Markets, Cyberthreats, And Real Estate

I'd love to get your thoughts um from a value investor perspective of this market right here. How are you guys positioned here as we finished up the first quarter of well, thanks for having me, Paul, Uh. This is just quite a fun world to be living in, to be downright honest for investors like us. Where As you pointed out, the dynamics of the oil market have people really caught off guard and and on the wrong foot.

And at the same time, we have Warren Buffett out there being as aggressive as he ever is in an open market common stock investment decision like he's doing with Oxidal Petroleum, and we feel great about that because we have lower cost basis, and we agree with everything he's seeing. I think the big difference though, is two years ago investors had to look directly into the teeth of hell in that business and bet that things weren't going to be as bad, but you didn't have a lot of

information to know that. Versus today, Buffett's looking at um in effect, the return on equity, the business exploding, the capital structure being far better towards the probability success is higher. Therefore he's willing to pay a lot higher prices, and the oddity is investors are not willing to follow him. How are you thinking about sort of the value trade in the place in the face of rates moving higher, and is there sort of that correlation or causation factor.

It's a great question, Taylor. Um. Just so you know I think about this is this is the opportunity of a lifetime. I'm thirty eight years old. Um. There's very few people that are thirty eight that actually believe that value investing works, or that you know, buying something cheap enough because the economics are so good, or are of any merit um. They all want to think about it or talk about it, but they all want to go do what the rest of the market participants want to do.

So to your point about higher rates, there's no question whether higher rates will hurt stocks. The question is who benefits from it, Okay, and it was the average stock

will get hurt by that. Multiples will contract. But I would argue that the oddity of the last ten years versus the next tent is that as the cost of capital rises, capital intensive businesses will succeed because yes, their cost the capital is rising, but fewer will enter those types of businesses versus if you're in capital light industry or an asset light business, people can enter all the

while the cost cost the capital rises. So the question is, you know, to save margins, you want to lack a competition, and we think there's just a huge price disparity between what the opportunity is is in what people are paying in the open market, and we own things like malls home builders outside the energy are our biggest sector in either of our international fund. Our US fund is energy um at over both of those, so we're incredibly bullush

on energy. But like I said, cyclical assets that are terribly miss priced are completely under the service of the S and P or as you go abroad. All right, I'm glad you brought up energy because it has had a very good run here. And I guess the question for a lot of folks who maybe weren't there early, is the room left in this trade? Yeah, so let's go back to Occidental because and it's so timely with Buffett. So I would argue to be your listeners that occidentals

producing about roughly fifty return on equity. Okay as we speak. Now if you think about I mean, that's crazy, that's tech like r O E. Now, some of that's just the accounting Paul, just so you know, they wrote down the good will from Anna Darko Okay, which means the book equity is lower than it really should be. Because now that we know we've hunted all the oil, that book equity that got written down you know probably shouldn't have. With that's done, it's made the return of equity go

a lot higher. So if you go in out and said, hey, let's go look at companies that are producing fifty return and equity and trade at two times book, we just won't find them, um, except in the energy business. Right, So, like like Graham said, you know, Ben Ben Graham is mentor said, prices what you pay values what you get. Coca Cola was producing the same return in equity and eighty eight when Buffett stepped into it and did that

for about ten years to follow that. And what ends up happening is you can comp on book at that level for five, seven, or even ten years. You make so much book value per share you don't really care what the book multiples in the end because the book grows so much. And that's exactly what's going on. Oxy. If they can buy back shares, that just enhances they've laid out most of their capital turns are gonna happen by buy back that just enhances that book value per

share idea. Are your klins so asking you at all about the bad word here, the R word recession and sort of how you think about some of these big value performers in the face of that. Yeah, it's a it's a great question, Taylor. Um, so you got to remember the said is augmenting the curve still right that you know that we have not stopped buying on the long end. Um, so they're still subduing the long end.

So the question I would be asking is if the FEDS not present in a year, what does the long end look like versus they're completely controlling the short end, And we know that that's got to go up, And the question is does it got to go up to two and a half or is Larry Summer's right and we're going to four and that's the only way to quell this. And then the question is where does the market end up taking the tenure on the long end

of the curve. So we we don't see it as a recession because if you look at prior instances of like oil spiking back in oh a percentage of wallet that was going towards gas was way higher than at those prices than we are now at the numbers we looked at, I think this came from fund strat four point seven percent back then a percentage of wallet it's at three today. At these current prices, we'd have to go to hundred fifty two dollar prices to really get

back to a crimp like that. And we're a moonshot according to the Biden administration, you know, away from that as they released reserves today. So um, so we don't look at it like that. Also, if you look at debt service ratios, they've never been lower since nineteen eight. So the American household, with their savings rates coming off the pandemic and their low debt service ratios, we've never been so ready to spend our way directly in deflation inflation. Hey, Cole,

thanks so much for joining us. Always appreciate getting your perspective. Cole Smead, President, portfolio manager of SMED Capital Management. Looking at the t l c O function on the Bloomberg terminal gets all the global commodities. Looking at the medals in particular, I'm seeing year to day gains of ten even before you look at Nickel up fifty six percent year to day. Where do we go from here? Obviously reflecting a lot of geopolitical tensions in Europe, Let's bring

in Everett Millman, chief market analyst for Gainesville Coins. Everett, which your big call here for medals? Here you highlighted the last time you're on that this was gonna be an issue. We're gonna get some supply change, some supply issues coming out of Russia. Where do we go from here? Absolutely, Paul Um and I believe the Biden administration invoking the Defense Production Act is not just a significant move with

respect to Russia. UM, it goes beyond that. Many of the sources for some of those EV medals, those battery medals that we're talking about, like nickel and lithium and cobalt, they are mined in uh not particularly well regulated jurisdictions UM and also not particularly friendly trading partners for the United States. So, for instance, about two thirds of global

cobalt is mined in the Democratic Republic of Congo. UM. You have a major nickel operation in Indonesia, and the Indonesian government has been become increasingly protectionists with its nickel and copper exports. And then of course Beijing is on both sides of dominating consumption and production of a lot of those key commodities. So really this is a move to bring those supply chains to the United States, to North America a bit more secure. But of course I

believe this process is going to be fairly gradual and constrained. UM. It takes many years for for these types of minds to become operational. That doesn't even mention the infrastructure needed for charging stations, and the d p A doesn't clear away any potential regulations on the mining UM. So the Biden administration has been fairly careful to keep environmental concerns

at top of mind. Um, all of this means that it will not be quite so easy to ramp up production of That sort of brings me to my next question. When we think about domestic production of some of these raw materials, is it clean? We've spoken a lot of companies that say, look, we can do it cleaner, but I think there is maybe some concern around that, right, A major concern um, not just for E s G reasons,

but from a feasibility standpoint. And that's one of the main things that invoking the d p A does is it at least gets the ball rolling on some feasibility studies to see what is the what kind of costs can we expect, what kind of profitability can we expect? Because, as you mentioned, if environmental regulations are ignored, as they are in some jurisdictions, then um, you can mind these metals much more cheaply. But that is obviously not going

to fly in the United States. What are you telling your clients about metals just broadly definders there are still room to grow, or do we kind of it's had its run up, it's a fascinating question because although I think we do still have room to grow, the high

level of volatility we've seen across the metal space. You mentioned nicol that's probably the biggest example, but even with gold, we've seen quite a bit of intra day volatility going back and forth UM that is leading to some liquidity issues. It's pushing some traders and participants out of the market.

And now we do have the fresh set of lockdowns and SHA high, so that could potentially curb some of the demand for copper and gold in these other medals, it's just right now, it's a big, big pale of uncertainty that's hanging over this market. How does this sort of help relieve some of the volatility within this market, if at all? It may not. I think that it's going to take um many months for this to play out, especially given the geopolitical conflicts that are continuing to rage.

I think volatility and um some impaired liquidity is probably what we should expect for the next at least the next quarter across the commodity space. All right, ever, thank you so much for joining us. Really appreciate getting your perspective on all things metals. All right, let's talk about we'll continue our discussion of energy, this time focusing on security of the energy grid. To do that, we welcome Daniel McGann, CEO of American Superconductor. Daniel, thanks much for

joining us here. I know you guys at American semi Conductor provide wind turbine electronic controls and systems that gives you a good sense of kind of how our system is kind of wired here in terms of our electrical grid here, how secure or how insecure from your perspective is the electric grid in the United States. Thanks for having me. Um. Yeah, at American super Conductor, we focused not only on wind but on resiliency of the grid. And what we're seeing is this is a challenge that's

going to continue to exacerbate over the coming years. The types of things that we're going to rely upon the grid for, um, from you know, powering different neighborhoods with with the change and how people are working and working from home, to the electrification of transportation and specifically vehicles, and the grid is going to be asked to do

a lot of things it's not designed to do. UM. So we've developed some solutions to help the system providers be able to in a cost advantageous way be able to provide more capacity and more resilience either the overall system. Talk to us about sort of that transition in the way that renewables can play a part. A lot of people, of course want the transition to renewables, but they just wanted in a reliable way. How are you thinking about

the role that renewables can play in that? But we want to make sure that renewables can be UM a cross competitive UM. We work across the globe in wind and also in large scare solar UM. A lot of what our most recent focus has been on is on hardening the grid, allowing the grid to be able to do more. Are we separate our business into a wind segment and a grid segment. Our grid segment now is at record levels in the history of the company. We actually grew the grid segment, but more against a year

ago quarter. So we see that, you know, the renewables in many way and the electric vehicles are going to drive dramatic changes to the grid to bring be able to bring this power to market, to to where it's needed when it's needed. UM and one of the solutions that we recently made some news around US our resilient electric grid solution. I actually Taylor did read a book that was a recommendation from Keith Grossman simply called The Grid, and it's a history of kind of electrification of the

United States and kind of where we are. So if you want to learn about the electric grid United States, and it is a fascinating development story, I recommend that. Um, Daniel, you know, we had a guest on from the petroleum industry just earlier today and she's making a pretty strong argument, not surprisingly given her from you know, the group. She represents that there is still a need for oil and

gas in this country. Can't just all be renewables, and we're seeing that now with the price of energy, given some of the geopolitical concerns. How do you think that think about the future of you know, kind of just energy development. Is nuclear does that have a role? Uh, fossil fuels, where do they fit in? And then of course renewables, how do you think about that. I think there's a diverse need for energy sources and you can see, um,

you know, the world changes can change pretty dramatically. Um. You know, not too many years ago we were talking about a move to natural gas um, you know, and now Europe's waking up realizing that, you know, they have their challenges with with supply from Russia given everything that's

going on over there. So I think as long as the world keeps moving towards cleaner sources and creating a network that can allow you know, green power to move as easy as other types of power, that I think net net, the consumer is at an advantage and and the you know, the planet and the climate are taking better care of. How do you think with renewable some of the big question has been the storage of that. Are you thinking about how to better store renewables that

when we need it, we have it. I think that that's that's certainly I'll say maybe a mid a longer term problem where we've focused a lot on is is there's need for kind of instantaneous manage of power within the grid because of these disparate sources, because we're asking

the distribution grid to do more and more. So a lot of our solutions are really trying to deal at kind of the middlesecond microsecond management of voltage, current or some combination thereof in different parts of the grid, be it trying to bring more rooftop solar onto a grid using the existing system, be it trying to interconnect nodes on the network, these transmission distribution substations to allow the

grid to untrapped existing capacity that's already there. We looked at certain cities where we could double the quadruple the level of resiliency in the urban core by turning the distribution system into a true network where every point on

the grid talks to every other point allow actrically. UH. Today, the distribution grid it's kind of like an aqueduct to your home, you know that if you think of power as water, everything rolls in that direction to you, and once you get into the last mile or so, there's no way really to be able to move power to

other parts of the grid. So we've developed this thing called Brazilian Electric Grid that we UH just lit up our first installation with the City of Chicago in the summer, which enables the interconnection of these existing assets in a very new and unique way. Right, Hey, Dan, thanks so much for joining us. Really appreciate it. You know, we're talking about energy here today and that includes they the

security of our energy grid as well. Daniel McGann, CEO of American a super Conductor that's a NASTAC traded stock. A m SC is the symbol for that one. I'm want to get to our next guest right now, Kevin Kelly Good Irish name Kevin Kelly, CEO and founder of

Kelly E. T F joins us. Kelly, thanks so much for taking the time here because I just wonder a story about mortgage rates really starting to tick up um and I'm wondering if this is kind of the first, you know, break maybe and what's been a very strong commercial and residential real estate market, particularly the residential side over the last couple of years. What's your view of

the residential real estate market. Well, I'm glad we're talking about mortgage rates and its impact on, uh, the the overall housing market because the problem we're having now is that there's very limited inventory, so that led the prices going up, and with mortgage rates going up, it's going to lead to less inventory because people that have purchased homes or refinanced homes last year are going to stay in their homes for longer because they won't want to

give that interest rate up, and so it's going to further exacerbate the housing inventory shortage we already have. So it's going to really reverberate through markets, and I especially when we're talking about inflation, is on top of everybody's mind. This leads to higher structural inflation, and the set is

very conscientious about it. I mean, you've seen the San Francisco Fed even talk about how these persistent increases in asking rents because of the low housing inventory is actually feeding into uh, the rent component in the consumer price indexes. How do you think about when you think about inflation and some of the impacts on the equity markets, the power of dividend growers where at least you're getting some

inflation protection via dividend. Yeah. I think that's a great point to bring up, because you want to be positioned with companies that have pricing power, and so when I look at that, they have to have unique business models that will be impervious to the inflationary shocks that are seeing bouts and fits that that are happening across the board,

especially with oil. And so a lot of dividend companies and in income companies have proven their the sustainability of their models over time, and so That's why investors can get really comfortable even in some residential publicly traded reads that are out there because of the structural inflation that we're seeing, and rents are only for a year, so

then they can reset higher. So just take for example apartments, right, Apartment has had a really tough time in one especially in the coastal markets, and we've now seen them completely rebound and so they've seen about rent increases from their levels which were impacted from the pandemic. And so when you're thinking about income and trying to generate it, you want to go to those companies that are uh that the key part of their business model and objective is

to generate income. All right, let's stick with the residential rule state. I gotta admit I don't get it. Housing prices are just ripping through the roof. And I was a recent seller, so I benefited from that. People are telling me that rents are going crazy, and they certainly are here in New York City where if if if those markets are up, what markets are down, there's there aren't more people that need to be housed in the

United States. So where is the other side of that trade? Yeah, the other side of that trade, uh started to happen in where we decided to build less. And you've had real estate is very locals, as you know, you just sold, right, and so you're focused on your local market. Well, what happens is is you have a lot of state and local municipalities that have zoning restrictions and it's the ultimate nimby, right, not in my backyard. I don't want this big residential

development going here. I don't want you know, I don't want zoning to be this and that. So since we've actually seen fewer total housing units being produced in household formation, So what is the driver behind that? Millennials? Right, Millennials got in the last bust and so they were living with their parents, they were trying to save money. It was a tough economy. Now they're coming out and forming a lot more households, and we have you were almost

a third fewer housing units available. So it's just simple supply and demand, you know. So I am so sick of millennials getting blamed for everything, Kevin. I was getting blamed because I wasn't forming households. I was the one not doing it. Now we're all doing it, and that's for the cause of all the supply jacking issues. It's unbelievable.

When can we blame gen Z for something? Yes, so, Taylor, you're right, I mean, I'm I'm I'm in an older millennial myself, right, and so I bought my first house at the age of thirty six, and so you're blamed. Yeah, yeah, it's totally my fault. Right, Um, we can blame gen Z for the for the last mortgage or sorry, we can blame the we can blame the older generations for

the last mortgage crisis. So that's how we differ and deflect as millennials because we had to go into the job market and it was a tough time for us when we were trying to do our household formations because look at all the costs that went up. Think about what people have to spend money on every day. Education. Education has gone through the room, right, So we're paying more in education costs, we're paying more in energy costs, we're paying more in housing costs. What generations are are

to blame for that? I'll leave that up to you guys. All right, I think I know where this is coming coming back. Yeah, you may, you may. Yeah, I'm in the tail tale and literally the last year or two of the baby boomers. But Kevin, he gets points for explaining to me this housing cost issue. I hadn't. I haven't gotten that. So we had supply over the last ten twelve years going down, and then you had some demand spike heres the millennials get out of the basement.

So Kevin Kelly, good job there, CEO and founder of Kelly E. T S talking about the rental market, the real estate market way way hot, even during the whole pandemic. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.