumbs up! Don’t forget to subscribe to our YouTube channel
so you don’t miss any of the live Q&A’s that we do. Austin Smith, Matt Argersinger,
guys, thanks for being here! Smith: Thanks, Chris!
Hill: Thanks so much for watching! We’ll see you next time! Fool on!
AMNA NAWAZ: Today’s 800-point plunge on
Wall Street is just the most recent swerve for a stock market that had very recently
been hitting record highs. Jeffrey Brown reports that the high level
of volatility has investors large and small on edge and looking for answers. (BEGIN VIDEOTAPE) JEFFREY BROWN, PBS NEWSHOUR CORRESPONDENT:
President Trump’s trade and tariff wars, major slowdowns in the economies of Germany and
China, the prospect of further actions by the Federal Reserve, and more. It may be August, but national and global
events are impacting markets and, maybe, the economy overall. Neil Irwin, senior economics correspondent
for “The New York Times,” joins me now. Nice to have you back. NEIL IRWIN, SENIOR ECONOMICS CORRESPONDENT,
THE NEW YORK TIMES: Thanks, Jeff. JEFFREY BROWN: Big drop in the market today. You see several things going on. Let’s start with the trade and tariffs. How is that moving markets? NEIL IRWIN: Sure. So, we’ve seen a bit of a de-escalation of
the trade wars in the last couple of days — JEFFREY BROWN: Uh-huh. NEIL IRWIN: — as the president has kind
of backed away from one round of tariffs that were set to go into effect. (CROSSTALK) JEFFREY BROWN: Which should be good in a
sense, yes. NEIL IRWIN: It should be good, but remember,
that was only partially pulling something that was only announced back two weeks ago. JEFFREY BROWN: Yes. NEIL IRWIN: What we’re seeing is that this
trade war, it’s something bigger than just one little dial that you can twist. It’s infecting the overall economic relationship
between the world’s two largest economies. Businesses worldwide are having to adapt and
adjust, and they’re nervous about making investments and really investing in the future given that
backdrop. JEFFREY BROWN: Do we see actual damage already
or is this about fears looking ahead? NEIL IRWIN: So, so far, in the U.S., economic
data, it’s pretty mild. You see some evidence that the industrial
sector is slowing down. Business investment has been weak in the last
few months. But it’s not a catastrophe so far for the
U.S. economy. So far, the U.S. economy seems to be holding
up. The question is what — what’s going to happen
in the future? JEFFREY BROWN: And when the president pulled
back yesterday on the latest tariffs or at least postponed them, was that perhaps as
seeing that it might — this time, it might affect consumers, or why — why do you think
he did that? NEIL IRWIN: Yes, I think this was — this
round of tariffs is going to affect consumers 10 percent on basically all Chinese imports,
including toys, including iPhones, including things that people are buying in the Christmas
season. They didn’t want to do that. The thing is you can’t really go back again. Sometimes, this idea of constantly escalating
global economic warfare, once that gets in place, it’s not so much the details of any
one tariff, it’s what’s going to happen to the relationship overall, and what does that
mean for the future. JEFFREY BROWN: All right. So, there’s that on the one hand, but you’re
seeing something that’s part of — this is part of something much bigger, deeper,
a slowing, a weakening, perhaps even signs of a recession. What points to that? NEIL IRWIN: So, the biggest thing is what
happened today is called an inversion of the yield curve. So, the yield curve is interest rates on the
treasury bonds for different durations, different time periods. And what’s happening now is you’re actually
seeing lower interest rates on longer term bonds than on shorter term. All that means is investors worldwide soon
to be pricing in an expecting slower growth, weaker growth, lower inflation, more Federal
Reserve rate cuts. That’s a pessimistic signal we’re getting
from global bond investors. JEFFREY BROWN: And how — where are they
seeing that? I mean, what specifically are they looking
at that’s making them feel so pessimistic? NEIL IRWIN: It seems to me this global forces,
not just the trade wars that we’re already talked about, but a sharp slowdown in the
European economy, geopolitical tensions. You have tensions between China and Hong Kong. JEFFREY BROWN: Yes. NEIL IRWIN: You have a very complex situation
where the entire world economy and the world political system seems to be in this very
fragile state. So, it doesn’t take much to undermine growth. JEFFREY BROWN: Now, the president clearly
seeing what’s going on, he put out another tweet today, another blast at the Fed chairman. He referred to him as clueless Jay Powell. What is — what is that coming from? Or what do you seeing there? NEIL IRWIN: So, look, President Trump wants
to blame the Fed for everything bad that’s happening in the world markets and the economy. And it is true — look, the Fed raised interest
rates four times last year. They’ve already taken back one of those. They seem to believe that — you know, there’s
some evidence that they overdid it last year and maybe raised rates too much, given where
the global economy is. But you can’t — you know, you can’t hold
the Trump administration blameless. They keep kind of throwing bombs in the different
elements of the global trading system in ways that are disruptive. And you talk to CEOs. You look at corporate earnings reports. There’s clear evidence that the Trump administration
has part of the responsibility. JEFFREY BROWN: I mean, we’ve talked about
this before and over the years many times, the uncertainty unsettles markets, right? NEIL IRWIN: Yes, if you’re a CEO, you’re
trying to decide whether to invest, whether to hire people, whether to build a factory. You look around — you don’t know what the
world economy is going to look at in a year because there’s this kind of chaos that
emanates from, not just Washington, from other world capitals as well. That’s a very difficult setting in which
to do business. And what’s happening in markets is reflecting
that more and more. JEFFREY BROWN: It is still true, though,
that some numbers look OK, or even good, right? Job market is still OK. Wages are up. So, is everybody sort of parsing all these
numbers, huh? NEIL IRWIN: Yes. Look, so far, the U.S. economy has been the
calm in the storm. The U.S. economy has been basically sound
even with all this — all this turmoil overseas. The problem is what’s being — what we’re
seeing in markets this month seems to be suggesting that could change. And it doesn’t have to be a recession. We can still avoid a recession, but the risk
of one is a lot higher than it was a month ago. JEFFREY BROWN: And just briefly before we
go, what is it about August? Something about — everybody is supposed to
be relaxing, but a lot of things happen in the economy and market — markets. NEIL IRWIN: We keep seeing this — happened
in 2011, happened in 2007, happened in 1998. You know, one explanation, it seems to be
that a bunch of traders are on vacation, so there’s liquidity in markets. You get wilder swings. It may be just a coincidence but I think we’ve
seen this pattern before where August is the month where global markets seem to melt down. JEFFREY BROWN: All right. Neil Irwin of the “New York Times” — thank
you very much. NEIL IRWIN: Thanks, Jeff.