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🔴Financial Crisis Indicators Hiding in Plain Sight (w/ Peter Atwater)


PETER ATWATER: I can remember writing- shortly after
Trump was elected, he has to placate his base. And he has to placate the markets. And their interests
are mutually exclusive. This is a time where small localized individuals have
far greater power than those at the center. My freshman class this spring- they do not see 2018 the
same way investors see 2018. There is no question in their mind that the peak is
behind us. GRANT WILLIAMS: Now, the peak in what for them? PETER ATWATER: The peak in confidence, their
confidence, the confidence of America at large. They saw something 2014, 2015. When somebody picks up
the Wall Street Journal, the Financial Times, to step back and say, as you’re reading these
headlines, why are they here? Why are these on the front page? And they were on the front page always to confirm the
bias of the reader. The front page is telling you this is the consensus
view. The nationalist Nissan leadership base said we are not
going to become fully integrated into a global organization. That nationalistic opposition to globalism put Ghosn
very vulnerable. The American Dream from for most Americans has become
unachievable. And so, that which is not given will be taken. GRANT WILLIAMS: I’m about to sit down for a long
overdue chat with a man who probably makes me question things I read and think about more than just
about anybody else. That’s Peter Atwater. There’s so much I want to talk to him about confidence,
mood, left versus right. And of course, Tesla, I can’t leave that one alone and
the trade wars. So, let’s go see what Peter has to say. Peter Atwater, welcome back to Real Vision. PETER ATWATER: Thank you, Grant. GRANT WILLIAMS: We’ve been trying to do this for a
while. We finally got a diary synced. But now we’re here. It just feels like there’s nothing
to talk about. PETER ATWATER: There isn’t. Either we just call it a
day. And- GRANT WILLIAMS: What the hell are we going to talk
about? After our first conversation, which was over two years ago now was one of my favorite
interviews I’ve done. It’s just talking about mood and confidence and all the
signals there. And since we had that conversation, I’ve recalled that
over and over in my mind, and you’ve really helped me see what’s going on through
a completely different prism. So, I thank you for that first of all. PETER ATWATER: No, thank you. GRANT WILLIAMS: And then there’s just so much of it. Once you’re weighed to it, everything has an ulterior
message and send signals. So, there’s a ton of stuff I want to talk to you about. But I guess I’m going to start by throwing out with
you, what do you think is the most important indicator that
you’re seeing right now? PETER ATWATER: So, the things that I’m focused on right
now are iconic people, images, characters. We’ve transcended reality to a point where levers that are being pulled all relate to very large
oversized symbols. So, you’ve joked with me about the pandas. But China’s decision to recall the pandas from the San
Diego Zoo is an enormous powerful message that people are completely ignoring, because it seems
cute and silly. It’s like, no. They’re saying, we’re retrenching. And if you don’t understand that symbol, then you are going to be completely trampled by what’s
coming after this. Because we’re sending you billboard size messages that
you’re ignoring. GRANT WILLIAMS: But people look at that. And they just
see it as a, I guess, in panda poem, a Tit, Tit for Tat, Tat. I don’t know if that’s- I
don’t know what the pandas are called. But if everything that’s happening feels like it’s just
well, you do that, we’re going to do this. But if you look beneath the surface, it’s steadily
escalating. And it people, as you said, won’t believe that the
pandas is actually a major escalation of this. But it is. PETER ATWATER: It is. And I think a lot of the reason
we are missing all of this, is that it’s very uncomfortable to take something that
is as psychologically distant as a trade war. And believe that that could possibly be true. It’s the
difference between talking about cancer as a broad term, and then receiving a diagnosis that says,
you have lung cancer. And so, it’s going to take something- and I don’t know
what the precipitating event is to bring this foreign thing that’s out there that crystallizes in our
mind and we go, oh, shit, this is real. GRANT WILLIAMS: Yeah. So, let’s talk about that. Let’s
stay on the trade war for now. Because the signs that you’re seeing from the Chinese
side, the signs that very clearly and deliberately being sent by the Trump
administration. The Huawei thing is perhaps the one to talk about first
and foremost. But what do you see? How are you seeing this play out
through the media, through those iconic images? PETER ATWATER: So, Huawei is a wonderful, iconic
example. So, it is to China what Apple is to us. So, I think it’s only a matter of time before something
is aimed at Apple. Because we’re now going after the iconic American
industry that has been at the center point of this recovery. And so, we, the Chinese government are going to do
something to take a bite out of that Apple. The challenge as we’re seeing with Huawei and others
is, the egg is so scrambled that when you try to separate yolk and white to say, this
Chinese symbol, this American symbol, you end up with ripples through this scrambled supply
chain that has enormous unintended consequences. And so, as much as leaders want to send these symbolic
messages over the bow, they’re ignoring either deliberately or just out of
ignorance how deep the connections are and the odd pivot points that go along with that. GRANT WILLIAMS: But it is ignorance because the Huawei
thing, the day it happened, which is, as we record is just a couple of days ago. And I woke up, read that and I was like, wow, this is a
major escalation. And in the very next day, I guess it walked back again. Is that ignorance which terrifies me or was that a
deliberate strategy that we’re going to do this and then we’re going to walk back just to show you
where we might go with it? PETER ATWATER: But you can’t keep walking things back. GRANT WILLIAMS: No, exactly right. PETER ATWATER: So, you may be able to do that once or
twice. But eventually, you have a cascade. It begins to take on a momentum of its own. I think
you’ve seen a lot of that in the agricultural space, where what felt like symbols have all of a sudden
created real havoc. And so, you can’t walk it back. The damage has been
done. GRANT WILLIAMS: So, when you try and game this trade
war, what are you looking for? What are you looking for as a potential tipping point
that means okay, we’ve gone too far, this is no longer posturing, this is now going to
become a big problem for markets? PETER ATWATER: So, what I’m looking for is the crowd to
stop coming up with placating narratives that go along with each of
these actions. And so, every day, I’m watching to see the causation
arguments that are out there. The market fell because- the market rose because- and it’s remarkable how we’ve been able on down days to
come up with yes, but. And so, there comes a point where the crowd says, there
is no but. And so, what I’m watching very closely is, how close
have we come to the cliff where we just keep going? And I think we’re getting precariously close. GRANT WILLIAMS: Yeah. This narrative on the markets
about Trump saying, we’re going to stick another 25% on $200 billion. And in the next day, the tweet about things are going
great. I’ve got a great relationship. I’m astounded by how long that seems to have worked and
seems to have held the market together. Maybe it isn’t that holding the market together. I
don’t know. Because it feels to me like we should have reached that
point you’re talking about long ago. PETER ATWATER: So, I can remember writing- shortly
after Trump was elected, that he is like a soccer player who wears one jersey, runs midfield to change the jersey to play for the
other side. And what I mean by that is, he has to placate his base.
And he has to placate the markets. And their interests are mutually exclusive. The Venn
diagram doesn’t overlap. And so, this has been going on for the entire term. It
actually took place the night he was elected, and the futures cascaded, and then people are like, oh,
no, he’s not going to be as bad as that. And then you had to rally through the tax incentives. And so, he is playing a very challenging game, where
the two ends are in absolute opposition. Globalization and integrated supply chains is anathema
to those who are looking for a wall, whether in physical or emotional form. GRANT WILLIAMS: You write all the time about confidence
and the importance of confidence in investor psychology, the markets themselves. Trump has been successful in many avenues that he’s
charged down. Does that confidence on a human level- boiling it down
to him only- is that to our detriment, eventually, that he has been boiled with more and more
confidence and so, he’s becoming more and more- or using
brinkmanship more and more, because he feels imbued with absolute confidence? PETER ATWATER: Oh, absolutely. And you see that in the
relationship between the decisions he makes when his approval ratings are high versus when they’re
low. And not uncommon that with leaders of that personality
type, they become very emboldened by their approval ratings. What’s interesting about Trump is that other leaders
have chosen those high approval ratings to undertake efforts that are cross the aisle. So, we’re going to do something that is going to
stretch my base a little bit but is good going forward. Or I believe it to be good. There’s a generous quality. What you see with the President is the antithesis of
that. This is when he is very vindictive, and tries very hard
to truly press- GRANT WILLIAMS: Settle scores. Yeah. PETER ATWATER: Yeah. Settle the score. And that’s something that you see based on personality
by example. And then a terrible example and an extreme example, is
what was going on when oil prices peaked last year, and the Khashoggi killing. That, to me is a
classic revenge-filled moment of peak confidence. GRANT WILLIAMS: Let’s switch away from the President to
the Fed, because there’s another group which have a tremendous
effect on the markets. I never associate the word confidence with the Fed,
just it’s more hubris to me, I don’t know they’re confident, I think they believe-
they truly believe that they have all the answers. What did you make of Powell’s flip flop? I asked as many people as I can this because I’m still
trying to figure it out. PETER ATWATER: I think that they, as a group, are
extremely underconfident. I think that the Fed as an institution peaked, whether
it was with Greenspan or slightly thereafter. And I say that because in the Greenspan era, no one
knew the names of the regional Fed governors. There was one voice. And that singular voice speaks to
the confidence inside and outside of the Fed. Today, you can name all of the regional districts, who
they’re headed by. And so, you have this Medusa-like organization that is
trying to be all things to all people. And that’s a terrible place for the Fed to be at this
point. GRANT WILLIAMS: But is it a coordinated attempt to
spread as many- let’s just throw a whole bunch of stuff at the wall and
see what sticks, see what resonates? Or is it every man for himself, I’m going to get out
and say what I think? PETER ATWATER: It’s every man for himself. GRANT WILLIAMS: Really? That’s interesting. PETER ATWATER: Yeah, no, you have seen power shifts
from the center to the region. And candidly, you’re seeing that in lots of other ways,
as well, today. If somebody said, I want to run for president or be
governor or be city mayor- I’ve said to my students, this is a time where small localized individuals have
far greater power than those at the center. GRANT WILLIAMS: Or may have peaked as an example. PETER ATWATER: Exactly. I was about to say. He embodies
that. This is a time when grassroots leaders are going to
come to the fore in good ways and bad ways. But yeah, I think that you’re seeing the rise of local
leadership today. And it’s being mirrored at the Fed. GRANT WILLIAMS: You mentioned your students- when
you’re trying to teach kids about this stuff. And realistically, the only knowledge they have of the
world has been since we went through the looking glass. How do you try
and teach them about how the world used to be and how it’s always run when they live in this strange
construct that we’ve built around ourselves? PETER ATWATER: So, one of the fabulous parts about
teaching college freshmen- it’d be even better with middle school students, is
they feel it unconsciously. They sense all of the uncertainty. My freshman class this spring said the peak was really
three years ago. And they could define it in terms of the music that
they were listening to, what they believe to be true, that they do not see 2018
the same way investors see 2018. There is no question in their mind that the peak is
behind us. GRANT WILLIAMS: Now, the peak in what for them? PETER ATWATER: The peak in confidence, their
confidence, the confidence of America at large, they saw something 2014, 2015. GRANT WILLIAMS: Oh, so prior to the election? PETER ATWATER: Prior to the election. GRANT WILLIAMS: That’s interesting. PETER ATWATER: And so, to talk about the election with
them, it makes perfect sense to them that Americans who feel worse would be favorable
towards Trump versus Clinton. So, it feels very right to them that we’ve evolved the
way we have given that confidence peak some time before. GRANT WILLIAMS: So, by immersing ourselves in markets
as we’ve done, are we doing ourselves a massive disservice right now in trying to figure out
what’s going to happen next? PETER ATWATER: Yeah, I think that the markets have been
very late to the table here. GRANT WILLIAMS: Yeah, seems to be. PETER ATWATER: So, whether you look at auto sales, you
look at unicorns, there are lots of indicators that suggests that the
peak was behind us. And from my perspective, even vis a vis the markets, I would say that the financial market peak was January
2018 when Bitcoin- when asymptotic, what it is, what it embodies, talk
about iconic institution. But Bitcoin, for me, the peak of that bubble was the
peak in our willingness to embrace transformative change at such an extreme
that this time was definitely going to be different. And grandma was in on it. GRANT WILLIAMS: Yeah. When you talk to people about
this. And I read every single piece you put out, because it always just makes me think about this stuff.
And sometimes, I’ll read a newspaper article, and I won’t think twice about it, then it’ll appear in
your Friday article, and I’ll go, damn, I haven’t think about that. How do
you try and frame this stuff? Because I know you see something behind every headline,
and I’m trying to learn how to do that. And it’s between you and Ben Hunt, it’s an ongoing
class that I’m taking. But can you help people understand how to read these
things in the correct way, and how to open their mind to what their message really
is behind it? PETER ATWATER: So, I think when somebody picks up the
Wall Street Journal, the Financial Times, whatever they do, and you can do it online, the online
curating works in the same way, is to step back and say, as you’re reading these
headlines, why are they here? Why are these on the front page? And they were on the front page, always, to confirm the
bias of the reader. It is very, very rare that you’ll see on the cover of
the Journal, the Financial Times, The New York Times something that is challenging,
that’s going to cause the crowd to step back. What they want is for you to start reading and keep
reading from there. So, the front page is telling you this is the consensus
view. And so often, you will have seen a story that a week
ago was on page B18 move to the front page of the B section to move finally
to the front page of the front section. And so, that migration is telling you that the story
has legs that it sticks, and the momentum is now peaking. I think it’s important to recognize that front page
acreage is incredibly expensive, so nothing can last there. It hits and goes. So, this
is the editors capitalizing on the frenzy. And once it’s there, it’s done. So, let me give you a real-life example from some of
these New York Times. What is front and center on the top of the New York
Times? A story about the financial distress of people who
bought taxi Medallions at the top. And you dig in. And there’s this beautiful picture of an asymptotic
peak and Medallion prices that have collapsed. And so, you couple that, and you say, wow. So, here on
the one hand, we have taxi drivers who are despondent, and you have Uber going public. What a wonderful contrast in mood, the bullions albeit
stale of an organization like Uber, and a traditional taxicab business that is all but
bankrupt. GRANT WILLIAMS: But how do investors learn to step away
from that, recognize these things for what they are? And we talk a
lot on Real Vision about being a contrarian. And there’s a way to look at that in the broad spectrum
of things, but to try and force yourself to think like one when
you read the news, which seems is what is required. You don’t need to act on the story, but you have to
teach yourself to be a contrarian. Ben Hunt says, why am I reading this? And why now? Which is paraphrasing exactly the way you talk about
is. And that’s something that I’ve really tried to do to
every headline. How do people always train themselves to be able to
read this differently and either take action over it, or at least open their
mental pathway to take an action that goes against the crowd completely? It’s a hard
thing to do. PETER ATWATER: It’s an incredibly hard thing to do. And
it’s lonely. So, that makes it difficult. It is inherently in conflict with what the crowd is
doing. And it’s far easier for us to accept the opinion and
ideas of a crowd than it is for us to come up with our own. I think that for most investors, being a contrarian is
all but an impossibility. But at the same time, what contrarian thinking does is it enables you to look at things from a risk
perspective. And to say, yes, yes, prices could get far worse here
at the low. But as an entry point over the next month, I’m not going to pick the low but the lowest in this
neighborhood. And if I’m wrong, it’s because bad went to terrible,
not great went to good. Which is when most investors start to look at things. They buy the dip. It’s no, no, don’t, that train left.
This is they’re truly buying things that are reviled, deeply discounted in price, and are very lonely. Buying
ag, soybeans a week ago when every headline from Deere to crop plantings is telling you it’s only
going to get worse. GRANT WILLIAMS: There’s so many things in there, and
maybe a bit scattergun with this. But let’s talk about buybacks because this is something
that you’ve written a lot about this. What does this mean- this massive, massive move? I saw
an amazing stat, I may get my numbers wrong. But it was saying that the S&P would have been 19%
lower if it hadn’t been for stock buybacks. What’s the signal there? PETER ATWATER: So, a couple of things about the
buybacks. If you think about companies who started to buy when
prices were lower, they bought few shares, then a larger volume of shares. And so, you started to see as earnings were rising,
share buybacks were rising. And so, what you’ve had is a buying more at higher
prices. The classic Don’t Do This. What Graham and Buffett say you should never do. But
that is inherently what we do. And in this cycle, it’s what corporations have done to
get a record access. And the challenge with that if you’re a corporation, if
you’re the CFO or the CEO, is that in the back of your mind, there’s an average
cost. GRANT WILLIAMS: Way back. PETER ATWATER: And your average cost is rising and
rising and rising and rising. And so, you have cost basis bias, which says if prices
start to fall, I’ve got to keep buying. And the danger with that is that it becomes
existential, that now, I have no choice but to buy because I am the bid. And
what’s been interesting of late is, I think investors are now frontrunning corporate
bidding during the blackout period. And an example as you are, to me, was Lowe’s this
morning, where the stock plummeted. And then it was a bungee jump kind of an ascent. And you can imagine in the minds of some investors,
traders thinking Lowe’s can’t buy now. But they’ll be back next week. And so, I’m going to be
lifted out of this. And that’s a really telling aspect of the behavior that
we can now game corporations because we know they’re coming. GRANT WILLIAMS: But, that’s really dangerous for
markets, right? PETER ATWATER: They’re terribly dangerous. GRANT WILLIAMS: And it’s amazing how you started
talking about these no skid marks events, Toys R Us is the one that jumps immediately to mind
where these bonds are trading money good. And then suddenly, they’re bankrupt. And that just
tells you how little people are looking at- and they’re all certainly are worrying about
deterioration in credit quality and stuff. But it’s amazing to me how quickly the market- whether
it’s passive algos or not, I don’t know, has figured this out. And when we get these big downdrafts on specific missed
earnings and slash guidance- those are the two, the classic double that you don’t
want in your announcement. And already, the markets figured out that’s potentially
a buying event, is that algos? PETER ATWATER: I think that there’s a lot of that. But
I think whether the algos have picked it up, or whether psychologically, the crowd now knows that
once the blackout periods end, corporations will be back because they have to be.
We’re late in the cycle. So, in order to boost DPS, it’s about some growth at
the top line but the denominator has got to shrink. And it gets really interesting in the context of Uber. So, the other day, there was a fabulous chart showing
the cost basis of different investors in Uber. And I think it’s really significant that late in the
private rounds, who shows up but SoftBank and SABIC, the Saudi kingdom.
So, now you have investors, you talk about existential risk. They can’t afford for
Uber to trade below their cost basis, because that then draws into question so much. So, the first time, they’ll buy the dip. And my sense
is that’s probably what happened last week, the week before. But as we look at symbols and
organizations that are of strategic global importance, I’m watching Uber because it has huge political risk
now embedded in it. If SoftBank and the SABIC start to lose money, that has implications through to governments around the
world. GRANT WILLIAMS: Why does SoftBank fit into this
narrative? Because I’ve looked at it and shaking my head for a
long time now. I have never believed the hype. There’s something about
it that just doesn’t smell right to me, is there any integral part of this? PETER ATWATER: Yes. Yeah, I think they- I’ve said, my associate’s son is the Carlos Ghosn of
finance today. He has created a financial alliance that links Silicon
Valley and the kingdom. I call it Silicon, Arabia, Saudi America, whatever you
want. But he is at the center point of political, economic,
financial ties that go now globally, in the same way Ghosn was. Again, I don’t think folks
truly appreciate the symbolism. Ghosn is in jail purely for symbolic reasons. GRANT WILLIAMS: But explain that because there will be
people- that story has been amazing to go under the radar. PETER ATWATER: Yeah. So, no question. He spent foolishly and the things that they’ve
uncovered would naturally have been uncovered. GRANT WILLIAMS: We’ll get onto CEOs but foolish dealing
with it. PETER ATWATER: But he was defrocked because the
nationalist Nissan leadership base said, we are not going to become fully integrated into a
global organization. That nationalistic opposition to globalism put Ghosn
very vulnerable. And it was just a matter of what can we find to upend
this? And remarkably easy? It didn’t take much, and the consequences have been
perilous eyond what you would normally expect if confidence was
rising. He should be out on bail somewhere and he’s- so we’re
imprisoning the symbols here. That’s telling us that there is enough nationalistic
groundswell in Japan, I would say. You’d sense the same thing in Europe, that the days of
integrated behavior are coming to an end. We are thriving, we are volcanizing the global economy.
And he was the poster child for integration. And I see a very similar potential outcome on the
SoftBank front, because what you have in SoftBank is the Mitsubishi Nissan Renault. It’s the same concept, same thesis, now likely to be
viewed same cancer applied to a different patient. GRANT WILLIAMS: So, how important is it that the in the
last month, we’ve seen the stories about the hundred billion IPO of
the vision fund? How important is that as a potential catalyst for this
change? PETER ATWATER: I think it’s an extraordinary expression
of the overconfidence that exists inside of SoftBank. GRANT WILLIAMS: But nothing wider than that? It’s just
it’s a purely SoftBank specific? PETER ATWATER: So, I again associate that to say, if
SoftBank is a symbol- maybe THE symbol of the integrated capital flows into
high tech, into disruptive technology, into this time, is different technology space. That IPO, the vision fund says to me we’re ringing the
bell. GRANT WILLIAMS: It’s funny isn’t it? The bell, it felt like Uber and Lyft were going to be
in this battle, the vision- It seems to be one upping. The bell’s is out there
somewhere. And as soon as I saw that vision fund headline, I was
like, this is- PETER ATWATER: But what that vision fund generated was
skepticism. And that is very, very different from what I think we
would have seen 18 years ago. GRANT WILLIAMS: So, just going back to going briefly,
how important is it that he was a foreigner? PETER ATWATER: Oh, it made him simple to oust. So, again, we will easily gleefully upend foreign
leaders. You saw the same thing in Barclays when Barclays had to
skid, and what did they replace him with? Diamond was replaced with a very traditional
nationalistic leader. I would say it’s what makes Jes Staley extremely
vulnerable today. He is not British. He is not inside the tent. Have nothing to do with
ability. Just we will want leaders who look, speak, act like us,
however, we define the us. GRANT WILLIAMS: Yeah, that’s sure made you now. Yeah,
exactly right. So, I’ve done I think a fantastic job of leaving this
question until we got to this, but you started us down the automaker thing. So, I have
to bring the conversation around a Tesla, because so much of what you talk about is wrapped up in
this stock and I get criticized all the time for being fixated
with it. And I make no apologies for that. I am utterly fixated with the story, because I think
it’s way bigger than Tesla. It’s nothing about making a few dollars off a short
position. It’s nothing to do with that to me. This is the crystallization of everything you speak
about, everything Ben Hunt speaks about, of everything I’ve watched build up over the years.
It’s malinvestment, it is low cost of capital, it is reaching for yield, it is dreaming, it’s
ecoculture. It’s the cult of celebrities, everything wrapped up
into one stock. And you can now finally see this thing unraveling in
real time it seems. So, broad question, how important is Tesla to the whole
market narrative? And then from there, what’s your take on it? Because
I’m fascinated. PETER ATWATER: It’s hugely important. And it’s hugely important because of the personality
type that is Elon Musk. I joke often he, like others that are out there, is
often analogized to Harold Hill, the music man. Promising boldly. And I think of that in the context of
more specifically, the circus barker and people will be offended by the
analogy. But if you think about a circus barker, the first time the circus comes to town, the lady has
two heads, and everybody goes. And in the next year when the circus comes back, she’s
got to have three heads, because otherwise you’ve seen it, and then the three
heads have to become five, become eight. But eventually, when you get to 10 heads, the crowd’s
like, no, no, I just- GRANT WILLIAMS: It’s like six-minute abs. And say,
that’s fine. PETER ATWATER: It just becomes so extreme as to be
disbelieved. And I believe that that’s the nature of the con, they
become self as fixating that in order to perpetuate it, you have to go to such great
lengths that it finally collapses on its weight. And I think that you’ve seen that with Musk and all of
the pivots. This week, it’s cars. Next week, it’s cars with solar panels on the top, then
it’s cars that have this, and now, we’re talking about insurance. And so, to me,
Tesla is now the 10-headed lady. And it’s become so extreme as to be disbelieved. Now, having said that, I think in the last week, you’ve seen a capitulation that we no longer believe
that. We accept that it’s a 10-headed lady. And so, you’ve got these calls of $30, $10, how low can
you go? GRANT WILLIAMS: So, people are desperate to get the
lowest price. PETER ATWATER: Right. So, it’s the same thing you see
at the top where $100 target becomes $200 becomes $500. So, we’re
seeing that in a very short run. So, I would say to anybody listening to this, in late
May, early June, this is not the time that I would be eager to get in on
Tesla. I think Tesla is a goose egg at the end. But too many people have bought into the narrative that
it’s suspicious. So, the potential is some sort of a bounce. Somebody
makes noises about being interested in it. Almost anything at this point could levitate at some
meaningful percentage. But it’s significant because it’s far more substantial
than Theranos was. Theranos to me, Elizabeth Holmes stands out to me as
the subprime of circus barkers. She was too extreme too quickly that the veneer wasn’t
deep at all. Tesla makes real cars. So, that gives him something to show people. This is
what we do. And at the same time, you have something like SpaceX, which is demonstrating tremendous competence in what it
does. So, there’s some substantial form to Tesla, ignoring
the financial condition. And so, that adds psychologically some strength to its
viability. But we’ve moved from Theranos and squarely to something
that is more real. So, I think of Tesla’s the Alt+A of this cycle, that
there is still nothing there and it will be eviscerated, as confidence falls. The broader danger are companies that have perceived
real business models- Uber, Airbnb, Amazon. And I think that the challenge for all of them is as
scrutiny intensifies, we work. What are they? They’re logistics companies. So, how do
you value a highly leveraged, highly growing logistics company that in many ways has
no real assets? Its balance sheet is goodwill, intangible? Its balance
sheet is network effect. GRANT WILLIAMS: Yeah. For sure. PETER ATWATER: The same thing with Facebook? GRANT WILLIAMS: Yeah. So, as night follows day, does a return to valuations metric follow the
destruction of confidence? PETER ATWATER: Yes. So, scrutiny and confidence- they
run inn opposition. So, as confidence falls, the intensity of the scrutiny
is going to rise. And we start to look for things under the rocks, not
buried treasure, but worms and slugs and things that then support the narrative that this is
a discredited organization. Those that are most fragile, like a Theranos will fall
very quickly. But there is no question in my mind that the cycle has
changed to, again, looking, questioning is this real? One of the most important elements to me of Uber from a
narrative perspective was growth is not enough. There need to be earnings. So, that, again, speaks to a
lower level of confidence. GRANT WILLIAMS: But soon as- God forbid- earnings
started to matter again. That, in itself, could cause all kinds of things. PETER ATWATER: Sure. GRANT WILLIAMS: And is that inevitable now that we’re
on a path to that? Because if you believe in cyclicality which I do, then
we need to go back to something real and valuing real earnings as a decent way to clear away
any puffy valuations that might be out there. PETER ATWATER: Yeah, so, let’s look at the inputs to
valuation, to earnings, and how stretched all of the inputs are. This isn’t a
case where one metric has been stretched. Everything has. We have to start at the bottom. Tax
rates that corporations are paying, interest expense that corporations are paying, the
operating margins based on global manufacturing and the ability to outsource to the cheapest location. So, the issue, I think, from evaluation perspective, is
that we’ve taken this accordion and we’ve stretched every variable to its extreme. So,
that when the accordion starts to come in, you’ll see demands for higher tax rates, at the same
time, interest rates are rising, at the same time, companies are having to on-source. So, the potential for corporations is to have this
crisis in parallel, that all of the levers that they’ve pulled- I can’t buy
back my shares. So, it all starts to hit at once. And you know that the
earnings models that exist today, nobody has taken all of the levers. GRANT WILLIAMS: But in this, yeah, works community
adjusted EBITDA. PETER ATWATER: Yeah. GRANT WILLIAMS: But they got away with that, right?
They got away with it. Now, is that another sign of confidence and how do we
try and figure out when that is going to change? I saw my first article that made a joke about community
adjusted EBITDA recently. Is that the first chip in the- PETER ATWATER: Those are the signs that we are no
longer tolerating the ridiculous. If somebody asked me to write a book on the last couple
of years, it would be called the Gullible’s Travels. Because investors have been completely smitten by the
bells and whistles and the sideshow barkers and all of the razzle dazzle. GRANT WILLIAMS: But how important is it that this
hasn’t happened yet? How have we managed to avoid this for so long? And why do you feel like we may finally be at the point
where all this is going to matter? PETER ATWATER: So, I think if you go back to a peak in
2015, what has prolonged this? Well, the tax. First, the promise of the tax cuts. And again, folks
don’t realize that when the legislation was finally approved and signed, that was the top. That was
coincided with Bitcoin and people eating tide pots. So, you had that extreme in confidence. But it was
sustained by financial engineering. And investors in the cycle have fully embraced whatever
financial engineering they can. After the tax code, it’s been stock buybacks and the
Fangs. And so, you’ve had more financial engineering, but more
importantly, you’ve had narrowing. So, we went from embracing a diverse portfolio to a
series of acronyms. And even that has narrowed. We now have the mega stocks, Microsoft, Apple, Google. GRANT WILLIAMS: I honestly believe people are becoming
cuter with acronyms now than shoving stocks in there- but it’s working. PETER ATWATER: But from experience, the cuter the
acronym, the more painful the end. So, if I’ve learned anything from being involved in
this industry for a long time, when the acronyms start flying and they feel like
something out of a comic book, ride the wave but realize that the undertow will be
precipitous. GRANT WILLIAMS: So, what role and how big a role, I
guess, is a better question, does passive play in perpetuating this and perhaps, its
unraveling? PETER ATWATER: So, I think that you’ve got two aspects
of passive. One is that it is an autonomous vehicle. And that’s a
really important analogy. Because we’re becoming frightened of autonomous
vehicles. You could see that with Tesla, you see that with Boeing, we are now becoming
suspicious of autonomous vehicles. And people really cringe when I call passive index
funds, autonomous vehicles, but that’s what they are. So, there’s that aspect of it. It’s also price indiscriminate. So, I think that one of aspects of this, you have to go
then look at 401k flows. So, economic driven inflows into passive instruments is
keeping all of this going. I don’t know how many young people have reached out to
me to say, hey, where do I start with my 401k? Where do I start with my IRA? So, there’s no question
that this full employment is having an impact into flows that are inherently passive, because your
defined contribution sponsors have all been beaten with a stick to come up with the
lowest cost alternatives. GRANT WILLIAMS: So, taking it back some of this
spectrum in the beginning because it’s been rattling around my head ever since. And that’s this retrenchment on a national level, from
globalization, the growing cacophony of noise about capitalism not
working. And then on an individual basis, we as members of
society, people, retrenching and whether that’s to play PlayStation or
into their phones, or whatever it may be, what does all that mean, when you take it together for
the future? PETER ATWATER: So, I think what you’re starting to see
is a shift in priorities- from an investing perspective, to community driven
investment opportunities. Things that are real, that I can see the impact
tangibly. I can walk past it. I can talk to people who are employed there. Buying stocks is a really psychologically distant
experience. I can’t look at it. And we’ve made it even more so because now, you don’t
even get the stock certificate. So, I have nothing there. So, it’s very questionable as
to what I’ve got. So, I suspect that the whipsaw reaction and we’re
starting to see this in many communities, Detroit being a great example, where folks are saying,
if I’m going to invest, I’m going to invest with real impact that I can
control, that I can see the consequence of, that I’m proud of. So, the potential outcome is that you see, out of this
monopolistic, oligopolistic asset management industry, a reversion or
a migration- not to active, I don’t think active is going to come back in the way
we think of it, but to investing, that is far more localized. Governments are going to play a big part of that. I would be incredibly surprised if you don’t see
onerous tax rates being put on foreign earnings. So, we’re going to make it very difficult for you to invest in the ETFs that participate in Europe or
Asia. It’s going to be competitive that way. GRANT WILLIAMS: So, what does this mean? It’s hard to believe that we’re almost three years into
the Trump presidency. We’re starting to see the battle lines being drawn for
next year, the election and the battle lines are very clear. And it is capitalism versus some palatable form of
socialism, without wishing labor or anything, but that seems to be where we’re at. What does that debate being front and center for the
next election mean? PETER ATWATER: So, what’s so interesting, and to me,
challenging about President Trump in a forecasting perspective is that his genesis was low confidence. He
did best where people were feeling worst in 2016. The state by state, all of the data really supports that the underconfident migrated towards Trump versus
Clinton. That works to become elected. But typically, presidential approval rises and falls
thereafter with confidence. So, you have someone who was negatively correlated to
mood who’s now become positively correlated to mood. The
most interesting, initially, I was thinking because of behavior, which was Tesla
good proxy for Trump, the most clear correlation, interestingly as Las Vegas Sands, his LVS shares and
Trump approval move and lock step. And that’s interesting. Being a casino, there’s lots of
things within that. But what that speaks to is that President Trump has
become positively correlated to confidence. So, moving into the election, if confidence falls, it
begs the question, is he upended because sentiment turns against him? Now, you’re never going to upend his base for a whole
series of reasons. But the broader question is, if the economy turns down, will he be blamed as most presidents become blamed? He’s trying to do a masterful job of laying blame with
the Chinese, laying blame with the Fed, laying blame with others. But it’s not clear how that
will play out in November of 2020. But what that also then starts to beg is, what does low
confidence liberalism look like as far as the candidates that are brought forward? That is not
Joe Biden. Interestingly, at his genesis, in the 1970s, low
confidence brought him to the fore, but he correlates to positive mood. He said, he’s a
globalist, he said, centricity there. There are lots of things about him that will make him
difficult to serve as a unifying force for the Democratic Party. I think Pete Buttigieg is an interesting prospect,
given his grass roots, given his military experience, given his location in
the Heartland. He brings a lot of things behaviorally that would fit
in a declining mood. He’s also young and youthful. And there is a sense that we’re going to look for
somebody who is charismatic and compelling and youthful, the Bernie Sanders of this generation. Sanders’ time has come and gone. He no longer has the
traction with the youth. So, the challenge for the Democrats is finding a
candidate who will be compelling so that you unify a growingly or a crowd that is
growing more irritable. GRANT WILLIAMS: Yeah. What does it say to you when you
look at Sanders and he had a hell of a run and arguably would have won had he run against Trump?
You can certainly make that case, we’ll never know. But what does it say to you that his
policies have been taken, and built upon by IOC and by Elizabeth Warren, and it
seems on the Democrats side, that there’s a one upmanship of taxation and demonizing
the wealthy? This divide is real obviously. So, how important is that, and how important is the
fact that this seems to be a ratcheting of- PETER ATWATER: So, I think that speaks to the growing
decline in mood. So, we should expect that if mood continues to fall
that the calls will become even more extreme. And so higher taxation, policies that are more liberal
oriented will become more and more pronounced. That the challenge will be, for the Democrats, being
self-aware enough to say, at the end of the day, you’ve got to find somebody who can at least attempt to
straddle some group on the right. GRANT WILLIAMS: But that’s seems difficult, because the right is so far- you know the right have
some pretty wide legs to get straddled around. PETER ATWATER: So, you end up with people having to
hold their nose one way or the other. GRANT WILLIAMS: So, in wrapping this up and looking for
a slightly more positive way to finish, is there a way that you can see that this decline in
confidence can- for want of a better phrase, have a Goldilocks soft landing and perhaps, it
dissipates but we reach somewhere where maybe the trade negotiations get settled and then
we have a renewed burst of confidence? Or is this a cycle that that has to run its course and
that requires a complete loss of confidence? PETER ATWATER: So, I’m looking at every low to see
what’s the sustainability of it. And so, the December low to me, bottomed on chaos more
than anything else. That’s not the basis for some sort of a bull market
from here. Might we make it to new all-time highs? Yes, but it’s not- It’s very different from 2011. It’s very different from what we’ve seen certainly in
the last 10 years of a low with real traction. I think that policymakers are going to have to come
pretty close to the edge of the cliff and realize that it isn’t their- and our best interest
to come to some agreement. That’s very difficult, given the way we have tribalized
and the echo chambers that exist. And so, it deeply troubles me that we’re not suggesting
true openness to anything that is across the aisle. I think that one thing to
watch will be does infrastructure gain any kind of traction. Because that would that would be
a signal that, okay, beneath all of the rhetoric, beneath all the anger, you have some willingness and
ability to come together. But I think, short of that, this is pretty perilous. So, you have in China, a leader who at the top was
named for life. And that speaks to an extreme in confidence. So, I always think that that which happens at the top
needs to be mirrored at the bottom to an equivalent extreme. GRANT WILLIAMS: So, whenever I try and think this
through, it seems to me that the wealth inequality issue is the
one thing that if we’re going to bottom, and we’re going to get through this part into the
upside, that has to be dealt with somehow. Because the longer it remains in an air of declining
confidence, the bigger a target it becomes, the bigger a focal point it becomes for both sides.
Does that have to be resolved? And is there a way for it to be resolved without some
kind of- you’ve spoken about conflict in the past? And it doesn’t necessarily have to be a war, but it
feels like there has to be a conflict of some sort. PETER ATWATER: Yeah, I think that there will be. I
think that the vilification of the wealthy is inevitable at this point that the- The American
Dream for most Americans has become unachievable. And so, that which is not given will be taken. And so,
whether it’s taken through taxation, the estate tax to me seems like a very likely way,
because it’s such a, again, psychologically distant phenomenon, and that affects so
few. But both on the left and the right, I think people have misread the right in terms of its
feelings about wealth inequality. You keep agricultural prices low the way they are
today. And you could see a lot of Middle America joining folks
on the left to say, where’s mine? You have big Agra. And the data suggests they’re the
ones who are getting all of the farm subsidies. So, the potential unification I don’t think is
necessarily ideological left, right. It could be up, down. It could be in any number of
ways. My frustration with the stereotyping of Trump supporters versus Clinton supporters, that the
Venn diagrams, the circles are not clean. And I think that the wealth inequality piece is going
to be one where you could see what would be viewed as very strange bedfellows come together where it
surprises the pundits who gains traction in that mode. GRANT WILLIAMS: Yeah. And that doesn’t surprise me
where wealth is politically agnostic, it seems to me. We’ve had wealthy Democrats, we have wealthy
Republicans, and they are case always. So, last question, what’s the one story, the one
narrative that people should really be paying attention to? Is it the trade
wars? Or is it something that most people aren’t paying
attention to already? PETER ATWATER: I think it’s important with the trade
wars. The trade wars are a consequence. People need to stop looking at those and saying, the
trade war causes this. It’s like, no, no, we’re causing unconsciously the trade war to either
continue or to end. That’s the consequences of how we’re behaving. I think
the bigger question, Grant, is, are we reaching a point where things are becoming
incredulous? There are a lot of 10-headed ladies out there. And I’m
looking to see- as those start to be exposed, the danger is that people say if that’s not real, what
is? GRANT WILLIAMS: Yeah. Well, I guess we’re going to find
out and hopefully, you can come back again as this continues to unravel
and make its way through wherever it’s going and we can do this again, because
it’s been so much fun. Like I said, I love reading everything you write. So,
thanks for taking the time to come do this. It’s been fantastic. PETER ATWATER: No, great to talk to you again. Thanks. GRANT WILLIAMS: Well, I told you, there’s a lot to talk
about. We talked for an hour, I could talk for two or three more. And if Peter’s got
the time, I’m going to take him for coffee now and have the rest
of that conversation. But yeah, everything Peter talks about really rings
around my head. And I think if you look through that conversation,
there are so many ideas to think about. So many potential outcomes to try and handicap. And for
me, that was an invaluable conversation. So, I hope you enjoyed it as much as I did.

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