The conversation I have for you today is with Todd Harrison.
Todd is an incredible character, a 20-year Wall Street veteran who’s worked multiple roles in finance, beginning at Morgan Stanley’s worldwide equity derivative desk where he built the financial services and biotech “books” into multimillion dollar profit centres. Most likely a factor leading to his being promoted to vice president at the tender age of 26, the youngest in the firm at the time.
Todd then went on to join Galleon Group as Managing Director of derivatives, where the fund grew from $500m to $6b during the 3 years he was with Galleon.
Todd then joined the $400m hedge fund Cramer Berkowitz LLC as president and head of trading in 2000 where he managed 200 positions through the tech bubble and bust, interfaced with research analysts and had sole responsibility for an annual $90 million commission structure.
He is founder and CEO of Minyanville Media and his flagship website is Minyanville. He’s appeared on FOX, CNBC, CNN and his articles are published in The Wall Street Journal, Business Week, Fortune and Barron’s. He’s also an Emmy Award winner for his animated business news show “Minyanviille’s World in Review.”
Todd’s also the author of “The Other Side of Wall Street: In Business It Pays to Be an Animal, In Life It Pays to Be Yourself”.
During our conversation Todd and I covered:
- Why in the GFC the Fed “bought the cancer and sold the car crash”.
- The velocity of information is outstripping the velocity of money and what this means for algo driven markets which act in real time while policy makers take time.
- Todd’s trade of the decade and his current largest position. I guarantee it’ll surprise you.
- And much more.
Direct download link (right-click and choose “Save As”)
Or – if you prefer to read rather than listen – you can read the podcast transcript below (or download it here).
I speak today with Todd Harrison. Todd is one such gentleman. He began his career in ’91 at the drawing desk at Morgan Stanley where he taught himself the derivatives business, and where he was promoted to Vice President at the age of 26, which at the time was the youngest in the firm. In 1997, Todd then left Morgan Stanley to join the Galleon Group as the Managing Director of Derivatives. During his tenure there, the fund grew from $500 million to $6 billion, when he was then told that he didn’t have what it take to make partner. In exchange, that triggered one of the best decisions in his career. Todd left Galleon Group and then joined Cramer Berkowitz which was then a $400 million long-short hedge fund as partner and he had training in January 2000, where he turned the training operation from an execution platform into a propriety revenue generator. He managed 200 old positions through the tech bubble and burst, and sole responsibility for $100 million in commission structure. In 2000, the firm generated 37% after fee for its investors. And in July 2000, Jim Cramer asked Todd to write a trading diary for the Street.com, where he began his writing career. In 2002, Todd then founded Million Dollar Media, which was an online financial media company with their mission make positive change through financial understanding. 2002, Todd created and became president of the Ruby Peck Foundation for Children’s Education, a non-profit organization committed to the pursuit of knowledge, and believe it’s a child’s opportunity to learn and develop the gift. And his own imagination shouldn’t be limited by economic classifications, social status, physical challenge or any geographical boundaries. Todd has lectured at academic institutions, including Harvard University, Syracuse University, New York University, Australia University and Wharton School at the University of Pennsylvania. Todd has appeared on Fox, CNBC, CNN, Bloomberg TV, The Wall Street Journal, and a host of other financial publications. And he’s also written a fascinating book called “The Other Side of Wall Street”, “In Business, It Pays to be an Animal; In Life, It Pays to be yourself”. And that was published in 2011. I had multiple conversations with Todd in the last few weeks and I recorded one of them for your benefit. I hope you enjoy it.
Todd, you’ve got this vast experience. Your background was within the derivatives space, it’s very difficult to trade derivatives without even understanding what the underlying asset class are, whether it would be commodities, whether it would be equities, bonds, et cetera, you know, whatever. So when I speak with derivative traders, they tend to have a very different view around asset classes, capital movements and things like that. And what I found really interesting with a number of other guys, and you fit into this bracket, is that you’ve done that and then you’ve moved on and you also done a number of other sort of investment—not asset classes, but longer-term stuff. What you built with Minyanville clearly wasn’t derivative-focused. A lot of the audience, depending on the product, was actually very much retail. It was very much a man-in-the-street who probably is not going to be interested in buying futures or asset swaps or anything like that. So you’ve almost certainly got a very different and quite well-rounded view on asset classes, and how it helped to interact within the global economy. So I’m quite keen to get your thoughts on first and foremost, what this all means with respect to a Central Bank policy that we have today, how that is affecting markets in your opinion? And any other thoughts that you got on that and can also sort of move into the geopolitical, if you will. There’s an article that you wrote back in 2011, which I thought was a fantastic article. And you’ve discussed some of the ramifications, if you will, that can come out of the GSE and how they can affect things like war.
So here we are, 2016, and many of the things that you wrote about, you know, at the time, people might as well scratched their head and thought you were a bit of a kook. And you look at them now, and they’re very prescient.
Todd: Well, contextually, if you want to take a step back and look at the markets as a whole and the world as a whole, I almost would look at it as a tale of two tapes with really 2008 serving as a tipping point. And I think what you’re referring to in the article I wrote spoke specifically to the Central Bank policy and their actions in there are unprecedented actions, a far beat for me to talk about what would happen—what would have happened if they did not act as they did. But I would ventured a guess if there would be a firm destruction, much like a forest fire, it would be painful. It would be scary. And ultimately, there’ll be a fertile rebirthing that has a fundamental backdrop and has a more substantial base to it.
Think what central banks did or our Central Bank, the Federal Reserve did, if I had to sum it up in a catch phrase, “they bought the cancer and they sold the car crash”. So they ingested a lot of the toxic debt that was on private institutional balance sheets and assume them to the public’s fear, which allowed the banks, most of all, but really any company with a finance arm, to recapitalize their balance sheet. And I want to say any company with a finance arm, that’s a pretty wide birth, everything from General Motors to Target was caught up in this tsunami. So the Federal Reserve did what I guess what they thought was best, and it may have been for the best at the time, but I think there are many unintended consequences that have manifested since then. We learned about it at the time. And specifically, you know, this whole notion of suicidal acrimony, social unrest and geopolitical conflict, not something one wishes for, especially if you have children and if you try to look at the world with a glass half-full point of view, glass half-full as opposed to acid prices with the interest where they are. If you held on, good for you. I think the markets shook a lot of people out and made a lasting impression on our generation, much like the Great Depression made on my grandparents’ generation. But the difference being, we were giving drugs to mask the symptoms, but not medicine to cure the disease. And I think that that’s still panning out. And where it goes from here, it’s hard to tell.
The markets near-term to me feel very coiled. But they can just as easily go up, blow off to the upside into year-end with all the performance anxiety. Or the way in the world, so to speak, you catch up to the markets. And if that calls into question the credibility of central banks and the faith of central banks, then we’re going to have a comeuppance of sorts.
Chris: So on the domestic basis, do you feel on the other hand, what is your thoughts on the US equity markets? Just sort of taking out of the equation for a moment Europe, Japan, any of these destinations.
Todd: Well, I don’t think you can take that out of the equation for a simple reason. I remember back in 1999—I’m an old man now—markets rallied on the whole notion of globalization. And I think we were well on our way. I think what we see from central banks is really move the needle back towards isolationism and protectionism, particularly if Mr. Trump heads to the White House. That’s another can of worms. But the equity markets to me feel coiled and it’s really unfortunately, a lot of the metrics that I think wants for you is to judge the worthiness of a market. I always looked at the market through four distinct lenses, they were the fundamentals, the technicals, structural, and the psychology, with psychology really being the most important, right? But that’s all evolved. And as I wrote about it in 2008, it’s still going on. That started the giant game of chicken with central banks on one side and the imbalances on the other side.
So I have a high degree of confidence that it’s not going to end well. But I have no confidence where the markets go between here and there, only because the forecasting mechanisms that I have traditionally used had really been rendered, I would say, not obsolete but certainly of less importance. And, you know, one of the things, circling back to 2008, I think it was really brilliant by the Obama Administration, and I don’t think anybody really has put their mind to this. But if you recall, the financial banks then and the financial firms were really under the gun. If you remember, vitriol, the nastiness that everybody hated banks. But what happened was policy that allowed the banks to get out from under the hammer and ultimately recapitalize themselves. The brilliance of that, I think, and if you remember Obama came into office, this was eight years ago, talked about healthcare, healthcare, healthcare, and the mega world of financial crisis. I think, you know, in hindsight, and I think maybe the reason they did that certainly was if they tried to put their boot down on the neck of banks, the market would have crashed. The banks weren’t strong enough to withstand any further political pressure.
So what happened was we focused on healthcare. The markets recapitalized. And now, I think you’re seeing that war on capitalism continue both in Europe and domestically. Speculators are a susceptible casualty of war in the eyes of the Federal government, and with constituency. That really isn’t here to speculate as much as live their lives with the markets serving as a funding mechanism on a longer-term basis. I’m not sure how much sense that makes but it’s clear in my head that this is an ongoing phase. You’re seeing it with Angela Merkel. You’re seeing it right across the board. Any hint of speculation ironically being quelled as the Federal Reserve and other central banks with the policy being exported to the Bank of Japan and the European Central Bank. It’s all been cumulative in nature. And I don’t know how that ends. I don’t think it ends well but I don’t know when.
Chris: OK. That’s kind of ironic in that the actions of the central banks essentially have caused speculation. Because if you’re acting with a market. You know, you met a client who’s an incredibly valued client a few minutes ago. And you said that some of the metrics that you traditionally used essentially is sort of broken down and were not functioning as they would typically a function. So they’re not as useful today as they might have been in the past. And that is because of the incentives and the manipulation on the central banks, other things that distorted markets, where they don’t function as the markets anymore. As to what that means for an investor is that you cannot invest on a traditional manner. You just—you can’t because of banks are not functioning anymore. So you sort of—you’re flying blind to an extent. And then what that leads to is exactly speculation. But from a political standpoint, it makes every sense for a politician to be able to hold up speculators and put fire in their face because there will always going to be the minority. So it’s quite easy to attack them.
Todd: You’re kicking the can down the road effectively. It’s more in the standard of living for our children. And that’s sort of what pisses me off about the whole thing. In a way, trying not to be emotional about markets. But it seems to me that my children and my grandchildren aren’t going to be afforded the same opportunities that I had or my parents had because of this mountain of debt, this part that our government, that the US government has assumed now.
Ultimately, now this plays out in several ways. There’s only so many ways that you can release pressure from the machination: currencies, interest rates, and ultimately equities and commodities affected as by-product of that. But I don’t think that negative—I think negative interest rates may be the last bullet tends to be pointed inward. But I don’t understand how negative interest rates—I mean, I understand how—why they are looking in that direction. But I don’t understand what type of depth that will have. Because at a certain point, investors will just arbitrage negative interest rates and keep the money in their home, which will inevitably lead to higher crime and more “suicidal acrimony”. There’s a lot of venom out there. You almost want to keep your head down. It becomes a liability to have an opinion in this market, especially in the digital age. And the velocity of information is outstripping the velocity of money, right?
So there lies an interesting arbitrage and something that I think is not necessarily a good thing, not evil in it of itself, but certainly something to pay attention to. I remember back in 2008, and Paulson was on bended knee, I wrote that the problem here is that policy takes time and the markets move in real time. And that continues to be the case. But I would say that that dynamic has been leveraged a hundred X from where it was picking that number. It’s been magnified greatly by the innovation, I guess you can call it, in trading and the high-frequency trading, and the algorithms that are really pushing the market around. It’s become a machine learning-type of environment.
If you’ve been in the market for seven years or less, this is great, right? Markets go up, stocks go up. Arrows fell down. Somebody buys the dip and life goes on. My fear, or at least my concern about the markets, is that when they flip and the algos start to work to the downside, and the Federal Reserve runs out of bullets, there’s a lot of air between where we were in 2008, S&P 666, and as I said, S&P 2170 right now. So, you’re seeing now, markets have tripled. You know, just seeing a richer view on equities. And my view on equities is, you know, look flat right now. But understand that the markets sold 300% in the last eight years. And that’s not really sustainable or natural, for that matter.
Chris: Yeah. I mean, one of those things I’ve been looking in the chart is price-to-sales. Because if you look at the price-to-earnings, it doesn’t actually tell me the picture, because what’s been taking place at the corporate level, what you need is extremely low interest rates. It’s manageable and I said, “You know what, guys? We just need to take on the extras. The cheapest of it instead of them. Let’s take on debt and let’s buy back stock. Alright?” And so that pushes the price multiple higher. It doesn’t change earnings. And then these guys liquidated their options and tanked them. And I walk away with fantastic packages. So it’s making management really wealthy. So the valuations on companies are function of cheap interest rates. The most cheap interest rates have been utilized in order to buy back stock, which—and we talked about this on a societal basis, it’s making that 1% wealthier. The wealth cap has increased. Certain people that are becoming wealthy on the back of these low interest rates, but earnings are not earning higher. And so if you look at price-to-sales ratios, we’re not doing very well. So in the US, it’s not doing very well. So it’s interesting how the financial market is so intertwined with the political and the societal breakdown with it.
Todd: To your point, there’s a big difference between a stock market rally and an economic recovery. And anybody other than that top 1% or top 1% of that top 1% will tell you that they don’t really like we’re sitting in all-time highs, so in large part due to corporate buybacks and other financial—I want to say ‘trickery’, but certainly financial maneuvering. And ultimately, this is going to take us so far. I think what the Federal Reserve and other central banks quite essentially have tried to do is buy time, hopes that a legitimate economic recovery follows suit. I don’t see it. Unfortunately, actually, I’m actually long. I’m long right now with my exposure, but not so much that I’m putting myself at a risk. You got to pay to play while the music’s playing—excuse me—but when it gets to easy and it looks like it’s usually is the sign that it’s going to be a gun check.
Chris: So Todd, how do you go about constructing a portfolio in this environment?
Todd: Well, really on the basis and the value of the underlying assets themselves. I don’t necessarily feel mandated to be invested in cash as a position. And if you really want to hedge that, I suppose gold—but I’ve always-I’ve never really, I see both sides with gold. In one hand, it’s a store value. On the other hand, it’s a rock, right? And rocks fall during deflationary times. It’s perception versus reality. So I sort of steer clear from gold. Sure, I have traded it certainly. But I had no long-term positioning which may or may not be right. With markets, do you enter this blow-off phase to the upside? And that’s a huge if. You want to be in equities. You want to be in gold. But again, the field position of 300% is—no, we’re not going to start here, put it that way. So when you say how do I construct my portfolio unique to me is the answer. Everybody has a unique time horizon and risk profile. But I try to look at the relative value of underlying assets. And if I don’t see relative value, or I don’t understand the story. I’m not going to risk capital.
Chris: And do you—what’s your sort of time horizon? Are you looking at kind of deep value and then trading around positions or are you taking a short-term view and say, “Look, we know that these markets are relatively overvalued”, so it’s more of a stock-picking environment, making sure that we’re getting into equities that have that fundamental value? But essentially shortening in duration of your investment time frame?
Todd: Yeah. Well, I’m a renter, not a buyer, so to speak, in stocks. But that’s hurt me. If I can be candid over any sort of risk management protocol over the last seven years has been a drag on performance. So the inclination for a lot of people, I think, is that, well, I’m not going to hedge or flat is the new short, right? People have gotten burned so many times. And so I think you have to be deeply aware and you have to be diligent. And even then, there’s no bells at the top. There’s no reason they’re going to tell you, “Hey. It’s time to get out of the market.” And anybody who tells you that they know what’s going to happen is full of shit, right? Or trying to sell you something. Nobody knows especially now, especially in a time where there’s historically unprecedented financial maneuvering by central banks and how that’s going to settle is beyond anybody’s knowledge, to more of a speculative assumption. And you look at some of the smarter people, people who I consider to be smart, they’ve been bearish for a long time. And the market keeps going up. So I don’t think anybody knows. I’m confident that nobody knows. If you try to assess risk, you need to assess risk based on methodology that works for you. For me, that’s been more concentrated positions that I can do more work on and just try now. Try that, they can go into the sunshine and not get too greedy when the tide turns.
Chris: OK. So this contact to one of the topics that were brought up in the beginning of this conversation, which was around societal discontent, geopolitical factors. And I want to touch on something that you wrote about 2011, I think it was. And you were talking about that geopolitical conflict essentially born from religious differences, and economic collapse at the same time. And so we’re getting—certainly, in terms of economic collapse, so we’re seeing a lot of that playing out, especially in Europe, which is coupled with religious differences. So we’re seeing that now as the refugee crisis and these conflicts that are taking place within essentially speculative societies that are now at odds with an ideology that is quite different to it. And it’s interesting because I watched Trump using that as well in his political rhetoric and it’s resonating. It’s really striking a cord. I’m not making any judgment either way. I’m a market observer. I have no political inclination, one way or the other. I’m truly a market observer looking, who trains and participates, in particular, myself accordingly. But you made this comment that Tunisia was Fannie Mae and Egypt was Freddie Mac. And Libya was AIG. Bahrain is Wachovia Bank, and so on and so forth.
And it was back in 2011. And we’ve gone a long way since then. And there’s been things that have been taking place which make a lot of those events look, you know, kind of like speed bumps in comparison to concrete barriers. So what are your thoughts on that sort of geopolitical environment today and how that impacts markets? I mean, one of the things about discussed as 1% is overvalued as the US market may be. And even on the bond side, you can say that you wished bonds was at 10-year at 1.55%. You can say this doesn’t make a whole lot of sense. You’re not getting paid a lot to take on essentially quite a bigger risk. At the same time on the relative basis, if you look at—and this is the trend that we’re on a few months back—was short Spanish debt, sovereign debt, which is negative, which in turn makes no sense. They don’t have a government, and then long US. Because first week, the Euros, in my own posts, so you’ve got a foreign exchange, some of them short, anyways. And then you’ve got the new differential. That’s been contracted to me. But the point I guess is that capital is global, and it’s fast. And gone are the days where it took a long time. You mentioned that policy is slow and markets react in real-time. And today, they’re acting super real-time. Because of the advent of technology, we can move capital in a blink of an eye than we do. And so.
Todd: Therein lies the arbitrage, right? To talk in derivative speak, it’s a fatal arbitrage, right? It’s a time-valued arbitrage. So it’s an unfortunate evolution. It’s not something, I hope you’re right on. But what I had written back then is sort of playing out unfortunately, right? But it takes time, right? So you could really look, go back in time and look at from a contextual standpoint and say, “The Federal Reserve went from defense to offense. Knowing it’s a Y2K”, and realize that the stock market is the world’s biggest thermometer. And, wow, if I can get the market up, everything’s funny when we’re making money, right, as the saying goes. But I feel like that’s been used as a tool for the last 15 years, as a tool to boost psychology, whether it was after 9/11 or age of the first Iraq war—or I guess it was the second Iraq war in 2003. And these things have ramifications. And the ripple in the pond, so to speak, the vacuum created in the Middle East, the secular uprising that was the manifestation of children who saw their homes being blown up on CNN. Those children, those kids, they’re adults now. And they’re decisive. They’re pissed off at the world. And they have an ideology that in comparison to Western society, that’s the way they believe. And you can’t change that. That’s been going on for centuries, right? So no amount of artillery or drone strikes or whatever is going to change the ideology of a lot of people, right? Far be it for me, it dictates foreign policy.
I’m not saying that we shouldn’t have gone in. Who knows what will happen if we didn’t go in? But there are ramifications. There are unintended consequences. There are many cases of moral hazard, right? And I think that these are all cumulative in cause and effect. So while they’re happening in the world, the markets are looking at a zero interest rate environment. There are negative interest rate environments. And hey, stock is the only game in town. I’m going to dance while the music is playing. And now that would go on until that psychology shift or that structural shift. I don’t see how central banks pull out without impregnating the bear. [LAUGHS] You know what I’m saying?
Chris: Yeah. I mean, it’s one of those things I’ve been looking. Because I just read an article this morning, I saw and read the last time, published it this morning and it was essentially looking at sovereign bonds and gold. And the interest thing, Todd, is that they’re trading—that shot is a mirror. So I brought up PIMCO 25 years. They’re a coupon ETF. And you overlay with gold and it’s a mirror. And what that means essentially is that bonds are trading like a commodity, right? And if they think about that. What it is, is bonds are yielding instruments typically. And so you’re buying before yield. And what’s happening now, nobody’s buying and agreeing for yield. They’re buying it because they want to flip it to somebody else more for a greater price, especially if you’re in Europe. You know, you’re buying a negative. The German 10-year that you’re losing 50 cents, right? And people are buying them. But they’re buying them with the anticipation that they can flip to somebody else. We’re going to lose a dollar, right?
Todd: So it’s a “greater fool” theory. I learned about this in college. And I also learned “follow the smart money” in college. And smart money has been bearish for some time now. So yes, one of the things that I’ve learned over the last 25 years in the market, but particularly in the last ten or five years, is that some things are only worth when somebody else don’t want pay for it. You could think that this or that has value. But at the end of the day, where you can sell it is what it is worth. And if you believe that there is a market place and there would always be a market place, I think free markets is a myth. There haven’t been free markets, in my opinion, a good decade. But there are still markets, right? There’s still an opportunity to make money, to get in, to get out, but the important part obviously is making that sell. If you think back to Sir Isaac Newton during the tool bubble, you know, he went broke. He bought it early. He sold it and then watched it go up without it and then bought it right back at the top and he got wiped out. I think history rhymes if not repeats. And that’s been happened.
Chris: So in that environment, do you purely only buy things that have underlying tangible value and have cash flows? And I know, to a certain extent, there’s yield-chasing. But you’ve got an underpinning to something like that, where if you take for example rental real estate, right? I don’t know what the cap rates are whether they’re commercial, residential. But let’s just take an opportune number and say—and look at commercial as we looked which was quite some time ago. I think they’re around about 3.5% yield on the high side, maybe about 6% depending on location. So in that environment, it’s still positive yield, call that commercial landing. It’s probably much higher than your bonds. But you can probably at least break it even on a trail like that. And then you’ve got an asset. So you may not be able to flip it to somebody else at a higher value. But over time, you’ve got these consistent cash flows that come in which provide you with certain level of stability. And I’ve contrast that to diving into equities that are price-to-book of, I mean, in the years, the price-to-book about 3 at the moment, price-to-sales of 2, which tells you something, and forward P/Es that are about 18. It’s not cheap. That’s become the average if you go across certain companies. It’s a whole lot worse. So then I think the downside is far more extreme. So I guess the question is do you go into asset classes like, say, rent or real estate. And this is the question that was put to me before. And I’m too scared to do it. I look at it and I think, you know, probably they’re tail end of the debt super cycle. And if you leave it, you know, it just kind of scares me. At least I’ve got a decent margin of error when that would be yield, when my cap rates need to be double digits on class assets for me to take that kind of risk. What are your thoughts on an asset class like that, like commercial real estate?
Todd: You know, I think it’s alright. I’m not qualified to offer an opinion on that specific asset class. But I think with everything, the hardest part about any investment is backing out the systemic risk, right? So ultimately, yes, you do want to have some underlying collateral, some sort of backstop to your investment. But that’s much easier said than done in this environment. But you don’t want pockets of opportunity here, like I’ll use the cannabis industry. Even though the DEA recently warned against declassifying it, that’s going to be the $100 billion industry about the next decade. But now, it’s mostly private equity. So there’s no—I mean there’s a few stocks that are interesting. But there are opportunities, not always in the equity markets or in the bond market. So I think those are relative opportunities. But I think if you look at alternatives, if you look at new and different industries that are emerging, that are entering into a growth phase, I think you’re going to see a tailwind as opposed to a headwind. But again, you got to do your work. For as long as I’ve been trading, more so in the last call it 15 years, nobody really cared what a company did. They just wanted to know the symbol and where it was going, if it was going up or down. And that was the nature of the beast, right?
Chris: And it’s an extrapolation of the long-term bull market. And people get lazier and lazier.
Chris: It’s only when you really get punched in the face that you go, “Hang on a second. I’ve got to pay a bit of attention here.”
Todd: Well, yeah. And that’s what Mike Tyson famously said, “Everybody’s got a plan until they get punched in the face.” The market hasn’t got punched in the face in almost a decade. Again, for those who have been trading or have been in the market for the last seven years, they don’t know from a bear market. They don’t know from a downtick. In the last 25 years, I’ve traded through a fair amount of financial crises. And almost to a point, each one of them characterized by the cycle of denial, migration, and panic, right? All three of those things. And usually, when there’s panic, that’s when you’re warned with the other way. And there’s this mild going back the other way. But it’s very hard to catch those cusps. I used to say when trading, you make your money between the 20’s, right? So you don’t need to trade or play in the red zone during the costs either way. But again, different strokes for different folks. Not everybody has the time and the inclination to do the work. As you said, it’s become a lazy man’s market that goes up year after year. I don’t know what the exit strategy of the Fed is. I don’t think they know what the exit strategy is.
Chris: I think they have one. Their method is mapped. So they can’t raise rates because if we look at the enormous amount of debt, it no longer becomes an issue of repaying debt which we know is not going to happen. It just becomes a pure factor that they cannot service the debt.
Todd: Well, the question becomes—and I’m not again—this is not my valid take per se. Whether they can retire that debt and move on without, you know, really narrow the dirt, so to speak, I don’t know. I talk to a lot of smart people and they don’t know. This is really unchartered waters and I think that for me to sit here and tell you markets are selling up and the market’s going down is just in general because I don’t know. So I’m just trying to find good companies that I can be disciplined in my approach too. And you know what, I’m not always disciplined, right? It’s easy to get caught up in the world when the world’s going one way. But when that world shifts, you have to be aware and you have to take action. Hope is not a viable investment vehicle.
Chris: So you made an interesting comment before and I want to go back to that as a last topic because I heard upon a session yesterday with a gentleman who is in that phase of not in the industry of cannabis, I think. And I was being educated on the medicinal attributes of this non-psychogenic attributes that are within the hemp plant. And one of the things that we were discussing was this demographic which we have. We know that the baby boomers are also retiring. And that’s the big focus and the big trend down watching and looking for opportunities in consumption is going to change. We’re already seeing that. And not as many people are buying microwave ovens and washing machines and so on and so forth, certainly healthcare, retirement facilities, things of that nature make a lot of sense to me. So it was fascinating to get his take on the medicinal products. It basically exists when none of it think it existed. Some of them have been outlawed due to the nature of their initial plant, cannabis.
Todd: If I can interject, one of my—I don’t like to talk individual stocks, but one of my biggest positions now is GW Pharmaceuticals, right? So I’ve been very cognizant of political environment as it pertains to marijuana. I thought it was very interesting when the DEA came out, I read that press release a dozen times. And it was interesting to me that if you really read between the lines, what they were saying is there’s no medical benefits as dictated by the FDA. So therefore, they can’t be classified from a class 1 to a class 2. But what that does is, in effect, it shifts the political liability from the DEA to the FDA, right? So once the FDA comes out and says that there is benefit to allowing what we know about the cannabinoids of CBD as opposed to the THC, so not the part that gets you high, but it’s a really amazing plant, right? If you really go into the deep dive into what they could do with this cannabis, it’s really quite amazing, right? But the DEA is not going to rule. It’s the Drug Enforcement Agency, right? So when the FDA shifts their staff and I think that’s a matter of time, I think that you’re going to see data that supports the notion that CBD, cannabinoids reduce childhood epilepsy, for instance, right? As that’s proven through, that’s a very—that’s a very socially-defensible position, right? Pricing is the barricade, right? The pricing is a whole another ball wrapped. But from a socially-defensible standpoint, you can argue that this is a very positive evolution/innovation, right, in the drug world. So I think that the FDA has to, at first, the DEA will give response to that and politically cover their ass. But the other side of that train, you see Hillary kind of standing on the soapbox with regard to Mylan and the EpiPens. It’s great to prove a drug that serves a critical need. But when you try to profit from that drug, you’re in a very much like, I would say, Chrysler in 2008-2009. I think big pharma or biotechs—that is the barricade, right? That’s the thing that keeps me up night is there’s going to be all this political pressure to lower the cost of drugs that are necessary for children’s epilepsy, for EpiPens. Whatever it is, that is politically a gold mine, right?
Chris: If you think about oil, oil has always been a political commodity, which is why I found it difficult to discount it. How do you actually discount the political side of oil? It’s really, really difficult. And then you come back to the demographics we just talked about, you’re going to have tens of millions of people that are entering the retirement space, needing pain drugs, and gives a solution. We know it’s a solution. It’s been utilized for centuries. Does it mean that pharmaceuticals in particular end up being a political commodity like oil? I think it’s more than probable.
Todd: Well, I think it already is. Unfortunately, talking about demographics, I think that’s a really important topic on a few fronts. You know, the millennials are catching so much shit for being disenfranchised. But what do you expect? Look at the world war they’re coming into. This is a function of the actions that—from 15-20 years ago or ten years ago even. It’s a manifestation, but it’s a cumulative manifestation. So when you look at something like pharmaceuticals, the political appetite to bash pharmaceuticals for price gauging, that’s a gold mine. The same as once they bashed the banks in 2008 during the financial crisis.
Chris: Very interesting.
Todd: Acceptable casualty of war. Somewhere along the line in the last 15 years, speculation became a four-letter-word. Profiting became sort of a four-letter-word. And nobody wants to know from it until they need to do it themselves. So this is—it’s become a very political industry unfortunately or fortunately depending on where you sit as a card-carrying free-market capitalist. I’m not happy with the way the world has evolved over the last 15 years, all-time highs notwithstanding, but you got to plan ahead and don’t knock the hand you want.
Chris: Not sure about the words that have been said. That’s been fascinating conversation. And I really appreciate your time.
Todd: Yeah. Listen, I don’t do this much anymore. You know, probably a good thing in this environment. But I do think that education in this world is probably more important now, as important as it ever was. And so I think that folks need to really pay attention to what’s going on. And that’s not to say the market can’t go higher. But the DNA of this market is very different than the DNA of our fathers’ market.
Chris: Couldn’t agree more. Well, until next time, mate. Thanks a lot.
Todd: I appreciate it. You take care now.
I’m always looking to make these conversations more interesting so please tell me how I can make the podcasts better here.
“Good traders know how to make money but great traders know how to take a loss. For if there wasn’t risk in this profession, it would be called winning rather than trading.” — Todd Harrison