The Fed, U.S. government are driving overall market frothiness: Satori Fund Founder

Yahoo Finance’s Akiko Fujita and Zack Guzman discuss the GameStop mania with Dan Niles, Satori Fund Founder & Portfolio Manager.

Video Transcript

ZACK GUZMAN: And that is where we begin today's discussion when it comes back to the broader market and what to expect. A lot of new investors looking at investment options. And of course, the volatility we've seen play out in GameStop this week is not the norm for the majority of history here.

But a look back on maybe some of the other bubbles we've seen play out here. I want to bring on our first guest today. Dan Niles is Satori Fund Founder and Portfolio Manager. He joins us now.

And Dan, look, you know, this conversation is very interesting, because we keep having this kind of retail versus hedge fund kind of discussion here. Obviously, people can be long and short names. But what do you make of maybe the way that, you know, we've seen this volatility in GameStop and some of these other names spill over into the broader market, when you look back at how we've seen these themes play out, these bubbles play out in history?

DAN NILES: Yeah, I mean, I think the fact that we're having all this focus on GameStop is actually pretty good, in the sense that I've had, you know, one of my wife's relatives called-- or she was talking to him, and he's involved in GameStop. He owns it. Godchild of mine texted me, asked me what's going on with GameStop.

So I think if you can get a lot of people-- if this is what it takes to get them thinking about investing and investing, that's absolutely fantastic, because the stock market's the biggest wealth creator over a long period of time that sort of exists-- that and owning your own home. So I think that's good.

I think where it gets tricky is that when you've got prices getting dislocated from fundamentals-- you know, if you're sort of investing what you can afford to lose as entertainment, which is what one of my relatives, our relatives told us, that's fine. If you're putting your life's savings into this-- or as another friend of ours, their child wanted to pull out their college savings to invest in the market-- then you're running into a level where the risk is completely outside of what makes sense.

So I think this whole hedge fund versus retail stuff is a little bit overblown, quite honestly. That may be how it started. But I think people need to sort of step back and go, we've seen bubbles in 2000 with the tech bubble. And then you had 4,000 internet companies roughly go to zero after that. You saw Volkswagen become the most valuable company in the world in 2008 off of a short squeeze led by Ferrari.

So this is nothing new. It's just sort of how it started. And hopefully, people don't take too much risk while they're investing in the market, I guess.

AKIKO FUJITA: Dan, when you talk about the price dislocation, though, I mean, this is a conversation that was happening even before any of this Reddit talk started, about just how frothy things are getting in the market. Going beyond these meme stocks we've spent so many days talking about, are you seeing that kind of activity, sort of the concern in terms of just the price not necessarily going along with the fundamentals, outside of this conversation?

DAN NILES: Yeah, no, absolutely. We've been talking about it for a while. And quite honestly, the Federal Reserve and the US government is driving all of this.

I mean, the Federal Reserve, their balance sheet went from $4.2 trillion to $7.4 trillion last year. And by the way, the US economy is about $22 trillion in size. They're buying about another $1.44 trillion this year, if they stay on their current pace. That's 7% of GDP.

And then you look at the $900 billion that was passed in late December, the $1.9 trillion that Joe Biden wants to get through-- that's another 13% GDP. So you combine all that, that's another 20% right there. So with that kind of money pouring into the market through those different channels, you're going to end up with prices getting absolutely incredibly inflated. And that's what you're seeing.

And unfortunately, it affects all stocks. People who think that this is just, you know, in GameStop and AMCX-- that's not the way this works. This spills over into everything, just like we saw in 2000.

And don't forget, in 2000 Amazon's stock went from $106 a share to $6 while their revenues went from about $1.6 billion in 1999 to $3.1 billion in 2001. So the revenues almost doubled, and the stock went down 95% because those other 4,000 companies went to zero. So that's the thing you have to keep in mind.

ZACK GUZMAN: And the other thing too, Dan, I mean, when we're kind of talking about this whole Wall Street versus Main Street debate here, something that I think gets lost-- you're talking about the Fed's actions to kind of support the market, which might get lost on people who are not involved in the stock market. And I know there's indirect connections here.

But when you step back and look at maybe what more the government could be doing to help in wealth inequality-- and we've heard this from Jerome Powell, chairman of the Federal Reserve. Just kind of talk about these things. And you had an interesting idea in terms of getting more people into the market, which is kind of what we're seeing play out now. But the idea that the government could give money to people directly when their child is born and say, look, don't touch this money until you retire. That would effectively create a lot of millionaires out there.

What's that thinking in maybe taking a different approach to addressing wealth inequality, rather than just stealing from the rich and giving to the poor, as Robinhood, its name alludes to? What's your idea around that?

DAN NILES: Yeah, I mean, I think people have talked about ideas along this line in the past. But if you look at it, I think last year about 3.8 million people were born in the US. If you just said, OK, I'm going to give each one of those people $10,000 as the US government, and we're going to put it in a diversified number of stocks across the entire globe or the US, and you don't get to touch that until you retire until you're 65.

That compounded at around 7 and 1/2% a year-- and by the way, the S&P is compounded, including dividends, around 9 and 1/2% since the late 1920s. So I'm giving it a discount. That $10,000 in 65 years would turn into about $1 million. And by the way, that would get you very focused on what's going on in the stock market if you see that.

And so I think, you know, rather than people going out and gambling in Las Vegas or whatever they're doing, if they get really focused on, how do I save my money, how do I invest my money, that will do so much to fix the wealth inequality gap. And I think that's a good way to start and would cost you $40 billion every year. That's nothing compared to the amount of numbers we're talking, such as a $1.9 trillion stimulus package that President Biden wants to pass. So I think that's a really good place to start, and it does good things over the long-term.

AKIKO FUJITA: Yeah, it's an interesting thesis that I think a lot of lawmakers may listen in on that. But I wonder if we can get back to the portfolio you're currently managing. When you look at the volatility that has played out over the last week or so, how has it prompted you to shift up your allocations? Is there some de-risking going on because of some of that price dislocation that you're seeing?

DAN NILES: Yeah, no, I was worried about this price dislocation late last week, because what we were seeing was a lot of companies preannouncing positively, and the stocks were not going up, and in some cases were going down. And if you think about what we've seen this week or just the last couple of days, Apple reported blowout numbers. The stock's down 6% over the last two days, including today.

Facebook, blowout numbers. The stock's also down about 6%. Those two combined is $3 trillion in market cap. You've seen $180 billion roughly get vaporized between those two stocks.

And that's sort of an example of some of the issues that are going on with the stock market, because valuations are so high and expectations are so high, at 1.6 times market cap to GDP for the entire stock market, that even blowout numbers like we've seen, the stocks are going down. And they're going down pretty quickly.

And as you brought up, Akiko, what we're seeing in stocks like GameStop, et cetera, that's causing issues. We shorted a basket of short-squeezed names a couple of days ago, a few days ago. We're constantly resizing that.

We'll be covering some today, I'm sure. We'll be adding to some other positions as well, I'm sure. And we've got some short positions on the entire market-- the S&P 500, which we'll probably be doing some changes to today as well. And we're sitting on about 20% in cash on top of that. So we're pretty defensive right now, because this is not healthy, what we're seeing.

AKIKO FUJITA: Yeah. And Dan, to some of those tech names that you mentioned, there's certainly a number of guests we've had on that would argue that some of the pullback that we've seen on the back of earnings is not a bad thing, given just how heated some of these stocks have become. Dan Niles, it's always good to talk to you, Satori Fund Founder and Portfolio Manager.