Liquidity Up, Markets Up, Liquidity Down, Markets Down

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Why Kirk Spano thinks there is potential for some dislocations in the economy and markets (1:00). Federal deficit, baby boomer retirement and American exceptionalism (4:40). Rewriting debt will essentially be at prevailing interest rate (22:05). AI will shorten our work week, but won’t cause mass unemployment (29:00). Big pharma stocks, why Kirk is selling more than buying, and writing a lot of covered calls (32:15).

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Transcript

Rena Sherbill: Kirk Spano, welcome back to the Investing Experts Podcast. Welcome back to Seeking Alpha. Always great to talk to you.

Kirk Spano: Thanks for having me, Rena. Welcome to the second Trump administration, as it starts.

RS: Thank you very much. What are you looking at in this moment in the markets? What are you most focused on as we are already approaching the end of the 1st month of 2025?

KS: Every New Year, we get a lot of predictions, a lot of pontification, and I think it’s especially true in a year where we have a Presidential change.

So, there are a lot of people giving their opinions about this is going to happen or that’s going to happen. This is the way it’s going to be, and they’re very sure of themselves. I’m not so sure about all these people being so sure about themselves.

I think that there is a very good chance that the wiggles in the line, that the way that things work, that the decisions that get made, aren’t quite what the market expects.

I think that’s certainty and uncertainty are fickle, and I think that the market does not like uncertainty. So, if things don’t go in a particular direction, if we just don’t know what’s coming next, I think history supports that the market gets the jitters.

That’s been my base case assumption for this year given a few things that are going on that the Trump administration has to deal with. I’m not a big ideological guy. I’m pretty centrist. I can reach and shake across the aisle with people on both sides, but I think that in an era where we’re a little bit more divided than probably we should be, I think that there is the potential for some dislocations in the economy and in the markets.

And, of course, that drives market sentiment. And I don’t know that we’re exceptionally well prepared for some of the economic and financial transitions that are probably going to happen and are probably going to happen differently than maybe a lot of people are projecting.

RS: What few things would you put at the top of that list?

KS: Well, I was watching the confirmation hearings for Scott Bessent, and I think he’s a smart guy. I really do. I have said over and over again in webinars and in articles.

When I went to the Hart Energy Conference in the spring, I made the comment that the private equity guys are usually the smartest guys in the room. And I stand by that. I think the private equity guys know the numbers. I remember Sam Zell famously saying that he’s cursed by knowing the numbers.

I think that the private equity guys know the numbers, and I think that they are less susceptible to ideologically driven policy. I think they’re less driven by rhetoric. I think that they want the bottom line to work out. And I think that they understand how numbers move, and I think that he’s probably a good man for the job.

However, he’s got a boss who I think maybe isn’t as experienced on the financial side as the top private equity guys like Marc Rowan or Bessent in this case. And I think that he might have to deal with political realities that he wouldn’t otherwise choose.

So, I think that that makes his job difficult. He has the 333 strategy, and that is reduce the federal deficit by 3% or 2, 3%, I should say. So, it was actually a 4% reduction, but get the annual budget deficit to 3%, which we haven’t had in pretty long time since, I think, 2016.

Improve the economy to a 3%, essentially perpetual growth rate of 3% GDP growth, and then drill, baby drill, the equivalent of 3 million barrels per day equivalent, which would be gas plus oil and liquids. So, really all oil and gas production, the equivalent of 3 million barrels a day more equivalent.

Well, all three of those are tall orders because to cut the debt that’s really, you know, people want to talk about a $1 trillion getting cut from the federal budget, but when you look at it, the main components of the federal budget, if you include Social Security and Medicare, are in fact Social Security at the top. In second place suddenly is interest on the debt, which just surpassed Medicare spending and defense spending and just very recently in the last several months.

That means that we can lower the annual deficit a little bit if interest rates come down. Right now, Bessent is going to have to figure out how to refinance, I believe it’s, I just had this in front of me, $6.7 trillion of debt in the next 18 or 21 months. It’s a big number. And that’s going to be difficult.

So, I just think that there is a lot of hard things to do. A lot of things that have been getting kicked down the can a little bit down the road. The can getting kicked down the road.

And it’s not just the last 2 or 4 years. It’s really going back to the 1980s when we started to do these types of policies under Ronald Reagan, and every President’s really either continued them or double down on them, which is try to pull back on taxes, try to cut taxes, and try to deregulate and try to grow. The problem is, is that we never really do any of the belt tightening. We just do all the expansionary things, and then we run a debt.

And it was okay for a very long time. And suddenly we’ve run into a period that is being called fiscal dominance. I mean, that’s the term when fiscal policy is more important than monetary policy. Up until very recently, monetary policy was the boss. We were so strong fiscally that monetary policy can move the economy in one way or the other with those countercyclical policies.

Well, now we’re running into a massive secular problem with the baby boomer retirement, and it’s not really a problem. Had we planned for it, it’d be okay. But we underfunded the Social Security program, which is really a pension, right? It’s really the national pension, and we’ve underfunded it.

So, we’re going to have to come up with I think it’s 30 extra trillion dollars over the next 50 years. It’s not overcomable, but we still have to do it. Had we invested that money better and actually had a lockbox, we wouldn’t have to deal with that.

Medicare actually is incredibly efficient, but we have holes, and every study says that. You can ask the health insurance companies, and they tell you that. So, those studies are all out there. Medicare is very efficient. Medicaid, on the other hand, and other health programs tend not to be very efficient because we put all these convoluted rules in place that makes them hard to manage. We have a lot of people managing things that are hard to manage, and we spend a lot of money.

Bessent really has a lot of things to deal with that are basically out of his control, right? The root causes of the problems, he can’t change. So, the old adage of putting a band-aid on a wound that probably requires surgery, are we running into a period where we can’t band-aid things anymore?

I’m not sure, but I do know that Janet Yellen, who is brilliant, figured out a way to offset the Federal Reserve’s quantitative tightening. And financial conditions, which were getting tighter, hence the term quantitative tightening because of the monetary side through the Fed, while the treasury came in on the fiscal side, and instead of issuing a broad range of debt, which is what they normally do when they refinance debt, made it all short-term debt. Or 60%, 70% of it short-term debt when that wouldn’t normally be the case.

Suddenly, we have a big debt wall hitting us in 2025 and 2026. Bessent has to figure out how to allocate that to new debt. And because interest rates are higher, unless those interest rates come down, there’s not really a way to reduce the interest on the debt.

That puts pressure on congress to act. Ultimately, I think the monetary side has to come in again with QE at some point, probably as soon as next year. And I just think that between now and then, and Bessent having to deal with that debt wall in-light of his goals of increased growth and decreased deficit spending, I just think it’s going to be hard.

I don’t think that there are any easy answers. The article that I have out there right now is showing some charts that illustrate pretty clearly that there just isn’t a lot to cut from the federal budget. Can you find a 100 billion here, maybe a 100 billion there? For sure.

Is there a way to make the system more efficient? Yes. Especially on the healthcare side, without cutting benefits, which if you cut here, they just pop up over there, right? It’s like whack-a-mole. So, can we find several hundred billion in efficiencies and cuts that are good for us? Yeah. And we should do it.

But finding a $1 trillion or $2 trillion it’s probably impossible. And I think Bessent has to navigate all this. These are hard, hard problems without easy fixes. There is no magic wand. There’s no Harry Potter presidency. This is going to be a really difficult set of problems. And I’m not a real Pro Trump guy from the standpoint of, I don’t like his rhetoric, but I think he’s at a unique point in history where he might be the only guy that can do the hard things.

Does he do them and do them well? I don’t know. I have no idea. I do not know how to handicap this. And that’s why I say anybody who is certain on how to handicap this, man, either they are some of the, Marvel stuff, right, either these people are Demigods or they’re fooling themselves and they’re trying to fool you.

So, I don’t know. I think this is the hardest set of problems I’ve ever seen. And I’ve been talking about us getting to this point really since college. I mean, I wrote my senior thesis on healthcare, going into it thinking, oh, we needed more privatization. And at the end of two semesters, I was like, holy cow. That’s probably not the right approach. We probably need a hybrid approach.

And the hybrid approach we have right now is Medicare where it’s partially public and partially private, right? Because everybody has a supplement, that is privately purchased or through an employer. And that actually has the lowest administrative expense of any healthcare plan, whether you compare it to United Healthcare or Anthem or whomever. And Medicaid is the least efficient, so that’s probably where you can find some efficiency.

But again, that’s not something Bessent handles. That’s going to be Congress and the President. So, for him and Jerome Powell, who I have no idea how well they’ll work together to navigate trillions of dollars of debt coming due that we’ve never seen in one big wave before, it’s not going to be easy, and it might lead to something that we talked about off air is crowding out.

Crowding out is the concept that government spending overwhelms the financial system and crowds out private sector spending. So, if a lot of money, especially on the bank balance sheets, instead of getting, turned into loans to help build houses or expand businesses, if that ends up having to go into U.S. treasuries to float the debt and government puts their thumb on the banking system to do it that way, which they’ve done in the past, then what happens to the growth of the economy?

Well, then the 3% growth rate is out the window. So, we have a lot of problems, all coming to the fore at the same time. The earliest projection I saw years ago, I think it was, like, 6, 7 years ago, for all these things that come to a head was 2026.

I always thought it would be about 2030, that we’d have to deal with the whole baby boomer retirement system shortfalls and obligations, because that’s when the last baby boomer is 65 and on Medicare, and almost all of them are on Social Security by 2030.

Because of the way that debt is structured in the economy with, again, I think it’s $6.7 trillion. Maybe we are about to face the first gut punch from having to deal with the underfunded baby boomer retirement system. I’m not sure. And I don’t think anyone who’s given you an answer can be sure.

Let me give you an example. I helped the Teamsters at one point with healthcare and pension negotiations. I think that was easy compared to what President Trump is going to have to deal with here, right? I mean, the guy’s got to negotiate things and maneuver in ways that I don’t think anybody has taken head on in my lifetime.

I don’t think honestly, if I had to be political, and I don’t, I have the luxury of not having to be political, I can just make money, which is what I tell people. Look, you just do the best you can to make money. And as investors, that’s why we’re here. And you put your ideology over on the corner of your desk, and you think, okay, I want the world to be a better place, but, gee whiz, I have to make money somehow.

And what I’m facing, what I’m having thrown at me, I think that we are probably going to see a period of uncertainty and volatility. And, ultimately, I’m an optimist. I think it all works out, but I don’t know if it works out in 2 years or in 10 years.

I think that that is the question. I think the question is, how prescient was Winston Churchill? Do Americans always have to do everything else before doing things right or will we get there a little faster this time?

I do think that President Trump, because of his uniqueness in history, and he really is a unique President, I think that he can do things that could actually bridge the aisle, to fix a lot of things. Will he? I don’t know. I just don’t know. But when he ran the first time, he talked about the Bernie folder should be over with me. Maybe he’s right about that sort of thing.

What if Trumpcare ends up being the marriage of Medicaid and Medicare into a Medicare For All system where everybody’s got universal coverage, everybody’s got coverage with preventive healthcare, but you have skin in the game because you have to buy your own supplement or get it through an employer. And that preserves the private side of the equation that drives quality.

And then it gets rid of all those ER visits that cost 10x more than going to a primary care doctor because now people can go to a primary care doctor instead of having to wait until they’re so sick that they go to the ER. We know that that’s something like 15 or it’s some teen percentage of all healthcare expenses are unnecessary ER visits.

So, maybe President Trump can figure out a way, to figure out an efficient way, to fix the healthcare system. Because to my way of thinking, if we fix the healthcare system, we pretty much win. Because our economy really is that much better than everybody else’s.

Our gift of geography that never gets talked about, so I’ll throw it in here, we have the gift of the best geography on the planet. There’s reasons why everybody wants to come here. There’s also reasons why people get angry at us, but we have oceans on two sides of us. We’re contiguous between those oceans. We only have two neighbors, one to the north, one to the south. Neither one is a military threat.

You take a look at Unites States geography, we have metals, we have minerals, we have water, we have arable land, we have everything. And somehow, we have put together a good enough system. We have the worst system except for all the other systems, right? Capitalism and our former Republican democracy works.

And I think that that’s one of the reasons the dollar is so strong even though we have a lot of debt is because who else’s currency would you rather have?

Bitcoin is emerging, but would you rather have a yen or a ruble or a yuan, a rupee, a pound, a euro? Nah. At the end of the day, you say, okay. What economy has the most productive capacity? And it’s ours. And it might be that way forever. So, just because of the rock that we sit on. So, I take a look at all this, and I’m just hugely optimistic.

I believe in American exceptionalism, but, man, have we kicked the can down the road on things that we knew were coming? In my article, I used the Dan Rumsfeld quote, right? There’s known knowns and known unknowns and unknown unknowns.

We knew that the baby boomer retirement was coming, and we really didn’t plan for it. And now suddenly, we’re like, oh, all the debt. Well, we could have planned, and we didn’t. I do think that Trump’s got an opportunity here, and I think it works out. I don’t know how fast.

But I think in the short term, this debt wall is the first time we’ve ever had to face anything like this. It’s really a lot of debt. And I think that when we start talking about numbers way into the trillions, I mean, Rena, those just seem like a big number. You’re like, I don’t know how to rationalize the number in the trillions. Where does that come from? How do I think about that?

I think the markets aren’t quite understanding the dislocations that can happen in the fixed income system, and I don’t think that the market especially with a lot of younger investors now. In the last five years, we’ve really, we’ve doubled the number of traders in the market, and everybody wants to be an overnight millionaire. It took me a very long time to become a multimillionaire.

And, the fact that some of these people think that they can do it fast with a couple of trades in GameStop (GME), good luck. That’s all I could say to them is, good luck. But I do think that President Trump has some unique opportunities. I’m optimistic that we get to where we need to get. I just don’t know how fast, and I’m really afraid of this debt wall in the short-term.

RS: I keep thinking of that line from Social Network. You know what’s cooler than a million dollars? You know what’s cooler than a billion dollars? I mean, we’re just going to keep going up that scale.

And the other thing that I keep thinking about is the fact that we are in an era of unprecedented events. It seems that everywhere you look, the event that you’re looking at is unprecedented.

When we talk about this unprecedented debt level and when we talk about a new administration and new people coming in to fill positions and we’re talking about the next Fed meeting and interest rates and what’s going to happen there, how do you see it playing out? How would you advise them to play it? And where do you think interest rates are going to sit? And broadly speaking, the economy moves along as we as we live out the year?

KS: Over the next year or two, I think that rewriting the debt that’s out there is going to essentially be at the prevailing interest rate. Could interest rates go up a half a point or a point or down a half a point or a point? Absolutely. I do think that the market, the whole notion of bond vigilantes, is overstated, and I think inflation is overstated.

I think that we can look at any charts and see that what we, in essence had from COVID, which was the combination of massive bailouts that exceeded the amount of the problem, right?

We didn’t know how big the problem from COVID was going to be, so we just kept printing and bailing. And we actually printed and bailed more than the hole in the economy that was created.

There’s a couple of reasons to think that happened. One was they just were unsure, so they figured better to over bail than under bail. I think that’s legitimate. The idea that if we do over bail, it goes to mitigate the problems of the baby boomer retirement. And I think that that’s pretty legitimate.

I don’t think that gets talked about a lot, but I think that they were willing to overstimulate coming out of COVID, because they thought it was a way to mitigate what was coming at the end of the decade. And there could have been political reasons, right? Juicy economy to get re-elected.

So, I think that all these things are coming in to now. And over the next year or two, I don’t expect interest rates to change much. I do think it’s a policy error if they pause interest rate cuts.

To my way of thinking, and we’ve known this a long time, right? This isn’t a new discussion. We have known for a very long time that if we can grow the economy at 3.5%, 4%, that we can outgrow all of our debt issues.

It’ll take time, but if we have consistently higher growth than we had in the 1980s, 1990s. If we go back to 1950s type of growth, we can outgrow the debt the same way we did after World War 2. And to have that high growth rate, you need the 5-year U.S. Treasury to come down.

Why? The 5-year U.S. Treasury is the benchmark essentially that most construction and business development loans are based on. When you want to build a $20 million or $30 million apartment complex or condo building, you don’t take a 30-year mortgage. You take a building loan that is a year or two, and then you do a five-year note, and then you refinance it in five years.

That’s why we have this mini, and I say mini because compared to the financial crisis, it’s small, but we have a commercial real estate problem right now.

That’s already brought down three banks and hasn’t brought down really any more, of substance, in the last couple of years, but those loans were basically taken in 2018 or 2019. They’re due now. They were due last year. The banks stretch out the terms.

And they just don’t have to recognize the loss right away. And they’ll stretch that out, and the Fed’s helping them, and they have facilities. Don’t call it QE because they don’t like that word, but they have special facilities that are really QE, but don’t call it QE because they don’t want you to say QE, but if you say QE enough, you start to realize it’s QE.

So, I think that the rates need to come down. I don’t know if they will. And if the rates do come down to the neutral rate, which is around 3%, we’re not positive, but it’s about 3%. And I can say that it’s probably about 3%, because that $20 million, $30 million loan that I want to build a 40 unit building, I need an interest rate about 5% from the bank and this which means they have to borrow at about 3%, so they get a spread.

For me to be able to attract investors, I have to show them an internal rate of return that’s high enough, generally in the teens, to get them to invest in a private investment, right? Otherwise, they’ll stay liquid in the stock market or in the bond market or in money market accounts.

So, I have to be able to offer a high enough internal rate of return to build, which means that I have to be able to borrow at a low enough rate. And right now, those rates aren’t done. You can look around all over the place. There’s all kinds of deals that are just sitting there, because they can’t get the proper loan.

There’s subdivisions in the Midwest that we’d like to build, and we can’t build them because to put in the infrastructure, you have to take out a loan and the interest rates are too high.

So, if interest rates come down and Chairman Powell talked about this at the last meeting. I mean, he made a comment. Go back and listen to it. He made a comment and said, look. There’s been a slowdown in new starts on construction projects and residential construction projects. He goes, that’s because of us because we’ve had the rates higher. He knows what he has to do to stimulate that.

My argument is better sooner than later. I don’t think that we need a recession. I think that we can grow our way out of this. I know that he’s afraid of inflation coming back.

Tariff arguments are very inflationary. If we deport more than the criminal element of the people who have immigrated, then that’s inflationary. I don’t want to get into a big discussion on immigration, but the reality is that most of the people that came, the aggregate number, we mostly need them. Otherwise, the economy shrinks. And when the economy shrinks, we get deflation and bad things happen.

We had a shortage of labor, and that skyrocketed labor rates, compensation. What happens if at the low end of the compensation scale, we don’t have people to do those jobs? How do we handle farming? How do we handle all sorts of $15 and $20 an hour jobs? How do we fill those? What happens to the economy if there’s not the full ladder of progression for compensation?

We’ve seen it once recently, and I think Chairman Powell is afraid, and we’re going to find out in a couple days, I think he’s afraid of the inflationary pressures from the government, from the administration in particular.

So, we’ll see. I will say that if I were Powell, I would cut the rates and then see what Trump did.

RS: How does all the AI and automating everything, how does that figure into this part of the conversation?

KS: We did an interview, is it two years ago now, about the singularity coming. And I don’t think that AI is going to get rid of as many jobs as people think.

I do know back at CES 2020, one of the comments made on one of the panels of Consumer Electronics Show in 2020 was that AI wasn’t going to get rid of a lot of low end jobs. It was the middle managers that had a problem. Because the middle manager whose job it is or they think it’s their job to look over your shoulder and just be a pain. Why do you need them in a future where the systems are so smart that anybody can plug and play into them? Do you really need somebody thumping on your head, right? Because everybody’s going to know what your productivity level is.

So, AI, I think, continues to gut middle management. I think that that was a point, again, that was a point made five years ago now as 2020 CES. Five years ago now. The things that they talked about at that particular show, AI and 5G and Space and Blockchain really are just hitting us now hard in the last year or two, and they’re going to hit us hard for the next 10.

So I think AI probably pushes us to a pretty consistent four or four-and-a-half day work week. I do think we’re going to get some hours back. I don’t think it requires that we lose jobs or compensation.

Plus there’s all sorts of new jobs that always come with technology. Think about all the neat things that we’re going to be able to build now. All the space travel, right? AI is huge in space travel. It’s going to be huge in figuring out battery chemistry and battery architecture and how to make energy more efficient. Maybe it figures out fusion for us.

It figured out the proteins in the body. They plugged in all the proteins to Google’s AI, what two years ago. And they showed up at the office one day and said, oh, here’s your answer. Science has been working on that for decades. There are a lot of moving parts, Rena.

We do know that demographically that the population growth curve is flattening. As people become more affluent, population growth rate just has consistently been coming down, especially in the developed economies, and it’s starting to happen in the emerging economies. So, the growth rate for humanity is slowing.

I think it’s probably flat. If I live, 40, 50 more years, hopefully, I think there’s going to be years where the population, back to back years, is about the same. And that’s even with our life expectancy going up and up and up, which AI is going to help.

I guess that was a super long, breathy answer. The short answer is I don’t think AI causes mass unemployment. I think it shortens our work week, but I don’t think it causes mass unemployment.

RS: Well, one of the reasons why I love talking to you, Kirk, is, I love a thoughtful person with personality, and you definitely fit the bill. So I appreciate your long breathy answer.

One of the stocks you mentioned last time you were on was Pfizer (PFE) as an AI Play, which I bet many of people aren’t thinking in those terms. And recently, you wrote an article about all the stocks you were selling.

So how does all of this figure into how you’re looking at the market and how you’re thinking about stocks? And maybe if you want to get some, sector specific, happy to hear that as well.

KS: So, as far as me being a net seller over the last few months, and remember Warren Buffett’s been a net seller for over a year now.

I’ve been a net seller since around October, and that doesn’t mean that I’m in 0% stocks. It just means that I’m selling more things than I’m buying, and I’m writing a lot of covered calls.

I’m taking in as much income as I can. Because at this point, and I get tired of arguing it, but we know that when liquidity in the financial system contracts, asset prices go down, and it’s a near certainty that liquidity contracts in the next year or year-and-a-half because of this debt wall that we’ve talked about.

So, that is the main reason why I’m selling. It’s not because I think NVIDIA (NVDA) is a bad company or Netflix (NFLX) is a bad company or whatever, but it does mean that they’re going to have challenges finding capital to push prices higher, right? Because you need a buyer to make prices go higher. And if people have less money, then there’s less buyers. It’s just that’s about as Econ 101 as you can get.

Now, the global M2 has been rising roughly 2% a year for a really long time. And that’s compounded, so it’s a curve. There are periods when it bends back a little bit. It doesn’t actually go down. It just doesn’t go up the full 2%. And then there are times when it goes up more than 2%. In COVID, it went straight up.

Never happened before. It went straight up. Even during the financial crisis, it only went up a little bit. It didn’t go up like COVID. COVID was a straight up line. I’ve shown that M2 curve before.

So, yes, I’m a net seller right now, but I also recognize that the stock market goes up about 80% of the time. Maybe a little bit less, but about, four out of five years is generally going to be flat to up. You only get about one down year for five years on average, and they usually are clustered, maybe back to backs, things like that.

So, anytime there’s a down year, I’m a buyer. I’m going to find something to buy. And anytime we get four or five up years, I generally will find a way to sell if and the shortcut I use is the monthly and weekly relative strength index, RSI. It’s just a shortcut. It’s not perfect, but you should respect the technicals.

And the technical indicators are saying the market is stretched. We’re running out of buyers. And does that mean there’s an imminent collapse? No. Maybe there’s another puff on the cigar, I don’t know, but all these people who are so certain of it, you want some personality. I could say something pretty personality wise there.

But the reality is that if liquidity runs into a crowding out effect in the next year or two, asset prices are going to go down. That’s just the way it is. And the correlation historically is almost 100%. I say almost 100%. I think it’s 100%, but long and variable time lags, all that sort of thing. I just know it’s almost a perfect correlation. Liquidity down, asset prices down, liquidity up, asset prices up.

And I just don’t think people, unfortunately, all these folks who are managing their own money, I don’t know if it’s three out of five or four out of five, I think it’s probably closer to three, just really don’t understand those basic economic principles to the point where they should be managing their own money outside of an index fund.

I’ve made the argument that Buffett says, invest in indexed funds because he doesn’t think that you have the qualifications to invest your own money. Unfortunately, I think that that applies. I think there’s a lot of people trying, and I think there’s a lot of younger people who haven’t had their volatility moment yet. Everything’s been subsidized since they got into the markets. I think it’s dangerous.

So I do think that the liquidity equation plays out like it always does. And if we get lower liquidity, asset prices go down. So, I’ve been a net seller.

As far as why I like AI and healthcare, there were two acquisitions just in the last week or two. Was it Eli Lilly (LLY) bought somebody and Johnson & Johnson (JNJ) bought somebody.

The biotech space and I don’t usually have a biotech watch list, but I do right now, and it’s, like, 60 companies. I think a lot of those companies are either going to go to 0, they’re just going to fall apart, or they’re going to become big deals or a lot of them get bought out.

Why? Because they have something in data or expertise that a company that is well heeled and can afford top notch AI, the best AI is still expensive. And the fact that I can buy Perplexity or whatever ChatGPT for $20 a month, and it does the things that I need, that doesn’t mean that it has the quantitative capacity to do complex mathematics.

If you go to a website called SandboxAQ, they talk about LQMs. Right now, everybody knows about large language models, but an LQM is a Large Quantitative Model. That’s Jarvis. So if you think about the movies, this is the smart AI. This is the one that you can say, here’s all the data and all the stuff that we know. Figure it out. Do the math, put together the theory, spit out a product or an answer. That is expensive and not perfected at this point.

Quantum technology is going to help it a lot, but as, the CEO of Nvidia, mentioned a couple weeks ago, much to the chagrin of the quantum stocks, we are probably decades away from actually having quantum technology. Now what he didn’t say explicitly is that a supercomputer to a quantum computer, the difference is many, many fold. So just the incremental improvement or progression towards quantum computing is a big deal.

If you take all the data that’s out there that has to do with us physically, and you can start figuring out things like, not just what they figured out with the proteins in relation to the genome, but if you can actually start doing personalized medicine and you can make it cheap. So that you say, okay, this is my metabolism. This is my genetic makeup. This is how I’m built. And this is the problem that I inherently have because for thousands of years, people who come from my genealogy have this problem, whether it’s high blood pressure or this or that or the other thing.

We’re going to be able to do medicine that is phenomenal. GLP-1s, first step, right? Imagine if a GLP-1 didn’t just trick your brain, but it actually just caused you to burn more calories, right? Imagine if all the things that we have half solutions for or partial solutions for, they actually can do.

Well, the big pharmaceuticals like Eli Lilly that already did an acquisition or Johnson & Johnson or Pfizer, the one that I think is one of the ones in the front of the pack. They have all that data, and they have the money to buy the right quantitative tools or build them.

And they can buy the small companies that have done focused research on orphan drugs or right, different types of diseases that are not – there’s an unmet need. I think that’s the exact term, the unmet need.

Those big pharmaceutical companies, I actually think are in a pretty good spot because they can just go out and buy whatever they need, put it together, and improve it. So, I think that for the first time in my career, and I made my first big hunk of money on Exact Sciences (EXAS), decade ago, and I really haven’t done a lot in Biotech since. Even though I have a good understanding, it’s just there’s so much in that space, right? You have hundreds of companies trying to do all sorts of different things. How do you keep track? There’s no way.

So, I actually have analysts that I read specifically for what they’re saying about Biotech because they only cover Biotech. We have a the Vasuda Healthcare here on Seeking Alpha. I read his stuff all the time. And I don’t get a lot of ideas from it because I think a lot of it is high risk, but every now and then, I’m like, that meets my risk profile. I can invest in it.

I think that Pfizer and the pharmaceutical companies that haven’t run up on GLP-1s, right, it’s hard to invest in, Eli Lilly because they’re so expensive, and they just have such a GLP-1 premium.

You’re probably going to see that market, which I think is topping out right now, become more diversified, right? So, the companies that made a ton of money on GLP-1s, they have first mover advantage. It’s just like anything else in economics. It’s going to get chipped away at by competitors over time. So, which companies are undervalued that are going to get some of the GLP-1 and then also use AI to turn data into even more pipeline drugs.

And Pfizer is a leader in the pipeline drugs. I have a whole article that’s been 80% written for two months. I’m just waiting for the next quarterly report to finish it, and I think they’re going to do great.

Are there other big pharma companies? Yeah. I’d say take a look at any well-heeled pharma company, that has an AI and biotech program, that hasn’t run up on GLP-1. I think they’re all candidates.

So I think (XLV), the SPDR ETF, Select Healthcare, I think that that is going to be something that you can position trade at some point. A position trade being something that you hold for a year or two, from the bottom of the trough to the top of the cycle.

I’ve been looking for Biotech ETFs. I don’t really like (IBB), just because it’s concentrated in the big ones. So I’ve been looking at some of the ETFs that have holdings in smaller and mid-cap biotech companies. I think for most people, that’s probably the way to go instead of trying to pick out a basket of a dozen biotechs because it’s hard to keep track of.

Even with AI, it’s hard to keep track of. I think that that’s going to be a big deal because a lot of them have been cheap for a long time now, right? That is not a sector that is as a whole, done great. I mean, you’ve had your huge winners, but as a whole, it hasn’t done great.

So, I think if you are the type of person that just wants to beat the S&P 500 by a few points, I would look in that direction.

RS: I want to remind listeners that you run your own Investing Group on Seeking Alpha called Margin of Safety Investing. So, a, if people want to dive deeper or get more personal attention or have some new ideas, check out Margin of Safety Investing.

I’m also curious as we’re at the beginning of a new year, do you go into a new year either for yourself as an investor or as the leader of Margin of Safety Investing? Do you go in with certain goals that you want to achieve?

KS: Kind of. So, for me, it’s more rolling than it is calendar year dependent. I do think that this is an exception. I think that we are at an important spot because of that debt wall.

And I just think we’re at the front-end of having to deal with the baby boomer retirement system dependency. There’s a thousand articles out there, at least a million articles probably, about how aging demographics impact the economy.

Since we didn’t plan for it very well, we’re going to have to do a lot of things over the next 5 and 10 years that we should have been planning for three or four decades, and that’s going to come with stress. So, I think that that’s the way I think of it.

Calendar year isn’t normally that important to me. I look at the cycles more. Most economic cycles are, they’re fractal in nature. You have the shorter-term year or two and going into the longer-term expansions and recessions. Typically your expansions are three, four, five, maybe six or seven years, and your contractions or recessions are a year or two. That’s the nature of the beast.

I know that there are people out there talking about decade long depressions. I’m trying to be diplomatic here, and not have too much personality. I think that that is overkill. I don’t like to use the word clickbait because I’m sure I’m guilty of it sometimes, but I think that talking about depressions is probably, let’s just put it in economic terms. I think it’s wrong.

There’s not a problem that we can’t fix. However, they’re not fixable in three months. It might take a year or two to really come up with good solutions. I will say, the one thing that worries me the most is that President Trump governs to the rhetoric and the vitriol more than he governs to a legacy.

I think that presidents want a legacy. I don’t think he’s going to go into this and say, I’m going to burn the world down. I don’t think he’s the Joker from Batman. I think that he’s going to govern to his legacy if he’s like other Presidents in the regard that he cares about what people think 10 and 20 years down the road, I think that he will govern towards the legacy, and he will do some good things. I think he will do some things that are surprisingly positive.

Calendar year, not so important, but this is a transition. This is a special calendar year. This is a transition period. And transitions again, people don’t like transitions. I just want to make money, and I know certain things to be universally true, which is liquidity up, markets up, liquidity down, markets down. That’s just pretty much the way it works.

And if this debt wall causes crowding out, you’re going to get a period of market down. And you know what? You should buy it because over the long-term, it’ll work out.