Money Life Interview – Brian Barish
Cambiar President Brian Barish recently joined Chuck Jaffe on his show Money Life. Brian details the digital economy, the unprecedented actions by the Federal Reserve, and the subsequent M2 money supply growth that has been keeping the markets afloat.
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Welcome to the big interview on today’s show. And I am particularly excited for this interview because I can tell you, I have waited for this interview for well over a decade. Serious, true story. And I’ll explain it as I tell you that my guest today is Brian Barish. He is president and chief investment officer at Cambiar Investors. If you want to learn more about the firm, it’s Cambiar.com. They’re on Twitter @CambiarInvestor. Brian is the portfolio manager for the Cambiar Opportunity Fund. And unless things have changed in the last 13 years, you’re in for a treat.
And I know this because, well, back around 2007 was the last time I talked to Brian. At the time, he had just inherited the longest winning streak. I mean, he had earned it, but Bill Miller from Legg Mason Value Trust had had this long streak of beating the market. Bill’s fund just fell off and actually disintegrated pretty much after that in terms of its performance. But Brian had the longest streak of beating the S&P. He also agreed to chat with me. I was at Market Watch and we were doing some podcasts and talking about stocks, and he was a great interview.
And then I stopped doing that version of the show, and I have never been able to get him onto Money Life until right now. So I’m excited. You should be too because I think you’re in for a treat. Again, cambiar.com is the website for the firm. Brian Barish, Thank you so much for finally joining me on Money Life.
Thanks for having me. Appreciate the time.
And the interesting thing is that the last time we spoke was in 2007, before the market got into the 2008 troubles. But before that we had talked reasonably often. And I’m curious right now, for you as a stock picker, as somebody who examines markets, does what we’re seeing now, remind you of that last time we were talking in 2007, when things were frothy? Or does it remind you of, say, internet bubble days when we first started talking, when things were frothy? I mean, is there some memory here that says we should be looking at this and seeing something that reminds us of those times, even though pandemic is totally different circumstance?
Yeah, yeah, no, it is a very different circumstance. I mean, the pandemic is more like a war than a normal recession, where you just have to drop everything you’re doing and fight the war because that’s just existential. You got to do it. In terms of market conditions, Chuck, it’s way more similar to the latter part of 1999, when you had the tech bubble and you had rampant speculation and tech names. Back then, people talked about the new economy and the old economy. The new economy was chips and software and computers and things like … anything that used a lot of electrons, basically.
And today I’d say you have kind of a similar parallel where you have the digital economy and the physical economy. So we know the physical economy, that’s taking it on the chin because of the pandemic. And there’s all kinds of activities, like flying and going to restaurants and on down the line that you can’t do in a normal way and be safe, whereas if you’re interacting with a digital screen, you can do that in a cloistered manner and be perfectly safe.
So the digital economy, doing great, to some extent accelerating due to the pandemic with things like Zoom and work from home. But I think it would be very dangerous to just extrapolate current economic and day to day usage patterns well into the future. We’re all hoping we have a vaccine sometime in the next 12 months. There’s certainly a lot of science directed at it. And it just seems to me a little bit dangerous to extrapolate the here and the now too far into the future.
That being the case, investors have been going for what feels safe, et cetera. So we have a market that has been driven by a handful or maybe two handfuls of stocks. For you, has that meant that there are things that really have been off of the general public’s radar that are particularly attractive right now?
There’s a lot that’s attractive. I mean, I think what’s different today versus 1999, back in 1999, the distinction was ultimately very capricious. There were a lot of industrial businesses that were going to do perfectly fine. Hotels and lodging going to do perfectly fine. All kinds of consumer categories did perfectly fine in the future. I think the difference today, let’s take Tesla as a for instance. So we don’t own Tesla. I think it’s grossly overvalued. But they are part of the future, right? Electric cars are part of the future. They’re the best electric car company. They’re the pioneer. So people want to own that. And all the old internal combustion engine or I.C.E. car manufacturers from the Americans to the Germans to the Japanese, they’re not. None of them have successfully made the transition.
So you’ve got this whole industry of dinosaurs and this one disruptor, and presumably, there’s going to be more of them. There’s going to be Nikola and Rivian and a few other E.D. companies, and they’re incredibly well funded. And it’s hard to get comfortable that the old guard is going to be able to handle the disruption. So from a value investing perspective, and we have a value orientation, it’s really hard to know exactly how long are these companies going to be around or more what their earning power is going to be. Is it just going to be a profitless prosperity where they have to invest a lot of money just to stay afloat? So hard to go about normal investing.
And that’s just a really easy industry to pick on, Chuck. There’s a whole bunch of others. There’s the traditional media companies. There’s companies that feed into commercial real estate, where it’s hard to see why the future and the past are going to look very similar to each other. It seems that they’re going to look very, very different. So you do have a lot of investment categories, this is my long-winded point, that are tough to get comfortable with. And I think that’s one of the reasons why the MC market is as bifurcated as it is.
Well, it’s hard to see why the future and past will look similar. You just made that case from the business standpoint. Will it look similar from the what works in the market standpoint? Because value has not worked for a long time. And while growth and momentum have worked, the pandemic basically ensures that growth numbers are going to be weird and wacky and have a period where things aren’t really normal, which creates an asterisk. And the market doesn’t like asterisks. So do we have the same disconnect between the future and the past when it comes to what works as an investor?
You know, financial history does tend to repeat itself. That’s an excellent point. And it’s a lot like 1999. So in 1999, people of a certain age remember this well. Everybody’s worked up about Y2K, including a guy named Alan Greenspan who was chairman of the Fed. And Greenspan very liberally put liquidity into the market, which juiced the NASDAQ 100 names and a handful of other frothy names back then. And as soon as we got into the year 2000 and, guess what? Our credit cards still worked and our bank statements still were what we thought they were going to be. They began pulling that liquidity out of the market. As soon as that happened, the market began to fall apart. It was just wildly overvalued. Fortunately for people like myself, we had a kind of a sense of what was and wasn’t a crazy valuation, and with respect to various kinds of businesses, intended to step away from some names once they got a little too far carried away and then bought kind of vanilla stuff, and that managed to hold up pretty well.
So in the pandemic, we have to some extent an exaggerated version of it. I’ve heard the expression, Y2.20K something like that. And, to put it this way, there’s an expression that the president of the United States, he’s the most powerful person in the world and the chairman of the Fed, that’s the number two most powerful person. But the difference between number one and number two is not as wide as you would think. The chairman of the Fed is number two, but he’s very, very powerful. So we have unbelievable money supply growth in this country right now, courtesy of the Fed. We know why they’re doing it. It’s because of the pandemic. And they want to make sure that credit is available to anybody who is a vaguely decent borrower so they can stay afloat because there’s all kinds of businesses that are going to fail, not because they were bad businesses, but because of the extremity of the economic circumstance.
So the Fed wants to avoid that kind of collateral damage. But meanwhile, it’s juicing the market. And Chuck, just to put this in some perspective, your viewers can look up this up for themselves. The Fed publishes money supply growth every week. M2 growth is the number that I tend to look at. Currently it’s early July. M2 growth year over year is 25% (Source: Bloomberg). And if the Fed keeps doing what they say they’re going to do, and I have no reason not to believe them, we’re going to be at over 30% by the end of the summer, and as high as 40% by the end of the year. The highest money supply growth ever got during the peak of the financial crisis, when the Fed needed to essentially monetize all the issues that were in the financial sector, was about 11%. And it got back to 10 or 11% again, very briefly in 2010, when the Fed engaged in the Q.E. program, its initial part of the QE2 program, excuse me.
So we’ve got money supply growth the likes of which we have never seen. World War II, Depression, peak financial crisis, peak inflation in the 1970s, nothing remotely resembles this, that is what’s using the market. So one day, and it’s probably not going to be in 2020, we’re going to need a vaccine for this to happen, the Fed is going to stop doing all these things. And that will be your uh-oh moment, I think, in the stock market.
Is it going to take the Fed to stop doing these things? Or will we get to a spot where all of this stimulus does what stimulus normally does and puts us back onto an inflationary path? I mean, can we get through all the stimulus without you worrying about inflation, at least in 2022, 2023, wherever down the line?
Well, we’re getting an asset price inflation. We’re getting it, it’s just of a different form. The digital economy/physical economy dichotomy, it’s not just clever rhetoric. There there’s a real thing going on. And what we’re seeing is that for tradable goods, so that could be thermoses, hats, stuff you’d buy physically at a store, globalization and manufacturing efficiencies, competitive efficiencies and e-commerce, and all these things that we have, is making it such that it’s very difficult to generate real inflation in physical goods. It’s possible. It’s possible, but so far it’s kind of like a leprechaun. You can imagine what it would look like, but you can’t see it in nature.
But what we are seeing is that with interest rates at 0% as far as the eye can see and all this money supply growth, you’re getting a lot of asset price inflation. I’m not going to say never because that’s just wrong. But it, it has been a long time since we’ve seen any tradable goods inflation, and I think the bond market, it certainly doesn’t see it. So we’ve just got this other form where the liquidity finds a way to get into asset prices and pushes them up.
How do you feel about domestic markets versus international markets at this point in time?
The U.S. market has just outperformed everything in the world for multiple years now. I go back to the digital economy part. We have these giant digital ecosystems, the Apples, the Microsofts, the Amazons, the Googles, that they’re all American affairs. All of them. There’s very few digital ecosystems that have erupted. There’s two that are Chinese: Tencent and Alibaba. Alibaba kind of copies Amazon, but not exactly. Tencent’s a little bit its own unique animal. Those have been fairly successful. But in Europe you just don’t really see it at all. They haven’t really invented anything. Same with Japan in terms of giant world-beating type of ecosystem.
So that’s why the U.S. has done as well as it has. We’ve also had a very strong dollar versus the rest of the world. That’s a long story that I don’t really want to go down that rabbit hole, but we’ve had a lot higher interest rates than the rest of the world, and that’s tended to cause money to flow into the U.S. I personally feel like the rest of the world is cheap because expectations are unbelievably low. You’ve been able to say that for the last two years, three years, four years, five years. So what’s different this time? Maybe it’s the money creation that we have here in the U.S. The response to the pandemic has generally been a little bit, let’s say, more coherent outside the U.S. We have all kinds of States just sort of doing their own thing here, basically. And perhaps, but I don’t know, it’s a tough one to make a big prediction about and feel super confident in.
I’m hoping you and I aren’t going to wait 13 years for the next conversation. So if we have the conversation a year from now, will we have gotten there, do you believe, without some sort of a shock, despite all of the shakeouts that we’ve got to do? That we can do this without having a significant bear market from here?
I think it’s very possible. I think the market … Normally you have a bear market when one of two things happens. Either you have a classic economic recession because the business cycle expires. And the other way that you get to a bear market is the Fed needs to tighten up a lot and that causes money to be leaving financial assets. I think we’re going to have volatility between now and a year from now. I don’t know that we’re going to have a bear market necessarily. The good news, if you’re looking for it, is that we just had the end of the business cycle. It was just very, very fast, but very, very deep. And we have double-digit unemployment, but it’s shrinking rapidly. Auto production fell by 50%, but it’s growing rapidly. Home purchases, those fell by a huge amount and now it’s growing rapidly. So you have all the classic things that you would have early in a new economic cycle. Hopefully that is a good indicator that that’s not where we’re at.
Brian, thank you so much for taking the time out. Please don’t let it be 13 years again. Let’s talk in the not too distant future.
Terrific. Thank you.
That’s Brian Barish, everybody. He is president and chief investment officer at Cambiar Investors. Cambiar.com, the website. They’re on Twitter @CambiarInvestor. The website worth checking out because of, well, not just Brian, but some of his colleagues do the blogging there. Brian is also portfolio manager for Cambiar Opportunity and he’s responsible for the oversight of all investment functions at the firm.
We’ll be back in just a moment to wrap up today’s show, let you know what’s coming for the rest of the week, talk about some new guests we’ve added to the calendar, and then we’ll cross the finish line. Stick around. This is Money Life.
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M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.