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Bob Fitzwilson: Investing in a Hall of Mirrors

Surrounded by illusion
Wednesday, July 24, 2013, 10:07 PM

I have been doing this for 40 years, and I have never seen anything like this. This is the most difficult, vexing set of conditions that any of us have ever seen -- in part, because not only is there a combination of many cross-currents in the markets, but you have financial repression going on at the same time. And there are resource constraints that are coming to play here, too. 

So states Bob Fitzwilson, President and Director at The Portola Group, Inc, one of the financial advisory firms endorsed by Peak Prosperity. 

As we've repeated warned here on the site, financial assets have marched well into fantasy territory. Time-honored price correlations have vanished. Bad news has become good news for stocks and bonds. Economic weakness is met with cheers.

I'm not the first person to use this phrase, but we're investing in a hall of mirrors. This is not supposed to happen. There cannot be a sustainable gap between the measures of how an economy is doing, such as the stock market, and the underlying factors.

It's true that there are companies, particularly larger companies, that have done very well. And there are some small and medium-sized companies that have done very well. But you cannot have a situation with unemployment high and real disposable income coming down without eventually there being a discontinuity.

From our standpoint, there has always been a connection between the GDP and the health of the economy, and workers and the markets. Now we have this widening gap; there cannot be a continuing rise in equity indicators while the real economy is heading in the wrong direction.

It's a very, very confusing, murky, opaque environment for investors. Whether you are doing it professionally or you are doing it yourself, everybody should realize that none of us has ever seen anything like this.

From our standpoint, you try to find the few things that are remaining that are reasonably trustworthy, and one of those is cash flow. When we look at companies that might have an interest in, cash flow is probably the number one thing that we are looking for. 

Chris and Bob delve into the details on the type of cash flow Bob and his team look for in companies, as well as discuss the outlook for other investments Portola prefers such as the precious metals and energy plays.

If after listening to this podcast, you find yourself interested in connecting with Bob and his team to learn more about their advisory services, please use the form here to do so.

Transparency note:  As a result of our public endorsement of Bob's firm, Peak Prosperity has a commercial relationship with them. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.


It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and Bob are obviously unaware of) and should be obtained directly from a financial advisor you trust. Before acting on any of the statements made in this podcast, we advise you do just that.

Click the play button below to listen to Chris' interview with Bob Fitzwilson (38m:45s):


Chris Martenson: Welcome to this Peak Prosperity Podcast. I am your host, Chris Martenson. Today we are pleased to welcome back Bob Fitzwilson, Founder and Managing Partner of the Portola Group, one of the financial advisory groups we endorse here at Peak Prosperity. I have invited Bob to join us again to share his views on just how to navigate some of the most unusual, if not difficult, investing conditions anyone is likely to experience in their lifetime, if not ever. As mentioned on my prior podcast with Bob there is a business relationship between his firm and Peak Prosperity, the details of which are clearly spelled out in the write-up accompanying this podcast.

Bob, I am really excited to have you back on the program to discuss investments, investing in these crazy markets.

Bob Fitzwilson: Thank you very much, Chris. I appreciate it.

Chris Martenson: Let us start with a broad view of these markets. In your several decades of experience, I guess we can call it, of investment management, how do these recent markets stack up?

Bob Fitzwilson: I have been doing this about forty years, and I have never seen anything like this. This is the most difficult, vexing set of conditions that any of us have ever seen. In part, because it is not only a combination of a lot of cross-currents in the markets, but you have financial repression going on at the same time, and you have the things that you have highlighted that there are resource constraints that are coming to play here, too.

Chris Martenson: Let us talk about an important cross-current. I see oil trading today at $106 a barrel in the U.S. and $109 on the global market, as measured by Brent. Those seem to be a really high price to be building a strong case for a rapid return to robust growth, isn’t it?

Bob Fitzwilson: Yes. I would say there at least a couple of things going on. One is that, with all the tension in the Middle East, it is not a surprise that there would be a bid under the price of oil. I also think we have seen very large inventory draw-outs. So I think the demand for oil is a lot higher than what is being reported. But, to your point, rising oil, rising gas prices, that is just another body blow that the consumer is going to have to take.

Chris Martenson: Let us talk about that as a cross-current, then because obviously high oil prices are not very conducive to rapid growth. But if it is indicating, of course, something beyond Middle East tensions, such as rising demand in the U.S., what if taking that at face value, do you have any other confirming evidence to support the idea that there are pluses stacking up in the U.S. economy right now?

Bob Fitzwilson: There are some; the leading indicators are heading up. The newer orders for durable goods have broken out the upside. There are some severe negatives. Real disposable income is taking a nosedive, retail sales are in the downtrend, auto sales are in the nosedive. We have a situation where, in the paper markets, if you look at the headline indexes, it seems like everything is hunky-dory. Underlying economy is weak. There are pockets. We are headquartered in Silicon Valley, and I do not think I have ever seen San Jose to San Francisco as strong as it has ever been right now. You cannot say that the entire economy is weak; there are definitely pockets. In terms of the broad statistics, you have a market heading in one direction and you have the normal economic indicators heading the other.

Chris Martenson: The broad markets and underlying indicators can part ways, I guess, during periods of unusual monetary excess, and for that we might turn to the European economy which, by the way, anything you mentioned for the U.S. we can multiply by some whole number as being worse. In Europe, looking at auto sales, hitting not just recent lows, but I think multi-decadal lows, and factory orders plummeting for Germany, all kinds of things going down. Yet as I skate over, I look at the German Index right near an all-time high. FTSE right near an all-time high. What does that tell us?

Bob Fitzwilson: Well, I am not the person to use this phrase, but we are investing in a hall of mirrors. This is not supposed to happen. There cannot be a sustainable gap between the measures of how an economy is doing, such as the stock market and the underlying factors. It is true that there are companies, particularly larger companies, that have done very well, and there are some small and medium-sized companies that have done very well. But you cannot have a situation with unemployment high and real disposable income coming down without eventually there being a discontinuity.

From our standpoint, what the Federal Reserve has to do and what they have done for some time is, there has always been sort of a connection between the GDP and the health of the economy and workers and the markets. Now we have this widening gap; there cannot be a continuing rise in equity indicators in having the real economy heading in the wrong direction.

Chris Martenson: That has been where we have been for quite a while. How would you know that that is coming to an end? Really, there’s only one of two ways to resolve this the economy really has to pick up, but I think it was even Goldman Sachs that pegged second-half growth at about a percent, cutting the recent estimate by 50%. That is pretty fair, I think, and that is a headline number, too, which includes all the statistical wiggles and jiggles that are applied to make it potentially look better than it is and does not factor out things that may be it ought to be, like government deficit spending, things like that. We look at a headline number, like one percent, and it does not seem likely, at least from where I am sitting at this point, that the economy is going to rise to the stock market. Do you disagree, and if so, what is left as an option?

Bob Fitzwilson: I agree. We have been heading towards some sort of a cliff, and having them lock it down from four percent, three percent, two percent, one percent is like saying I think we are slowing down, but the cliff keeps coming. To me, from a logic standpoint, there is something like $1.7 trillion of reserves sitting with the Fed. I think they have to continue the quantitative easing (QE), because somebody has to fund the deficit for sure, and I think that QE really is about keeping interest rates down as much as anything else.

If we were trying to create inflation, trying to get the economy going somehow, they have to get that $1.7 trillion off the balance sheet, back to the banks, and get it into the system. Then I can see the real economy picking up and catching up with the markets, but so far that has not happened.

Chris Martenson: Even if they did do something like right now, those excess reserves sit at the Fed; they are earning a quarter percent right now. That sounds pretty nominal, but a quarter percent of $1.7 trillion is real money. If the Fed reversed that and started charging a quarter percent to hold it, obviously that money would come flooding back out into the banks. Then the banks would have to do something with it; who would they loan it to, or what else could a bank do with it? What would they do with that money if they were not keeping it with the Fed, do you think?

Bob Fitzwilson: Anecdotally you hear that it is terribly difficult to get a residential loan. It is terribly difficult if you are a small business to get a loan. They have to get the money back to the people that are creating jobs. Again, if we take them at their word that they are trying to get the economy going and trying to get inflation in the system, that would be the way that I would do it. You and I we are chatting, and it is kind of at cross-purposes to try and get inflation going but then report inflation net of food and energy.

Chris Martenson: Yes.

Bob Fitzwilson: This gets back to what I started out the conversation. It is a very, very confusing, murky, opaque environment for investors. Whether you are doing it professionally or you are doing it yourself, everybody should realize that none of us has ever seen anything like this.

From our standpoint, you try to find the few things that are remaining that are reasonably trustworthy, and one of those is cash flow. When we look at companies that might have an interest in, cash flow is probably the number one thing that we are looking for. There are plenty of companies out there are generating lots of cash flow. Corporate profits are flagging to heading down, but cash flow is heading up again.

In the metals markets, I finally realized that the paper markets are, in essence, a virtual gladiator contest between people who have fiat for margin who then create fiat contracts. That particular game is really going to be won by the people who have the biggest ability to create fiat money and fiat contracts. That game could continue for some time, but what is different is that we are getting signs that the physical market is extremely tight golden backwardation, for example. From our standpoint, the price that gets reported is hovering and seems to be capped around $1300 for gold and $20 for silver. That could go on forever, and it is kind of torture to set there and watch it, will it cross or won’t it, because those markets are being massaged, shall we say. The thing we would focus in on are the stories about the depletion of the ETFs and the vaults, then backwardation. There are a handful of things, whether you are looking at companies or you are looking at metals.

Another thing that is happening as we speak is the miners are definitely reversing course. While the metals may be flat, the quality miners are going up substantially. That is real. Given how far they have driven down, you can look at those prices, and if those are reversing, they are at least communicating that a reversal may be in hand and the metals could follow.

Chris Martenson: When I used to trade gold and silver on the futures market, I would never dream of trading either set of contracts without having a whole stream of miners up on my screen. I had my own sort of sub-index. You could use the HUI, or the AMEX would be suitable as well, because I found that action in the miners usually preceded any change in the underlying futures market for gold or silver. I just attributed that to the idea that whoever is playing those markets does so on long/short positions on the equities and miners; they do it on the futures market with gold and silver. They probably did it in ETFs, and probably using puts and calls and other things on all of those.

Yeah, these markets are all at very, very big players on them, who are running strategies that do not have to have anything to do with fundamentals. It took me a while to learn that, but it is absolutely true. They only care about making money. They do it both ways. They do it with significant size advantage in the market. They are busy rooting things around, and I am sure it all makes sense on paper, and I am sure they are recording some very nice fiat games for themselves.

Underneath it all, I notice that the flow of gold from East to West has gotten strong and has yet to abate. We are seeing a lot of difficulties and miners across the world, South African ones in particular. There is just a very fundamental supply-and-demand story. But things can really get out of whack for a while in the paper markets, particularly when you have this much funny money sloshing around, distorting everything.

The question is, how can you be confident that any signals you are seeing at all are real ones in this environment if you do not trust the price signals so much?

Bob Fitzwilson: That is why we go back to the backwardation. I mean, there are signals. It is hard to trust anything. That is one of the things that makes it so bizarre that investment management, the foundation of it, was usually pretty reliable. Now everything is suspect; there is just a handful of things you can watch. I think you just have to be patient and sit there and let the events happen, not trying to guess who is doing what to whom or when it is going to start; just wait until it happens. With these miners, for example, there is a company that we are familiar with that just reported recently, and they had a fantastic report despite the fact that the prices received for their products were over 30% lower.

You cannot think of them in terms of adjectives like “miners;” this is where the stock picking comes in. You have to really dive deep and you have to start with a category or sector, but then you have to go down company-by-company and see what they are really doing. There are good miners and bad miners. It is critical. I think the mistake people are making is to view it as a binary situation. Looking too much, perhaps, at the macro and you may be right about where the macro is heading globally, but there is still plenty of opportunity to make money.

Frankly, there are more companies that show up on our screens, and it is hard to deal with all the potential good investments. You have to do that, and so if you sift through five hundred of them ,maybe you will find four or five, but that is more than enough to complement the position somebody might have, and the energy and the metals and miners. And wait, just wait; maintain your conviction, but then just wait for eventually some form of market reaction to bring things back into some price discovery.

Chris Martenson: Let us go back to one of those measures that you are using –the cash flow. One of the things I track, obviously, is looking at earnings. Earnings projections are usually start out really, really robust and rosy, and get whittled down as the year goes on. This year has been no different in that respect. Some of the forwards earnings growth that I think consensus analysts are putting forward seem a bit high to me; let us just be kind about that going forward into the next year. As I look at those, I am seeing erosion in overall earnings growth, but you are looking at cash flows.

Just to get wonkish for a second, are you looking at free cash flows or cash flows from operations are you isolating that at all? What are you looking at there?

Bob Fitzwilson: Free cash flow. The tricky part is that there have been a number of companies that have done really well; some for good reasons, and some for bad. The bad side of it or the difficult side of it is, if the companies have not hired, they used more technology, so they have been able to get more profitable and build up a lot of cash flow. There have also been companies that just benefit from the environment and execute it properly and they generate a lot of cash flow. One of the questions is is that, because of all the QEs that we have had, that there has been all this money out there, that a shrinking handful of companies did well. So you cannot project it forward. One has to be careful about that.

You want to marry the cash flow with companies that are growing. It is common sense. There are a lot of themes, really interesting common-sense themes. Food is one whether it is Fukushima or GMO and things like that, companies that are providing food products that the consumer can rely upon, that has to be a growth industry independent of all this monetary stuff. Technology again, from San Francisco to San Jose, it is an amazing variety of high-tech companies. It is not like it was during the 1970s or 1980s, when it was just specific groups, like semiconductors or disk-drive manufacturers. It is med tech, it is high tech, it is social media. It is a lot of productivity-related things. Silicon Valley alone to north of San Francisco, there is a whole area where one can search for opportunities.

Texas we talked about that Texas is another energy sector. It also seems like there has been sort of a renaissance because of the relative abundance of new energy that we are developing in the United States. You hear stories about companies bringing operations back or foreign companies bringing operations here. My advice is, people should maintain their beliefs, maintain their macro-allocations, but then while they are waiting for those to happen, then sharpen your pencil and use your head and see if you can find things that are going to make sense regardless of this.

Chris Martenson: There is always going to be something being sold and done. The economy always has some movement to it, and no matter what is going on, that is true in Greece at this moment. Certainly there are some spots there, and you mentioned this renaissance in manufacturing, specifically, that is around natural gas, and it makes sense at four dollars a therm that the spread between the BTU cost of natural-gas-to-oil is very, very high right now, natural gas being cheap in that spread. And it is a feedstock for everything from fertilizers to plastics, to even Sasol from South Africa is thinking of coming and doing a gas-to-liquids plant so they can convert natural gas into diesel. These are all just ideas that pop up, not necessarily because it a great idea from an energy standpoint it is not but it is a great idea from an economic standpoint, with prices this cheap.

It is an interesting story, there, developing. If you look at natural gas coming out of the ground, the conventional headlines tell you there is just endless amounts, and more and more is coming out. That is not the case anymore; it has actually flattened out quite a lot, because guess what? you lose money when you drill at $4 a therm into the formerly biggest place, which would be Haynesville, Barnett. and places like that. You cannot get in and out of there with anything less than $7.50 to $8 a therm. Guess what; there are no rigs operating or very, very few that are operating simply on a defensive basis to hold on to leases that they think will have value in the future.

That is what we are seeing right now, and then the natural gas, it is coming out of the ground. It is coming because people are in wet gas plays like the Marcellus, or it is an ancillary product of the efforts in the Bakken or the Permian Basin, places like that. Actually, it is flat, and so I think there is an incredible story there, watching all of this new demand come online with the assumption that there is going to be this explosion and growth in the underlying product. There will not be until prices go up a lot again. Then there will be; people will drill again, but this is one of the things that I am absolutely confident on: If people lose money at it, they stop doing it.

Bob Fitzwilson: Plus again, our research inputs tell us that there is a lot more oil being sold than they are reporting. Demand has been extremely strong, and perhaps those drawdowns are indicative of that. It is all consistent with your research that we have hit this plateau combined with increasing demand.

A couple of things have happened since we last talked. One is, we had the Treasury well, the fixed-income crash. The ten-year went from 1.6% to I think 2.7%. To me, collectively, we are all kind of trapped down this blind alley. When they try to let rates go up and they saw what happened to fixed income and all the assets that are priced off that, then they had to back off. Then we saw the dollar decline as rapidly as I cannot even recall a decline like that.

I think from a big picture standpoint, there is only one way forward, and that is to continue the QE, maybe taper it back a little bit, because government expenditures have been declining for several years on a year-over-year basis. There may be some room for that, but they cannot let rates go up, because that takes out all the sovereign budgets and kills the housing market. Fixed income for us, at best, is going to be a bad investment; it is just going to sit there. If rates were to rise, probably because they lost control, then it is going to cause destruction in price. If the government is successful at creating inflation, that is going to destroy it, too. Any kind of fixed income is going to be a problem, and at best it is just going to sit there and be a bad investment. What you are left with at some form of equity. For a lot of people, they have been investing in real estate, and the median sales price has been pretty strong. People feel comfortable with that. At least certainly in the bare area, things are red hot.

Then you have equities, so if you are an institutional manager, typically you are supposed to keep like 60/40 between equities and fixed income. If fixed income is generating flat returns, your only choice, really, is equities; you have to do something with it. I think that could be why the indexes have been lifted to the level they are, and the strength. When we do our screens for new ideas, the strength is coming in the small, the medium-size companies. That is where the institutional investor is going to turn once they have bid up the big company stock. If people are switching out of bonds into stocks, you are going to see a tailwind on these small to medium-size companies.

Chris Martenson: Was June 19th-20th where we saw what was putatively a reaction of Bernanke’s comments back then? Honestly, I saw interest rates were tailing off well before that moment, but it did accelerate. What I saw during those two days plus about half of the one that followed was a sell-everything mentality. It showed that there was not this sector rotation where people risk on/risk off, cashing from equities back into bonds. Everything got dumped. That was, to me, a pre-shadowing of what we might see, not that we necessarily will, but that is what happened in 2008. That is just a liquidity crisis. The world has been creating all of this liquidity and everybody has to keep doing it; that is one of the macros I see.

So Europe’s has really got my attention. I do not know if Europe has the capability of going all-in like the Fed has, for a variety of political reasons. Maybe they could, but they think the alternative is worse. The data that is coming out of Spain and Italy and Greece and Portugal is really quite atrocious. Are you keeping an eye on that and trying to factor that in, or how can anybody really factor in an unknowable risk, which is what bureaucrats may or may not do?

Bob Fitzwilson: I just think Europe is lost. Because the kinds of things that the U.S. can do with the money printing certainly, we can print money and shovel it over there, but it is not changing the underlying economies or the human suffering and job loss and all that. The spotlight is on the U.S. as to what they are going to do. I feel terrible; I just do not see any way out of it for them.

In China, they just announced the GDP numbers; I guess it is good that the number was what was expected so there was no fallout. They have their problems too. The United States, I do believe, is strongest economy in the world, but it has its problems. We need to fix our problems first, and I think that is going to benefit Asia and Europe at the same time.

Chris Martenson: How will that benefit?

Bob Fitzwilson: Well, there was a strong connection between the U.S. and China. There is a strong connection between China and Europe. These links are being broken. Once you break them. it is really hard to put them back together again. I think we need to fix these problems quickly and try to get people back on prosperity and wealth-creation, or the links dry up, and then there are problems everywhere.

Chris Martenson: Let us talk about a part of that prosperity part this is something I feel pretty firmly about, is that savings and investment are really critical components of future prosperity. What are you seeing in terms of corporations actually investing in the future capital expenditures? I know that the oil industry, which I track closely, has been pouring, just shoveling money, into capital expenditures. They have some returns to show for it, but not as much as we would have seen in past times. It looks like the return on equity is going down across that sector even as profits remain high for the moment when you look at expenditures on new efforts. What about the general investing across the economy in ways that would have a real solid downstream return out in the future. What are you seeing there?

Bob Fitzwilson: I can just speak anecdotally. I mean, when I do the screens you find a lot of the nuts-and-bolts companies in Midwestern valve pumps, packaging, and things like that. I see that to some extent it is perpetuating the problem. I think the companies with the money to spend are going to invest in productivity-enhancing equipment, things like that. There is a generational problem with the workers. We cannot bring true prosperity back until we get the workforce back engaged. We spent decades ignoring the workforce, so to some extent, there is an incentive for the corporate ecosystems to try to make themselves more efficient, more profitable. Unfortunately, that often means less hiring. When you think about what is going on, it is a very difficult task, because there are just so many moving parts here, and to many things that have been occurring over a period of time. To get this back on track it is not an easy thing to figure out.

I was thinking this morning though that money used to be a manifestation of wealth, accumulated deposits. Somehow at some time in recent decades it has gone from being manifestation of wealth to a way of creating wealth in people’s minds. That is a huge problem. That is why we have lost price discovery because there is no constraint about creating money out of thin air. It is destroying any people who have maintained their wealth and money. They are finally getting it and they are finally going to artwork and real estate and gold and silver and things like that because they money has almost become a disease. It is destroying wealth instead of being a reflection of it.

Chris Martenson: That is an interesting observation. I was taken by a study that a couple of Bozle Researchers did not from the BIS but from a university and they were looking to ask the question about the spears of influence and looking at all the boards of big corporations and whittled it down. They found that they are a hundred forty-seven companies from various levels of cross ownership that basically control forty percent of the world’s wealth. When you whittle that down to the top fifty I got my hands on that list and scanned it. Out of the top fifty companies there are only two that are not financial companies either banks or financial management companies. One of those is Wal-Mart and the other one is Sinopec. It is kind of interesting that we have gotten ourselves to a point in time now where out of the top fifty companies in the world forty-eight of them are just about managing money and articulations of money. I bet you fifty years ago, forty years ago, thirty years ago, that list would have been almost entirely inverted. That is an unusual condition, history and I would caution listeners not to assume that today is just that we have reached some new nirvana, and pinnacle and this is just how it is going to be. Things tend to swing back and forth and we have come through a very long period of intense concentration and fascination with paper and those companies certainly control a lot of wealth, but that does not actually for the most part create true wealth. It is just moving it around and is being very good at vacuuming money out of the money creation centers. Which by the way are the central banks and their friends, the governments?

Bob Fitzwilson: I can think of instances in history, always the Romans come to mind. That is what they did, they set adrift their citizens and eventually you have problems. I was reading an article about inflation in Pakistan and there was a sentence in there that the price of basics is becoming out of reach for the common man. What does that mean? I mean people have to eat and heat their homes and stuff like that. They are talking about it almost clinically. That is a really bad situation that we have to bring everybody up or there are going to be problems.

Chris Martenson: That has certainly been part of our strategy in the United States I think with rising food stamp usage and other things. It is pretty clear to me that with real incomes median real incomes trending down for the past decade now that it is just getting harder and harder for average families, median families to make it. Of course that is if you buy the CPI, which is used to deflate the wages as a real arbiter of actual price increases that we are seeing. We are not; we are experiencing something far higher than I believe we are admitting to.

You mentioned one of the other pieces in there, which is unemployment or employment and those, are the two pieces the Fed is looking at. They want to see inflation above two and a half percent that is sort of their cut off point for terminating the money printing. They want to see unemployment down below six and a half percent. But when we look at the unemployment numbers the headline numbers that get put out there that say we are having this reasonable recovery in hiring, you do not have to scratch very far to discover that nearly all of those jobs that have been created the vast majority of them are part time jobs. There is a variety of regulatory reasons for that Obamacare being one. I think corporations have fundamentally gotten there is a new landscape for them which is they can get away with whittling down the worker/employee contract to the bare bones, that is sort of the new normal.

I do not see any strong chances for wages to really take off for hiring real substantial hiring of full time jobs that have benefits and other things associated. I do not see a lot of hope on that horizon at this point. I see sort of the continuation of past trends, here is where I get confused Bob. I do not understand how you can have a robust economy without the people who are supposed to be participating in it who do the lion’s share of the consuming are able to afford what is being sold. It is all the way back to Henry Ford saying “I am going to pay my workers five dollars a day because I want somebody to buy my cars”. That has been lost. When I look at the weekly hours worked and wages paid and see where we are it feels that is something I do not think the Fed has any plan for and nobody has been able to connect the dots that says – we buy mortgage back securities, here is how hiring gets better. Because we have not seen it and I do not understand it. How do you see that part of the story and where does that begin to turn around?

Bob Fitzwilson: It all does not fit. Just take the goal of creating inflation. If you have real disposable personal income taking a nosedive and your stated objective is to create inflation, you are just pushing those people off a cliff. If you create inflation at least in the way it used to be interest rates go up well we know you cannot do that because of the budget deficit. If you come up with bias numbers on the CPI you succeed in creating inflation but you keep the CPI low, people will not be getting higher wages, they are just going to be going further and further into a bad economic situation.

The things they are saying when you add them all up, do not add all up. I just do not see how it all works. I think it probably will not work and as you pointed out, people need to be very cautious, the stock market particularly the popular index is potentially a real risk for people unless you get the underlying economy going. They have to be cautious, they have to maintain their investment real assets and they have to be very, very careful about the stock market because none of what is being talked about makes any sense. It is not a plan that gets us to where we want to go.

Chris Martenson: Alright, if none of it makes sense what is the plan then? How do you and I navigate these waters? How does the average investor approach these times say somebody who is ten years off from retirement how would they position themselves in this particular environment?

Bob Fitzwilson: When you know in the 1970s it used to be if you were a trustee that you could pay out dividends and interest and that was it. With inflation raging and real estate real assets going up they changed the rule so you could use a total return. We have always focused on that. What you want to do is generate the highest total return sometimes that is dividends, sometimes it is interest, and sometimes it is capital growth. Then what you want is a bigger and bigger pot of money and that can pay a bigger and bigger mount in retirement. As we discussed earlier interest rates are still apathetic and it is dangers to own that stuff now if rates go up. I think you have to make sure you have plenty of real assets if you are going to be in equities you have to try and find businesses that can grow right through this. In the late 1970s in the last three years of it, the number one asset was gold and number if I remember correctly was high growth companies. In Silicon Valley that was primarily semi-conductor related things. If you are going to buy a company you do not necessarily want to go for the highest dividend, you want to go for a company that has a dividend but it is growing rapidly so they can increase the dividends over time not percentage wise but in dollar to try and bolsters your income too.

Chris Martenson: If you are looking at these markets and trying to think about the risks that are out there how do you position yourself for the potential of well who knows. There could be another financial accident is a possibility I suppose. We look at the Chinese stock market has done very poorly over time and contrast that with who has been doing really well. I mean the Greek stock market in the last year has outperformed the Chinese stock market. Where do you factor in these larger global risks into that story? Is this a place where somebody can select really high quality companies, look for total return and sit on it? Or does this require really active management at this point do you think?

Bob Fitzwilson: I think if somebody is not doing it twenty-four/seven or they do not have somebody doing it twenty-four/seven, I think the safest thing to do would be to if they do not have built positions in real assets - energy, gold, silver and miners things like that, and just invest, if you are going to go in the stock market go into smaller companies, the inside companies that have strong growth potential. Also, maintain a fair amount of cash and cash is a lousy investment right now but if you do not have your finger on the sell button all the time, you could get caught in another downdraft. There is no respite to be honest with you, it is just a constant activity to not only watch the markets, but also watch the geo-political stuff that is going on. It is how we started out the conversation; this is just the worst environment I have ever seen in my career.

Chris Martenson: Well there you have it; it is one of the worst environments in over four decades if somebody has been paying really close attention. We have been talking with Bob Fitzwilson of the Portola Group. Bob I really want to thank you for your time today. I am sure we will be back to continue to try to figure out and navigate these crazy markets.

Bob Fitzwilson: Always my pleasure.

About the guest

Bob Fitzwilson

Mr. Robert Fitzwilson is the President and Director at The Portola Group, Inc. He founded the firm in 1979. Mr. Filtzwilson has invested in more than 25 companies and founded several software firms. He is a Director of SOMA Networks. Mr. Fitzwilson obtained a B.S. degree in Industrial Engineering from the Purdue University and an M.B.A. from the Stanford University.

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yogiismyhero's picture
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173
After listening to this Podcast I just had one helluva...



...heavy sigh. Why? Well, lets assume the economy returns to robust growth. The demand for oil goes higher and the prices move rather rapidly as I would assume jobs and industry would be created or ramped up, and more demand for oil becomes a lock. This then causes all discretionary incomes to collapse to the oil markets. What also happens is debt gets paid down as it is my opinion we are all sick of the constant worry of paying our bills. It is a heavy drain on everyone's peace of mind. So honestly how will this cycle ever end? It must end in a debt destruction, and a massive destruction where we get a reset. What on earth is the corporate types going to make for those who can't even afford to buy let alone afford what is being made? Honestly, we will remain on a wash, rinse and repeat cycle for a long time until an event happens that truly removes the debts that has saturated all the consumers, world wide. House of mirrors?, you got that right. Why on earth would any institutional bank extend credit to any consumer when there is a good chance that the consumer will default within the terms of their agreement, especially when real wages are falling and will continue to fall, and inflation goes up. New hires will be low wage earners, part time workers with very few benefits. Why on earth would a bank lend to any municipal entity when all they have to do is look at the risks that Detroit will now show the world on how bankruptcy will absolutely gut the bottom line of many creditors, like 100,000 creditors?! What a mess. My gut tells me we are at our tolerance with oil at $106 and change now. So how about $200 dollar oil and 6 buck gas with just a moderately good jobs market? Part time jobs mean more workers using more gasoline where a full time job takes some part time workers off the road. So yeah, I can see more demand for oil but at the expense of our economy quite frankly. Gone golfing and walking a quick 9...Peace

mazanda's picture
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No insights

Mr Fitzwilson offered no useful insights in the portion( first 50%) I suffered through. Were it not for  Some of Chris's usual useful info/insights, this would have been a total waste of time.

Bob Fitzwilson's picture
Bob Fitzwilson
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Thank you for your comment.  I agree with you.  It is a mess.  The goal of the podcast was not simply to rehash that it is a mess, but to suggest a few things that investors can do to hopefully make money even in this environment.

I think there is too much focus on the big picture and not on what people can do and control in their own lives.  Peak Prosperity does a great job of providing such insights and directions.

Bob Fitzwilson's picture
Bob Fitzwilson
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I appreciate your feedback.  The goal was to refocus people on what they can personally do.  In the investing arena, there is a lot.  Stock picking is very much like being a detective.  There are companies outside of the metals and miners that have been doing quite well despite all of the macroeconomic and financial insanity.  Energy immediately comes to mind as well as high technology.  Everyone has access to inexpensive tools such as Investors Business Daily, the Internet and simple common sense.  There is a small but significant subset of the global equity universe that will provide long-term investors with the income and growth needed going forward.

Again, the goal was to give people hope that there are actions they can take and not to become frozen in inaction because of the "big picture".

Thank you for your feedback, and I will attempt to do a better job going forward.

yogiismyhero's picture
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Bob, thank you for your thoughts here...

...and yes the PP community is a place for intelligent thoughts,opinions and levity. My only focus is oil and yes, profits can be made up or down in this never ending cycle (it seems) of doing the wrong things as the Fed is doing and has done since 2008. The up went just fine and now the down will be played with (hopefully) similar results. I have been waiting for just this time now for quite some time. Here's hoping as I can benefit from this craziness that I cannot control but must invest in. Be Good.

tiafolla's picture
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Game change

I think the difficult investment and economic environment are just symptoms of a much larger situation.  Technology has reached a point where it's beginning to replace workers at a much higher (and increasing) rate.  Voice interaction and simple hard-wired robotic systems have already replaced low-level workers (receptionists and assembly line workers); but now we're seeing more capable systems replacing the next level of workers.  

For example, there is a robotic system that can take fast food orders and assemble the meal quickly, reliably, and 24/7 with no medical costs or time off.  How long will it take McDonalds and the rest to replace their line workers when this thing is perfected? How many millions will be unemployed?

Companies have plenty of cash to invest in this technology, and they'd rather spend it on capital equipment than personnel and benefits. Apply this next-gen technology to any job with a constrained set of functions, and how many additional millions are unemployed? At some point in the near future, the majority of unskilled labor will be mechanized, and unemployment will be what--30%? 40%?  And rising--remember that technology improves at an exponential rate (the difference between a palm pilot and an iPhone is less than 10 years).

I hate the term paradigm shift, but if it applies to anything, this is it.  Unemployment for the next several decades is going to keep trending upward, no matter what the state of the economy.  And at some point we'll have to address 100 million unemployed Americans as a permanent feature of the economy, not a temporary bug.  What happens when the robot repairman is also a robot?

yogiismyhero's picture
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tiafolla, I share in your questions and concerns...

...over at Mish's site he has up robots that will replace the migrant workers, picking fruits and vegetables, in the field and each robot will replace 20 illegal aliens or workers. Gregor not long ago penned a very sobering essay on robots and surmised one serious Deflationary event awaits us and this isn't very far away. You could say ongoing, 24/7/365 (why then would banks lend to anyone when they are financing these ventures and know how tenuous your job is and ability to pay within the time frame of your agreement?). Many millions of jobs have already been taken by the robots (world wide) since the 2008 crisis, and as you intimated, 1st to the change as a manager of any company that switches to robots will have a decided advantage over its competitors and is why I completely feel that China or any cheap labor country are now in the decline as labor competes with robots or should say, will lose their jobs to robots at all levels including management. China will use robots too but the side effects to a country with 1.5 billion people will be dramatically different than one with 350 million people. Add to this there aging population and debt and other issues like environment. I believe that Global will be Local in the not too distant future. Just one last example: Amazon, are running robotics for everything, are promising your orders same day or next. That will replace so many retail stores, people, etc...as we move forward. Energy (oil) will make this happen for sure. That represents a tremendous amount of jobs and spin off jobs lost forever. We will witness in our lifetime some awesome changes and I am excited for them provided I have enough food, clothing, shelter and heat to witness these changes in relative comfort.  

Nate's picture
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from fruit and nut land.......
yogiismyhero wrote:

...over at Mish's site he has up robots that will replace the migrant workers, picking fruits and vegetables, in the field and each robot will replace 20 illegal aliens or workers....... Energy (oil) will make this happen for sure.

Hi Yogi,

Locally peaches were the crop of choice 50 years ago.  The cost and availability of labor changed that.  Today the predominant crop is almonds.  Almonds are mechanically harvested and by-pass the majorty of the issues associated with peaches.  Another driver in this change is cheap, abundant energy.

About 2 years ago I noticed a change.  Several ranchers used migrant workers to harvest almonds.  Mechanically shaking the trees is hard on them, and the abundance and availability of labor changed this.  What remains to be seen is if this is a short term change, or something more permanent.  What we all know is that (long term) energy will become more expensive and less available. 

The availabliity and cost of energy will drive the robot vs human labor issues.


yogiismyhero's picture
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Nate, with interest I have followed this story (robots)...

...ever since Gregor penned his essay here. In all my research on this I think the robot is the answer for some of our energy issues. I know to compete in a global market that the CEO of any company where robots can replace labor they will have to be first movers just to compete, and that means loss of jobs and god only knows what (Amazon is the future). So profound the move to robots that I don't think the economy can adjust. No consumers because of no jobs, nothing for the robot to make. In todays Dr. Hussman report he sees as "baked in the cake" less than 2% growth in the S&P out 10 years with two Bear markets and two Bull markets with losses in the Bear markets being of the extreme variety. I will postulate then that the Bull market will be substancial as well so an investment climate of a lifetime are my thoughts. Anyways, and any angle you look at this, robots are coming and labor will suffer, management will suffer as well, and tax receipts, social issues, and again, god only knows what. Interesting times Nate.


Grover's picture
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Since the beginning of the US (and well before,) labor was needed to run the machines (of various sophistication) that processed the raw materials into sellable products. Capital was rewarded for taking risks, material producers were rewarded for providing the energy/metals/wood/food/fiber, and labor found steady jobs running the machines. So far, so good.

Because of the economic success, population grew. That meant more of everything. Eventually, resource limits were becoming evident. Machines became more and more sophisticated so a single worker could produce much more product. That reduces the need for labor. Labor no longer can demand higher wages. In fact, they're happy to keep their jobs at lower wages. This makes capital very happy. So far, okay.

Now, we've got robots that can replace humans on at an increasing pace. Robots either work or they need to be fixed. The sophisticated ones will isolate the problem so repairs can be accomplished quickly - by another robot. Labor can expect to be surplussed. What then?

It used to be that management needed labor to perform tasks. Soon they will only need customers. The unemployed who have run out of "benefits" will be worthless eaters. Capital won't want to pay taxes to support these people. Capital won't want to share the remaining resources with these people. Capital will devise ways to reduce population. This could be by introducing a virus, starting a series of wars, or ???

Those who survive (say 1% - 10%) will be able to live a life of leisure since robots will do everything. There probably will be one world government by then. There will be an abundant abundance with everyone retired and free to choose whatever they want. Money will no longer exist. The environment will rebound quickly. What's not to like?

I hope to die before this occurs.



yogiismyhero's picture
Status: Silver Member (Offline)
Joined: Jun 28 2013
Posts: 173

...why will we need management, the robots have their job too. Everything will just condense upon itself until the lights go out. I want to live until I don't. Be good Grover.

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