Meet the Masters – Bill O'Grady, Chief Market Strategist for a Confluence Investment Management

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Meet the Masters Full Transcription with Bill O’Grady, Chief Market Strategist for a Confluence Investment Management

 

Trevor Chambers:

Hello everybody. My name is Trevor chambers. I’m the host of Meet The Masters with Olde Raleigh Financial group. Today is March 21st, 2020. I Marked that date because the world is as always a bit nutty, but safe to say it’s very interesting, very, very naughty today. We’ve got COVID-19 going on, negative-valued oil. The Kim Jong Un from Korea may be dying. I don’t know. And maybe most tragically, there is no baseball going on.

So with that backdrop, I thought no better time to reach out to one of the firms, one of our firm’s favorite voices in the world of investing. Mr. Bill O’Grady, welcome Bill O’Grady. How are you?

Bill O’Grady:

I’m good, thanks.

Trevor Chambers:

Excellent. I’m just going to give a brief little background on you. Bill is the Chief Market Strategist for a Confluence Investment Management based in St. Louis. In that role, Mr. O’Grady performance market economic and geopolitical research for the firm and as a member of the investment committee for the asset allocation strategies and international equity strategies, Bill also co-managed his confluences, his global hard asset portfolio, which focuses on tangible commodities investments. These strategies all rely on top-down evaluations in geopolitical environment, the fundamental macroeconomic trends, and tactical patterns and in the target markets. Additionally, Bill writes numerous reports in the firm, which can be found in research and news section of the site.

So welcome to Meet the Masters, Bill. I just wanted to… can you give a brief history of you and how you ended up in Confluence and in this world of value investing in longterm investing?

Bill O’Grady:

Oh, well. I started in financial services in 1986 with a newly minted master’s degree in economics from St. Louis University with a little commodity brokerage called Clayton Brokerage of St. Louis. They were kind of an infamous firm. If you Google Billionaire Boys Club, their name pops up.

Trevor Chambers:

Oh cool.

Bill O’Grady:

They were also knee-deep into the Hunt Brothers silver corner in the ’80s. So they were a rather infamous firm as I like to tell people. I saw just about every dirty trick that you could do in the financial markets while I worked there, and I was only there about nine months.

Trevor Chambers:

Wow. I didn’t know that this is interesting. Okay, cool.

Bill O’Grady:

Yeah, so that’s where I started. I was there from March until December of 1986. The firm got bought then, and I got my first taste of being laid off due to a buyout and then went from one end of the spectrum to the other end. I went to work for a commercial bank, a bank in Missouri called Mercantile Bank, which at the time was the largest bank in the state. It had about 5 billion in assets, which now wouldn’t even qualify you as a small-cap in that space. But it was a different time, and I was their international economist and did country risk analysis for their international lending activities.

I had a front-row seat to the great sell-off of Latin American bank debt. At the time, I was very good at Lotus. And, of course, when you say that to anyone born after 1990, they look at you like, “What are you talking about?”

Trevor Chambers:

Yeah.

Bill O’Grady:

I was soo good at it. I actually used to teach it at night.

Trevor Chambers:

Oh cool.

Bill O’Grady:

But none of my bosses knew how to use it. So they drag me into these negotiating sessions where I managed to jerry-rigged old Compaq portable computer, which hilariously looks like a portable sewing machine and then managed to figure out how to hook a monitor of away from me to a table. So the executives around the table could see that, “Well, if we sold off chili at 80 cents on the dollar, what would that do to the portfolio?”

I was there for about two and a half years, and the last three or four months being part of this group that was selling off our exposure. And I remember telling my wife in the summer of ’89 that there is no way they were going to need me much longer because our loan book went from like 300 million to about seven, hilariously enough the 7 million that remained was Yugoslavian debt. And I remember going into my boss and explaining to him how insecure Yugoslavia was and his response was the communist always payback. And, of course, that ended up being the one leg of that, that fully defaulted.

But as I started to see the end of the road where I was out of the blue, I got a call from A. G. Edwards and there was a man there by the name of Gary Thayer who was doing energy and fixed income, and foreign exchange futures analysis for them. And he wanted to join the economics group. And so they had an opening. And Lee Reed, who was the head of that department, was an old Clayton Brokerage alumna. And so he kind of filled that department with analysts from Clayton Brokerage because although the firm had a bad reputation in terms of how it acted, his research was actually pretty good, and so I got hired on September 1st, 1989 in the. And by about November, my whole department back at Merck and teal had pretty much been obliterated.

So I kind of always assumed that if you went into financial services that things always blow up. But I ended up at A. G. Edwards from 1989 toward the end of 2008. And did a number of things for A. G. Edwards. I was in the future’s department for about 15 years. Half of those I was director of research, wrote a lot. Where I got into geopolitics was I’d been at Edwards for a little less than a year when Saddam Hussein invaded Kuwait. And, of course, me being the oil analyst, I was suddenly thrust into the spotlight. And it was pretty interesting. I remember thinking about it as I went through it that you can do all the supply and demand analysis you want on oil, but geopolitics plays a huge role. And I kind of really started working hard on learning geopolitics at that point.

And 15 years later, my daily energy comment was usually either the most read or second most-read report in the A. G. Edwards system because of the geopolitical work I was doing. And in 2005, the firm decided that it was time for me to learn equities. So they moved me to the market analysis department of the A. G. Edwards that was run by the legendary Al Goldman. And Al taught me stocks. And while I was there, people were missing the geopolitical analysis. And so I started writing a weekly geopolitical report in 2006, and have continued that for the past 14 years.

So about the time of the merger when Wachovia Bank bought A. G. Edwards, a group of us that had been on the investment strategy committee, had kind of came to the conclusion that if there was ever a time to jump, that was the time. And so we put together a little bit of capital, and a business plan and a group of us set sail on our own. And, of course, we set sail into a category five financial crisis.

Trevor Chambers:

Yeah

Bill O’Grady:

We joked about it at the time, we’re all sitting around in this really dumpy space that we had one Bloomberg and everybody else was getting prices, market information off everything we could find for free. And laughing at like, “Who’s idea was this again?” But it’s all turned out quite well. We’ve been in existence since we took our first dollar of assets in May of 2008. And we’re around 9 billion in assets under management all under our direction now. And it’s been fun and exciting. So that’s kind of me.

Trevor Chambers:

That’s fabulous. A great entrepreneurial story right there. I think I would love to hear those stories. Well, if you don’t mind, I’m going to just jump right into a topic that I read about through, I’ve read some of your writings about it, and that’s optimization, and it just think it resonates especially with what’s currently going on. So can you talk to us about what optimization is kind of definition, and then just kind of run through the impacts as you see it?

Bill O’Grady:

Well, the key thing about optimization is to try to get the most you can out of the circumstances that you find yourself in.

Trevor Chambers:

Awesome.

Bill O’Grady:

And where this gets people in trouble is when they assume that the circumstances they’re in are eternal. I’ll give you a real example from my own life. When I was in high school and college back in the ’70s, I worked for a retailer. Some of your listeners might remember a store by the name of TG&Y. They were a five and dime that originated out of Oklahoma that had evolved into a larger store format, similar to a Target or Venture Stores of a happy memory or a Walmart or Kmart.

And so, I started in high school working on the shipping dock and then eventually worked in the hardware department. And when I graduated from college, they offered me a management position. So I did that for a couple of years and learned a lot about retailing. But we are in the story of first optimization. When I worked in retailing in the ’70s, if you did just in time inventories, you would have been considered a bleeding idiot. Because inflation was high and the thing that you had that went up in value, the fastest was your inventory. So you were taught as a young retail manager to hold as much inventory as your shelves could handle. We used to have 14 and 16-inch peg hooks so we could load up a department with stuff. And no one really paid attention to what inventory that you had in the store. We had no inventory tracking because frankly, it always went up in value and who cared.

And then when you saw inflation drop in the early 1980s, stores like TG&Y were caught completely flat-footed, because suddenly now it made sense to have the leanest amount of inventory you possibly could to know exactly what you had and where it was and frankly teaching them why wasn’t able to adapt and went out of business about the middle of the 1980s.

So what happened? Well, when you think something’s going to last forever and you structure yourself around it, you become efficient, but you become brittle in other words. One of the things that we had been telling people for the past few years is that globalization was a great risk. That we were seeing a rise in populism and that one of the push that populace were going to do was against globalization. Globalization would include not just trade in stuff, but trade and services, trade and ideas and trade and people. Immigration would become less supported. And I can tell you when either myself or members of our team go out and give this speech, it was not uncommon to get a really strong pushback from members of the audience. And most of the time, it was members of the audience that were the most educated and the most wealthy, because they had made their money in a globalized world and frankly could not imagine it being any different.

And so, one of the dangers that managers face either of companies or money managers is to look at your world and say, “This is the best way to do things. And it will always be the best way to do things.” Instead, you should look at it from the point of view of “This is the best way to do things now. But if these factors change, it no longer be the best way to do things.” And it’s always important to know that what we deem to be optimal today may turn out to be considered far sub-optimal tomorrow.

So I’ll give you one quick example. We have made our medical supply chains literally across the world. I was listening to a podcast the other day, and it was describing a ventilator company trying to boost its production of ventilators. And it turned out they sourced 60 parts from 14 countries in a world where countries may see their production drop because of the pandemic that went from being an optimal way of managing your business to clearly a big problem. And what I suspect is going to… one of the factors is going to come out of this pandemic is that we are going to see a dramatic shortening of medical supply chains, which in terms of costs will probably be less efficient. We’re going to have more expensive workers putting together simple things, but we’re going to believe that going forward, it’s going to be better to have that stuff made here than it is to have it made more cheaply abroad.

Trevor Chambers:

What do you think? Not to digress too much, but it kind of sounds like inflation to me listening to certain areas.

Bill O’Grady:

It will. Inflation is a really tricky thing. There’s a book I’m just finishing up by Robert Shiller called Narrative Economics. And Schiller’s argument is that yes, data numbers do matter, but human beings are basically storytelling animals. We tell ourselves narratives because that’s how we remember them. That’s how we learn. That’s how we come to understand them. So when Jesus walked the earth, he didn’t talk to us in terms of theology. He talked to us in terms of parables.

Trevor Chambers:

Right.

Bill O’Grady:

And that’s just kind of the way we’re built. We remember stories, and we tell stories about stuff, and for inflation to become a serious problem, and inflation narrative needs to develop around it. Now here’s the thing to remember about inflation, narratives. Inflation expectations are the key to the narrative and the generation that remembers inflation the best. My generation, the baby boom generation, is steadily departing, this flea pale. And if you look at the average 40-year-old, their adult experience of inflation is about 2.3%. Mine is about 3.7%.

Inflation is going to come, but it’s probably going to come a lot slower than my generation expects it will. On the other hand, for the Millennial and Gen X, it’s going to be a shock because they’ve never seen it. And these changes tend to come like tipping points. One of the things I used to do is go out and give talks. I would tell clients that I got good news, and I got bad news. The bad news is there’s going to be a bond bear market at some point, and then you would see a scene very similar to that scene in an airplane where the stewardess comes out and says, “I want everyone to assume the crash position.” And if you’ve never Googled that-

Trevor Chambers:

Yeah, it’s hilarious.

Bill O’Grady:

It’s a good two or three minute wasted time.

Trevor Chambers:

I’ll integrate that link into this when we present this blog. Absolutely. Great idea.

Bill O’Grady:

And the second thing I would tell them is, the good news is that by the time this bond bear market becomes a real problem, you’ll all be dead. And that’s because it can’t happen as long as people who think inflation is right around the corner are still around. The reason the ’70s inflation occurred was the people in power then, which was the depression generation, and the early post-depression generation had experienced deflation, and they really didn’t think inflation could ever really take hold. And you read the contemporary economists in this, in the late ’60s and early ’70s. They were absolutely befuddled by the inflation that occurred.

They didn’t understand where it came from, and they kept misapplying policies to address it because that generation was terrified of unemployment and was willing to tolerate higher inflation to cope with it. The baby boom generation, on the other hand, it’s just the opposite. They are willing to tolerate unemployment to keep inflation down. But the baby boom generation is fading. We’re aging pretty quickly, and the influence of the baby boom generation will steadily wane over time. It’ll still probably take about 10 years for it to really make an effect. But into the 2030s and 2040s, I suspect that people will be complaining about inflation and where it came from.

Trevor Chambers:

And that’s all right on time with Millennials, men who are now in their late 20s and early 30s, they’re going to have to start having, getting married, having babies by half. It’s already happening. So that’s going to-

Bill O’Grady:

It’s all right. Well, and one of the things I like to point out is that the oldest Millennial was born in 1981. So let’s look at Millennial’s history. When that millennial was 17, you had the LTCM financial crisis, which a lot of people don’t remember. I’m sure very few 17-year-olds remember it, but it was kind of our first look at what the abyss would look like. And then we had the tech crash two years later, and then eight years after that, you had the great financial crisis. And now 12 years after that, you’re having the great pandemic.

The Millennial generation is about as scarred as the depression generation was, the silent generation. Because they’ve lived through all these financial crises, and it would make a lot of sense. It’s going to be very difficult to scare them by telling them inflation’s going to be 3% a year. They’ll look at that like, “Oh, well, so what, that might not be the worst thing.” Whereas you tell the baby boomers that, and it’s like, “If it’s three today, it’s 12 tomorrow.”

Trevor Chambers:

Right? Yup. Yeah. But if there’s hope in the Millennials too. I mean, they could because they are going to unleash a lot of spending just because that’s where they’re at in their trend line in their lives. Could they help us lead us back into recovery from this thing?

Bill O’Grady:

Well, you should, you would hope. The recovery will come because they’d always does. And we are seeing a lot of the lessons that were learned both in the depression and in 2008 have clearly sunk in. The actions of the Federal Reserve have been nothing short of historic, but even though rapid passage of three Stimulus Bills in probably one of the most partisan congresses we’ve had in over 100 years is nothing short of astonishing. And so there’s a downside to all this, but it’s a longer-term downside. It’s not a cardiac arrest type event like we had in 2008, or like we had in 1930.

Trevor Chambers:

Right. Well, these things can tend to move like a glacier sometimes. But, well, let’s move to another topic. The November elections will be here before we know it. How does that play out?

Bill O’Grady:

Well, to kind of frame this, my current boss is our CEO and CIO, Mark Keller. In 1998, Mark Keller had just been appointed the head of the investment strategy committee at A. G. Edwards. And the previous head of that committee who will go unnamed really strongly disliked me. And so-

Trevor Chambers:

I can’t imagine that, Bill. I can’t imagine that. Well, I mean, you’re a nice guy. You know what I mean?

Bill O’Grady:

Yeah. But I have a reputation of not suffering fools well, and I have to say when I was in my 30s and 40s, I had a particularly hard edge looking back on it. I can understand why he acted the way he did.

Trevor Chambers:

I get it.

Bill O’Grady:

But anyway-

Trevor Chambers:

I’m not going to cross you. I’m not going to cross you in an hour.

Bill O’Grady:

When Mark took over the committee, one of the first things he did was put me on it. And shortly after I joined the committee, he took me aside and took me out to lunch, and he said, “I have a particular project I want you to take on for the investment strategy committee.” And I said, “Well, what is it?” He goes, “I want you to cover politics.” And I said, “Well, okay, well, I’m really honored.” He said, “Well, don’t be,” he said, “No one else wanted to do it.” So it’s sort of like being the new person on the committee and getting stuck with doing the fundraiser for the year.

Trevor Chambers:

That came by fire.

Bill O’Grady:

Yeah. So I came about it, and I looked at it and said, “Okay, well, how should I do this?” And the first tenant I came out of the first postulate that I had is that I should be completely nonpartisan in this, in fact, I have to do two things. One is, I need to figure out who’s going to win, and number two, what are they going to do when they take office? And anything else that I add to this will end up being counterproductive. And so that’s how I go about it. As I tell people, if you can figure out my political leanings from my writings, I have failed, and I work really, really hard at sticking to, “This is what they did. This is what they said they were going to do. This is how it worked out.”

In terms of who’s going to win, I use a combination of polling and the decision markets for that. I have found the decision markets to be pretty good. They’re not perfect either. No. Predicting the future is hard, but I use a combination of the two. And use that to kind of scope how it’s going to win for presidential elections. I always remind people that the popular vote really doesn’t matter, that the popular vote is there to elect state electors. And so you have to really focus on the electoral college.

And then when you look at the electoral college, which you find out, is that roughly 200 votes per side is kind of in the bag. And you’re really talking about eight to 10 States that sway the election. And so we do spend a lot of time looking at state economic data for those States and polling data for those States and what the decision markets are telling us about those States.

And kind of in general there are three things I’m watching with this election. The first is obviously the economy. An incumbent… a president in office has not won reelection in the same year there when you had a recession in the election year or the year previous. The recessions are just deadly. And the last president to win an election in a recession year was Calvin Coolidge. So it’s not impossible, but it’s rare. The two classic cases would be George H. W. Bush and Jimmy Carter.

So this recession comes at a very inopportune time for the president. Now, this one is different because you can’t blame this recession on… this was clearly an insurgent event. And the voters may end up giving the president a bit of a pass because this one really was not his fault. And you can argue all day long about the reaction to it, but if you look at how the whole world has reacted to the pandemic, no one has been absolutely perfect. Everybody has had areas where you wish you had done something different, number one.

And number two, it’s always important to remember the politics is the art of the possible. There may be things that you would like to do, but it just simply not politically possible. And if you try it, you just know it won’t work. The second thing that we’ll be watching for is the impact of social media. Social media has… if you look through history, changes in media matter a lot. The reformation probably doesn’t occur without the printing press. Franklin Roosevelt probably doesn’t get four terms in office without radio. Richard Nixon probably wins in 1960 if it hadn’t been for televised debates.

So media does matter a lot, and social media has dramatically undermined the power of political parties. It’s allowed candidates to raise money in all sorts of ways that they couldn’t do before from people who didn’t usually matter before. Just pulling in money from a wealthy people, you can run a campaign without it, and that changes plus it allows you to put your message out without going through the expense of television and radio advertising. So it has been a complete game-changer. And to some extent, Barack Obama was better at it in 2008 than John McCain. And you can make a really good case that Donald Trump was much better at it than Hillary Clinton was in 2016.

And then the third element that I’m watching, which relates to this is, the fact that social media has made it much easier for foreign governments to affect our elections. And it’s not the foreign governments to affect our elections. Hello? Are you still there?

Trevor Chambers:

Yeah.

Bill O’Grady:

I’m sorry.

Trevor Chambers:

It broke up a little bit.

Bill O’Grady:

Okay, I’ll repeat that. It’s not the foreign governments haven’t tried to affect our elections before. They have. It’s just now have a much more effective tool available to them. And one of the things we could see is something of a free for all where one country may prefer Biden and another country may prefer Trump and they’ll work across purposes. Because you’re the hegemon when you’re the global superpower shaping how the election goes matters a lot.

What we tend to find when you have an incumbent Republican lose to an incoming Democrat is equities don’t handle it well for about six months. And then usually about by the end of the second year, after the election year, you can’t tell the difference. So it’s possible that a Biden win would be taken as a modest negative for equities. We would view it as a buying opportunity.

Trevor Chambers:

Certainly just to kind of riff on social media. This is really the first social media pandemic, and it’s just amazing to watch it play out on these platforms. I don’t know whether it’s doing any more good or harm, but it’s certainly… my kids are 16 and 13, so they’re right in the teeth of this thing, and it’s amazing to a parent into it. And so watch this particular crisis play out. Let’s talk about active versus passive, and especially in times like these, what’re your thoughts on that?

Bill O’Grady:

The way you should think about active and passive really circles back to that whole optimization argument. We have had 40 years where you have had an environment that is positive or supportive for capital owners. People forget, but it used to be illegal for companies to buy back their own stock. We had regulations in place that forced employers to keep unnecessary employees on the payroll. Practice was known as featherbedding. It wasn’t completely widespread.

Bill O’Grady:

But one of the best examples I like to give about this is that if you look at railroads prior to the Staggers Act, which passed in the late ’70s, freight trains always had cabooses, and the caboose was there as rolling office for the conductor and his staff by the ’60s. It was in ’70s, but communications had improved to the point where the caboose was unnecessary, but union rules required the railroads to maintain those jobs and the caboose. And I suspect most of the time the people in the caboose would sit there and read magazines and hang out and shoot because they had really nothing to do.

And then after the Staggers Act, suddenly you’d see rail yards full of cabooses. I grew up in Kansas City, and it’s a bit of a railroad hub, and we would have these enormous rail yards, and you would just see row, after row, after row, of unused cabooses, which eventually became restaurants or shops. I mean, a local town I live in has a caboose that’s been converted into a gift shop. And so you’ve had for decades where you’ve had a Federal Reserve that has clearly taken steps to support the financial markets. You’ve had disinflation, you’ve seen a margin steadily rise as capital earned a greater share of income compared to labor. And in that kind of environment, it lifts all stocks.

And so being a passive investor frankly isn’t necessarily a bad idea because it’s sort of like the whole the tide is lifting all the boats and so it kind of doesn’t matter which boat you’re in.

Trevor Chambers:

Yeah. I heard a colleague, they’ll say, of yours, say, “Don’t fight the Fed.”

Bill O’Grady:

Mm-hmm (affirmative).

Trevor Chambers:

No, I mean, makes sense. Right? So all these people they’re obviously investing in the Vanguard, global growth fund, or whatever fill in the blank. They feel safe. That’s good. It keeps going. I say, “Why fight the Fed?” But there’s a contrary. There’s another side of this thing, and it may have active management. Of course, now things are more tumultuous. So let’s talk about that.

Bill O’Grady:

What makes active management work is when it matters which boat you’re in.

Trevor Chambers:

Yup.

Bill O’Grady:

And we are probably very close to a point where what boat you’re in really does matter. Now, what boat you’re in matters a lot on under situations of crisis. Everybody looks good when everything’s going up. What looks good when stuff’s going up and down is an entirely different animal. When we select stocks, one of the things that we like to tell people is that we like to pick stocks that behave like tennis balls and not tomatoes. It doesn’t mean that the stocks we own don’t go down in a crisis. They do, but they tend to rebound really fast because they’re really good companies. And that’s what a good active manager should do.

Now, sadly, what’s occurred over the past 40 years is that a lot of active managers have just simply given up and become closet indexers. And so they were charging active fees for actually behaving like an index fund. And I’d have to say over the last five years or so, a lot of that has been sniffed out. And so you’ve seen this large shift out of active into passive management. But from our perspective, those were managers that probably were pseudo active anyway. But as the world changes and we start to see capital become disadvantaged to labor, which I think… which is one of the things that does sometimes happen after pandemics, is that you really want to going to be active management because, with passive management, you could end up with an index fund that’s flat for years if it does that well. So it really circles back to that whole optimization. Don’t assume the conditions that you’re in will last forever. There’s nothing wrong with making a stand, but know what you’re standing on.

Trevor Chambers:

So you’re saying there’s… you’re looking at a tumultuous situation where active management is critical, and you have less active managers out there versus passive opportunities. And therefore, I smell maybe could there be an opportunity for really well-run portfolios on the active side? It sounds like it.

Bill O’Grady:

Well, there is, one of the things that does have to occur though, and it gets back to this whole narrative argument that it’s going to take a while to overcome that active versus passive because the passive narrative has pretty much worn out. More people believe in that and then believe inactive, and I would suspect that if you polled people that the younger they are, the more, they assume that passive is the best way to invest because frankly, their whole life it has been. But if the world changes and I think we make a fairly strong case, that, “Here’s kind of the way to think it.”

Bernie Sanders didn’t win the nomination in 2016. He didn’t win in 2020. But the fact that he avowed socialist actually was in the running and was the last of the last person standing in the last two election cycles tells you that there is a strong desire for change and that change is not going to favor passive investing.

Trevor Chambers:

Interesting. So along the lines, we’re talking really about opportunities a few minutes ago, again in this batch out, where do you see opportunities?

Bill O’Grady:

Well, one of the areas that we do like a lot is gold because we do think that there is going to be widespread currency debasement and this isn’t a gold bug type of thing, but in our asset allocation portfolios, we’ve been adding gold now for over a year and doing that in part to protect the portfolios but also looking out longer-term and saying that everybody can’t have a weak currency, but everybody wants one. The situation that we’re in some respects is going to look similar to what we saw in the 1930s. In that regard, we’re seeing a retreat from globalization, and so that is one area that we have moved in terms of asset allocation.

Another thing that we’ve done in our fixed income portfolios is that we’ve created bond ladders for your listeners that may not be familiar. A bond ladder is a calendar of allocations that go from the short term to the long term. And it’s a mechanical process. When the one-year allocation expires in a year, you simply go out and by the eighth or 10th year, and you just keep doing the process in a steadily rising rate environment.

Bond laddering is really effective, and we may be a little early on that, but when the Fed has decided to put assets that could actually default in its balance sheet, the idea that you could see steadily rising rates over time probably make some sense. So those are two things that we have done in terms of equities. We are always looking for great companies trading at discounts. And so when we get events like this, I can tell you our equity analysts are working from home. But working late into the night looking at companies that they’ve been pining for a long time now finding them at price levels that are suddenly attractive. So that’s kind of the two macro-areas and one micro area that we are looking at.

Trevor Chambers:

So what you’re saying is the storm clouds could be raining gold for a value investor?

Bill O’Grady:

Gold is very interesting here.

Trevor Chambers:

Yeah. I see. That’s good. So what do you want to talk about? What’s the annals of your mind that we haven’t covered in that Not a lot of people are looking at, what’s brewing in Bill O’Grady’s mind? So we’d love to shed light on.

Bill O’Grady:

Well, we’re trying to look at what the world looks like without a hegemon. There’s a book I’d recommend. It’s been out for quite a while, but it’s called the G-Zero world. It was written by a guy named Ian Bremmer. And we think the US has been the global superpower since 1945 is going to be the first superpower that is going to walk away from the role without being pushed. Americans are tired of the role. They’re tired of bearing the cost of the role, and they and they just want to move on, and that will have significant ramifications for the rest of the world. The superpower provides two public goods for the world. It provides global security, so little borders don’t turn into big ones, and it provides the reserve currency, and to do that, it put costs on the country.

So if you’re providing security, what you’re doing is that you’re fighting lots of little wars, so they don’t turn into big ones. If Britain, for example, had been a strongly functioning hegemon, they would have stepped in to prevent the assassination of Archduke Ferdinand from turning into World War I. And we have stopped lots of little wars that could have potentially turned into big ones. But if we withdraw from the world.

In terms of the reserve currency, if you’re providing your currency to the world, that means you have to run persistent trade deficits. And as you run trade deficits so others can acquire your currency, it puts tremendous strain on your labor markets. And we have seen these numerous industries in the United States lost to import competition, which by design is unfair. And Americans are getting tired of that too. Now the trouble is that if a world without a hegemon is a world, it’s much more violent. And that is something we’ve been watching for a while. But it’s something that I think a lot of people don’t quite grasp that there is not always a natural progression from one hegemon to another that you end up having hegemons come, and hegemons go. But there are gaps, and in those gap periods, things can get pretty unruly.

Trevor Chambers:

Yeah. Certainly, we’ve been reading your work on that particular subject, and it’s a fascinating tectonic shift that we could be seeing. I mean, even look at our history Bill, is it fair to say that we really didn’t want to be the hegemon and we hated being under Britain’s thumb. We didn’t want to create that opportunity for us to be that, would you agree with that, or is there some thoughts?

Bill O’Grady:

Oh yeah. So it’s a natural position. We’re a nation of immigrants, but we’re getting away from all of that sort of thing. And we don’t face any real threats. The Otto Von Bismarck famous line about America, it’s surrounded by two-week powers and fish. And so we have told ourselves that we can sit here and splendid isolation and the rest of the world can just kind of go hang. What we have found is the world eventually finds us. But that lesson is being lost because the people who decided to take on hegemony are steadily leaving the scene. And the reason those people after World War II decided to take on this role wasn’t that they were pining to be the hegemon. It was because they were terrified if they didn’t do it, that we’d be fighting the Third World War.

In fact, one of the lines I often give when I give talks is that imagine that we were doing this speech and in 1960 and if I told you that by 2020, we would not have fought the Third World War, you probably all would have taken the other side of that trade. With good reason, because the previous 50 years, you’d fought too. And it didn’t happen because of the hard work that the United States did.

Trevor Chambers:

Well, with that all said, what are you optimistic about?

Bill O’Grady:

I’m always optimistic about technology. We do amazing things. We figure out amazing stuff. When I worked at A. G. Edwards for a number years, Gary Thayer and I would give each other a Christmas present every year, I would give him an almanac, and he would give me an almanac because we would get questions from advisors that needed a quick answer to something obscure. And these 1200 page books were really handy with finding all kinds of little oddball stuff.

And I remember when we first started using Google, it’s just like, “Wow, this is really amazing.” And for someone who had Google all their lives, they don’t give it a second thought, but it used to be a bit of an art finding stuff. And I spent hours transcribing data into spreadsheets, and the things we can do now are pretty fabulous. And obviously, they can be used for good or ill, but technology does make things better, and it makes things safer. And I mean, I still find it amazing that you can drive a car now and put on the cruise control. It’ll slow down when a car is in front of you. That’s really remarkable.

Trevor Chambers:

Yeah. Well, also, just technological advances that are coming to bear and in healthcare right here right now. I mean, it’s just absolutely amazing. I actually saw a pretty cool thing talk about innovation. I saw this online. It was a… I don’t own a golf course, and there’s somebody invented because you can’t touch the flag. There’s somebody invented a little like hook thing that goes down into the hole. It’s like a tray that goes down into the hole, and instead of touching the brain or going down and put your hand in and getting the ball out or moving the flag, you just, you just grab the handle with your club and lift up, and the ball comes out.

So America, the sleeping giant, and maybe awakening to a whole new bunch of entrepreneurs and innovation. Who knows?

Bill O’Grady:

That’s it.

Trevor Chambers:

Yeah. So I’m going to finish up with, what are you reading or indoor streaming these days?

Bill O’Grady:

Well, a lot of the reading I do is just keeping up with the world as it is. My favorite sources are the Financial Times, Wall Street Journal, New York Times. I do get a couple of subscription services straight forward, and geographical futures, which I find are really good, in terms of book reading, like I said, I’ve just about to finish Bob Shiller’s Narrative Economics. I’ve got other lists of books. I’m teeing up to go through, and on our webpage, you’ll see those show up as book reviews, in addition to the G-Zero world another book that I would recommend or any of the books by Peter Zeihan who as I told my boss, Mark Keller, he’s writing the books that we should have written. They’re really fun to read. They’re easy to read, but they’re absolutely spot on.

Trevor Chambers:

Can you give us a title?

Bill O’Grady:

The one that he’s most famous for is called The Accidental Superpower.

Trevor Chambers:

Okay. Yeah.

Bill O’Grady:

And it pretty much outlines how the United States became the superpower and why it wasn’t done by plan or by a goal. And then pretty much the other books he’s written are based off of that theme. But the ultimate theme is we’re withdrawing from the world and get ready.

Trevor Chambers:

Right.

Bill O’Grady:

And podcasts. I have a couple of dogs, and we go out for walks every day-

Trevor Chambers:

Yeah. What kind of dogs? I heard him in the back room. What kind of dogs do you have? I love it. This is, of course, happening all over the whole world, but you got-

Bill O’Grady:

Just a couple of rescues.

Trevor Chambers:

Oh, nice.

Bill O’Grady:

One of them has completely different personalities. One of them is a Samoyed golden mix. He’s an absolutely beautiful dog and extremely social. I mean, if he were a person, he’d be rushed, chairman. The other dog is a tail cattle dog, which hates other dogs, ignores pretty much everybody but us. And the only dog that she’ll tolerate is the one she lives with. So I’m not sure how exactly that happened, but you go to these facilities, and you see a dog, and you feel sorry for it, you get home and then you’re kind of like, “Huh, that’s what we did.”

Trevor Chambers:

Yeah. My daughters and I and my wife are on the hunt. Apparently, adoption is through the roof, which is great. So I didn’t hear a podcast that you mentioned.

Bill O’Grady:

A number of them I mean, we do our own, and obviously, I always plug though-

Trevor Chambers:

You guys do a great job of that, by the way.

Bill O’Grady:

Oh, thank you very much.

Trevor Chambers:

Absolutely.

Bill O’Grady:

The one, my daily list includes Tom Keene, Bloomberg Surveillance podcast, which is his radio show.

Trevor Chambers:

Okay.

Bill O’Grady:

It’s daily, and it’s hard to do it daily, and I’d have to say some days are better than others, but it gets good guests, and he asks good questions. And he’s got a couple of people he works with that are really insightful and they do very good interviews. And again, being in the daily I’m very sympathetic with them, but I have all the dailies I’ve listened to. It’s the one I think is by far the most impressive.

Another one that I strongly recommend to people with a financial bent is called Odd Lots. It’s also another Bloomberg podcast. It’s done by Joe Weisenthal and Tracy Alloway. And it’s weekly, but they have had some rock star guests over the past six months. The people they had on were doing the best analysis of last September’s repost scare of place I’ve heard. And if you’re not in the industry, it’s going to come off a little bit wonky. And their podcasts tend to run long. They tend to run for about 45 minutes. But if you’re in the business or you’re really interested in it they do a really top-notch job. And it’s kind of one of these things that I’m learning as we do podcasts is that they do evolve over time. And I’d have to say the Odd Lots podcast has gotten better over time that they have improved. And that’s something that I do like to see.

For general listening, I think it does a really good job. A planet money from NPR does a really good job in explaining complex things simply. One of the things that our clientele is mostly retail. And one of my claims to fame and in my career has been to take the complex and make it digestible for the average investor. And I learned lessons from them and how they do it. And I take things from them. And so I’ve found that to be quite helpful.

Trevor Chambers:

It is a muscle that you have to exercise. And if you do, you get better at it.

Bill O’Grady:

That’s right. And then Council on Foreign Relations does one called the President’s Inbox. It’s good. I’d have to say you’re getting the establishment view of the world in it. But I’ve been a reader of Foreign Affairs since the early ’90s. As I tell people, it’s a great magazine. You read the best people there, but pretty much the last two to three pages of every article are worthless. Because that’s when they go, “This is what we should do.”

Well, if there were no constraints and political obstacles, of course, you would do this, but you can’t do that. So, I’m not reading this. But their ability to describe what’s going on is very insightful.

The other thing that really good at is book reviews. So if you’re thinking about getting a book, and you’re like, “Well, I wonder if this is worth it.”

Foreign Affairs magazines book reviews are probably worth the price of admission. But those are the four that I listened to the most. I do listen to Geopolitical, I’m sorry, Stratfor Podcasts. I’d have to say they’re kind of a mixed bag. They do a lot of book reviews.

Fred Burton, who is the podcast host, he’s an old spy. And so he likes to have people reviews spy books they’ve written. And frankly, some of them are probably not worth it, but they also do some stuff called Essential Geopolitics where they have like 10-minute reports from their various desk officers. And those are really good and short, and they kind of layout quickly what the problems are.

So that’s what I listened to. The dogs get roughly about 35 to 40 minutes a day out. The Sammy mix, he’s getting older now, so as I always point out to him, my miles per minute when I walk him run about 23,
and my miles per minute when I walk, the cattle dog are about 16.

Trevor Chambers:

Got it.

Bill O’Grady:

He wants to sniff and pee and tell everybody he has been there.

Trevor Chambers:

Nice. Well, when the dog picks these days in terms of stocks.

Bill O’Grady:

Right.

Trevor Chambers:

Go along, I’m imagining.

Bill O’Grady:

Yeah.

Trevor Chambers:

They’ve got to stray a little bit.

Bill O’Grady:

Yeah.

Trevor Chambers:

Awesome. I’ll give you one though if you may know about it, but Barry Ritholtz.

Bill O’Grady:

Yeas. I’ve listened to before. What I have found is that Odd Lots kind of does the same thing, and it’s quicker.

Trevor Chambers:

Oh, cool.

Bill O’Grady:

Barry’s a good interviewer, but it can get kind of lengthy. In fact, it’s not uncommon. They will end up having the same guests sometimes.

Trevor Chambers:

Yeah, it’s very lunky. Very lunky. One last question. What music do you like?

Bill O’Grady:

Oh, that’s a good question. Over the… I’m still a big fan of ’70s and ’80s Rock & Roll. That’s kind of what I grew up with and even some ’60s. But, I’ve also got a really strong bent for classic country.

Trevor Chambers:

Wow.

Bill O’Grady:

My parents were really into country music from about the mid-’50s for the rest of their lives, although they died pretty young, so it didn’t go very long.

Trevor Chambers:

Sorry about that.

Bill O’Grady:

But I have a picture of my mother meeting George Jones after a concert and-

Trevor Chambers:

Gentlemen, George Jones.

Bill O’Grady:

That’s right. And when public television had their piece on country music, my wife was like, “You’ve heard of those people?” It’s like, “Oh yeah, I know all these guys.”

Trevor Chambers:

So I sing you a Cash guy. Johnny Cash guy.

Bill O’Grady:

Johnny Cash, big fan of Johnny Cash, his work. I’m a huge fan of Patsy Cline.

Trevor Chambers:

Great voice.

Bill O’Grady:

So, I don’t think anybody can hit it quite like she could.

No. Yeah.

But, that whole era, I have a real soft spot for. And so, every once in awhile, when I either use Pandora or one of the streaming services, I’ll set up my station for the old one. I mean, we have satellite radio, and that’s one of the things I’ll listen to a lot when I’m working is just the Willie’s Roadhouse.

Trevor Chambers:

Yeah, I caught him, and his kid and his band five years ago now. And it was amazing because right those two to three-minute songs and he just sit there, and I think they probably, what an hour and a half, they must’ve played 50 songs. I mean, it’s just a totally different way of going at it.

And there’re no breaks in between there. Just go at it. Have you ever taken the 17 and a half minutes and listened to Dylan’s new song?

Bill O’Grady:

No, I haven’t.

Trevor Chambers:

Oh, it’s just interesting timing for him, for the gentleman to come out with something. And I think he just released something else. So worth listen for sure.

Well, Bill, I really want to thank you for joining us here at the O’Reilly Financial Meet the Masters. We appreciate it. And I know you’re busy, and we’ll continue reading your commentary, and thank you so much for the time. We appreciate it.

Bill O’Grady:

Very good. Thanks for having me.

Trevor Chambers:

Awesome, Of course. Bye-bye.

Bill O’Grady:

Bye-bye.