GARY BRODE | From Deep Knowledge Investing

Are governments really spending money with the best interests of their own citizens at heart? Join Gary Brode from Deep Knowledge Investing in a thought-provoking conversation about the strange world of sovereign debt and how it links to the value of your money. Gary explains how government spending often doesn't add value to citizens' lives and contributes to the rising costs of everyday items.

Did the recent downgrade of US treasury leave you baffled? Gary dissects the facts behind this dramatic event, the function of rating agencies and the potential of a US default. Despite the downgrade, why is the US government still a safe haven for investment? Dive deeper into the potential repercussions of the US treasury downgrade on the future of the economy.

How useful are Wall Street's research reports? We shed light on the murky waters of sell-side research and insider trading. Learn how to decipher reliable information from marketing gimmicks, and understand the legal way to acquire investment insights.

As a bonus, we delve into the contentious dispute between Yellow Corp and the Teamsters Union - a stark reminder of the importance of communication in labour disputes.

Gary is also offering a special coupon code for listeners interested in Deep Knowledge Investing - you don't want to miss out on that!

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EPISODE TRANSCRIPT

0:00:01 - Chloe

Stocks for beginners. Phil Muscatello and Finpods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

0:00:12 - Gary

The sell side will change their price targets, their ratings and their earnings estimates based on what's going on with the company afterwards. So what they really are they are not predictive, telling you what's going to happen next. They're like the newspaper that will tell you what happened yesterday, and so you'll see their price target will actually follow the stock rather than lead it.

0:00:39 - Phil

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. Debt, debt and more debt. Who owes what to whom? How will it all end? Is it time for government to start cutting up their credit cards? Joining me to explore sovereign debt is friend of the podcast, gary Brode from Deep Knowledge Investing. Hello, gary.

0:00:59 - Gary

Hi, phil, thanks for having me back. Great to be speaking with you again, thank you very much.

0:01:04 - Phil

Thanks for coming back on. So there have been a few recent events covered in your latest newsletter, which we will link to in the episode notes and blog post. We newcomers to capital markets often hear the term sovereign debt. What does that mean?

0:01:18 - Gary

Yeah, it sounds like this really exotic, esoteric thing, super fancy. Oh, I don't know what that is, but for everyone listening to this, you do know what it is. It is government debt. So if you're in the United States, us Treasury bills. If you're Bank of England, they call them guilt, but it's just government debt. Sovereign just means the wealth of a nation, or, in this case, the debt of a nation.

0:01:44 - Phil

And this is what's often referred to as printing money as well. I mean, governments have been doing this for a long time. This is the way they create money that goes into the economy, isn't it?

0:01:53 - Gary

Yeah, so that's one of the ways they do it.

In the United States, the Federal Reserve has done an enormous amount of quantitative easing, which is actually more currency creation, but the primary reason that governments all over the world are their currency supply is expanding, they're getting more and more currency units, more dollars, more Australian dollars, more Japanese yen is simply because their Congress, their governments, are spending more money than they take in taxes and other fees, and so the only way you can make that work is to take on additional debt, and the method by which that happens adding debt to the system increases the currency supply. Now, for many people, you think, ok, well, what's the big deal? The government creates currency. They do that all the time. Why do we care? And the reason why you care is because when they do that, they are stealing from you, and so let's give people a really clear explanation on why and how this works and why governments do it, because what is being done is horrible, and the reason they get away with it is because people don't understand it.

So let's imagine that we have this economy in the United States. That's roughly $30 trillion, maybe a little bit less than that, and we have a certain amount of currency. Many people look at a measure called M2. So now let's say we have a COVID-related situation and the government prints $6 trillion of currency, and then the next year we have the Inflation Reduction Act, which is another trillion or $2. And then Congress is typically running budgets. They had been running budget deficits of about $1 trillion a year. Now it's going to be $2 trillion a year and all of a sudden, before you know it, they've created another $10 trillion of currency. You guys know the old expression right a trillion here, a trillion there. Eventually you're talking about real money.

0:03:55 - Phil

Okay, so it used to be about billions that one didn't it?

0:03:58 - Gary

Yeah, that's right, that was the expression. So what happens is the government will create more and more currency units in the United States, it is literally tens of trillions of dollars but that doesn't come with additional economic growth. They take that money that they've created and they spend it in ways that benefit them as politicians. They spread it out to their favored causes, their favored people, their favored charities, the groups that will vote for them. Right, and you know, this is all over the world. It's a bipartisan problem. Or, in European countries that have multiple political parties, it's an everybody problem. Right, it's not a oh the evil guys on the left or the dumb guys on the right. All politicians want to stay in office, and one of the best ways to do that is to spread money around. But the problem is they're creating the money out of thin air and overspending, and they're overspending in a way that doesn't add value to people's lives, and so when they do that, the value of the currency that you own, that you save in, that you get paid in, gets debased. Debased again, it's a fancy word for saying loses value. Okay, so for anyone listening to this, when you've gone to the grocery store and your grocery bill is much higher when you've tried to hire a repairman or buy an appliance, and those expenses are much, much higher. This is what we're talking about when you go to fill your car with gas or pay your electric bill and you see it's much higher, right? This is why it's happening, and the key issue here is the reason the government likes doing this is because it's stealth stealing, right, and that's my term for it.

So think about the old, traditional process, right? The government official will say I want us to spend a trillion dollars on item X or issue Y or cause Z, something that, and we think it's worthwhile. And but I'm letting you know, my fellow citizens, we're going to have to tax you a trillion dollars to pay for it. And then you know that politician has to run for office and people will either say, well, this is fantastic. This trillion dollar program that this politician created is great and created value for us and our lives are better because of it. Or alternatively say are you kidding me? A trillion dollars for this? Completely worthless, nothing, right? We're going to vote him out of office.

And the old system politicians had to be responsible for the legislation that they supported and run for office based on that. Now, what they do is they just print more currency, spend on whatever they want, and it never gets in front of the voter, there's no opportunity to vote them out, and that's just simply something that doesn't happen, and so I don't know what you guys did in Australia, but in the United States, when we had the lockdowns for COVID, the government sent out stimulus checks, and, by the way, they were still sending out these stimulus checks long after the emergency period of COVID was over, right when the economy was opening up. People were going back to work, everybody was done sheltering at home, and they're still sending out these stimulus payments, which got affectionately referred to as STIMMYs, and so most people thought, oh my God, this is fantastic. Free money, free money. Phil. Who doesn't love free money? Phil, do you love free money?

0:07:27 - Phil

Oh, it's the best thing in the world.

0:07:28 - Gary

It's the best right. Everybody listening to this.

0:07:30 - Phil

Except for guys like us. Guys like us expect them in dividends rather than from the government, presumably.

0:07:35 - Gary

Right, exactly Right. If you're listening to this, you love free money, right? Put your hand up. Who doesn't love free money?

Well, here's what really happened. So let's say, for example, one of the stimulus checks they sent out. It might have been for a thousand US dollars. So you get this thousand dollars, and boy, that is terrific, right.

But remember, they created $6 trillion of additional currency to fund the STIMMYs, right? And so what you had was $6 trillion of currency flooding into a system at the same time that people were prevented from working, so you had an increase in the money supply and a decrease in goods and services available. Well, the only thing that can happen is your prices go up, and so people love the free money STIMMYs. But now let's say you have a situation where your grocery bill goes up by $50 and your rent goes up by $50, and what it costs you to fill your car is up another $20, $30 a month, and this other thing is. So maybe your expenses go up by $100 or $200 a month, and you will have worked through your free money in the course of a year, maybe a little bit less. But now here's what happens the following year, you will end up with a permanently higher base of your expenses. Your rent will be higher. Your cost to hire somebody to help you will be higher. Your gas and electric bills are going to be higher. Your food bills Anybody who's been in a grocery store knows that the CPI in the United States it was showing food prices up like 5%, 6%, right.

My only conclusion is that these are people who haven't set foot in a supermarket in the last two years. That number is clearly inaccurate. Right, and so everybody got excited for free money. But here's the truth If you received those stimulus payments, you are paying for your stimmies, right, your stimmies will be paid for by you for the rest of your life in permanently higher prices. But government officials got to spend all of this money that they created, diluting the value of what you own. So all of this, it is an insidious way that the government stealth, steals from citizens and avoids having to run for office on the basis of making your lives harder and worse. Right, great, but the bill comes later.

0:10:01 - Phil

Investing in shares can be fun, but the paperwork isn't. My investing has been transformed since using ShareSite, the best portfolio tracking tool for investing. My portfolios are on Sharesight and whenever I buy or sell, the trades are automatically recorded. I can see the dividends I'm receiving and it helps me to work out my asset allocation. Sharesight are extending a special offer to listeners of this podcast four months free on an annual premium plan. There's a seven-day free trial where you can experience the full power of Sharesight portfolio management. Go to sharesitecom slash shares for beginners and sign up now for a free trial before taking advantage of four free months. That's sharesitecom slash shares for beginners. So why is inflation and sovereign debt so important to equity markets? So I'll just jump in here, because the stock market seems to be going fine. It doesn't seem to be a problem at all.

0:11:08 - Gary

Yeah, really, that itself is remarkable. So what you're really asking are two questions. The first question is why does this stuff matter? And the second question is if it matters, why is the market not responding to it? And so let's take these in order. The reason this matters is.

Here's the chain of events. The government creates excess currency units, right, more dollars, more Australian dollars, more yen, more British pounds. When that happens, we end up with inflation, for the reasons that we just talked about and explained. When inflation gets high, the only tool that central bankers have to deal with it is to raise interest rates. And when you raise interest rates, what it does is reduce the value of future payments.

Now, phil, I know there's nobody better at explaining the basics of investing to a learning audience than you, than stocks for beginners, shares for beginners. Everything you're doing is great at financial education and that's fantastic. So when you guys value a stock, what you're effectively doing is saying this company is going to produce a stream of earnings and cash flow in the future, hopefully a growing one, maybe not right? And we say, okay, well, the present value of those future earnings flows, those future cash flows, is worth a certain amount. Well, if we increase interest rates, then you're discounting at a faster rate. That's simply the math on it, and the payments that you would get in five years or 10 years will be worth less at a higher discount rate than a lower discount rate, and that's why currency printing and inflation end up affecting the stock market. Does that make sense?

0:12:56 - Phil

Because when we're looking at a company, we're looking at the amount of risk that we're willing to take on as investors, as opposed to the risk-free rate. Is that how it works?

0:13:08 - Gary

Yeah, that's exactly right.

Yeah, that's correct. But now also think about it in terms of incentives, right? So let's use the extreme situation we had just a few years ago, when sovereign debt interest rates were at or around zero and in some places like Europe and Japan, there was a point where interest rates were negative, which is itself crazy. There were trillions and trillions of dollars worth of negative yielding sovereign debt. Okay, so, Phil, let's say I say to you all, right, well, you can buy government bonds and at the end of it, maybe we'll give you your money back, maybe we'll give you a little bit less, but you're going to have a negative rate of return, particularly regarding against inflation. In that scenario, you're very, very likely to say, okay, well, I'm not doing that, but because the discount rate is very low, the stock market is going crazy. The real estate market is up, right, I'm going to take on more risk and buy stocks and buy real estate leveraged.

And the people who are even more adventurous, they're buying, you know, no revenue, venture capital firms, anything to avoid not getting paid. But now you know, look at what happened to US banks when interest rates hit 5%. Right, all of a sudden, those savings accounts or certificates of deposit or US treasuries, you could lock in 4%, 5%, and now people are starting to say, wait a minute, that 4%, 5%, that actually sounds pretty good. And they started to pull risk money out of the stock market and put it into cash savings accounts, certificates of deposit, government debt, right. And so people respond to incentives, and that's another way that these factors that we're discussing act as levers to push money back and forth between the stock market and the bond market, between cash and savings and investing and people's appetite for risk changes, depending on the risk-free rate, which is a much more complicated way of explaining what you basically summarized in one sentence.

0:15:19 - Phil

And so we as individuals have credit ratings. We, you know, go to the bank and they sort of look up some sort of chart in the background that says what kind of credit risk we are. Now, recently, the United States, the US treasuries, have been downgraded. They're not quite as safe as they once were. Who did this kind of rating, and where does this come from and what does it mean?

0:15:43 - Gary

Yeah, that is a great question, phil. So, first of all, the ratings agency that did it was Fitch. There are three main rating agencies. Moody's had actually downgraded the US I want to say 2011, something like that. Now, they were a little bit delicate in the way that they talked about it. They talked about a lack of political cooperation, reduced controls. They basically said, hey, because you guys were fighting about the debt ceiling, we hit the debt ceiling and there's a debate about that. We're no longer as comfortable. That, by the way, is absolute, total nonsense. That is not why the decision was made. Nor is that irrelevant. So, for everybody who had spent six months earlier this year and the issue got resolved panicking over, oh my God, we're gonna, you know, we're gonna default. The US is gonna default. We're gonna hit the debt ceiling. That was all. It was a show. That was all a completely irrelevant show. The US has hit the debt ceiling dozens and dozens of times In its history. We will again. There is always an agreement.

0:16:55 - Phil

It's an arbitrary figure, really, isn't it? It's not tethered to any sense, it's just like, okay, we've got the ceiling, we're gonna decrease it to this amount and then we'll negotiate again sometime in the future.

0:17:05 - Gary

Yes, that's true, although the fact that it's an arbitrary figure doesn't mean that it's not a real figure, right?

0:17:12 - Phil

The US can't go over it. Of course, of course.

0:17:14 - Gary

Now, because I will tell you everything. All government statistics are lies. They do not provide information. They advance a particular narrative. Janet Yellen, the secretary of the treasury here in the US, used what's called extraordinary measures to keep us under the debt ceiling. Right, and it's all lies and it's all fiction. The truth is, the US was over the debt ceiling for about six months, and the way they manage this stuff is they'll do things like they'll pull cash out of pension plans and just say hey, don't worry, pension plans, we'll get this resolved, and then we'll pay you back and they pretend that it's not extra debt. They'll do other things like not pay certain bills and pretend, oh well, we haven't paid this bill, we haven't taken on debt for it. And the proof that my way of looking at this is correct and the way the government is looking at this is a lie is within a couple of weeks after resolving the debt ceiling issue, the debt of the United States increased by approximately a trillion dollars. So you're telling me we're overspending by about a trillion dollars a year and we got about a trillion dollars in two or three weeks. That was a little bit less than that, but the point is they had spent six months accruing expenses and pulling cash out of places. Right, they're pulling cash out of the mattress that they intended and had to replace, right? So we were way over the debt ceiling limit. But the other thing is, people were acting like oh well, you know, if you get past the deadline, the US is going to default. That is also 100% weapons grade balonium. It's simply not true, right? The thing that the United States would have had to do in that highly unlikely scenario is pay interest on the debt. That avoids a default, and so what we could have done is shut down a whole bunch of government agencies, right, and stop spending money on a whole bunch of other stuff, and stayed under the limit.

The other option, which everybody pretended wasn't an option, and politically it wasn't a viable one. But, phil, if you have a limit, you were talking about us as individuals having a credit rating. So, if your credit card company says your limit is 20,000 Australian dollars I'm making up a number, right, and you are at, you know, you're basically at 20,000 Australian dollars on your credit card, right? You also have the option instead of saying, well, I need my credit limit extended to 30,000 Australian dollars, you have the option to not overspend. You have the option to not spend more than you take in, and somehow that option to live within your means got completely Deleted from the conversation, right? I mean, this is the whole thing, is it's drama?

0:19:59 - Phil

try talking to your bank in those terms.

0:20:02 - Gary

Yes, exactly.

0:20:03 - Phil

I look, I need this money, you know. You're right, I've got spending issues that I haven't dealt with yet.

0:20:09 - Gary

What do you expect us to do?

0:20:11 - Phil

Right, what are you For dinner? Five nights a week?

0:20:15 - Gary

right we had. We have to spend this money. We can't stop the economy. You'll die if we stop right. So this is the whole thing is basically set up as a drama, and my advice to Anybody listening to this is the next time we have one of these, you know Horrible, terrible, frightening moments where everybody's spending six months panicking oh my god, is the United States gonna default? Is the global economy gonna fall off a cliff? My advice to you is View the whole thing as a reality TV show with designated Villains and designated heroes. Just view it like you would view professional wrestling right and very entertaining, but nothing of value or meaning is actually happening here. Now Let me cut to the question that you implied but didn't directly ask, which is Can the United States defaults? Right, that's really at the end of it.

0:21:14 - Phil

That's right. Yeah, I mean it is supposed to be the the safest Haven on the planet. Us Treasury.

0:21:20 - Gary

Yeah, and the answer is it is, and it is and it isn't Right. So it is Because the government can't default. And here's the reason it's because the US government can print more dollars, right, and so how can we default, like if we fall 10 trillion dollars short on our debt obligations? The Treasury, they think, okay, they go to the Federal Reserve. Here, here's 10 trillion dollars that we just printed, right, we have control over the currency that our debt is denominated in. So answer one right, we can't default, so it's not a problem.

Answer to is when you're saying is the dollar the safest option? The dollar is, as of today, by far the safest fiat currency option. We're excluding hard money, things like gold or Bitcoin, from that, but in terms of fiat currency, which is a fancy way of saying a government issued currency that isn't backed by anything in the United States, the dollar is backed by faith and credit, and so you have that. And so the reason that the dollar is, right now, the safest fiat currency on the planet is because, as poorly as the United States manages its finances, the US, with a gigantic economy, actually does a better job with this stuff than other large countries, and so the financial problems that we have here are Dwarfed by the problems that they have in Japan, that they have in the EU. You know, the Bank of England last year came inches away from having a gigantic pension problem. They almost defaulted on their public sector pensions, right, I mean, these are huge problems, and so the expression that we'd use is the dollar is the best house in a bad neighborhood. Right, everybody's doing a bad job. We're just doing it slightly less worse Than others are, and that's why, as of today, the dollar remains the world's reserve currency. But, you know, losing share and not handling it particularly well.

But you know, the question was is this, you know, can the US default? Is this a problem? And I said, you know, we're good, we're good, we're not good, and here's the scenario where we're not good. So the real liabilities of the United States are much larger than people think it is. We've got now 32 trillion dollars of official on balance sheet debt. By the end of the next election, when the next president takes office in January of 25 or is inaugurated, depending on who it is, that will be in the neighborhood of 35 trillion dollars. This is an unfathomable amount, but that's not the real issue. The real issue is, there's another 200 trillion dollars of off balance sheet liabilities pensions, medicare, medicaid, obamacare, all kinds of social spending and obligations that we've taken on and have not reserved for and so you add up this 200 some trillion dollars about balance sheet liabilities, add to that another 35 trillion dollars of on balance sheet. We're closing in on 250 trillion dollars, that is, a quarter of a quadrillion dollars. That's a word that you don't normally hear outside of Zimbabwe.

0:24:39 - Phil

Inflation, you know any time. Yeah, and you know, it'll be real money again.

0:24:43 - Gary

Exactly, and so you know before, when I told all of you the US can't default. It's true, our obligations are in dollars. We can print dollars and ensure that we pay those obligations. But just take a minute and think. Earlier in this discussion, we were talking about what happens when a central bank prints trillions of dollars of currency without Associated economic benefit. Right, this is money that's handed out. These are basically stimmies, right? It's just instead of individual checks being sent to individual people, they're just stimmies for the whole economy. And so what we will end up doing, I believe it will be a stealth default when the government will just print so much currency that the United States will pay its obligations, but it will do so in dollars, with much less value, very little value. And so you know?

Imagine being in a situation where you're a pensioner. You get your social security check I'm making this up, let's say it's 300 us, sorry, 3,000 US dollars and you say, okay, well, great, now I can go buy groceries for the week, and now I'm done. And what do you do about things like rent or Having a car? Or you know any of the basics of living? Maybe you know Medical care, anything that you'd have to spend money on. If you have to spend your whole check on a week's worth of groceries, that's gonna make things really tough for people. And so you know the US right now is living in this world. Actually, it's not just the US right, the entire Keynesian fiat system, which is most large economies right now are living in this make-believe world of you know unlimited Stimmies. But the bill will come do, and the way the bill will be paid is in massive amounts of currency debasement, for the reasons that we've discussed in this conversation.

0:26:30 - Phil

So let's get back to the S&P 500, which is near and dear to all of our hearts. In the newsletter you have a section where you, you, you suspect that company earnings Aren't as good as they possibly appear to be in the latest quarterly reports.

0:26:46 - Gary

Yeah, yeah, that's definitely true.

So, here's, here's the way, and this is where it really does help to be a Professional investor who's been doing this for decades, because you really get a sense of how the system works. And there is a game being played here. First, the most important thing to convey, phil, is that the sell side Right the research reports that you would see from the big Wall Street firms those reports are not designed to help you as an investor. In fact, they don't care what your investment returns are, not even a little bit. Those reports that they produce, the ratings that they have, the stock price targets, are all designed to maintain a close relationship with the companies that they cover and use to then sell investment banking services. So the idea is okay, well, we have a relationship with company xyz and you know we're going to write up all kinds of nice Reports telling everyone your business is great and there's lots of growth and you know earnings next year gonna be terrific and we've got a by rating and a super by rating and a very high price target right.

All the other side of that is behind the scenes. They're saying Listen, when you guys do a secondary offering, we want to manage that. You do a stock buyback, we want to run through our trading desk. You have to issue that. We want that through here. You want to buy another company or I'm in a department, will be in to take care of that, right, and so basically, just before you go and gary.

0:28:17 - Phil

I just want to emphasize this point for listeners, because a lot of people put a lot of stock, so to speak, in these kind of analysis and there are incentives here that are not designed to help you as an investor there, to help brokers and investment banks continue their relationships with their clients in the corporate world. Let's just emphasize that point just for a moment and dwell on it.

0:28:41 - Gary

Yeah, fill. That is the perfectly express your hundred percent right. And now for your listeners, some of whom have to be thinking wait. So now? What do we do? What do we do with this?

We've been reading this research and here's my advice to you. It doesn't mean that everything printed in those reports is a lie, or that it's wrong or that they don't know what's happening with the business. My advice to you is you view it the same way you would be marketing materials, right? You go to buy a new car and they're not going to tell you this car has a high failure rate, we've got problems with the airbags, we got for recalls on it. You know they'll tell you the air conditioning system works well and rides really well, as good gas mileage, and you know, five hundred horsepower engine and great pick up, like all of that, maybe true.

Just view it instead of viewing it as investment advice. View it as marketing materials, right. And could you learn something about the company? That's true, yeah, you could Possibly, but you just need to be very skeptical and realize that you are being marketed to In a way where your needs and your financial outcome is not part of the calculation. Now, my response to all this is I simply don't read any self-side research at all. Right, I go to primary sources, I spend all day on the phone talking to people, I read company filings, I talk to people at the companies and I do read independent research. My response to this is simply never read any self-side research because it's simply its marketing materials it's a question.

Yeah, it doesn't help anyone make money. It's not designed to help you make money. And for anyone doubting this for a minute, go take a look and realize that's something like ninety five percent of the ratings are by ratings and two percent are hold and three percent are cells. And really you think there are like Fifteen companies in the S and P, five hundred that you sell that are, you know, that are below average. You're kidding me, right? This is ridiculous. The outcomes that we get here, our proof that the whole process is biased, and that's a really important thing.

And so here's the game. The game is the cell side analysts and I use that word analyst lately. I really just want to call the marketers, but that'll be confusing, right? So the cell side analyst marketers. They present their work as being predictive. I've got a buy rating on this. I've got a fifty dollar price target on a twenty five dollar stock. You will make a lot of money on this, okay, but that's not really what it is. The cell side will change their price targets, their ratings and their earnings estimates based on what's going on with the company afterwards. So what they really are they are not predictive, telling you what's going to happen next. They're like the newspaper that will tell you what happened yesterday and if the company had a bad result, then they lower their ratings are. Then they lower their price target or their earnings estimates. They do that after the fact, not before, and so you'll see their price target will actually follow the stock Rather than lead it right. So the whole thing, it's this giant game.

And so, coming back to Phil's original question, which is why am I suspicious of some of these company earnings, here's what happens the companies talk to the analysts at the cell side firms and they give them guidance, and guidance is a very gentle way of saying. They tell them what their earnings are going to be. Officially they can't give them a number, but what they'll do is, you know, it's sort of that wink and nod game. You know the analyst will send over their model and say, hey, what do you think? And the company said, well, you know it looks good, but you know, maybe the earnings number is a little high. We think maybe the problem is you're assuming your growth rate is like a little off by maybe one percent, and you know, if you just adjust the expenses by a little bit, because we're not really sure they tell this whole story. They're very carefully make sure they don't violate SCC regulations, but they keep having these iterative conversations into. The company says, yeah, we're comfortable with the model, right. So they've never said we want revenue of X and earnings of Y and margins of Z. They just keep, you know, iterating until they're comfortable with it, right. And so what that does is that allows the companies to lower the bar.

And we put up a chart in a recent deep knowledge investing piece showing what's happened to earnings estimates for the S and P five hundred for twenty, twenty three and a year ago, when I started saying to people, wait a minute, these numbers are way too high, they have to come down. The estimate for the S and P five hundred for their earnings was right, around two hundred fifty dollars. Now, depending on which source you look at it, somewhere in the two fifteen to two seventeen range. That is a massive reduction. Like. I want all of you to think about what you would do if you bought a company where you thought the earnings are going to be two fifty and a year later it's like, yeah, it's really more like two fifteen. That's a big change, right. And now what we see you know everybody who follows the market. What have we seen for the last month? Company earnings are great. Eighty five percent of companies in the index beat their. You know the benchmark they beat their yeah targets right.

my question for you Did they really? Because with these companies were able to do is, as they realize that business wasn't as good as they thought it was, it wasn't as good as they hoped it was, they lowered the bar again and again and again, and I'm gonna keep repeating this a slide from two fifty to two fifteen. That is a massive change in quality of earnings. The massive change in your growth rate is a negative growth rate. But the narrative that we're all being fed right now is earnings are great, companies are beating, everything's terrific, and you know it's simply.

These companies are able to lower the bar for themselves and the analyst played along with the game because they want to stay in the good graces the company so they can sell them investment services. That's how all of this ties together. And so you're all being told company earnings are terrific, they're beating the bar, yeah, but they were able to set the bar and then lower it and lower it, and lower it, and they were never punished for it. And so you know, like, do I think the earnings are alive? No, but I think the narrative is inaccurate and people are gonna get hurt on it.

0:35:15 - Phil

So you also mentioned the sudden announcement of the yellow bankruptcy. Who are yellow and what was this bankruptcy all about?

0:35:23 - Gary

Yeah, this was one of the most fascinating situations I've ever seen in my life. Yellow corp was a less than truck load carrier. Again, sounds really fancy, but it's really simple. Imagine for a minute that you're a Walmart or your Costco and you send. If you're that big, you're sending full truckloads from distribution center or stores to ports. Now let's imagine that you have something really big in your home that you want to ship Maybe it's a pinball machine or a piece of furniture and you want to send it somewhere. That is not a full truckload, and so you will pay for part of a truckload. It's a less than truckload carrier. They were the third largest company of that kind in the United States, literally one of the largest shipping companies in the world.

0:36:16 - Phil

And I'm enlisted as well. Yes, yeah exactly what's it code again, it's a YLL.

0:36:24 - Gary

yeah the company is in the process of declaring bankruptcy. So what happened was they got into a huge fight with their union. In this case it was the teamsters and the company. I've never seen this before. Company management came out with these really incredible a service comments about teamsters, management and how they crash the company. And this is actually true, but not the full story. So here's the part that's true. The teamsters did go to management and they said hey, we want to renegotiate this contract, we want to get paid more and, as that happens, basically we want more. And so management tried to negotiate with them and the teamsters dug in.

And then the teamsters made an error. They basically went out in public and they said we're about to go on strike. And here's why that's an error. The reason it's an error is because Now, let's imagine you are a big shipper. The last thing you want is to have truck loads of your merchandise stuck in the middle of the country or stuck at a port, somewhere when you can't touch it. No one else will touch it because it's a union strike and your driver just walked off the job. Nothing gets delivered and you have all of this inventory sitting and you can't go get it, you can't find it, you can't touch it. You're really in trouble.

So when the teamsters made that announcement, all of yellows customers immediately said, okay, well, we're happy to do business with you guys in the future, but for right now we're moving our business to ups, the fedax anywhere else. Right? And they immediately stopped all business to yellow. At that point cash flow to the company imploded and the company said, okay, well, we have to declare bankruptcy and More than twenty thousand teamsters employees promptly lost their jobs. That's why I'm saying this was a strategic error on the part of teamsters management, their union leaders, because the way they handle this cause tens of thousands of their people to lose their jobs.

0:38:36 - Phil

Now one of the really that's such a miscalculation, isn't it?

0:38:39 - Gary

Oh yeah, it's horrible, it is absolutely horrendous, and so one of the great things about Doing what I do in public where I talk in public ideas, I write in public, I, you know, put things on twitter Is people will come to me with information and one of the knowledge investing subscribers. Really interesting. Man named paul actually has a history in the trucking business and he started messaging me about this and you know he did confirm that this was indeed An issue and that the teamsters have been a huge problem and companies like ups had managed to have much better relations with their unions and, to that end, much of what happened is the teamsters fault and was a calculation error. But here's what Paul relate to me that the reason that the teamsters had been so adamant about not giving in, not giving any concessions, not negotiating in what we would consider to be good faith is because there had been a prior issue about cuts to the pension plan, and so yellow management had led them to believe that there would be payments to the pension plan. If you're a union representative, you really care about stuff like that post employment benefits that's a huge part of their compensation, and so they felt like management wasn't trustworthy Right, and so that part didn't get reported in the press.

And again, one of the advantages of doing what I do is people will Contact me and say this is what's going on. And I had people in the shipping industry telling me yeah, there's a reason why the teamsters are willing to extend any trust To management. Here they felt like management had been dishonest and not, you know, hadn't represented themselves well and hadn't treated employees well, and they got to the point where they said you know what? We're not going to help, you are not going to make any concessions. Now, one of the things that we did it deep knowledge investing was we Run the numbers and we looked at employee cost is a percentage of revenue, because management was saying, hey, we can't afford these guys, and what we found is that the recent employee cost is a percentage of revenue or not above where they were historically.

So this really was an unnecessary situation where Bad behavior by management led to horrendous behavior and strategic errors by union leaders and twenty thousand people are out of a job and it just ended up being a disaster for everybody, including the shareholders. Like this really was A situation where there is massive amounts of blame to go around For everybody and everywhere, and you know people always like to say your parents would they always tell you what you're fighting with someone else? The truth is somewhere in the middle. Parents love to say that, but occasionally, in the real world, what you find out is that everybody involved might have acted badly. The truth might not be in the middle. The truth might be that everyone involved contributed to a massive problem for everybody, and I have never seen a situation, though, where management came out and was so clear and a service and talking about the relationships with the unions, normally they're very careful about that.

0:41:55 - Phil

For me, the takeaway from that story is that you have one of your subscribers who has got experience in this area coming to you with information and you know some would say that's insider information, but it's not real. I mean, that's not insider information, nothing like what would be considered Something that you would be able to trade and make money on yeah, just clarity, it's, it's not inside it's not inside or in. No, no, no, I shouldn't even brought that up.

0:42:21 - Gary

Yeah, yeah it is a really good industry chat.

0:42:25 - Phil

That's right, and that's where you get so many insights from people who are involved in the industry and then have the added benefit of being investors that you've got a relationship with, who See something that is worth noting. That is, as you say, not in the news.

0:42:40 - Gary

Yeah, there are huge advantages to being able to source great information and having people come to you With great information to know these industries inside and out. And let's just take a second and talk about what is it isn't illegal here. So, for example, if some of you are interested in the shipping business, for you to talk to your fedex driver and say, hey, how's business? Are you more or less busy? Are they hiring drivers or letting drivers go? Are you seeing more routes or fewer routes? That is 100% legal, right. If you have a friend who's a driver working on, you know on the floor when are you more or less busy than you were a year ago? That's totally valid. You can do that what you can do can go and stand.

0:43:20 - Phil

you can go and stand outside a store Listed on the market and see are they busy or are they not busy? I mean, this is very good in the parking lot, yeah that's exactly right.

0:43:31 - Gary

You can ask the cashier, house, business, right. These are all legal ways to gain information there, even companies that have satellite photos. They'll count the cars in the parking lot and report whether it's up or down versus the prior month. The thing that you can't do is you can't call the company's cfo, their accountants, and say, hey, you know, people are expecting earnings to be x next quarter. You guys gonna beat the number or not. You can't have that conversation. That would be inside information.

And my advice to any of you should you ever find yourself with material, non public information you know something from a company insider that has not been publicly released. I have two pieces of advice for you. Number one do not trade the stock, don't trade options in the stock, do not put capital risk. And piece of advice number two keep your mouth shut. Do not pass that on, don't put it on twitter, don't discuss it with people, don't tell your friends to invest. You're not being clever, you're not gonna get away with it.

The sec is Remarkably effective at this kind of enforcement and I strongly recommend that everybody stays within the guidelines on that. And I'll just remind you it is not illegal Possess material non public information, it's illegal to disseminate that information and it's illegal to trade on it. So if somebody tells you something that you shouldn't know, keep your mouth shut and don't trade the stock, don't trade the options, don't tell people about it, and if you do that, you will be Compliant with the letter, in the spirit of the law so, gary, tell us about the knowledge investing and the very generous coupon code that you're offering listeners to this podcast.

Thanks, fill. I appreciate it. So I am a thirty plus year hedge fund veteran. I've been running deep knowledge investing for three and a half years now.

0:45:20 - Phil

You missed out turned to the good side.

0:45:23 - Gary

Yes, exactly right, and what we do is we help people like you, like your listeners registered investment advisors, hedge funds I would just individuals with you know a few tens of thousands of dollars in a need trade account or show up a car robin. Who can we help people get better returns? We don't recommend a ton of stocks. It this is not the pick of the week. We're not doing short term stuff, it's long term investing and we have an insanely high hit rate. Basically everything that we've done Since I started the firm has been a money making investment, with one gigantic exception. That was course. We've talked about that. But you know, listen, as much as I'm excited about the success we had, I will also own the mistake that we've had as well, and so we work with all kinds of people and help them invest better.

The thing that we focus on Is trying to help you get better returns and reduce your risk. Hedge your exposure will very good at helping people organize in that way, and so what we're doing is, if you're interested, if you like this kind of analysis, if you think you might want to get better returns or understand the market better, you can go to deep knowledge investing dot com. Click on the subscribe now button and we're offering fills listeners a coupon code. It is stocks for beginners Fifty. So stocks for beginners five, zero, and you can get fifty percent off of an individual monthly subscription or an individual six months subscription. So if you want to do Six months, we typically charge two hundred dollars. With the bills coupon code you can get a hundred dollars and then my suggestion is take the hundred dollars you saved and then invested in the market and Hopefully start to earn better returns on that. That would be my plan.

0:47:08 - Phil

It's always good plan invest in the market very bright. Thank you very much for joining me again today.

0:47:14 - Gary

Thanks so much for pleasure to be here thanks for listening to stocks for beginners.

0:47:19 - Chloe

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Transcribed by https://podium.page

Stocks for Beginners is a production of Finpods Pty Ltd. The advice shared on Stocks for Beginners is general in nature and does not consider your individual circumstances. Stocks for Beginners exists purely for educational and entertainment purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs. Philip Muscatello and Finpods Pty Ltd are authorised representatives of Money Sherpa PTY LTD ABN - 321649 27708, AFSL - 451289.