The Jay Kim Show #131: Grant Williams (transcript)

Jay: Today’s show guest is Grant Williams. Grant is the editor of “Things that Make you Go Hmmm,” which is one of the most popular and widely read financial publications in the world. He’s a senior advisor to Matterhorn Asset Management based out of Switzerland, a portfolio and strategy advisor to Vulpes Investment Management in Singapore, and is also one of the co-founders of Real Vision, an online, on-demand financial channel, showcasing the brightest minds in finance. Please enjoy my conversation with Grant.

Alright. Hey, Grant, thanks so much for joining us. We’re very happy to have you on, especially given some of the great work that you do. Thank you for joining us.

Grant: You’re welcome. Thanks for having me.

Jay: Maybe for the audience that hasn’t heard of who you are and what you do for a living, maybe you could give us a little bit of background.

Grant: Sure. I’ve been an equity and bond trader for more now — let’s just leave it at that — all around the world. I’ve worked in Asia and the US and Europe and Australia and Singapore. Right now, I have two main roles. One of them is I write a letter called “Things that Make You Go Hmmm,” which I’ve been writing for, I guess, eight years now. And I’m one of the co-founders of a company called Real Vision, which is an online, on-demand finance platform. Like you, we travel around the world, and we interview the smartest people we can find, which is always a lot of fun.

Jay: What you guys have done over at Real Vision is really groundbreaking and disruptive.

Grant: Appreciate it. Thank you.

Jay: And it’s great. For anyone listening, absolutely go and check it out. It’s just so high quality. And the speakers are just so high-quality as well.

I’d love to hear about how you became an investor. It’s funny. I like asking different speakers about how they started off their journey. A lot of times, it’s less intentional, more of “I just ended up doing this sort of thing, and then it led me down this path…” I’d love to hear a quick story on how you got into investing.

Grant: Sure. Mine was very deliberate. I had an Uncle Harry who was in financial markets. He was my hero. I just thought this guy was the coolest guy. I had no idea what he did, but I wanted to be like Uncle Harry. He was a foreign exchange trader. So whatever foreign exchange was — I had no idea what it was — but that’s what I wanted to be.

So I kind of educated myself about finance and actually went into equity markets instead of foreign exchange. But I wanted to be like Uncle Harry. And it’s been 30-plus years, mostly in equities but also some time in bonds. But it was just seeing one of these larger-than-life characters who was super-fast and super-smart and always seemed to have an answer for everything. I kind of figured, you know what? I want to be like… Of course, when you get into the business, you find out that you haven’t an answer for anything. You just have to figure it all out when you go along. So I think Uncle Harry pulled the wool over my eyes, frankly.

Jay: That’s right. Absolutely.

What is your investment framework or methodology? I imagine you’re still an investor today, and people’s styles change somewhat over time as they learn more about investing. I think if you come into the business with a mentor like an Uncle Harry that teaches you specifically about effects or something like that, you might be geared or tilted towards going that method. I’m just curious on what your framework is.

Grant: Yeah. One of the best things that happened to me, in hindsight in my career was I started work shortly before the ’87 crash. So I was in the Japanese markets at the time which were just going up every day. So we were in this crazy blow-off phase of the Nikkei. It was crazy. The market would go up every day. So you’ve got this other worldly sense that nothing could ever go wrong.

So to come in one morning and find the market fall 22% in a day, having that happen so fast when I really didn’t know what I was doing… I was kind of figuring it out as I went along. But to have that happen to you and to sit there shell-shocked thinking, “What just happening?” was a phenomenal lesson to learn. And I think having trade what, in hindsight, I realize were egregiously over-valued markets, to see what could happen to those sort of markets, I think I just evolved almost naturally into a value investor.

I look for value. I look for things that, if the market does get cut in half, I don’t mind owning it. So that’s really kind of guided my investment over the last 30 years, which is why today, this environment we’re in, I find it a very difficult one to navigate because I struggle to find value.

I gradually sold all my equity positions, and I’ve sold the last ones, I guess almost a year and a half ago now. And I’ve sat in cash and some bonds, and I’ve got a decent allocation to gold because I’ve been expecting to see a correction and some value emerge. But it hasn’t happened yet. And I’m comfortable with that. I don’t lose sleep sitting there in cash. I don’t feel like I’m missing out on a rally because I just don’t see the value there.

Jay: It’s funny. When you were describing the Japanese, I had to think for a second. Wait, are you talking about our current equity market, or are you talking about…?

Grant: No, I’m talking about the twin bubbles in the late ’80s.

Jay: Exactly. So it’s very uncanny because all the same exact same ways you’re describing it could very well be used for our current situation right now.

I tend to tilt towards value investing as well. And I think it’s an important mindset. I tell people when they first start out learning how to invest that it’s always a good foundation to build, just to be able to wrap your head around that investment psychology, differentiating yourself from Mr. Market, understanding risk/reward, greed and fear, and how a lot of times a large portion of the market is just behavioral. It’s just psychology. So being able to sift through that is quite important.

Grant: To me, the thing about value investing is it gives you a margin of error. If you’re wrong about the timing, you still own something of value. If you’re a momentum trader, if you’re buying the things now because you think you can flip them to somebody else and you get the timing wrong, you’re flat out wrong. And what you own is overpriced and its value is a long way below where it was trading. So I just like having that margin of safety that if everything goes to hell, this is a good company throwing off decent cash, it’s got a sound balance sheet, and there’s value in that if I hold on to it.

Jay: Absolutely. Part of it, I guess, also has to do with the investor’s personality. There’s a lot of very successful momentum traders that have made a lot of money in the last 18 months where we’ve been sitting in cash. And the value cats sitting in cash, sitting on their hands. And if you can sleep at night as a momentum trader… It’s often said that a large amount of money is made in the 8th and 9th late innings of a long bull market. So yeah, if you can sleep at night with your trailing stops, then by all means. Right? I tend to favor your approach. I’m completely happy sitting in cash at this point.

Let’s talk about… This is a bigger picture that we’ve delved into. We’re at a very interesting time in history with the abnormal interest rates that have essentially caused somewhat of a problem in the markets, as I see it and as I’m sure you do as well. Against that backdrop, there’s also this larger theme of de-dollarization. I’d love to hear your thoughts, without going down too much of a rabbit hole about the dollar, but you do put out a lot of good work on your newsletter, and I’ve heard you speak about this big shift that’s happening in the background. So maybe we can start there and give your thoughts on that.

Grant: I think what you’ve seen for the last of three, almost four years now, if you’ve paid close attention, there is a fundamental shift going on in the global monetary order. What began with Bretton Woods, post-World War II, and which ended when Nixon closed the gold window in 1971, you’ve had this pure fiat regime where the dollar has been unparalleled, and it’s hedge money. It’s been the world’s reserve currency. It’s had primacy the entire time. And it’s been very, very strong.

Now what we’ve seen in the last ten years or so, since ’08, certainly, is this increasing reliance on inflated balance sheets, the printing of money, the expansion of the US debt. All this has gone to undermining confidence in the dollar. It maintains its confidence simply, as a lot of people refer to it, as the cleanest dirty shirt, but there’s a new regime emerging if you look very, very closely.

The main reason behind the dollar’s primacy has been the petrodollar system in which the Saudis agreed to only sell oil in dollars back in 1971 in return for arms sales and protection. And doing that, forcing everybody to buy oil in dollars meant every country in the world had to have, certainly oil importers, had to have a healthy balance sheet of FX reserves, mostly dominated in dollars.

Now in recent years, since about 2013, the Chinese particularly have begun negotiating a lot of contracts to buy oil in yuan from various countries, and they started off with the likes of Russia, Iran, Turkey, none of whom were particularly great friends of the US. And recently, they’ve started to court Saudi Arabia as well.

Now China’s become, in that time, the largest importer or oil. So every oil exporter has a choice at this particular moment in time, and that is, do you want to maximize your sale price, or do you want to maximize your market share in the biggest importer in the world. And clearly, judging by these agreements that are being signed, the exporters are looking to maximize their market share in China.

The missing component in this is the gold market. If you look at what’s happening in the Shanghai Gold Exchange where you can buy gold and yuan and take delivery, you’ve finally got this link in place whereby you can sell oil to the Chinese in yuan, take your yuan and buy gold. So you can actually exchange oil for gold once again which bypasses the petro-dollar system, which is cause a lot of problems for the US.

For example, China has 26% of the GDP in FX reserves, most of which is dominated in dollars. The US, by virtue of being able to print dollars for oil, has 0.6%. So the natural effect of this is going to be for China to draw down its foreign exchange reserves because it simply won’t need to hold as many. That has knock-on effects for the dollar, for the treasury market… That’s it in a nutshell. There’s a lot more to it than that, but that’s the broad strokes.

Jay: And this is something that, again, like you say, you have to look closely. Mainstream media is certainly not going to be proliferating this type of news, but it’s out there. You just have to know where to look and do the research and read a little bit about history and take a more analytical lens to this sort of backdrop.

Grant, I want to talk about… Again, we’ve had almost a decade of artificially suppressed interest rates, and we’re entering a very interesting time where we’re starting to see a little bit of growth pick up and stabilize in the US. And when inflation starts to pick up, we’re going to be kind of backed into a corner because at some point, the rate of interest rates rises or hikes that needs to tame inflation is also going to not be sustainable for servicing debt payments of the US treasury holdings around the world. I’m curious to hear how you think this is all going to play out. This is a long time coming, but it seems like the debt keeps going up, and people just keep kicking the can down the road.

We just saw…was it Fisher, who was one of the more hawkish members of the Fed, he bailed, jumped ship. So it’s really interesting to see how long they’re going to prolong this.

Grant: It is. It’s been fascinating to watch, and it’s gone on a lot longer than I thought it would. The analogy I had was that the world’s central bankers were gradually backing themselves into a corner, and the markets were looking at them and were waiting to see their shadow on the wall because we couldn’t see how far back the wall was. Once we say the shadow, we’d know that we were getting close to that wall.

I’ve had the sense for a year or so that we’re starting to see those shadows. And to your point, I think everything is say is absolutely right. They’re in this position now where they have to try and raise rates because I think this realize that with an expansion that’s 98-months long in the US, chances are we are going to find a recession sooner rather than later. They need some ammunition in the gun when they happens. They need to be able to cut rates. But you’re absolutely right, if they push rates too high, it’s going to break the economy.

Every expansion always ends with a “one time too many.” And it will happen again this time. What happens, I suspect, will be actually pretty nasty, because the amount of debt that’s been allowed to build up, the last recession in ’08 was truncated and didn’t get to run its course because of all the desperate measures that were put in place.

So I do worry. I worry about what happens when the next recession comes.

And the other problem, which is a rather difficult one is if we say that 2% growth in the US, for example, is now good — before that it would have been pretty poor — but if we accept that 2% here on end is actually going to be pretty decent, which I think given what we’ve seen in the last ten years, I think you can make a case that 2% growth is actually going to be okay going forward. Now if that’s the case and 2% growth is what we’re going to see in a decent year, then equity markets are way, way, way overvalued. They do not represent a world of 2% growth.

So whichever way you look at this, some pain is going to have to be felt. Is it the bond market first? Is it the equity market first? Or, most worryingly, is it both? And this is the first time, certainly in my career, I could see how it could be both, and that would be really painful.

Jay: Yeah, it’s frightening to see what’s going to happen. Again, it’s one of these things where I feel like if we’d had this conversation a year ago, we’d have the exact same conversation. Nothing has changed.

From an industry-talk perspective, if you’re an active fund manager, it’s strange because you’re forced to produce returns, especially if you’re a relative benchmark fund. If you’re an absolute-return type fund or a hedge fund, this type of thing, you’re forced to print returns, and yet, if you’re sitting there like we are with a value tilt, and you’re saying, “There’s nothing I can buy right now, but my investors want me to produce returns…” It’s very difficult. It’s a hard job to do. And it kind of almost compromises some of your value systems, if you are a value investor.

Another question I wanted to ask you, Grant, your opinion on is, speaking of this artificial suppression of interest rates, and as we come into potentially a normalization of monetary policy and the fallout that might ensue thereafter, one of the curious things that market participants have talked about recently is volatility of the VIX and how that, as well, seems to have been suppressed for whatever reason. I want to just pick your brain on that and see your thoughts on that, because I think it has a lot of people scratching their heads.

Grant: It does. And again, a lot of it is momentum based. We’ve seen that shorting the VIX has been… I think it’s actually been the most profitable strategy for the last five or six years now. And so what happens? You get people herding into the short VIX strategies, which is fine when it lasts. The problem with volatility, by its very definition, is that it’s volatile. So you can short it, you can edge down, you can chip away…but the day you’re wrong, it doesn’t reverse two or three points. It goes from nine to 29. And you can give up all your gains in a heartbeat in this.

It’s a head scratcher because the world has never seemed a more dangerous place, but people equate financial market volatility with real-world events, and that’s not really how these things work.

But we’re trading way below the norms, and it’s not so much that you should go long volatility here. We may remain around these levels. But shorting volatility at all-time lows is an incredibly dangerous thing to do.

So I think the people who are late to the game… There was a story in the Wall Street Journal or New York Times maybe about an ex-manager of Target who sat at home day-trading short volatility and turned half a million dollars into $12 million, and now he wants to raise a hedge fund. When you hear stories like that, you realize that we’re close to something breaking. When guys like that… And good luck to it. If you can turn half a million bucks into 12 million, fantastic. And if you can walk away with it in your pocket, even better.

But when you hear stories like that of guys being attracted to short volatility because it’s a winning strategy, that’s a very, very dangerous sign, and I don’t think there’s a more dangerous thing, asset class, to make that bet in than volatility.

Jay: I love hearing those stories actually because they have to make me laugh. You hear a lot of those right now with this whole crypto-craze that’s happening. It’s kind of the same thing. I think that the one or two people out there that actually got lucky — and we don’t even know, like you said, if they actually colored up so to speak or they could walk away with that type of profit. It could all just be paper gain. But those stories always make me laugh.

Grant, in 2008-ish, I believe, after the financial crisis, you started your newsletter, blog, Things That Make You Go Hmmm, which, for the audience out there, it’s one of the best market newsletters out there that comes from… It’s an institutional-grade product because I know you have a lot of institutional readers as well, but it’s also very geared towards the private investor as well, which I think is why it’s such a strong product and it’s done so well. Maybe you could talk to us a little bit about what made you want to start writing that to begin with.

Grant: What made me want to start writing? I have no idea. I must be crazy. To our previous conversation about volatility, we live times that are bewildering, often. There are all kinds of things happening. There is so much news and so little information, and I wanted to try and cut out some of the noise, get to some of the things that I thought were…not confusing but the type that…really just things that kind of make me think. I talk about everything from bonds, asset classes, bonus quantities, I talk about different countries. I’ve written about Australia, Switzerland, and Japan, and all kinds of things. But it’s really an attempt to kind of pick out a theme, a story every couple of weeks and walk through the kind of absurdities of it.

I wrote recently about the Swiss National Bank’s balance sheet. The Swiss National Bank is now one of the biggest hedge funds in the world, I think $18 billion of US stocks. And just try to explain to people how that’s come about, why they’ve done it, and what potentially it might mean to the broader markets. And I try to do it in as accessible way as I can with some humor and just make it easy to read. But I’m very serious about everything I write, but I try and do it in as entertaining a way as I can, because this stuff is hard. It’s complicated to get your head around. So if you can lighten it up and simplify it, I think it’s in everybody’s best interest.

Jay: I think that’s one of the keys of newsletter writing. I think, coming from an institutional background, we’ve seen a lot of that sort of stock research that gets put out, and a lot of it is, quite frankly, not good, first of all. Second of all, it’s just really dry, and it’s just…ugh. It’s almost like reading industry reports where it’s just so boring. And that’s why I love your newsletter, which I subscribe to. It’s like a real person that is looking at real markets in just a regular way. Not trying to sound more complicated or sophisticated, which often research analysts on the Southside try to do.

Grant: Well, thank you. I appreciate that.

Jay: In addition to that, Real Vision, like we mentioned at the beginning, is also great, great product that you guys, you and Raoul, put together. Maybe you can talk a little bit about that as well. It sounds like it’s on a similar vein, that you might have been feeling the need to voice your opinions on the markets when you started your blog and your newsletter. In the same way, it seems like Real Vision was a way that you guys could express sort of market views but in a better way that is not clouded by the mainstream media.

Grant: The idea behind Real Vision was actually very, very simple. Raoul and I were both kind of disappointed in the way that 2008 was portrayed in the mainstream media, that no one saw it coming. It was a complete bolt out of the blue, which was not the case. It just simply wasn’t true. There were plenty of people that saw it coming. There were plenty of people warning of these things. But those stories don’t play very well, so they didn’t really get much airing.

And Raoul and I have been around for a long time, and we working with some incredible people around the world. And we just thought, why don’t we set something up and give these guys a chance to talk without commercial breaks, without interruptions, but just talk. Let’s talk honestly and openly about finance and pick the brains of the smartest guys in the world. And really, that’s what we set out to do.

We flew around the world, and we sat down with household name hedge fund managers like Kyle Bass and Hugh Hendry and Jim Rogers and Jeff Gundlach, but not for three minutes. We sat down for an hour, maybe 90 minutes sometimes, and really dug into not just… We didn’t want to ask them for a stock pick because there’s no real value in that because, again, it’s like they were guessing.

But if we could learn how they invest, the framework they’ve built over the years, some of the mistakes they’ve made and the lessons they’ve learned, we felt like that would be incredibly valuable for an audience and not just from the Kyle Basses of the world but from unknown guys that fly under the radar doing brilliant things incredibly successfully, but no one ever gets a chance to hear from.

So that’s what we’ve done. And the response has been just overwhelming. People really enjoy the chance to get an hour with these guys, to really dig into what makes them tick. And the feedback we’ve had from the audience has just be overwhelming.

Jay: It’s definitely disruptive and ground-breaking. It’s like you say. You see the two minute, three minutes clips on CNBC here and there, and you never really get anything out of that. It’s pointless. You see them sitting up there, and it’s like, okay, this guy is a guru. He knows what he’s talking about. But unless you go to a conference like a Sohn or these types of conferences which are extremely, extremely expensive if you could even get into them. So I think it’s definitely the way forward. I enjoy the content there.

As far as… The funny thing is, I was watching a movie. I don’t know if you’ve seen it. It’s called Money Monster. It was George Clooney. It was basically like Jim Kramer. It encapsulated what mainstream media is, especially in the financial publishing industry/media and how much of a farce it’s actually become. A lot of people, they don’t realize this. You have 350 million people sitting in America. I don’t know what percentage of them actually are savvy, but it’s very small. So you have a large portion of that population sitting there just watching the tube, trying to get their stock pick recommendations, and they’re only being fed one message. It’s almost like they’re getting fed the party theme or whatever it is.

And I think that that model is changing because of the internet, and you guys are the first movers in that, so I think that’s refreshing, and it’s very valuable for investors as well, as well as the education part of it, like you said. It’s not just “What’s your best stock pick? It’s let’s look into your methodology. Let’s go inside your brain and see how you think about it.”

Grant: …to get that information.

Jay: Grant, thanks so much for taking the time today. Our last topics that I want to talk about are about Asia and about China. You’ve worked, obviously in the region for a number of years. Japan you mentioned earlier. I know you spent some time in Hong Kong, and you spent some time in Singapore now consulting, advising some hedge funds and this sort of thing. Maybe you could give us your outlook on Asia, China specifically. China is on every investor’s radar. At this point, I think anyone that’s smart enough has China on their radar and trying to figure out how they can have access, exposure to it, how they can play China. So maybe you could give some thoughts on that.

Grant: I think you have to have China on your radar. It’s the second biggest economy in the world, and it’s impossible to ignore. The problem with China is the problem that there’s always been with China, and that is just enough opacity to not really know what’s going on underneath. It’s such a huge, disparate country, disparate economy. So you have to pick and choose where you invest very carefully. I have severe concerns about the shadow banking system, about this enormous amount of credit that’s been pumped into the system in China. And I think when that goes, it will be on a magnitude the like which we haven’t seen before. But that’s not to say it couldn’t last a lot longer because there is that opacity, and there is that sense that the Chinese can do things perhaps that other countries can’t get away with at this point in time.

I’m very cautious about China, very cautious indeed. I think broader Asia, I think there are some fantastic investment opportunities. Places like the Philippines I think is a great investment opportunity. Some of the smaller markets — Vietnam, I still think you can find value there. Indonesia as well. There are great micro stories on the Asia level.

The big problem that I think you have to keep one eye on when you’re looking at Asia is the dollar. It’s as simple as that. If the dollar turns around and strengthens again, I think it may do in the short term… I’ve gone from a dollar bear to a dollar bull, and I’m back to bearish on the dollar now over the longer term. But it looks at the moment, from a technical perspective, that we may be setting up for a bounce in the dollar, which is going to put pressure on Asia. But as goes the dollar, so goes Asia. So if we do get to see continued weakness in the dollar, I think it’s going to be a fantastic tailwind for Asia. That’s my base case over the next year, but it certainly won’t be without its counter rally. So I’m watching for those very, very carefully.

Jay: Interesting. What you say about China is so true. I’ve been in Hong Kong for 12 years now, and I’ve had my fair share of pitfalls and investing mistakes, particularly in, like you say, China. China is a huge country, first of all, so even within China, the different regions behave differently. So it’s hard to just say China and blanket the country like that. But again, the market reacts very differently.

You have a strange market where a lot of companies don’t trade on fundamentals, which makes it very difficult as an investor. And then, on the other hand, you have a stock market whose participants are 80-plus percent retail. So in theory, the institutions should be able to generate alpha and take advantage of that, but they oftentimes still struggle because none of them have actually figured it out. It’s like you say, I’d shy away from people that claim to be China experts, because even people that have been working there, Chinese locals, the real ones that are on the ground, even them, there are very few that actually know what’s going on.

So my piece of advice usually to investors is… Well, first of all, you try to do your work, but also don’t think that it’s something that you can just, like any other market, trade with that level of understanding, because it’s just a very different monster.

That said, I’m long term very bullish on China, and I think that the second-largest economy in the world which is on pace to be the first at some point, and if you take into account this de-dollarization theme that we talked about previously, I think China definitely has a place on the global stage, and they’re rising. So it’s certainly something to look out for.

Grant, any final thoughts on markets from here and six months out? Like I said, if we had this chat a year ago, we’d probably have had the same conversation. Any data points that you’re watching closely that might end this bull market rally?

Grant: Well, this time of year, for whatever reason, seasonality, whether you believe in it or not, has been shown to be incredibly important. And September, October are the two months of the year that you really want to try and get through before you can sound any kind of “all clear.” And I think the debt ceiling, they got through that, but it’s just pushed it back into December. I’m very nervous about the next couple of months. There are a bunch of things happening. Fisher’s stepping down I don’t think is a good sign at all. Generally speaking, when guys in positions like that step down out of the blue, it normally means they’ve seen something that they really don’t want to be a part of. If you think about the timing of Alan Greenspan stepping down a matter of days shy of becoming the longest-serving Fed chairman, that was a big heads up to a lot of people.

So I’m nervous about September, October. I think they could be some very tricky months when people come back. It’s been the quietest summer I think I’ve ever seen. And when volume comes back, volatility could come back. And from these low levels and with all the things going on in the world, if I’m an investor, I’m maximum cautious the next couple of months until I see North Korea die down, until I see volatility find a level, until I see the wobbles in the bond market settle down. I just, again, go back to that value bent of mine. I don’t see value right now. I see a lot of potential pitfalls, and I’d rather just sit quietly and watch until I see a point where I’m more comfortable jumping in, and I don’t think that’s going to happen in September or October.

Jay: I agree with you 100%. Grant, thanks so much for your time today. It’s been great chatting with you and hearing your views on the market and such. Are there exciting things you’re working on these days? Anything in particular personally or for either your blog or Real Vision or any interesting projects that you’d like to draw the audience’s attention to?

Grant: We’ve just launched the second season of our free podcast, Adventures in Finance. You can find that on iTunes. That’s the Real Vision podcast. And I would just suggest your readers take a look at Real Vision, RealVision.com. If you want to check out my letter, that’s TTMYGH — that’s Things That Make You Go Hmmm — dot-com. And if you’ve got any questions, just drop us a… I’m on Twitter at YYMYGH, and you can find Real Vision there too, @RealVision. We’re just trying to broaden that financial community and try and get as many people access to much information as possible. I think that’s so crucial right now.

Jay: Absolutely. Well, thanks so much, Grant. Appreciate it. Look forward to catching up with you soon.

Grant: You’re welcome. Thanks for having me, Jay.

Jay: Alright. Take care.