The Current Reality of the Stock Market | Chris Irons

What's happening in the financial markets right now and are the stocks truly represent what's happening in the economy? Our guest today is Chris Iron, who's a Wall Street insider with a big following on his newsletter. Today he's here to tell us what he's seeing in the markets and if the valuations are justified for a lot of companies. The economy and the stock market have always not been the same thing but decades ago used to be kind of the same thing. The market would track the economy and now thanks to decades of modern monetary theory, which is complete nonsense, the market does pretty much whatever it wants, many times the opposite of what the economy is doing. So the economy is grinding to a halt in my opinion and the market keeps moving higher because bad news for the economy is good news for liquidity, which is the only thing that the stock market cares about. I'm Siamak, this is Market Insider. Chris, it's great to have you on, welcome. Hi, thanks for having me. We want to talk to you about the state of economy, can you tell us what you see? The United States economy right now is finally watching real, positive, real interest rates catch up to the American consumer who is buried in debt and is having immense difficulty paying their bills, not just because of inflation but because of all of the consumer debt that they've taken on over the last few years since COVID. With interest rates, positive real rates now, meaning interest rates minus the CPI number that we're told is inflation, that just raises the cost of servicing everybody's debt, whether it's automobile debt, whether it's adjustable rate mortgages. Between that and rising prices, the American and no real liquidity lifeline like we got during COVID where the Fed just sprayed $4 trillion out in an attempt to just paper over the economy because the economy shut down. In an absence of that, the American consumer, I think, is completely tapped out. I think we're starting to see it in things like subprime auto. I think you're going to see stress in credit card delinquencies continuing. I think you're going to see bad marks on private equity books when it comes to commercial real estate and AI. It takes time and there's a lag between monetary policy and the economy, but positive real interest rates and nominal interest rates now at 3.5% are eventually a mathematical certainty that they will grind the economy to some type of halt. What that means for the stock market is a completely different question because the economy and the stock market have always not been the same thing, but decades ago, used to be the same thing. The market would track the economy. Now, thanks to decades of modern monetary theory, which is complete nonsense, the market does pretty much whatever it wants many times the opposite of what the economy is doing. The economy, in this case, is grinding to a halt, in my opinion. The market keeps moving higher because bad news for the economy is good news for liquidity, which is the only thing that the stock market cares about. In my opinion, we are probably over the next 12 to 18 months heading for some type of sharper economic deleveraging that I think the Fed will come in and try to rescue the economy from and kind of buoy stock prices and the nominal price of financial assets as a result to stave off essentially a sharp period of deflation, which I think needs to happen. The Fed doing that will widen the inequality gap, as it has done over the last few decades, continue to cause inflation and brutalize the lower and middle class. You mentioned every time we have bad news, the stock market can continue going up. Can you explain how that's happening? The stock market doesn't really run on macroeconomic data anymore. I mean, there's knee-jerk reactions to the CPI figure every month and to the jobs number every month. But from a nominal perspective, meaning the price of stocks continues to move higher, because every time there is a blip on the radar in the economy, and we saw it in 2000, we saw it in 2008, we saw it in 2020, and we're going to see it again here, I estimate over the next 12 to 18 months, there will be another sharp deleveraging in the stock market, but the Fed will print money as a result and essentially buy financial assets to support the market. The same thing they did in 2020 during COVID, the same thing they did in 2008 to help bail out companies and really an entire financial system that would have went under otherwise. The market doesn't necessarily see bad economic news as bad news for stocks. They kind of see it as a harbinger that the Fed will come in and continue to spray printed money wherever it can in order to keep the nominal price of financial assets like real estate and stocks and bonds, keep that with the appearance that everything is okay. That is a, in my opinion, really nefarious thing. It psychologically conditions investors the wrong way. It creates a ton of moral hazard. It socializes losses and privatizes profits. What it does is disproportionately helps people who already have the lion's share of financial assets, which is why right now the lower and middle class are dealing with the effects of inflation and have trouble buying a box of cereal. The world's richest men are getting substantially richer than they were in 2020. The NASDAQ has tripled off of its lows since 2020. All that does is support people that already own financial assets and makes it difficult for people that don't, if you're a first-time home buyer or you just want to start buying a portfolio of stocks, well, you're going to have to pay 40 times earnings now and buy at all-time highs. Even Buffett said this in 2020. He said, I'm just not seeing any opportunities, which in essence I took to mean the Fed came in too quickly, bailed out the stock market too quickly, and we never got value. There was just a support on the price of equities and the price of financial assets by printing money by whatever means possible. The nefarious thing about that is the consequences of money printing are not in your face. The Fed can do that and just pass off the consequences, which is slowly rising prices that are tough to notice and a diminishing quality of life. That happens in the dark machinery of night. No one really notices it right away. That's what I think makes that monetary policy, the widening of the inequality gap and the brutalization of the lower and middle class, really nefarious and quite gnarly. When you say the markets are overvalued, what metrics are you looking at? Well, you can look at any metrics right now, really. On a historical basis, the market is, I think on a combination of metrics, the most overvalued it's ever been. Common metrics are people will look at market cap to GDP, which is sometimes called the Buffett indicator, which is at or near all-time highs. They'll look at the Shiller price-to-earnings ratio. They'll look at the historical price-to-earnings ratio of the S&P 500 dating back decades. Really, on any one of those metrics, the market is at or near all-time aggressive highs for valuation, meaning the market's multiple and the amount that you're paying, stocks are as expensive as they've ever been right now. Do you think the speculation in the markets right now, it's placed in certain sectors right now compared to other sectors? Well, I think most of the robust speculation right now is in AI, but I think even on top of that, crypto is a huge speculative market. It's a completely nascent asset class that nobody really knows whether or not it's here for good or not, or whether it will serve some type of utility in the future where we're going to need it. That story is playing out before our eyes. We've had 15 years here or so of Bitcoin underpinning the crypto ecosystem, $2 or $3 trillion worth of cryptocurrencies and cryptocurrency-related companies on top of that. If the market all of a sudden determines that that was all malinvestment and that crypto doesn't have as bright of a future as many of these 20-year-old tattooed mohawk freaks think it does, like the people talking crap on the Reddit message boards. By the way, I have a lot of respect for those people. I'm a tattooed freak of nature. It's no problem. I'm an everyday guy, but I'm just saying if those people turn out to be wrong, the crypto industry doesn't survive long-term, not only is it going to be a huge incineration of capital, you're going to see the entire crypto market cap is like $3 or $4 trillion. That would essentially have no bid. That would go from $4 trillion to zero. If we find out something like one of the stable coins that hasn't been audited is doing something nefarious, we could see an FTX-style scenario again where crypto takes a huge dent. Then all of the companies that have become Bitcoin, Ethereum, Treasury companies, companies that have hired workers to work in crypto, those all become job losses. Just in terms of air pocket, I think crypto is probably the biggest potential air pocket. If it doesn't make it, it might. I think AI is probably right after that because AI is going to be here to stay and it does have legitimate uses. It's just a question of how far we've overshot the mark right now. Much like 2008, the build-out versus what we're actually using and what these companies can pay for. Actually, Michael Burry just did a great podcast like a month ago where he talks about the comparisons there and how we may have overshot the mark in artificial intelligence. We will have to see if the demand in AI at some point catches up to the robust amount of orders and partnerships that are constantly taking place. In terms of speculation, I would put crypto probably as the number one tip of the spear, most risk, and AI and tech probably right under that because even though they have a good use, the valuations are very aggressive. Chris, you have a lot of experience in finding companies that are overvalued in the past that you would look into them, especially China-related companies that would go public here. Can you tell us about that and how would you go about valuing companies? What do you look into when you're thinking about investing in a company? Personally, I wouldn't own anything that's an ADR from China. That's just me. I've seen so much egregious fraud in my very short career that it's just been stunning. There's a movie on YouTube that anybody can go and rent. It's The China Hustle. It's an hour and a half. It's a great movie detailing the company that I used to work for, which was called Jio Investing, who, along with people like Muddy Waters and some of the earlier short sellers, went through and performed due diligence on dozens of US-listed China-based companies that were just outright faking their numbers and faking the fact that they had a business. No one in the United States did any type of due diligence on them, not the auditors, not the exchanges. They got a listing, they got a huge market cap, and they got to file fake numbers with the SEC. Then ultimately, management, in a lot of these cases, got to abscond with hundreds of millions or billions of dollars in shareholder money, cumulatively, without any consequence because we don't really have jurisdiction to do anything over there. What the movie details is basically how these companies were presented to US investors versus what the reality was when a couple of boutique research firms, who are actually committed to the truth, as opposed to just scraping up fees, went to China and did on-the-ground research and found out the factories don't exist, the companies don't exist. We would compare the SAIC filings in China, which were State Administration Industry and Commerce, I think is what it stands for, filings, local filings in China, which had completely different sets of numbers than what these companies were filing with the Securities and Exchange Commission. Like with US companies, the devil is always in the details. For US companies, I say, just crack open a 10-K and read it from beginning to end. A 10-K starts with the name of a company and its industry, its objectives, how long it's been around, where it's headquartered, how many employees it has, what revenue segments it has. It goes all the way down through risk factors, through all the financials, all through management discussion analysis of the business, and covers every single thing you would ever want to know about a publicly traded company. If you go and read a 10-K, an annual report, you're ahead of 98% of people on Wall Street who just get their information from these sell-side analysts as cliff notes or are too lazy to actually do the research. You know how I go about valuing a business? Obviously, you want to look for a business that's growing, for the most part, unless you're looking for a special situation, a company that's been unfairly beaten down and is at an inflection point where they're about to turn around the business. I think the basics of what any novice investor should look for, which is modest growth, a good total addressable market, a price-to-earnings ratio that is on the lower end probably versus its peers, maybe a little bit undervalued versus its sector, which is a great way to value things. If you're looking at an auto company, how does it compare to the other auto companies? You don't compare it to NVIDIA, and in general, just companies that are well-capitalized and have a good runway of cash flow and positive earnings ahead of them that they can sustain themselves, hopefully pay dividends, because when you're buying an equity, that's what you're buying. You're buying a share of a company's profits and cash flow out X amount of years in the future with the X being the multiple. A company earns $2 this year, a share, and they're trading at 20. You're paying for 10 times that company's earnings in the future. You're hoping they either will duplicate that or hopefully grow into it, and those numbers will increase over the next 10 years. But that's basically how to think about a price-to-earnings ratio. The amount of times you're paying for this year's profit per share, what you should be asking yourself is, am I okay with the company needing to sustain this for X amount of years with the X being the price-to-earnings ratio? That's how I basically value companies. Essentially, getting to their business, understanding their business, and knowing where they're going in the future. Comparing it to peers, comparing it to their sector would be a great way to do it. Then obviously making sure that they don't have an unmanageable debt load or that there's some kind of growth prospects on the future. Then really the rest is for the investor to make up their mind. That's why reading the 10K is so great. You can get to the end of that, and between that and earnings call transcripts, really get a good feel for where our business is at. It doesn't matter what industry it's in. If you know the industry or not, you can usually familiarize yourself with it enough to hopefully make an educated decision. That's how I try to do it. Are the Chinese companies that are listed, are they treated differently than American companies that are on the exchanges right now? Do they have to go through the same procedure of audits? Yeah, they do. But a lot of the companies that they use are like, so if you take the auditors and you plug them into the PCAOB, a lot of the auditors are very small. Sometimes they're one or two-person shops, essentially places where you can buy an audit. You don't want to. Some of them you see in the movie, The China Hustle, some of them have also adopted the names of some big firms, but they're not part of the big firms. For example, something like Deloitte India. Now, I don't even know if that exists, but something like that, people say, oh, okay, Deloitte's name on it. But in a lot of those cases, it's not part of Deloitte. It's an offshoot or it's somebody paying to license the name, as was the case in years past. Generally, what we found years ago was that as long as the exchange fees were being paid, these companies could list through via reverse takeovers, which is different than an IPO. It doesn't offer up as much due diligence. I think the difference and the structure is different. They go through these variable interest entities, which is different than owning actual equity in the company. You actually own, I think, part of a contract. So it's a little bit more convoluted. But the general problem is they're just not here in the US. So they're extremely difficult to do due diligence on. Whereas somebody can go to Ford's plant in Dearborn, Michigan, and see trucks rolling off the line and watch the vehicle carriers come out every day. You're not welcome to go to Guangzhou, China, and sit outside of a factory with a camera and count the trucks. They don't particularly appreciate that. In the movie, even, you see the story of one investigator who was doing some research for a company who wound up going to prison for that for two years or two and a half years. It's frowned upon over there, telling the truth with regard to business or doing anything that stops or interrupts the spigot of fresh US capital coming over to enrich these businessmen in China. And it's so opaque. Unless you really know what you're doing, I wouldn't be involved in any company headquartered, for the most part. I mean, honestly, with the exception of extremely well-known companies like LVMH and maybe Bayer, just companies that everybody knows about. Other than that, I wouldn't be involved in companies that are domiciled outside of the US if you don't need to be. You want exposure to China? If you told me I had to have some exposure to China, I'd get it through an emerging market ETF, because then you'd have China with a bunch of other countries in there as well. And not everything is fraud. There's legitimate companies. It's just that there was a groundswell of US-listed China-based companies that wound up getting listed here in the US that turned out to be egregious frauds. The factory does not exist. The company does not exist. And the insiders are cashing out millions in stock. I think the main handicap is people think that auditors look for this stuff, and they don't. In a lot of cases, the auditors are simply paid off. You can go to PCAOB's website and look at an auditor's track record, which is what I would encourage people to do when they see a company's auditor, which is usually in the proxy statement. Look them up. See if they have any demerits. See how many employees they have. Many times we found these were small one- or two-person firms working out of a mini mall in Boca Raton, Florida. What the hell are they going to know about going to Beijing? Nothing. They've never gone there. They've never visited. They're taking management's word for it. And management has no reason not to lie, because there's no consequences. It's pretty ugly. And I wouldn't necessarily be trying to pick stocks domiciled in China listed in the US, especially if I was a novice investor. A lot of people are buying ETFs and indexes. And what are your thoughts on those? Well, I think that automated ETF buying and mutual fund buying, the way that it occurs in 401ks and now in these managed accounts, has become somewhat of a tail that wags the stock market dog. It used to be that an ETF would go up because its components went up during the day. Now the components go up because of inflows into the ETF, which is then forced to buy more shares. The magnetic poles have been reversed, and the ETFs are kind of now leading the underlying in a lot of cases. And that's when you hear people like Mike Green talk about the passive bid in the stock market, which is essentially your 401ks, your mutual funds, your retirement accounts, buying ETFs, which then buy stocks regardless of their valuation. Buying an ETF is essentially you are giving away the task of weighting, W-E-I-G-H-T-I-G, weighting different stocks and purchasing them at whatever given valuation they're at. And you're buying a group of them at the same time, which is supposed to be the idea. You're supposed to be diversifying without trying too much. Except like we saw during the housing bubble with these collateralized debt obligations, all you were doing was just diversifying yourself amongst a bunch of crap altogether. You got a bunch of C-rated bonds and C-rated bond, B-rated bonds and terrible subprime crap to begin with. Doesn't matter if you're diversified. And I'm not saying that's the case with all ETFs, but that is what can happen. There are some ETFs that I own because they give me exposure to things like emerging markets, for example, where I'm not going to take the time to go in and pick out individual companies I'd like to have an asset manager do that for me. But ETFs have generally become a tail that wags the stock market dog, if you ask me. What are your thoughts on that, with the concentration of a few companies having a big chunk of S&P 500? Well, I think that you're putting all your eggs in one basket, right? You have the MAG 7 stocks, most of which are aggressively valued, one of which I think is extremely aggressively valued. And so when you're buying an index-weighted ETF, you're giving away the power to own the things that you want to own in proportion to other things and just allowing an asset manager to do that. But it's really just automated recurring buying. I think the more attuned you become to just stock picking on your own and figuring out which individual companies you like on your own, because otherwise you're getting exposure to things that you might not want to own. Do you want to own an automaker that's legacy businesses and collapses and is trading at 150 times earnings right now? Maybe you do. But if you buy the S&P 500 ETF, you're getting that, and you're getting exposure to 499 other companies. It's just about how comfortable you are with diversifying. I think the S&P 500 ETF is probably overvalued right now, in my opinion. He, I think, is overvalued right now. And it's just a question of how long you're in the game. People just assume that the SPY is going to continue to go up, the S&P 500 is going to continue to go up. But then also, I'll remind people that we're in unprecedented monetary policy times here. We're in a situation where I think the Fed is going to have to actually start buying bonds at some point, because I do think the long end of the bond market is going to start to crack up here eventually if we wind up running head first into more inflation with this next round of quantitative easing. And in a situation like that, I don't think it's possible for the US to slip into what Japan slipped into, which is trading sideways for the better part of a decade or maybe even more. In that case, you have to be wary of the fact that you may not get the return that you're assuming you're going to get with the S&P 500 ETF. But yes, that is generally the preferred, if you're going to buy one thing, you buy the SPY, right? Some people say that the consumer is going to feel the impact of tax cuts next year. And there's a level of deregulation that has happened that's going to help the economy grow. What are your thoughts on that? I think cutting taxes in general is always a pathway to a more vibrant economy because you're taking capital that would otherwise be allocated by the government, who is a terrible capital allocator, and you're giving it back to the corporations and individuals and entrepreneurs that could use it for investment in their businesses or to pay dividends or to just return capital to shareholders. So in general, I'm not a huge fan of high taxes. I think that anytime you cut taxes or otherwise do anything to allocate capital to the private markets versus having government figure out where it's going, like we're seeing now in Minnesota, all of these daycare frauds. It's that times a million. It's everywhere. There's so much fraud and waste and abuse in government spending that it's perverse. Anytime that you allocate more capital for the market and for the people that have earned it and don't turn it over to the government, who can allocate it poorly, I think that's a great idea. That and deregulation as well, I think the closer we can get to a free market, the better. In terms of what you see, what advice do you have for investors in the next couple of years? My advice to investors would be learn about the Austrian School of Economics, which is basically basic economics. It's your supply and demand, it's price as a rationing mechanism, all of the basics of economics that underpin the economy all the way at its core before we started building this modern monetary theory house with 900 editions on top of it. If you can learn the basics and you can learn the basics of free market economics, you read Basic Economics by Thomas Sowell or go onto Mises' website or listen to somebody like Peter Schiff explain economics. Start there and anchor to that and then go from there because then you're getting your ducks in a row and everything in order at the very, very basics and at the very beginning. Then I think from there, otherwise, you're just going to be hypnotized and enchanted with all of these really nonsense paradigms that we've come up with when talking about the economy, when talking about monetary policy, the idea is debt is money that we owe to ourselves or we never have to pay off the debt or just throw a dart. I mean, there's a million, 40 times earnings is fine. It's different this time. Just learn for yourself, study history, study market cycles, check out the free market Austrian economists first and then if you want to dabble into MMT or whatever, do that. For me, it's been 10 years of hearing about modern monetary theory and learning about it, but it's never made more sense to me. To me, I feel like the free market kind of always has its way eventually and that's what I think is happening now with the price of gold, for example. With this deleveraging that I'm talking about, I mean, it's just math. You have positive interest rates on the largest debt bubble in history and at some point, something's going to give. Like I said, it could be in private equity marks, it could be in CRE, it could be in subprime auto, it could be that we completely don't expect. Some company right now that's an enormous company that nobody knows about that's committing egregious fraud and we don't know about it. Some guy is cooking the books somewhere at a major corporation now and you don't find out about these things until they blow up like FTX or Silicon Valley Bank or whatever it is. And so that's happening right now. It's just a question of how and when it will be revealed to us and what it's going to take down with it. So I would say, do your own research, learn the Austrian School of Economics, keep your head on a swivel, understand that auditors, sell-side analysts, people on financial media are not there to help you. They're there to talk your book. They don't have a vested interest in really helping you learn. They have a vested interest in promoting whatever it is that benefits them. So just stay super vigilant, stay super sharp and keep your head on a swivel in general because things can change very quickly. Like we saw with COVID, for example, everything was fine one day, the next day we woke up and people were fist fighting over toilet paper at Costco. And that can happen with markets. Everything can be fine today and we can wake up tomorrow and be limit down for any reason or no reason. So there's a reason that past performance is not indicative of future results is the same line that you see on every piece of financial. It's the same disclaimer you see everywhere in the finance world because that's the truth. Past performance is not indicative of future results. So beware of recency bias and do your own work. Keep your head on a swivel. Chris Irons, it was great to have you on Market Insider. Thanks so much for having me. Love you guys. Let us know what you think is happening with the stock market right now. Do you think the valuations are justified? You can always comment. We read all of your comments. I'm Siamak. This is Market Insider. We'll see you next time.