Inflation: The Fed ‘is asleep at the switch,’ strategist says

Dan Niles, Satori Fund Founder & Portfolio Manager, joins Yahoo Finance Live to discuss inflation and major themes in the market such as Big Tech, sports betting, and electric vehicles.

Video Transcript

ZACK GUZMAN: Backing up and just looking at the broader market action in terms of where we are, there's a lot to discuss. Of course, Rivian, the latest entrant here, might be a good heat check on investor enthusiasm for some companies that are well, well away from profitability. But for more on where we sit, I want to bring on Dan Niles, Satori Fund founder and portfolio manager, joining us once again.

Dan, good to have you back on the show, man. I guess we can start with the inflation numbers, because it's the hottest print that we've seen in 30 years. And prices are going up across the board here. I wonder how much that fuels the expectations that the Fed is going to have to be more aggressive in terms of their rite hakes-- rate hikes, rather-- planned as they move forward. How do you see that mix changing the right way to invest?

DAN NILES: Yeah, I mean, I've written about this before. And you and I have talked about it. But inflation is something we've been focused on all year. And if you think about the Fed coming in, they were saying, oh, we're not going to raise rates through 2023.

Now people are-- now if you look at the Fed votes, it's split 50-50 on whether they'll raise rates in 2022. And they keep saying inflation is transitory, but if you go back and you read the statements from 1970s with Arthur Burns, the chairman of the Federal Reserve then, he said, oh, this is just transitional cost push inflation. And you had incredibly high double digit inflation. And inflation was high for a decade.

So the Fed really, honestly, in my mind, is asleep at the switch, relative to most other central banks. You look at Russia or Brazil. They've raised rates six times each. So I think this inflation, as I've said all year, is going to be pretty persistent. Rents are going to be-- stay high because housing prices are up 20% year over year. That feeds into rent a year later. That's more than, by the way, during the housing bubble.

And then you've got two million more job openings than unemployed people. And that's going to keep wages high. So I think we're going to have a big problem, especially given where valuations are. I expect multiple rate hikes next year from the Fed.

KARINA MITCHELL: For sure. And in your note, Dan, you said seasonally, this is a good time of year to be invested in the market, right, under normal circumstances. But there is nothing normal about the environment that we're in right now. We just saw surging red hot 30-year-high inflation prices. Fed starts tapering maybe next week. When do investors need to start de-risking?

DAN NILES: Well, you know, the great thing about this market is when you're fueled up on so much stimulus, you can't see straight when you're investing. So, the way I would look at it is, before the pandemic, the Fed went ahead and put in $3.2 trillion in stimulus over 11 and 1/2 years since the global financial crisis. Then, the pandemic hit. They put in $4.4 trillion over just a year and a half, so 10 times the daily amount of stimulus. That's why the stock market's up 45% over two years when you've had a global pandemic start.

So either you think a global pandemic is good, or the stimulus really has a lot more to do with that. So, you know, my belief is you've seen some signs of this. You know, who knows whether Tesla being down as much as it was over the last week is some signs of some of the froth coming off.

But as you pointed out, Karina, I think as the Fed starts to taper later this month, that's just going to make people go through withdrawal symptoms as they come off of all this stimulus. I think you need to be thinking about de-risking right now, even though 18 out of 19 times, you know, it's been a great time to be in the stock market these last two months when it's up 15% through the month of October, which we've tweeted about before.

ZACK GUZMAN: Yeah, and derisking, I mean, you've written about this, too, when rates are going to be moving higher, obviously, than a lien on the valuations that we've seen from some big tech players. But there is one that you enjoy, I guess, separate from the others in Google, when you talk about how they could still benefit from some of these things that are persisting. Why do you like that name? And why should investors be looking at that one over some of the other tech players that will get weighed down?

DAN NILES: Well, it's a great question, Zack. So there are a couple of things there. I mean, right now, my big problem is valuations are astronomical in general. If you look at the market cap of the entire stock market divided by GDP, it's at about 2 times. The peak of the tech bubble was 1.4. And the 50-year average is 0.8. But if you look at Google, they're growing revenues close to 40% this year. And you can buy it at about a 25 PE. The stock market's right now, the S&P is about 22, 23. And Google benefits from reopening.

So, as there's more vaccinations, more herd immunity, that 10% to 15% of revenues of Google's that's in travel, leisure, things that we're not really doing as much of, they're going to start advertising more as you get into next year. So I think Google's a good way to have some offense in your portfolio, where you're getting growth, 40% growth, at just barely above a market multiple, and you get a reopening benefit, which is why it's my favorite, really, of the big cap tech names or mega-cap tech names right now.

ZACK GUZMAN: I know you also like the BETZ ETF. We've talked a lot about sports betting and what could come through there. I guess one of the things that could weigh on it, we saw the tax rates that are going to be there for the state of New York when it comes to more than 50% tax rate. So I mean, how does that maybe weigh on, I guess, some of the enthusiasm in the betting space and what it means for maybe other states that green light, too?

DAN NILES: Yeah, I mean, it's certainly something you have to take into account. But the thing I think which is more important, to some degree, is, you've got about 30 states or so legalize gambling. But only about 2/3 of those have legalized online sports betting. And I think as you go through this year and into next, more and more states will legalize online sports betting. And it's one of the last big markets to go online. And the nice thing is the valuations in that group are really not that expensive for the growth rates you're getting when you look at other areas like software, et cetera.

So for us, you've got to remember we're a hedge fund. So we've got almost as many shorts as we do longs. And so we may be long sports betting names, but we're also short a lot of software names that are trading at 20 times EV to sales. We've got a basket of names. And so we're sort of pairing those against each other because my belief is next year, the S&P 500 is down. So in that scenario, you want to make sure that you've got shorts lined up against your longs to balance that out.

And you're exactly right. The tax rates in New York are high, but some other states that have had very high tax rates haven't seen the revenues they thought. So there's sort of a balance. I think New York's too high. I think some of the other states will be less. And, you know, there's a wide group of names in there. And I think you're going to see very strong 20% growth for the next several years.

ZACK GUZMAN: Oh, let's talk about the thesis there, right, that you could see some valuations here, which you said are sky high, start coming back down to Earth. At least for today, we've got a good example of that not happening. Some enthusiasm still running very hot in Rivian, the latest EV entrant here to go public. And price shares at $78 in the offering raised $12 billion, which makes it the sixth largest ever company to list on a US exchange.

When you look at that, though, it's a pretty astronomical valuation for a company that's really only sold a few vehicles to its own employees, mostly. When you look at, I guess, some of the enthusiasm in that space, I know EVs are hot, but what does it say about the excitement around some of these pre-profitable companies and ones that are very early on in the roadmap?

DAN NILES: Well, look at it this way, Zack. You had a movie theater name, AMC, worth I think $7 a share before the pandemic. Now after the pandemic, that stock's trading at $40. So clearly, the movie theater business is supposed to be 6 times better than it was before the pandemic. Or you look at a GameStop that was at 4 bucks before the pandemic. Now it's at 200. Or an Avis at 50, now it's at 250, you know, rental car business. So, you know, again, those are sort of just the most egregious signs of things not making sense.

So if you look at a Rivian, you know, it's going to have around $100 billion market cap, it looks like, if the pre-market indications are correct. They're going to have maybe a million dollars in revenues in the third quarter. You look at a Ford and a GM, which, you know, they're actually making some pretty good electric vehicles. And those stocks have done great this year. But you've got $120 billion roughly in revenues for both of those companies this year. And they're both trading at about an $80 billion market cap each.

So, you know, valuations right now, the average retail investor, they're not looking at valuations. They go, I like EV, or I like, you know, solar or biotech. Or you pick your favorite name-- crypto. And they're just putting it in. There's no thought about it because you haven't really been made to pay for that. I mean, if you're in a global pandemic and the stock market's up 45% in two years, why worry about downside?

But I think, again, back to Karina's question earlier about the Fed, you know that's why the Fed tapering will be interesting because my firm belief is that's what's made people just forget about everything other than the momentum in a stock and how sexy it sounds and will start to have them look at things like valuation that you brought up with Rivian.

ZACK GUZMAN: Yeah, and I guess we'll all be watching to see how that happens on day one, how much more room to run there might be, priced at 78, already indicated to open at 120 a share. We'll see where that goes. But for now, Dan Niles, always love having you on, Satori Fund founder and portfolio manager. Thanks again for the time.