The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close the door. What you're about to watch is my interview with Satrini. Over the last two years, he's had a better handle on markets than anyone. He's nailed big trades around the rise of artificial intelligence, GLP-1s or weight loss drugs, and more recently, US election beneficiaries.
Cetrini and I have a special relationship because he exploded onto the scene after coming on my old podcast almost two years ago. This was his first interview ever, and many of you, my longtime listeners, were some of its earliest research clients. Citrini just raised the price of his research service for 2025 by 25%. And because of our special relationship, you, the Monetary Matters listeners, can get access to the old price by clicking the link in the description.
Let's get into it. I am so pleased to be joined once again on Monetary Matters by the investor. trader and researcher known only as Citrini, who has seen around corners and very few others have over the past two years. The Citrindex, his index is up 165% since the summer of 2023 and inception and year to date as we record the day before Christmas in 2024.
The Saturn index is up 65%, which compares favor to the S&P across themes of AI, GLP-1s, connectivity, the fiscal beneficiaries, the Trump trade. He was talking about the Trump trade long before. the big banks and Bloomberg were talking about it. I am so glad to be speaking to Citrini. James, welcome to Monetary Matters once again. How are you doing? Great. I love this running joke that we have where you're like...
Known only as Citrini. Anyway, James. It's been a great year and congratulations on the new podcast. I know you're going to kill it. Thanks, man. I really appreciate that. I really appreciate you. You've got to piece out 25 trades for 2025. These are just ideas, things that you'll be looking for for 2025. You're looking at everything ranging from Ukraine normalization to automation in...
agriculture, to connectivity, other things. Okay, so James, let's start with a trade, I think it will be of very much interest. It is shorting home builders and other Shorting the stocks associated with the U.S. housing market. Interest rates went up on the low end from zero to 5.5% on the 10-year and 30-year, which is what matter, 1.5% to as high as 5%. That was widely expected to absolutely...
destroy the US housing market because, of course, people buy houses on leverage and they use a mortgage and it's just much, much less attractive. That didn't happen. Sales in the existing home market declined.
because people didn't want to sell. So people went to the new home market. So prices actually stayed flat or went up. And actually, home building stocks have done quite well, despite the fact that interest rates are high. You now are looking at taking a swing at this short home builders thing.
Why? Well, you know, this is kind of a bittersweet part of writing this article where, you know, because this article takes two weeks to write every year, there will be something. This was the first trade that I started writing out. And in the meantime, we got some earnings reports. That is actually a good thing because it makes me go back and kind of assess and say, if one bad earnings report is enough to say, well, this trade is done.
then it was not a good trade to be in a year ahead outlook, right? So I guess we've already gotten some confirmation on this. But what's fascinating about the housing market right now is that you have this kind of odd dynamic where it's actually cheaper to buy a new home. than an existing one. And that's like when it comes to home builders, home builders are forced sellers and also forced to warehouse this risk while the home is built.
And you can think about it like if you're a market maker and you just have to warehouse the risk of being short the S&P and it can go against you because home builders have to. sell the homes that they build no matter what the market price is to keep cash flowing and to avoid carrying excess inventory so they don't have the luxury of holding out for higher prices like homeowners right now
If you look at the environment, we're seeing new home inventory climb significantly, especially in the markets where homeowners have been most active. So like Florida and, you know, the Sun Belt. And historically, inventory is the strongest predictor of housing prices. That's a pretty simple truism. Sometimes there's a lag defect. Sometimes it leads. Regardless, it always eventually plays out.
The levels that we're hitting really suggest significant downside risk ahead, especially in entry-level new homes. Builders are being squeezed. Their costs are rising more than 3% a year because of the cost of land and the cost of labor. But at the same time, they're selling into a softening market where prices are already starting to fall. And, you know, the rates eventually do have an effect. They can't just, it's okay for there to be a huge lag, but eventually they do have an effect.
And that's bad news for like D.R. Horton because their earnings are heavily leveraged to price their clients. There's also the smaller, more vulnerable players like DreamFinders, DFH. They're super concentrated in Florida, loaded with that. You add in like that picture. Some other concerning stuff, the inventory building that we're seeing falling new home prices. And it just, it sets the stage for a drastically different housing market in 2025, where, you know, builders are cutting margins.
reducing construction starts and and face real earnings pressure and that's not something that will be resolved by one bad earnings report that's the beginning not the end So housing prices shot up in 2020 and 2021. And in the 2022 bear market, housing stocks were kind of priced as if...
housing prices would collapse. They didn't. And they actually budged up a bit and they didn't shoot up again, but housing prices have gone up and the stocks have done really well. So in your short basket, which again, you have not triggered this, you're just building, you know, kind of loading the gun, so to speak. DR Horton.
Len Lenar, DreamFinders Homes, and Builders First Source, BLDR. So Gary Horton and Lenar are giant home builders. I hadn't heard of DreamFinders Homes. And then BLDR, I know, is a very hot stock. One of the best performing stocks over the past 10 years. That's I don't exactly know what they do, to be honest. But why did you pick these four stocks? Well, it's basically I'm focusing on kind of these.
Entry level, like big, largest price dynamic impact, the timing of price decline recognition, HPA weakness versus consensus, Sunbelt exposure, Florida exposure.
and then also you know a builder to supplier cascade right where that sequence can become reflexive this is like a very narrow kind of i wouldn't even call it basket it's just four things to keep on your watch list but uh as builder you know as uh When there's an impact to supplier revenue and supply chain stress and builder earnings decline, this is kind of something where all four of these stocks would be the most effective.
And so you've got a chart of the new houses for sale that are actually completed. And it shows from 2005 to 2007, 2008, this thing shot up. Housing supply has been constrained and it reached an all-time low in 2021. But it is shooting up. And I guess, James, the reason that house prices haven't gone down is because new houses, I don't think have gone up because everyone is trapped in a quote unquote, you know, golden cage of
They're locked in at a 3% mortgage, so they don't want to move and get a 7% mortgage. They would actually be experiencing a loss if they were to prepay. So I guess as a trader and as a market timer, how are you thinking about... What are you going to be paying attention to for you to actually start to put this in this Citrine Index as a short or in your trading portfolio? And tell us about the timing of Lennar or some housing builders.
since you started writing about this before you publish it, reported weak earnings. And I'm looking at the BlackRock home construction ETF from late November is down like 16 or 17%. To be clear, are you saying that this trade already happened or are you saying this is confirmation that this thing is right and actually I'm going to increase the chance that this is going to be something to be worth pursuing in 2025?
Yeah, I mean, I think so. And I think that there's a lot of there's a lot of the people in the market that kind of got really comfortable with rates rising and that, you know, D.R. Horton cited high interest rates as a factor. to keep buyers on the sidelines and you know that they necessitated their increased incentives to stimulate sales so you know this is something where
The risk to earnings is really significant. And I'm sure that there will be another entry here. And it's also the reason that it was the first.
trade that we kind of spoke about is well first you know i figured i had to open with one for the bears and one for the bulls right but at the same time it's i've never really had a bad experience shorting something because the supply is going up and inventory is going up right that has always worked pretty well for me and the trades that i see elsewhere are so kind of asymmetrically exposed to
the downside from the slowing economy. So it seems nice to kind of have something in your pocket that you're pretty convinced on that can offer kind of a implicit hedge.
against that and uh it's a market where it's somewhat difficult to not to find shorts it's easy to find shorts it's sometimes it's difficult to actually put them on and uh you know keep them on so with this it's an industry that's very driven but you know there's a lot of data on this it's very driven by what the earnings are it has these fundamental kind of you know come to jesus moments once a quarter and
So it seems like a safer kind of short to be highlighting for 2025. James, what do you think 2025 will look like? And why do you even go about writing a piece like this? Well, that's the... thing is if we're being honest with ourselves this uh concept of a year ahead outlook it's a little bit ridiculous the premise that just because of the number at the end of the calendar changes we're supposed to sit down and say oh you know here's what i
strongly believe is going to happen over the next 12 months. Listen, if any of us had a really strong, you know, what was going to happen over the next 12 months, we would not be waiting until December to share or act on it or whatever. Right. So. As investors and speculators, we spend a lot of our time trying to predict the future. And that's a good effect. The more effort that you put in trying to be right or trying to be less wrong tends to pay off.
We can't pretend that we don't all have moments where we look back in hindsight and we say, oh, God, I missed something that was so obvious. If I had just been a little bit more. observant of the broad picture. And in my framework, at least the emphasis that you put on this precise forecasting sometimes has the opposite of the intended effect.
where you don't see the forest for the trees. You're so up close to something that you get lost in the weeds and you stifle the creative process that you need to kind of outperform. I mean, at the end of the day.
As much as we like to joke about how stupid our counterparties are, we're in a market where a lot of money is changing hands and a lot of that money is controlled by very smart people. Sometimes the only difference between... underperforming and outperforming is that you form a differentiated view and you act on it so once a year since 2020 i basically set aside the last two weeks of the year always after the last
I view like after the last FOMC, I know pretty much everything that has occurred that year. I have a full picture. I'd break from that kind of really intense focus on worrying about being right. And I just... look at what might happen. You know, so when I started in 2020, it was the 20 trades for 2020. And that's gone throughout. And it's just a brainstorm. I call everyone that I know that I respect as an investor.
create a list. And some of them are really high conviction ideas. Some of them I already had on. Some of them are just total wild cards that I want to keep on the radar. Some are, here's how I would best capitalize on this trend if it changes like this. It's really just about being prepared, right? Like I was a boy scout or I made it to life scout. And the one thing that actually served me well as an investor from that was the mantra of just like be prepared because.
When you have a list like this, like a thematic watch list, you're minimizing intellectual blind spots. Some of these trades I'm never going to look at again or will never materialize. Even 24 of them might not work. But when that one does, I'll be aware of it and be more prepared than my counterparty. So...
The core of it is essentially if you come into the year and you're prepared with a list of everything from like, this is really what I think is going to happen to like, this would be absolutely insane if it happened to like. This is probably not going to happen, but if it did, here's how I'll play it. It kind of harkens back to this quote that I really like about how one should think about the process of speculating by Como Se, who was at Soros.
Fundamental analysis is not about predicting the weather. It's about noticing that it's raining outside. And then like a very significant departure from character, George Soros actually said this with more gravity. where he said, I don't predict, I observe. The core of this is essentially, there's a ton of doubt out there to be made by just being observant of more than what you're focused on in the moment.
We want to create something that's as broad as possible and with as little constraints as possible to really maximize the chances that we're looking at something that surprises the market and creates a differentiated view in that performance. So these 25 trays are not so much predictions. They are just kind of sticks in the ground where if you observe and you see that this is happening, you say, aha, I already have this idea. I already have the basket.
I'm going to be one step ahead of people. Perhaps that is February or March, 2024. You put together a Trump basket and you had names like geo group and others. And if Trump did not get. elected president and there was not a red wave, the stocks would have gone down, but they didn't. And you notice that they were and people can look at Geo Group and see it was quite a good performing stock. And when it comes to macro for 2025, how are you thinking about
threats to the stock market, either of too high inflation, the no lending scenario, or a recession. You've written about, and I don't know the exact words, but about how there's going to be an oscillation between recession fears and a no lending fear.
And that is actually bullish for markets. Can you explain? Oh, yeah. Schrodinger's recession. Schrodinger's recession. Explain what Schrodinger's recession and why was that so bullish for 2024? You know, close to almost a record year for the S&P 500. And do you think that there will be Schrodinger's recession in 2025, which will also continue to be bullish?
Well, now that all the quantum shikos are ripping, I guess everyone should be familiar with the concept of Schrodinger's cat, which is essentially you have a cat in a box and it's either alive or dead, but it can be both. until you look at it, right? Recession was something we made early on in the year, which was essentially, we figured that the market would continually build up these walls of worry and rapidly oscillate between we're for sure going into a recession or
We're going to have a soft landing or inflation is back on the table. And the Fed was easing, but everyone kind of wanted to be one step ahead until the Fed's first cut. You got a lot of this panic pulled forward. And that is something where it's a well-known truism that investors don't like uncertainty, but that the thing that they love.
even more than they dislike uncertainty is the resolution of that uncertainty. So if you have an environment where you're constantly building up these walls of worry. and then taking them down what that results in in stock prices is just a constant grind higher because you got you know it's august and everyone's a yen carry trade expert and we're for sure going into a recession
And then you get to tear that down and then you slowly go over to the other side. Oh, no, actually, the economy is too good and we're going to get inflation. And that has been a dynamic that's been really positive for stocks. As we go into this new year, I'm not of the mind that just because the year changes that the economy changes. But I do think that the way that this resolves, I don't think that
We go from severe inflation fears back into kind of like this Goldilocks soft landing. I think that we're going to have to have another growth scare because if you look at the macroeconomic data, you can twist it any way you want. But if you look at it. closely the trend is not like the concerns about inflation seem a little bit more intangible than concerns about growth they're very focused on the impact of trump and his trade war and uh
You know, that's probably the biggest risk that we'll face. Anyone who traded back when Trump was president knows the first quarter will have the highest probability. of taking what trump says as gospel and that will cause some significant volatility because he'll probably hit the ground running you know i think we spoke about this in the last podcast where uh
When you start a new job, you're kind of like still getting acclimated to it, especially if you're the president. You have to figure out how the White House works. What's it like to sit behind a resolute desk? And he doesn't have to deal with that.
You come in as a second term president, you already have these obligations, these things that you've tied yourself to. Maybe you have some goals, but you have to deal with the stuff that you've already done. So he's kind of free of those constraints. So we'll probably.
hit the ground running with a lot of really impactful announcements to the market. So the way that I see the first quarter playing out is probably heightened volatility. I don't think the performance will be all that well in the first quarter, but
When you look behind it, we're still pretty deeply in that dynamic of the market takes things, blows them out of proportion, and then we come back and say, you know, there's no better example of this than stir, right? We came into the... beginning of the year and we had like I don't know by mid-January we had like seven cuts priced into this year or something and and that was a fade and now we're going into January 2025 and we have less than one cut and like zero
zero clarity on when that's going to happen. So I think that there's a lot of room for this dynamic to continue playing out. But at the same time, If Trump comes in and is adamant that they're going to cut the deficit, right? The deficit and GDP are two sides of the same coin. Every dollar of deficit spending is a dollar of corporate profits.
And the GDP in the stock market, they have moved pretty significantly with that deficit in this kind of DRG paradigm. So I'm not smart enough to say what that way is, but on the surface, if you come in and you say,
We're going to cut the deficit. You're going to cause some upset. That represents a pretty significant risk. And then at the same time, the tariffs, the concern about them stoking inflation or being done in a way that... doesn't work you can speak to 10 different people and get 10 different answers about the macroeconomic impact i don't need a view on what he's actually going to do to know that if there are
10 different people telling me 10 different things about the impact that Trump will have on the macro economy. It probably sets up for some volatility as we deal with that. So I think you're really going to go in, we're probably setting up for something. scary in the first quarter. That's one of the highest potential of the market kind of running away with their imagination is. And at the same time, I think that when you look what's happening.
Technologically, when you look what's happening, just in the way that the economy has shifted since COVID, when you look at the overall kind of small business optimism, it seems like it'll be a buying opportunity if it does materialize. What I kind of highlighted in what I titled my likely useless macroeconomic forecast, which is what it is, right? I know precious few people who can accurately forecast what the economy will look like 12 months out. And that's not necessarily me.
So that's not where I'm the most confident. But I do think that if you look at, say, 1995 to 2000, you had a 10% drawdown basically once a year. And every single time, you know, on the Mazdaq, right, was a solid buying opportunity. And that kind of strikes me as similar to what's happening here. I also think that Trump will broadly be good for markets, which is why we covered some of the deregulation beneficiaries and other things in the 25 trades. And I think that...
The way that you construct your baskets and the way that you trade, and this is available at Citrini Research, is slightly different. So there are questions I would want to ask you, James, not about S&P target, but are you bullish for 2025?
How are you thinking about, are you overweight US stocks versus Europe versus Japan and China? You know, the typical questions that strategists get asked. And I know you do have interesting thoughts on that, but I think that we should be honest with people and say that you're- strategy does not start with that at all. You start with a theme, and then you learn about a theme, and then you construct a basket on the theme, and then you track it, and then maybe...
Maybe not. You put it on. You put it in your index, the Citrine Expert for Citrini Research. You put it in your trading portfolio. Yeah, I'd love to learn more about this process that subscribers of Citrini Research, they are familiar with it. I'm familiar with it. But for people who might not be familiar with it, you know, James, I mentioned at the beginning that, you know, you raise your prices for 2025 and Monetary Matters subscribers can until the middle of February.
get access to the 2024 price, the old price. So that will be available. We'll put a link in the description or something like that. But just tell us about your process. Did I roughly get that right, James, about how you start? with the theme you start with some idea and then
you learn more about it, and then you construct a basket. You've kind of nailed a lot of things. And it's definitely impressed me and impressed a lot of people, particularly in the institutional hedge fund investment. But basically, You know, number one, about your process. Number two, why do you think it's worked? Why do you think other people who attempted to do this have might have failed where you've succeeded? Well, you know, I'm not...
I'm not going to pretend that the last year and a half hasn't been one of the best environments for thematic investing in a long time. It absolutely has. And that certainly plays into it. But as far as a general approach. I would say we try to look through everything from the equity lens and the lens of the trends that are affecting equities. And that includes macro. And that makes for some pretty interesting implementations of trades.
Like my favorite example of this was a trade that we put on this year and kind of the middle of this year where we really started looking into the dynamic, what was occurring with kind of the legacy air carriers, right? for a while you had it's like airbus and boeing can't get their stuff together they just keep messing up and then you have stocks like transdime and f tie and crs and ati and they just go up every single day because the aftermarket aircraft parts market is so tight
And we looked at that and looked a little closer into United, which we kind of thought was a good place to start because we figured, well, you know, the environment is kind of capacity constrained. Then United has like... I mean, the cheapest planes that United can buy are in their own fleet. So we started looking at it. It was probably like maybe like 15 or 20% off the lows.
And it was kind of definitely went into analyzing the airlines with like our eyes wide open because there's a very famous Warren Buffett book that goes if an investor was present at Kitty Hawk.
he would have done his successors a favor by shooting orbital down and so airlines have always kind of been viewed as this place where capital goes to die and those kinds of dynamics always strike me as really interesting because The place where thematic investing works the best is basically in industries and subsectors and factors that are really viewed negatively at the time that this kind of trend hits.
there are countless examples of that i mean you look at how ai played out kind of arose from the depths of every single person on the street being bearish on nvidia because of like this this crypto gpu glut that was you know everything was focused on wrong thing so and the same thing for you know we covered earlier in the year kind of this healthcare innovation cycle and all these kind of like healthcare names hadn't been left for dead and so
We follow this kind of framework of the hype cycle where you get the peak of inflated expectations after everyone bids things up. And then you get this trough of disillusionment after everyone sells it and they think that the trend is and then you get this plateau of productivity where the... tailwinds and the secular drivers never went away that they just got overestimated and underestimated by the market so when you are coming out of a bear market
and you're doing thematic investing, the best place to focus on is which area has the highest probability of rallying to this peak of inflated expectations. When you're already in a bull market though, you kind of have to adjust your framework and start looking for themes.
that will affect names that are in this kind of trough of disillusion. Airlines was a good example of this. Payments stocks were a good example of this. Some of our smaller cap, kind of like biotech, medtech, health care names were an example of this.
the way that this kind of airlines trade construction represents what we do best is we looked at this dynamic and for the first time in in a very very long time airlines were operating in an environment where capacity is constrained the predecessor to this the kind of historical analog was in 2014 with the burgeoning industry of the low-cost carriers you had southwest that imposed a strict cost discipline and everyone played copycat
That was a very fragile dynamic because of this artificial capacity constraints saw the airlines go up 200, 300 percent in a couple of years. But what happened was a single OPEC decision that sent down the price of oil basically rendered all of that. it didn't matter everyone went crazy uh the oil investors will be familiar with this dynamic right once you can go for it and then they blew up and everyone said well yeah that's probably what we deserve for investing in airlines but now
It's not the capacity constraint is not because they're exercising discipline. It's because they literally can't add points. Boeing and Airbus are backlogged. Parts are scarce. The market's incredibly tight for aftermarket parts. Low-blast carriers are crumbling under the rising costs. They're in the past. And they don't get this like labor arbitrage that they used to get and that they hadn't as an edge. So low-blast carriers are like...
Spirit, Frontier, Elysian, you know, that labor arbitrage is gone because of unionization and inflation. And now you have an industry that's structurally undersupplied and you have a cycle that has echoes of like the 2012 to 2014 cycle. that was driven by low fuel costs that was unwound by low fuel costs but you have a constraint that's exogenous right it's imposed by something that they can't change so we positioned around this dynamic by
Going along United, basically the legacy like United Airlines, Delta, Alaska Airlines. United at the time was trading below the implied value of its aircraft fleet, which was like a crazy margin of safety. Delta had a lot of interesting stuff going on with improving their operational efficiency with predictive analytics. And basically there was this gap between those carriers and the budget carriers that just kept growing.
We kind of enhanced this margin of safety. Once we understood the trend that was going on, we went long, United, Delta, Alaska, and then shorted some of the low cost carriers. So it was like 200% long, those latency carriers, 100% short. Allegiant, JetBlue, Spirit, Frontier. And then we looked at the trade and we said, okay, what are the risks to this trade? And there were two, essentially. A, Boeing and Airbus get their shit together.
And we get a capacity flood because everyone starts buying all this new capacity and you get the same kind of dynamic as when you had the OPEC decision that lowered fuel costs or you get, uh, loosening aftermarket aircraft parts market where everyone can fix their fleet and refurbish planes and because of those parts become cheaper so We believe the aircraft shortage, we believe that's a theme, right? That's like a durable trend. But at the same time, it could be wrong. So...
At the time, puts on FTI and Transdime were incredibly cheap because all these stops that was go up every single day because their market was so tight. And then calls on Boeing and Airbus were also very cheap, more cheap on Boeing than they were on Airbus. um but we viewed that as like okay so here we have this trade that we're really certain is going to work and then we have this cheap optionality that we can use as a hedge that in like a edge case
might actually pay us off even if our core trade continues working. So recognizing a generational shift in industry economics. and the pricing power and capacity and like the premiumization trends. So that was how we implemented the trade. And, you know, looking at it at the end of the year, it's like the long led work, the short led work and the hedges work.
And so like, that's, you know, obviously that's an incredibly weird situation, but, but yeah, it like that, that's kind of how I would say that we approach a theme is, is the, the comes back again to like, don't predict, observe. Right. There's a lot of alpha to be had in just looking at how trends and themes and industries are playing out. You put that in, the article came out November 1st.
Yeah, what's the performance been since then? So basically, we put this trade on end of October, beginning of November. Like I said, this was something where United had already gone up. We started researching this probably in either August or September.
And we have a memo functionality where we can send out things that aren't full articles and people can interact. In that, we sent out a short memo where we said that we think that United Airlines calls are really cheap. So put them on if you agree with very basic idea.
So we put on the United calls that expire at the end of the year. And then we had some exposure while we were writing it. And then we published it end of October, beginning of November with the... full at one in the full way that we would execute this trade and that basket of like long United Alaska Delta short. Yeah. So, yeah, we were long United, Delta, Alaska. We were short, low-cost carriers like Frontier and JetBlue and Southwest.
And then we also had some smaller longs on Sun Country and SkyWest just because the premiumization trends don't affect the Midwest as much. And then we added in those kind of Boeing call hedges and the Eptide put hedges, Transline put hedges. And so that's up like 25% since the beginning of November. And, you know, the United calls have gone parabolic, but, um, that, so that was an example of kind of, you go basically.
bottom up, then top down, but just understand the overall industry trend. And then if you have an inkling that there's a theme that you kind of go for it, you know, if the story makes sense, it's probably a good trade. And James, the handful of times that I've had success in my own investing, it has been kind of the Charlie Munger approach of very concentrated. I learn a lot about the idea.
I think I understand it better than a lot of people trading the stock, but it helps if it's not Apple or Microsoft or some giant company. And then I hold it on for a very long time. You have had remarkable success, much more successful than me with a very different approach of.
total scattershot shotgun approach, not at all concentrated positions. And it is impressive. If someone has a same result with three securities as someone with 35 securities, there's a higher chance that 35 securities was just from skill rather than from...
luck um the way that i look about it is essentially if you look at like we publish a basically like an index that serves two functions it's our active management of these baskets i think that it's like when the sell side publishes a basket it's kind of like here's the basket and then that's their
AI basket, right? And like, I won't name names, but there was an AI basket that was published in March of 23 that didn't have NVIDIA, but had Farfetch in it. When we publish a basket, it's basically us committing to monitoring that theme.
and kind of so we publish a matic model portfolio that incorporates these baskets but it also incorporates our active management or our opinion on what should be overweighted what should be underweighted what should be taken out what should be added back in and it's kind of like You know, how you would do the S&P 500, right? There should be additions and deletions. There should be a framework for those. And the other signal that we get from comprising this index is it's a good read on how.
our style of investing is doing in the market, which can have some signal value, right? Thematic investing tends to do better in bull markets than it does in bear markets. Although that's not to say that there aren't teams in bear markets. There are you looking. 2022 natural gas have to be cashed well positive businesses but the main thing essentially is we construct these baskets we keep them updated and the way that i view our
portfolio management approach, like a letter for a model portfolio is we are diversified at the security level, the very concentrated at the thematic level, right? So when I think about the positions in that book, I don't think about like, oh, you know, I have a 40 basis point position in NVIDIA and a 35 basis point position in Apple. No, I think about it like. I am 12 and a half percent allocated to artificial intelligence as a theme.
all right i'm 10 allocated to airlines the the airline view said and this kind of like capacity constraint thematic and 10 allocated to uh payment stocks or health like this healthcare inflection that we've observed so it's the way that i invest i don't think that it's necessarily for everyone but i do think that nobody ever had a negative effect from being aware of uh
secular trend that worked right even if it's to keep an eye on it like if a secular trend works there are two things that will always happen a becomes momentum and then b you have a crowding in that eventually unwinds
So that can create multiple opportunities in the same thematic, right? Eventually, this will happen to AI, I'm sure, where the input expectations will get so ridiculous that there's no way that they can meet up. And then there will be a huge unwind where people rotate out of the stocks. And then we might have gone away. It will probably continue getting better.
And maybe the trigger for this will be like we get a revolution in ASICs or it's application-specific integrated. Like maybe there's a challenger to Nvidia's throne and it gets commoditized, which semiconductors do tend to do. And... That will mean that AI will actually get better and there will be an opportunity after that to kind of find.
the actual winners longer term and buy them pretty cheap so it's diversified but it's concentrated in these kinds of trends diversified in names concentrated in trend but how do you know which trends are going to And also, how do you separate a fundamental view which can be right versus the market trading in a certain way that oftentimes, I guess, is moving in the opposite direction at the same time to...
the fundamental reality, but I guess it's just pricing in a rosy future. So for example, the airline industry stocks really went down from 2021 into 2022, but the fundamentals got so much better. I mean, they basically were in a depression in 2020 and 2021, and they were emerging from a depression. Yes, fuel prices hurt them really, really hard.
And I mean, some companies, there's one SPAC I won't mention that went out of business. But why is it only now that the airline stocks are rallying like crazy? And how was it that you had an inkling that this would occur? Because I bet in terms of revenue growth.
I bet 2022 and 2023, revenue growth was way higher than it is now. So why are stocks only rallying now? How do you find these inflection points? Not in the fundamentals, because fundamentals, not easy, but they're way easy. If you do a lot of work on them, you can figure these things out.
How do you get the trade right? Because there have been times I've done a fundamental analysis. I think XYZ is going to happen. It does happen. But then my security selection, my trading, my timing did not work out at all. Well, that's kind of the macro informing the micro, micro informing the macro.
If you want a lot of people to make a decision, you're not going to do it with a spreadsheet. You're going to do it with a story. And you need to kind of have a strong fundamental view, but it needs to inform how people will view this overall story. So with AI, for example, the most revolutionary paper about artificial intelligence and large value models was called Attention is All You Need. And that was published, I think, in 2017.
And, you know, you could have went to the market and said, oh, God, AI, we're going to need a ton of parallel computing and GPUs. I'm going to buy NVIDIA. And then you would have been in that trade with no actual fundamental impact in these earnings because of AI. You would have eventually been right. But you need to basically have a strong view on how can this theme make itself known to the market? How will investors react? And with airlines in particular, it became pretty.
painfully clear from doing the work that United was going to do a pretty large share by that, right? That was the only thing that made sense from their fundamental positioning. Like I said, the cheapest planes that United could buy were in their own fleet. And they were trading below the value. So it's like if I have a company and the value of these companies planes are worth a million dollars, but my stock's trading at $900,000.
uh do i go out and buy planes with all the money that i made or do i find them in stock essentially we recognize that and that was kind of a trigger for the market to realize this and then it becomes a theme for a long time before this the aftermarket aircraft parts was kind of the theme the tightness in the market and uh so that's something that you track and then you wait and like It's always going to be a good idea to have a strong view on industry trend or a theme and then look for.
the uh kind of like catch-up trades or things that have been neglected which brings me into another one of my 25 trades if we can uh yes you know uh like uh like the The third one that we wrote about was this dynamic in power, integrated circuits, and even passive components like capacitors. Basically, you've seen this huge trade that's happened in the independent power producers of nuclear energy.
and all that stuff because it's an objective fact that data uses a ton of power, especially if you look at the trend of how much power recently the O3 from OpenAI uses. It's reasonable that trade has occurred. But part of it was there was no... real overhang, right? So when you're looking at a theme, sometimes you want to look for essentially thematic beneficiaries that have a big overhang from something that's extraneous to the theme.
An example of this is for a while, TSMC was trading down on worries about the economy or worries about Taiwan-China relations. Yeah, Taiwan's become a huge, huge producer of... semiconductors, and they're not fabulous. They're the ones actually making stuff. Yeah, everyone knows what TSMC is now. I know that this is a primarily macro-focused show, but unless you've been living in Iraq, you probably know what TSMC is.
Anyway, this was something that we covered in the 24 trades for 2024. The TSM had a huge upside from NVIDIA and their pricing power was crazy. As long as they could deal with some of the capacity, you could transform Cobos and they could unlock. this kind of AI tale that was incredibly sad as long as the market viewed them as having it. So now we've continued to look in areas like that. Like this year, there was a big trade with connectivity where you had
When you have a theme that's kind of working and you have a very thematically driven market with a lot of momentum, you get these kind of ignored aspects of the theme. And that makes sense because capital goes where it's best treated. So NVIDIA goes up every single day and is the most obvious beneficiary of artificial intelligence.
Nobody wants to go digging in the dumpster on like, these names maybe will benefit from AI, but that's where the opportunities end up being. So in, I think, June or July, we... covered connectivity and we called it the new dawn for optics suppliers and you had a bunch of these names like coherent and sienna and momentum that were really beaten down because of how bad
the kind of inventory glut and postcode dynamics of the telecommunications industry work. But at the same time, they had this huge, huge data com tail. And we looked at them and All you needed to have a view on was essentially, you didn't need to say, this is it guys, the telecom cycles inflecting. No, you just needed to say telecommunications will probably.
not get worse or if it does it will get worse at a slower rate than it has been and once that happens people will take a second look at these stocks you have a potential for a huge re-rating as
the kind of connectivity needs of the data center arise. So we've kind of stuck with that framework for finding like the next phase of the AI trade. You know, this year we went through kind of like the power stuff we went through all the connectivity stuff and so we when we were writing the 25 trays we sat down and said you know where is the next place that this is going to play out
And our best guess, you know, this is deeply into like guessing territory is we all know the rising computational intensity drives the man for power, but. The core aspect of that is essentially not all power is created equal. You know, we think about water quality, we think about food quality, but power quality is, it's one of the, it seems like a binary thing, right? The eternal lights are trying to work.
you or it doesn't but that's that's kind of like a blase attitude that like especially in the data center you can't really afford when Everything from like medical equipment to data centers depends on clean, stable power. The quality of that power matters more than ever.
when i say clean i don't want to get pegged as an esg investor no i don't mean green i mean actually like pure consistent electricity that's free from surges says distortions because that can really wreak havoc on sensitive equipment so There's a quote from Schneider Electric's head of data center strategies warning that the servers have become less and less tolerant to the slightest sags in power or brownouts.
And what used to be considered the minor power fluctuation can now crash an entire system. And if you have artificial intelligence servers that are reading radiology reports, that's not about keeping the lights on anymore. So. In AI driven data centers, you really need that efficient and reliable operation. We started looking at, we had a pretty great. play where we've started doing this series called In Conversation where we will find stocks that we like and some of them are like just like
Undercovered or the views are stale or there's a short report or long report that's wrong or outdated or whatever. And we will sit, we will like reach out to the management. And we'll say like, hey, you know, we think you're being underserved by like the investment community. And there's some things that we think should be cleared up.
But nobody's going to do it better than you are. So one of the names that we did that with the company was Credo Technologies, and they provide active electrical cables, right? So Those are like cables that actively do basically active filtration and active management of power. Credo, there was a lot of stale information out there about what their upside was, but we saw a company with huge potential from AI.
and interconnects the, the, the kind of AI sub thing that we had just covered. So we sat down with their management and we spoke about What is the actual upside here and what would you like to clear up? And their big thing was the upside for active electrical cables, which do. signal conditioning and can deliver power over Ethernet and have integrated chipsets that can either boost signals or manage power delivery and a really big deal for power efficiency and energy efficiency. So
The stop wasn't really necessarily viewed as an AI beneficiary, but it was. And they saw this huge uplift in that segment for active electrical components. So we looked at that and we said, well, you need the passive electrical components too, right? But if quality is so improved... so important. And we looked at essentially a couple of these names that do integrated circuits for power, like AC, DC converters, capacitors for smoothing and filtering diodes.
Anything that manages voltages or deals with harmonics, anything essentially that ensures the reliable operation of electrical and electronic equipment. And we got this huge list of names that make, you know, capacitors, inductors, diodes, surge protectors, filters, transformers, even like moss sets for discrete power semis. And most of them.
are trading at the lows or if they're not. And the reason why is because there's this huge overhang from the automotive cycle and the chemical cycle has just been. Bad. It's like an apocalypse, right? You look at the more well-known of these are like STMicro, NXPI, Infineon, On Semiconductor.
And so I'm looking at a list of 10 to 20 companies, and I think I've heard of maybe one to two of them. So there will be people listening to them who've heard of zero of them. Some of these companies are in Japan, so they make. What do they do? They're capacitors. They basically make it less likely that there'll be a brownout. And so they improve the grid. As you say, these companies are trading at low valuations compared to history.
But yeah, just tell us more, because I feel a lot of people watching this will not know what this means. So basically, we just made a list of names that had been negatively affected by the on motorcycle. that also have upside to severe need for power quality in data centers. So that's like making sure that the voltage is consistent and that you're not having brownouts and that.
Your power supply is uninterruptible and that the power is smooth and filtered. This very precise management of voltage to various components can get pretty sophisticated and technologically heavy, but a lot of these companies, their major driver revenue is is automotive and that's been bad so the general idea of the trade is essentially these are on names like on the power ic side you have like alpha and omega semiconductor aosl or on the capacitor side you have like vshay
of the stage which is and all these kinds of names that have really just been not participating at all in this data center upside because of the automotive cycle there's something that you keep watch on because Again, it doesn't necessitate that the automotive cycling flips upwards. You just need it to stop getting worse or to get worse at a slower rate.
And once that happens, the narrative can take hold that like, oh, some of these guys really have a significantly fat tail from, a fabri tail from artificial intelligence and the data center buildup. So these companies, a lot of them make parts for chemicals as well as automotive.
I know automotive cars as well as chemicals is very weak. So people predicting a recession, a lot of them are either industry people from automotive cars and... chemicals or their economists who are recessionistas who are relying upon these typically leading cyclical industries to say, well, we've got to be in a recession because most of the time before a recession, the automotive cycle turns and the chemical cycle turns, and that's already happened.
I mean, they have been wrong for, you know, now close to three years now. But you're saying that the automotive cycle is weak. The chemical cycle is weak. And a lot of these companies in this basket, which, again, is not in your Cetrini index, I don't believe yet. This is just, you know, you're taking a look at this is.
they do make stuff for AI. And I could make a comparison to Nvidia, which in 2022 suffered because crypto collapsed and a lot of Nvidia chips were used to mine Bitcoin and the like. And they had a cyclical downturn then, but obviously he was a massive AI beneficiary. You're saying maybe not to the same degree, but there's a similar dynamic here in these names.
Yeah, absolutely. The setup is there, right? The thing about the automotive cycle right now, you know, it's very clear that we're not in a recession, but the automotive cycle has still sucked. So there are more... niche and and kind of sophisticated drivers of that but at the same time you don't need to be an automotive cycle genius if you're just looking at these names and you recognize that they can get the same kind of treatment i mean
Everyone at this point probably has seen the charts of companies like Vistra or CG. Everyone has seen what? If anyone has looked at the kind of... dynamic that's played out with these names like Vistra and the IPPs right the power producers essentially you had this like sleepy utility industry and then by the end of the year it's trading with like a one correlation with nvidia right so it's like when you have these areas that are like really trading at like
classic kind of industrial cyclical multiples and can like unlock this thematic driver. If there's like an overhang there, it's always a good idea to keep that on your watch list. Right. And so just a few stocks that we've mentioned, I'm just going to read out their year-to-date performance. And again, year-to-date is from January 1st, 2020. to December 23rd, 2024, because we're recording on December 24th, 2024. So Coherent is 127% yearly returns. Sienna, 94%. TSM, Taiwan Semi, 102%.
There's also Credo, you mentioned, that's up 254%. Based on your research, I actually did buy a one call option on Kratos. Well, I made seven times my money. So, you know, obviously there's a chance that could have expired worthless, but it was a convex bet that paid off. And then, so you also talked about Vistra. So there's an independent power thing. Explain what they do. That is actually the biggest stock in the... Sorry.
The best performing stock in the S&P 500 year to date, 269% from January 1st to December 23rd. Was that in one of your baskets? Was that in the AI basket or the fiscal beneficiaries basket? And explain what they do and just... Why do you think it went up so much?
so like vistra is like a large integrated energy company that is the largest independent power producer in the country right so but they're kind of not constrained by the classic issues with utilities where the regulation kind of and so that they can only make so much they own and operate a mix of power plants that are natural gas coal nuclear renewable it has a very large fleet it's one of the largest power producers
They had significant focus on Texas and it's a very competitive energy market with ERCOT and they have a major footprint there. This data center boom and increased need for power has asymmetrically benefited them.
When you look at a trade like AI that's getting long in the tooth, approaching AI should not just be, should I buy NVIDIA or not? There will be multiple... branches off of this trade that will continue to play out and to try to stay ahead of the curve when it comes to what's the next thing that's going to benefit and you know it's interesting because
There are so many areas and there's so many disparate drivers that really the best thing that you can do, look at the areas that could benefit. For example, when we covered connectivity, I think that basket was down on the year. And now that collection of stocks, I think it's gone up. probably 60% since then. The same thing with capacitors, the year to date performance of this basket of power ICs and power quality is down 16% year to date. So it's something where
Does that AI tail materialize? Are they able to overcome this kind of like automotive overhang? Maybe, but if they do, it'll be a very asymmetric trait. And so that's kind of comes back to the core of this article, which is just, you know, what should you be? monitoring in the year to come where there might be a trade. And where does American Semiconductor play into this? I believe the ticker is AMSK. Yeah, you wrote a piece specifically about...
American semiconductor, which I know you rarely do. Why do you feel so strongly? Well, I mean, American superconductor basically... Perconductor. Yeah. And that actually is a good example of just keeping an open mind where, I don't know if you remember, but there was this height surrounding superconductors, right? That we had unlocked room temperature superconductors.
And my understanding of that was, I was like, you know, what the, he's a superconductor, you know, but I keep an open mind, right? So if it's possible, then I'm going to look into it. So I broke a very tongue in cheek primer. I'm like.
here's what it would mean if we got room temperature superconductors we're not but like here's what it would mean and we created a basket that was just like listen if there's a one percent chance that this happens these stocks are going to go so parabolic that it makes it worth the time of like
There's a 99% chance that it doesn't. Now, the thing is, at the time, I had put American Superconductor in there because the name... is american superconductor right it would just i was like well i know where i'm starting and you know i never really did i have a watch list that has all the baskets and then like i never
took it off the watch list because it was just there. And something I noticed was like, oh man, this is one of the best performing baskets since Inception. I think it was just killing it every day. I figured, well, okay, I guess that a lot of these memes that had upside to superconductors were probably, you know, also had upside to this kind of power narrative.
And then I started looking into it and like what surprised me is American superconductor doesn't really do that much with superconductors. They do have significant IP there. I started looking into it because this technology that so. Just to be clear, room temperature superconductors do not exist, but high temperature superconductors do. And they basically can enable compact, high capacity transmission lines.
that reduce losses and improve efficiency and reduce the need for substations and so if you have a really dense community they laid one of these high temperature superconducting wires in germany so they don't need a substation there because it was too dense of an urban environment i thought that that was interesting related to the amazon talon deal if these data centers are going to need the kind of
connection directly to these power sources, this could be interesting. But as I looked into the company, I've realized that there was a disconnect, basically. They have these Volt reactive dynamic systems that are critical for maintaining voltage stability and reactive power compensation. They ensure high quality, stable electricity. And that's essential when voltage sags and surges and disrupt.
sensitive equipment and you know they have part of the revenue is from wind in india which surprising to me is pretty good actually not like it is elsewhere so I looked more into this company and it spoke to essentially the power of just keeping an open mind, keeping a watch list and looking into stuff. Because what I found was a company that although it did retain this superconducting tail, it also was significantly implaking their earnings.
And the chart of the EPS expectations versus what they were actually posting was stunning, just clearly wrong. And so that was, you know, we covered that stock and it just seemed to me like, you know, I thought this company was just like superconducting me. But if I thought that, then maybe other people think that maybe that's why their earnings estimates continually come in so low.
And the thing is, you know, this was a name where they don't really have that exposure to the automotive cycle. So it was an easier way to, you know, if you want evidence that this power quality thing is important, well, you know, it's working already. And it has worked in some names. The market cap of American Superconductor is now just under a billion dollars. So maybe that's why it's not as well covered. James, I think a lot of people know you for...
One of your first public calls on AI and the big stock there, of course, is NVIDIA. For close to a year now, your Stratini index has been underweight semiconductors relative to the S&P as well as... underweight nvidia you referenced earlier you said that yeah yeah we've been underweight nvidia but not underweight seven inductors okay thank you thank you for correcting me there so underweight underweight nvidia that was my the point i was trying to make and so you said
Nvidia or AI is getting a little bit long in the tooth. Maybe you were talking about Nvidia. What do you think about Amidia's prospects right now? I mean, the year-to-date performance is 180% from January 1st to December 23rd. So very, very high. And of course, good in 2023 as well.
Of course, the valuation is high, but it has not gone up as much as people think because the earnings growth has been so robust. In terms of macro risks, potential risks in 2025 at the very end of your over 100 page report, page 111. The risk to Nvidia's dominance drags down the indices. When you first started talking about Nvidia, it was nowhere near big enough as a percentage of the S&P 500.
to be a macro risk but now what is it six seven percent of the s p 500 a bigger percentage of the the nasdaq probably that's like 100. so What are your views on NVIDIA and what are your views that the risk that in an increasingly concentrated market is such a big percentage that if NVIDIA goes down, it could drag the other players down with it?
Yeah. I had a friend of mine that's a client sent me something that I thought was really funny. He said, everyone who doubted you is now long in video, which is that section is essentially on the risks that could materialize, right? And I tried to focus this year on because... When we were coming into 2024, I was like, the best call that I've made all year was not about AI or any theme in particular. It was really on a macro level just to stay bullish on equities.
And so I was focused a lot more last year on potential tail risks, basically things that I think I even opened that section of the article last year with these things won't happen, but. We should just be aware of them in case they do. You know, it was like the Houthis disrupt all the shipping lanes and inflation comes back or there's...
really effective AI driven disinformation campaign with the election or a dark horse cannon that comes out and is crazy, you know, whatever it was. But this year I said, let's focus more on a couple things this year that have a little bit higher percentage of happening. So with NVIDIA, they're winning, right? Nobody's arguing that. They are winning. They have won. Their lead versus the next closest competitor is so wide. You could land a 747 on it. It's a really...
insane mode that they had between CUDA and their design capabilities. I mean, they're winning. But that's something that is pretty well understood at this point by the market. So you have to say, well, You know, the other day, this is probably a month ago now, there was a headline about like Rubin, which is the successor to Blackwell. There's been this whole debate about scaling laws and when you kind of hit the wall.
And NVIDIA basically announced that Rubin is six months ahead of schedule, right? That's a headline that six months ago would have sent the stock up five or 10% a day. And I think we went up 40 basis points off of that. So when stuff like that starts to happen.
you know it's not like i i'm like oh god i have to be bearish on the stock now but it does necessitate a more high touch approach with it where where you're more constantly assessing risk versus reward and uh the asymmetry that's being presented so in my mind you know nvidia is great it'll probably continue to be great uh but
Does it present asymmetry, right? Am I expressing something that isn't already priced in? Am I expressing something that can surprise the market? I guess you could say that NVIDIA continuing to win could surprise the market. That's totally valid. But at the same time...
Can I underwrite the risk of the competitive threat to their software CUDA or their hardware emerging in 2025? And I personally, it's not that I. can't underwrite that risk but what i can say is i can find really asymmetric ways of playing that or just continuing to play this ai data center build out without needing to take the risk of what that would look like so something where you know if you can like if open ai has like triton
and AWS with their training, you know, not like these are all competitive threats to NVIDIA and most of the breakthroughs with like, like trying to challenge traditional GPU clusters have been done in inference. where the parallel computing aspect is not as important but the creation of like this happened with crypto mining and it's like it's actually kind of like a deja boom moment if it were to happen because like
part of the reason why NVIDIA was so cheap when this all started was because of the fact that they had sold so many GPUs to the crypto industry and then they essentially got cut out by the creation or proliferation of these application-specific integrated circuits that were just for mining Bitcoin. And then they had this huge glut and demand wasn't as high. The hardware got commoditized, which tends to happen with hardware. So that really is a risk there. And it's something that could.
I'm not going to say will, but like could happen this year where, where, you know, it's probably, they're most probably bigger in the software side than in the hardware side, although they're both very wide, but you see like, like Amazon really pushing with Tranium. And these risks that are trying to address volumax and at the same time try to offer AI accelerators that really...
can unseat NVIDIA's place on the throne. So, you know, like Metasm, Google has used, AWS has Inferentia and Tranium and like, you know, so all of these are like not as good. like like amd is definitely not as good there's a great piece analyzing that from film to tell with semi-analysis and that is 100% the case but
At the same time, when you look at the environment, you still have to be long NVIDIA when AI is firmly here. The inference workloads will continue to increase now that more models have been trained.
uh data foundation for deployment should do well it seems to me that there's more risk than i want to take relative to the upside with nvidia here that is a nuanced view it's not like for sure this is the year that nvidia gets disrupted totally possible that that doesn't happen at all uh but at the same time if it doesn't happen you know what do my returns look like versus looking elsewhere so totally possible that nvidia remains the king in 2025 but you're saying
it's already being priced in. And even if NVIDIA even expands its domination of AI, the stock might not go up that much because it's not priced for Doom. And how much can it outperform those rosy expectations? Let's talk about AI losers. You talked, you know, going back to 2023 about companies that would lose from AI. It now seems that...
a lot of those names, you're actually thinking that they could be new winners. And what is this phase three of artificial intelligence? Are we in phase three right now? And why in the phase that we're in right now, would these former AI losers turn into winners? And what companies are we talking about? Yeah, so the second article, the first article we ever published was titled global AI beneficiaries. And that was kind of like our core basket of just like,
Here's 150 stats. We created a tri-phase approach where we said, you know, the enablers and then the implementers will be the ones to benefit in the beginning. And then you get the actual really like moonshot democratization of AI. That's where he pepsed up. So we focused on basically the data center infrastructure, the lab that was phase one, and also the hyperscalers and rails and where the gains would accrue the most. And we had a pretty bearish outlook on software that was.
primarily due to ai cannibalization or i mean there were a million reasons to be bearish on software and that played out and then it stopped playing out and there is a distinct feeling in the market that there's this rush to really show that the return on investment of this data center build out will be good. So the market is looking for these solutions now.
It seems like we're still kind of reaching for buzzwords. Like it's very difficult to get a one sentence answer if you ask someone like, hey, what is an AI agent? I can answer the question in more than one sentence. Can you? No, I could not. No, what is an AI agent? That's what I'm saying. I mean, okay, so the concept of agentic AI has quickly been gaining currency and is right now probably more of a buzzword than a reality.
But it is almost certainly the way that we get these phase three winners. Essentially, AI agents represent this natural evolution by standardized generative AI tools, the kind that would summarize documents or generate code snippets on request.
and this evolution like emerges from the groundwork that enterprises have been laying for years in their data and workflow infrastructure so We have all these companies that have spent considerable time and resources building enterprise-grade data fabrics, where they're storing all this data, they're making it clean.
so that it can be easily accessible. I mean, I'm sure if we're talking about investment, everyone has opened an Excel sheet and been like, this is a nightmare, right? So you need to make sure that the data is labeled well and has good metadata. And they've also built out these high fidelity workflow engines that streamline what needs to be done. Agenda AI basically takes large language models from providing quick answers or code suggestions.
and extends it into these integrated frameworks that can reason not just in business logic and they can write instructions and then execute those instructions in live endpoints. And the whole way they're kind of ensuring that the compliance and governance and company specific standards are met. So the quickest way to put it from a consumer level would be like.
Right now you could have the AI and you can upload your schedule and be like, Hey, what's the best way to streamline this so that I'm not traveling a ton in between meetings or what's the best way to contact all these people, like the order that I have to do. You can basically have AI give you input on things that you upload to it. An AI agent at the consumer level would essentially be like, you're walking down the street and we had some trouble sketching this because it's Christmas, right?
I get a notification that says Jack wants to do this place in time. And then I can speak to an AI assistant that'll say, Hey, how am I scheduled for this specific day? I want to make sure. that i scheduled this podcast with jack around something else that has to do with markets because i don't want to change my frame of thought and because the data that it has on me will understand the things that i'm saying and understand my life enough to basically be able to do that right
And it will have the agency to like, when I say, okay, schedule this thing with Jack, but also move this other thing. Who was the guy that I was talking to last week? So that's a very basic example. But if you imagine that example and you take it to the enterprise level.
There's so much that needs to be understood about the way that a business goes. And if you can essentially take on enterprise levels, how things should be reasoned, how workflows should go, how workflows should be executed, how they should be generated. That's basically what an AI agent is.
Again, the buzz is still pretty nebulous, but at least it kind of allows us to close a loop on a point that we made a year and a half about, which is we're confident now that the gains from AI will not solely accrue to the hyperscalers. We think that it's time to create a preliminary framework for if you do get significant breakthroughs in AI agents, which there's a lot of promising stuff, but there's more AI startups than I can possibly remember.
you know looking instead of the infrastructure to the implementers to the innovators it's more like the enablers to the executors to the ecosystem, right? Like eventually there will, at the end of this, you have like a iOS moment for AI agents, which is like an app store, right? Like an ecosystem that they function.
You also need these executors that create turnkey solutions and then to build the AI infrastructure, the operations, the data pipelines and the hosting for AI agents. So it's probably going to be the next phase. But if you don't want to speculate too much, you know, I think that what this really boils down to as a phase is essentially.
There's a lot of names out there that even names I personally, like when it was June, 2023, when we published what I think is one of our better named articles, which was a less deus, more machina. exploring the AI losers and names that were better positioned versus worse position. So we created a long, short basket of that. And, you know, there's still some of those long, short pairs that I'd really agree with. And there's some where you're kind of like shaking up, you know what I mean?
Most traditional or the AI loser that everyone knows about is Chegg because Chegg fell on the sword. And they did something that no other company has begun where they admitted to having a negative impact from artificial intelligence. And immediately everyone was like, oh, well, fuck that. Whereas now companies that hurt from AI.
They just pretend that they're beneficiaries of AI. They say, we're really excited about it. Yeah, exactly. So now that AI isn't vampirically sucking the lifeblood out of software... It's kind of like, let's go back and look at maybe some of these AI losers are really bombed out. And maybe that provides asymmetry because the thing is, if you have a list of like five companies that are going to lose from AI.
And let's say you're right about four, but you're at the point in the trade where all five of them have been priced like they're losers of the significant secular trend. You get a spark moment where one of them actually is a winner.
You can't be short that bad. That name will rewrite so significantly that like the returns on it will blow everything up. Right. So. it seems like there's asymmetry there and you know so we looked at like a couple like uh if you want to look at examples of like what happens when this starts working is like fiber or asana these were like very classic like ai losers and then recently it's not even like they're like
really like core AI winners now, just like the market has been like, oh, maybe, maybe they're not like totally screwed. And you can see what happens to the stops when that occurs. But, you know, if we if we start to. get into where like we're pricing we're not just like pricing in who are the AI winners but we're going back and we're saying like we're pricing in who the winners are that we're actually viewed as losers.
There's a few good examples. I mean, one of the more significant ones is like, it's a company called Task Us. I mean, that's been really hit hard by kind of like AI loser fears. The thing is, it still kind of has a critical role in enabling them, enabling AI, because what they do is they provide like like data labeling and content moderation and support services. And like we were talking about, you know, if you're if you're going to do AI.
First up, you need to have good data, but at the same time, you also, as AI proliferates, the data will start to be AI generated. Right. And so you so like and like, do you want to be training your AI model on like other AIs or even like worse AIs hallucinations? So. Basically every AI application being built today requires what the company calls human-in-the-loop services. They essentially provide annotators and tasks with gig workers that will do writing, ranking.
adversarial testing, content moderation, and essentially make sure that what you're training your new AI model on, or the data that you're putting back in to do inference on is not terrible. And so that's maybe AI. does this itself. But in the meantime, there could be a pretty significant level of upside for a stock that's down 95% from its highs in 2021. that hasn't participated at all in this AI bull market.
to say, oh, maybe we're not quite done with the human aspect of making sure that this data works. And that kind of takes me like, I know that we started this conversation with, uh, a little bit of a bearish spin on the home builders. So we can end it on the opposite of that, which is what happens if we have a continued crazy bull market. Yeah. What happens if we get a continued crazy bull market?
Well, you know, everyone that's been watching the equity market intently, not like if you're looking at bonds, then this doesn't apply to you. But like, if you've been in the equity market, you probably have like a strange sense of deja vu. where it feels like we're back in the Zerp era glory days. Or, you know, you probably have this nostalgia. I guess, listen, if you're like a short seller, I mean, the root word of nostalgia, the Greek root is pain. So I guess you also have nostalgia.
But if you look at some of the names, like the most Icarus's of 2021, right? Like Ablovin, Carvana, C. They basically, you know, they flew too close to like the stimmy driven sun. And that like. trillion dollars of liquidity and they gorged on cheap capital and then they just died. And for a lot of people, that was where the story ended, you know, like, haha, Carvana.
you know and and like but the thing is there was like a twist there it's we're like sticking with the icarus analogy like the companies pulled off what daedalus didn't which is uh i'm getting super into greek mythology but like they built better wings Because companies, the market flooded them with cheap capital. They did things like they really spent a ton on CapEx. They did a bunch of stock-based comp.
If you're thinking in the way that this 25 trades article encourages you to, which is taking a step back and kind of saying, let me disconnect from my biases. If you take away that anchoring bias of like there was a past disaster, so this is a cautionary tale, there might be a little more to this story. And the more to that story is like these companies had access to cheap capital and they used it.
to build real and lasting infrastructure so that's platforms operational modes and network effects that are literally impossible to replicate today because of how high the cost of capital is So we like termed this the temporal mode, like these aggressive ZERP era expansions that seemed super reckless in hindsight.
but actually locked in competitive advantages at these cost basis is that no competitor could touch today without like totally torching their margins. So maybe Carvana and AppLove and C, maybe they're not. individual cases, but actually emblematic of a larger trend of these companies that you would find really populated in the 2021 era, like Tiger Cub 13 app. And you think about the investor psychology aspect.
Everyone hated these names and then still does. But during that correction, when everyone was blowing out of them and facing career risk for being Long Carvana, there was this creative destruction process that occurred. Where just specifically to take Carvana, their closest competitor room doesn't exist anymore. There was this winnowing process. And now the victors are poised to consolidate fragmented marketplaces and maybe become category killers.
And then during this redone that we've had, investor psychology and like positioning was so skewed in their favor because the usual suspects, these like tiger cub or like long only growth managers, they weren't positioned to participate. that they basically remained in like this constant state of under ownership and everyone you know oh that's a shit cow sure interest remained high despite the fact that their fundamentals were improving and so
What we did with like this trade, which like, like I said, we started with like Barrissue on the home builders. Then we had to redeem ourselves with bulls with this, which is like, if this keeps happening and we stay in this market environment, where could we speculate that maybe. Some of these other ex-Tiger Cub names actually built these temporal moats. So we named this Crouching Tigers Hidden Dragons, which like, you know, if...
What if 2025 has more of these Carvanas or Ablovin or Sea Limiteds in the store? And we looked into a bunch of like Tiger Cub 13s from 2021. And obviously it's like... very grossly overpopulated with names that are just trash. Yeah. And you're like, oh, I see why some of these funds took like a 60 or 70% drawdown in 2022. It's bubble stocks of 2020 and 2021.
that popped. And most of those bubble stocks are trash companies that people should not buy. But you're saying there are some of them that are overlooked and they actually do have temporary modes. And you mentioned three of them that have actually just totally whipsawed.
Carvana, C, and what was it? So instead of just like aping into Carvana and C and, and, uh, we basically did a screen where first we looked at the tire 13, then we made it a little more quantitative where we were like, okay let's make a screen where a your stop went down more than 50 percent during the unwind of the 2021 bubble but then at the same time you are essentially beating the EPS estimates that were placed for you for 2024 at the peak of the expectations of 2021.
So when Apple Oven or when Carvana's stock is like $300 in 2021, what did the analysts expect that they were going to do in 24? and which of these companies are actually beating that. Carvana actually isn't beating it. It's close to it. So that's why we took a two-sided approach. A, we looked through all these TireCub, 13Fs, deployed potential candidates, and then we ran a quantitative screen.
so that we can look at names that were actually exceeding their bubble expectations for this year. And we can look through them and say, okay, who's embracing cost discipline? Who's reigning customer acquisition cost? Who's like really prepared for the moment where their end market picks up?
and we like so we created a list and there's some interesting names in there you know and the thing that i say about this is like it's very easy as an investor to have an angry bias and just like because these names died clearly like there's something wrong with the company and like but in some of them there was nothing wrong with the company there was something wrong with us as investors right we put our shoes on them by by creating these crazy expectations and now
they use that to their advantage and when you have a market like this where like even the most cyclical of industrials are trading like 25 times next 12 month earnings you can't really be cynical about names trading at the lows just because like they used to be darlings so we have the best and we highlighted a couple of them there are a few that were specs there are a few that were caught up in the meme stuff but that's another kind of watch list to keep on because there are
a couple of ways that this can go from here. And if we go into a genuine speculative mania, some of these stocks probably will repeat the performance that we saw from Apple and Carvana if they were able to take advantage of that quote unquote temporal note. So that makes sense. If we go into a bubble, these stocks, the same stocks that lit up in 2022, but James, there are stocks that...
you know, are from last cycle, you don't want to maybe own the zoom of this time around, you wanted to own it in 2020 and 2021. If we go into a bubble, and by the way, I'm talking about bubble, I'm not talking about, you know, Chipotle having a price to earnings ratio of 60 or FICO having a price to earnings ratio of 100. These are ridiculous valuations, but they're high quality companies that are profitable. I'm talking about...
IPOs that go up 300% in a few weeks and they've never made a dime of revenue. I'm talking about 2021 levels. So that's where the risk is though. Like the fact that people are comfortable paying those valuations because of the justifications like, oh, it's a quality company.
That strikes me as more of a risk than people willing to take a growth view on some of these names that are totally blown up. There are a couple examples of this. Like I mentioned, a few of them were SPAC. So there's one that was Finance of America. They basically do reverse mortgages. And they got totally destroyed after 90% downside. They did a stock split. But the thing is, they originated about $18 billion of reverse mortgages from 2018 to 2023.
a little less than half of those pay out on a floating rate. So it's actually kind of a bet on higher for longer. At the same time, they capture the spread between the rate on the residual income paid out and the fixed rate that they pay to investors on their securitized bonds. Even if they stabilize around 3.5% or 4% on rates, it's still a pretty big opportunity.
And the other kind of secular trend here is that like we've all heard everyone talk about like aging America and like the silver tsunami. And part of that like silver tsunami is that there is 40 trillion U.S. homeowner equities, the highest that it's been since like the mid 50s.
And that $14 trillion of home equity will either, there are literally only two things that can happen to it. It's either going to be passed down or it's going to be used for income. And like, if we... look at the things that like the government cares about you know a big concern is essentially you have this like huge wave of retirement
And the 10,000 people a day in the U S turn 65 every day over the next 10 years, seniors will reach 20% of the population. And mostly all of them want to remain in their current home. So like. aging in place, as it's called, has become a pretty bipartisan concern for the US government. And they have programs that have consistently, for nine straight years, increased the...
limit on what the maximum amount of home equity to get a reverse mortgage to the program is. So, you know, you can take this like the cynical route where you're like you're entering peak boomer retirement and boomers are selfish and they're not going to pass down that home equity.
Or you can take it like the realistic route, which is like there's an increased cost of living due to inflation from the past few years. And that's going to result in like significantly less home equity passed down because of the fact that with rates where they are, it's like a pretty. good solution to generate like residual income. And that is, you look at the stock and like they clearly have been destroyed by the dynamic that's set up, but it's actually a beneficiary of higher for longer.
and like they seem to be pretty severely low-balling earnings and so basically the stock is trading Real cheap because of this dynamic of anchoring bias and aversion to SPACs. I mean, some of the best performing stocks in the past year were D-SPACs. Did you want to talk like Burda, for example? I didn't know that was a D-SPAC.
Yeah, it takes a little while for this anchoring bias to play out to the market where people are comfortable again. And, you know, every time that NVIDIA went down 2%, Vertif would go down 10. Just because people were like, oh, you know, it used to be a stack.
like so you know that and then there's other uh like in that like kind of crouching tigers hidden dragons uh dynamic there another one would be like chewy right which is like everyone's 15th favorite meme stalker from yeah well it's the company that ryan cohen who now is
runs GameStop, big investor in GameStop. He was the CEO of, and I guess to institutional series investors, that is kind of the, you know, that's why it may be a black sheep is because it's associated with GameStop. But I agree that SPACs, I mean... 95% to 99% of SPACs that came public in 2021 and 2022 were absolute crap. And that gradually became known to the investment community. However, the 1% to 4% of companies that are not crap.
There's opportunity there because it's so poorly rated. You know, I no longer own it, but I haven't evolved with Grindr. I owned, you know, warrants in Grindr, which paid off quite well. So now just, you know. I've told people that my two best performers traded in 2024, so that is not at all representative of my performance. But yeah, things that can get bombed out because they have a reputational hit, they can perform well. I mean, you saw that with SMCI.
super micro which had some accounting fraud scandals so it was you know price ratio earnings ratio of 10 you know when you became involved in it i i like like you're on podcast i was like You know, I want to come on and I want to do a promotional deal for where people can get the, because we hike prices for next year, but for your audience, just because.
I have used that when we had that interview where I said that I sold SMCI, every single time that some idiot on Twitter is like, how's that SMCI working for you? It's like, listen, not only did I sell it. but like i went on a podcast to say that so so i'm very thankful for that also you you you were the first podcast that we were ever on and that was super funny and definitely increased my conviction in the ai trade because every single youtube comment was like
Get a load of this fucking idiot. That's why you want to be contrarian. You don't want to be too contrarian. You can't be contrarian for the sake of being contrarian. I want to do a lightning round because I think we've only done, you know, maybe four or five. I want to do a lightning round, you know, one, two minutes. But first, let's just tell the audience, what is this?
Special thing where our Monetary Matters subscribers and listeners can get access to Citrini research at the 2024 price. He did just raise prices by 20%, I believe. But until mid-February, Monetary Matters subscribers can get it and we'll include a link in the description. So yeah, just share. You know, you write these research pieces. How often do you, do you write it? What is the goal? Who is the audience? You're not just me anymore either. When I started the.
Newsletter, essentially, was the way that I kind of think is I write and looked at when I was doing research on the AI theme. I had paid some people basically because I didn't know what I was talking about. So I basically went out and paid for expert calls and I paid for talk.
to people that were in the industry and i paid for researchers uh kind of create some things and and help me formulate a model and at the end of the day my expected compensation for that was going to be that i was hoping this trade work but Because the way that I organized my thoughts is I organized them on paper. I had this huge primer on what AI is. And I figured maybe I can pull forward some of these returns and just post this newsletter. And then...
It took off after, like I said, you were the first podcast that we ever went on and it kind of took off. I realized that my investment process is better when I'm doing this writing. I have people, like I know that people are going to read it. So I continued doing that. We had a string of pretty decent calls and I enjoy it. So I kind of have been growing the business and now we have four employees and we're transitioning into really becoming.
the go-to destination for thematic equity research. We've also tried to create a community where You can just go and, you know, if you think that something isn't going to work or you think that it is, or you want to get color, we created a pretty interesting community of finance professionals, but also people that are just high net worth individuals that are investing their own money. And basically.
It's kind of interesting when you have a bunch of people that are investing. And then once, once every time we publish a theme, there's someone who's like, oh yeah, that's the industry that I'm in. We create great discussions in our chat. Part of that is we can't have it get overloaded with people. Pretty much once a quarter, we've been raising the prices. And then on the year we raised the prices, we just did a 25% price increase because we're...
pretty comfortable where we are and anyone that comes in additionally, we kind of want them to be a part of the community and view it as a value add. So because I Really appreciate the fact that you had me on when nobody had heard of me. We created a promotional link that you can follow and take it for anyone that's listening to your new podcast can lock in. the rate that we had in 2024 instead of pay the price hike if they want to subscribe.
Thank you, James, for correcting me. It actually is not a 20% price hike for 2025. It's a 25% price hike. So when people can use the Monetary Matters extended 2024 rate, they can get the 25%. quote unquote off, but just it's not the 2024 price, not the 2025 price. And Jim, yeah, I think you don't have to be a thematic investor to benefit from your work or find your work interesting. Like I'm thinking...
You know, people don't have to have these vastly diversified 100, 200 stock portfolios like you do. Like someone who's a financial hedge fund or financial specialist, they can look. I mean, I've never heard of finance of America.
they might look at this $200 million market cap company and they either think it's, okay, this is a good trade idea or it's not. And maybe a lot of them think it's a lot of the trade idea, they don't put on every trade, but the one that they do and they become educated and do their own work on it. It really can work out. And there are many such examples. James, now, as promised, I want to do our lightning round of the 25 trades of idea. So let's start with.
travel normalization. What are the travel normalization stocks? What's the thesis and why? So basically, a lot of the themes that we've seen play out over the past year have been about what happened in the wake of the pandemic. How has demand for certain goods and services changed? What has turned from a bust into a boom?
where inventory plots got worked off. While there has been obvious benefit to the travel industry, and they've seen pretty sustained positive demands in this services-driven economy. But while a rising tide tends to lift all boats, there have been a number of idiosyncratic corners of the travel supply chain that have still been dealing with unique challenges.
So we basically found that some of these ladders have good reason, but some of them don't, or they did and now they don't anymore. For example, MTN, they've been struggling with lower than average snowfall. that changed pretty significantly this year. And they never really got that huge post COVID services travel driven push. So
that they're kind of a candidate or there's some overlooked growth stories, leisure travel, which is more counter-sipable than business travel. And so we highlighted Playa, P-O-Y-A, as an example of that. Another thing is we try to have like, like, Every one of our themes is kind of informed by other themes. So you can see with that FOA, right? You're looking at these companies met their bubble expectations, but they have blown up and not recovered on a stock price basis since.
and that's a theme but then there's also like aching america or higher for longer so same thing with like the travel normalization and like trump coming in where like the regulatory concerns over time shares with like hilton grand occasions or BAC, like these are experiencing both tailwinds from travel, but also potentially tailwinds from like Asian America or the election. And James, why play up...
GVVAC or Vail MTN? And why not the much more mainstream names you Hilton marry those types of names? Yeah, well, I mean, it's really just a function of where the majority of the gains in the stock market have accrued because of this travel normalization this persistent travel demand so basically these are names that have retained a more asymmetric upside because of the fact that they
had either idiosocratic issues or they had a negative impact or a headwind from something that was external to this travel normalization. So that's basically why we're kind of more narrow in this. Okay, so that's vacation. Now let's move on to unmanned technology and electronic warfare, also known as drones. So very topical given the drone sightings in New Jersey. What's going on here? Why are you bullish on drones? And what kind of companies are you?
you know, in your potential basket here? Well, I'm not actually bullish on drones. I would say I'm actually probably bearish on drones in some specific areas. Like one of the shorts that we added after the election was to our fiscal policy approach was air environment.
just because their switchblade drones, there's such a significant increase because of the war in Ukraine. So if you expect that Trump will kind of positively impact relations with Russia, or that you'll see some sort of Ukraine normalization, or even just that you'll see decreased government spending on the arms that we're sending to ukraine that clearly the downside but what i do think there could be emerging theme and uh because you know i don't really want to touch like the
Because of those same reasons with Duprain, I don't really want to touch like the Lockheed Martin, Northrop Brumman, Raytheon of it all. But... It has become clear that drones have taken the forefront of warfare. And you can't scroll Twitter for a week without encountering one of these videos of these Chinese drones forms. And the US certainly currently has the technology to handle.
those forms but that doesn't mean that defense spending won't focus on countering any future advancements right so like constantly changing chessboard so i think that the more interesting space in like unmanned aerial systems is in like electronic warfare and counter UAS so you know the bigger names like Parsons does some of this Leidos does some of this but then there's also some smaller names that are kind of
involved. And I would say that that's like a basket where you go through and like, you really have to be kind of picky with that because some of these names will have downside but if we do have like a normalization ukraine some of them will probably just mostly have upside from like drones becoming more focused and counter drone technology coming forward and
James, now how are you thinking about fiscal policy and the election? You've got baskets of deregulation. You talk about how banks that do mergers and acquisitions, which were in your Trump basket, now it's priced too much. And they are, I think you used the term, incredibly expensive.
Also, how are you thinking about the Biden fiscal beneficiary basket, the inflation reduction basket? What are your trades that you either have on or are looking to have on that are informed by your fiscal views for 2025 and beyond?
I mean, like we mentioned, we had created two implementations of a Trump play in March. One was a net long implementation that expressed the view that Trump would be positive for markets. And then the other one was market neutral, basically long names that benefited from Trump in 13 different sets.
themes of what he would represent and then short the names that had benefited asymmetrically from Joe Biden. My favorite chart of the year is the performance of that basket since we made it versus the poly market odds. The last time I was on, we spoke about how performance had bottomed.
a couple of days before the odds for Trump on pine market didn't like became a leading indicator. But it's also basically when Trump won, you see those odds resolve to 100 and the basket resolves to 100, right? Like it doubled since we... created it so now it seems mostly like there are some areas that have upside but overall is like an overall trend it seems like the way that you play the actual trump presidency versus the election of you know trump versus harris or biden
is different so we have a couple different ways that we approach this we had published something we have like an institutional offering to the solely for hedge funds on citrini.com and so we published like way deeper stuff on that. So we had written at the deep dive on a company called a liquidity services, LQDT. That's like an example of like, if you actually get the department of government efficiency coming in and like liquidating the government, well, you know, like you can't.
You can't be doing that in the name of government efficiency and then just throw away all the junk that the department of education owns cars this isn't liquidation like they sell tons of stuff that's what yeah resources yeah and you know we went back through some of their filings and they estimated the size of the government market you have to assume that that pam is bigger if you're actively
liquidating some areas of redundancy in the government. That is an example that also fundamentally the business is strong and also has an interesting dynamic where they're almost counter cyclical because when the economy slows down, they do better. You could see like, they were one of the best coforming small and mid cap stocks during the global financial crisis. So yeah, that's like an example. We also went into like from the basket approach basically.
Looking at like a list of names that either have had issues with like the Federal Trade Commission, Lena Kahn, or have had issues with regulation or some sort of regulatory overhang.
and then basically sorting by the names like would not would have that overhang lifted and would not also have like a negative impact so like visa and mastercard for example they would benefit from deregulation but at the same time trump has uh floated the idea of a 10 cap on cards which is spoken very favorably of yeah so that's something where it's like okay you would have bipartisan support there would be super easy to pass and like do i think it happens probably not but if it does
You don't want to put that in the deregulation beneficiaries thing because you don't know how those two things would net out. So these are just names that have a sole upside from deregulation. And then we also went back, like we had, when we first wrote about US fiscal policy, which we termed the fiscal primacy of the economy solely driven by fiscal.
One of our co-authors was Steven Moran, who just got appointed to lead the Council of Economic Advisers. We went through the implications for the equity market. And at the time, the Inflation Reduction Act and the IAJA. and the Chipsack were big drivers. Some of those funds are just starting to unlock. But if you assume that there's going to be some sort of gutting of these programs.
We also did a screen on it because we had created a massive basket and then we narrowed it down and put it in our actively managed model portfolio. But at the same time, we went back to that big, broad fiscal beneficiaries universe that was. created mostly as IRA beneficiaries. And we just screened for the ones that were really overvalued and had really seen significant earnings increases or basically revenue increases since the IRA funding began getting unlocked.
And then we present that as you could be long the deregulation beneficiaries, short the IRA, or you could do a long short and the chart that generates it, you know, you look at it and you're like, oh, okay. It very much accurately mirrors how. people think about the regulatory environment and the future expectations of Republicans versus Democrats. And then we also went in a little bit into, like you said, Ukraine normalization. And we had a little part about
Maybe, you know, make America healthy again becomes mainstream. That's, as it goes on, it's kind of like, these are more speculative, but there's still things that might be good to watch if RFK gets confirmed, for example. You know, food recalls could pick up. There could be incentives for organic grocers and maybe some sort of promotional activity like getting healthy. I mean, that's basically like imagine if Michelle Obama's project was part of the government, right?
or like really like a focus on it. So yeah, that was basically, we're essentially changing our strategy because we had a lot of like, what you would look back now and say like, oh, that was like a classic Trump beneficiary. A lot of that stuff was in our basket. So like the boutique M&A firms. the eu defense versus us defense that was in there the private educators for-profit like vocational training that was in there so a lot of those trades are kind of like okay this is priced in now
We still want to play like the impact of Trump. We're going to have to switch things up. So switching things up, Ukraine normalization basket, you talk about potential beneficiaries such as... companies from Georgia, the country, not the state, like Georgia Capital, Bank of Georgia, also VEON, I think it's, I just looked that up, a media company that has some things to do in Ukraine. Highly speculative. I don't know anything about this, but in terms of negative impact, it's the traditional...
you know, military industrial complex, RTX, formerly known as Raytheon, Lockheed Martin, Northrop Grumman, etc, etc. And then in Make America Healthy, again, long healthy food providers and short junk food, as well as long some workout companies. So that's interesting. You mentioned banks. Let's talk about banks. The large cap stocks, banks have rallied like crazy. How are you thinking about banks? They do benefit from deregulation. I actually just spoke with...
a former bank regulator who is very well informed and he kind of confirmed the view or supported the view, I should say, that the Trump administration and the regulatory environment will be friendly to banks. But how are you thinking about this? What opportunities are you seeing? You talk about how you're kind of long.
us banks short european banks other such trades what's going on fast finance what's going on so basically a hundred percent that deregulation and a steepening yield curve is kind of like ambrosia for banks right it's perfect And at the same time, some of the moves that you've seen in some of these banks have been a little bit over the top. So we basically are trying to prepare for what that environment looks like.
Even if it does like disappoint expectations, the thing that there's a screen that we kind of use to. back in the day helped me find Silicon Valley Bank. Obviously, you know, kicked out like 40 results back in 2021. It had helped us find some of these banks that were... you know, a little bit on unsteady ground. And that's mainly because deregulation creates an environment where banks can grow very fast if they choose to kind of issue.
traditional risk controls and maybe take risks that i mean we're all traders or investors so we understand that like you take risks and when they pay off it's great right and that's like why some of these banks are
ripping right now maybe they continue ripping but it's my opinion that in banks basically it's always a good idea to have a firm read on the banks that are growing faster than banks should be we have a framework we published in 2023 explaining our framework for analyze financials and how to look at insurers and banks and see when growth might be unsustainable. But we have some very basic screens that should put things in front of you. If everything goes well, these banks will be
Amazing. And being an event that is risk-off for the financial sector and the rising tide of deregulation ends up pushing some banks too far out on the risk curve, the biggest beneficiaries of deregulation will be the large banks. We looked at some of the really fast growers the past year and banks that are growing loan growth faster than the income growth unsustainably or they see return on tangible common equity compress while loan growth expands.
or their loan growth is too far outpacing their provisions for loan losses and you know that they have like a historical example of like net interest margin volatility where they have this explosive expansion of net interest margin that's not just explained by rates, or even they see like a divergence between their fee income and their interest income. Anyway, it's, in my opinion, always well thought out screen.
It gave us a watch list of basically 40 banks. Some of them are doing great and you look into them and it's like, oh, they're growing because they're doing something different or they're doing something really solid, but they're not taking crazy risks. But then there are some where you're like. This will pay off if everything is great, but if things turn, this bank will immediately be in that short club because that's the way that risk works. So that's kind of, again, more of a watch list.
James, we're going to leave it there. People, you've got so many more thoughts on your 25 trades for 2025, everything from rare diseases to cosmetics. furniture, a lot of special situations and single name ideas. Your thoughts on global macro, many great trade ideas there, as well as agricultural technology. People do have to be a subscriber to Substacks to see those ideas, as well as all of your other research.
Again, Monetary Matters subscribers and listeners can get access to some training research at that 2024 price before the 25%. price hike of 2025. So we'll include a link there in the description. And of course, Citrini does have institutional service for hedge funds and family offices that's more in the weeds. James, tell us the link for that service as well as just your closing thoughts.
yeah that's just the citrini.com and it includes everything that we publish on our newsletter and then also deeper dives and more institutionally focused trades so
Concluding thoughts for 2024? Whatever you want to say. I guess that the core takeaway of this year is basically if you don't close yourself off by getting too much of a one-track mind, you really... compete things in the back of your mind that will pay off down the road and you know it's never a bad idea to get a surface level of understanding something because then you're just more prepared
if that becomes the core driver i mean you look at what's happened in semiconductors from ai eventually on a long enough time frame everyone is forced to get some proficiency in everything because the market kind of will even if you're a specialist there will be impacts on what you do because of some overarching theme. So I think that going into 2025, my mindset is really just to be prepared by
kind of observing overall things and not getting too myopic about, you know, is the market go up or down or this, that, or the other thing, because it all plays together, right? The macro informs the micro and the micro informs the macro. James, I know I said final question before this. I promise you it's my final question. You on Twitter referred to micro strategy.
the company that issues equity as well as issues convertible bonds to buy Bitcoin. I forget the exact quote, but you said this is an example, a supreme example of reflexivity, a theme George Soros, someone you have a lot of respect for, has written about. explain that as well as how do you think micro strategy is going is going to do what's what do you think it's
Saving a very easy question for last. The core concept of reflexivity is that the perception of investors actually can influence the reality. And that is both in a... positive environment and a negative environment. The example that you used in the book was mortgage REITs, that they had benefited from a favorable interest rate environment, and they had delivered strong returns, investor confidence grew.
And they could borrow even more, invest in additional mortgages. And there was basically this very aggressive lending, overextension in the market. Everyone viewed these things and was like, oh, they're money machines. And that had changed their ability to generate capital, which drove this kind of overextension even further. And then eventually you get triggered for a reversal because the positive feedback loop can only sustain for so long. And, you know.
buys in short-term rates or decline in property value and interrupted the feedback loop. But the thing is, you look at micro strategy and it's really like, if Soros had seen that, he would have been like, oh man. Yeah.
yeah you look at micro strategy and you have to imagine that george soros is sitting there and looking at them saying god i really wish that had happened when i was writing this book because it is the most kind of perfect example of reflexivity where there's this cognitive aspect, this manipulative aspect, and this feedback loop where the higher that you...
send MicroStrategy stock, the more Bitcoin that they can buy, the higher that they drive Bitcoin's price, the higher the MicroStrategy stock goes, the more, you know, it's this feedback loop that really encapsulates investor perception, really changing reality.
And, you know, I don't know where it ends, but it will end. At the end of the day, MicroFed, they are a little bit better positioned than just a levered Bitcoin ETF because they have this ability to issue debt. They're not really margin loans, but... it'll end and then probably depending on how that works i mean if you look at sailors cost basis it's already up to pretty much all eyes because of this weird environment where
When the funding environment contracts, it's the same time as when Bitcoin goes down, right? And when the funding environment is kind of better and people are more willing to buy these converts, that's when Bitcoin goes up. So basically, the availability of them to be able to issue equity or issue converts to be able to buy more Bitcoin only happens while Bitcoin's going up. So one of my...
Best trades ever was the first thing that I ever published publicly was a short thesis on MicroStrategy at the end of 2021. And then around the time after Piets had imploded. I kind of looked at it and really went in the weeds on the math and realized unless Bitcoin goes below, I think it was like $6,500, the seller is going to be fine. The converts were trading at like...
50 or 55 cents on the dollar maybe even less and it was something where uh i never in a million years where those strikes on the conference were so far ahead of the money that i was just like As long as Bitcoin stays up here, they'll be able to sell it and pay this back to par. The beautiful thing when a really out of the money option gets in the money and the gamma just drives it insane. Those converts did really, really well. I don't have a strong view on...
Bitcoin's price. But what I will say is that there's two ways that that can dissolve, right? That premium to the asset value. The first way would be obviously a Bitcoin price decline. We saw that already. But what I will point out is that it would be very unlikely for micro stretch to to ever trade below that man even even when when we had that fpx moment in 22 it's like i think it spent probably like a cumulative four hours at like
what you would call fair value, right? But now it's back to the 200% or whatever it's at. There is another way that this can abate. And essentially what like... If it's not the demand side, it's the supply side, right? So right now, the supply of companies that do what MicroStrategy does is narrow. if you got an environment where a bunch more companies tried to adopt the micro strategy playbook
That could end up, not that it would necessarily be bad for MicroStrategy share price, but it could end up narrowing the premium. So there's another life sciences company called Semler SNLR. And they're basically doing the same thing that MicroStrategy did. They have this relatively sleepy, casual positive business, and they're just levering up their balance sheet with Bitcoin. So that could be kind of an interesting 12 months from now or whatever. There's like five.
or six or seven companies that are trying to execute the MicroStrategy playbook. And then like the idea of maybe going long, all of those versus short MicroStrategy could work out. you know i don't know what micro strategy is going to do i also don't know what bitcoin's going to do that's like a that's a real involved macro call that i'm not ready to make
It's a tough one. Similar scientific. I found out from any, their website is funny because they have a legitimate medical product. It's like two things. It's like. peripheral arterial disease. And then it also says Bitcoin treasury strategy. And there's micro strategy, right? Micro strategy was like this, this X growth, free cash flow positive, this sleepy little business intelligence software company. And then it's like,
you know, and eventually they'll mortgage that business to buy more bigger. Yeah. James, it's a pleasure as always. We'll include a link in the description for people if they want to check out Satrini Research. Thanks for coming on. Thanks everyone for listening. I hope everyone has a... Great at 2025, including you. Thank you. Just close the door.