What The Midterm Elections Will Mean For Investors | Meet Kevin

[Music] [Applause] [Music] What about Keystone Pipeline? Should Biden have kept that going? It would have been the fourth phase of it. We've got the other three. Do we really need it? Any changes expected?

Yeah, I think it's clear now that the market thinks that was a mistake. You know, when Biden took his mandate and went into the direction of green, which was, you know, that was his mandate from his voter base. We hadn't gone through the risks of energy security, which we've gone through now, and so we had amnesia to that. All of a sudden, it's been brought to the fore through what's happening in Ukraine. Most Americans today, my bet is that they would vote for some kind of more realistic phasing out of hydrocarbons to assure energy security over the next 20 years, while we take the profits from that and deploy it to finding other cleaner ways of powering our economy.

I might bet again every incumbent president loses seats at the midterms. But what you're going to see in this midterm election is going to be brutal. I'm predicting that even the Senate may go the other way. Oh wow, it's really ugly out there. The House promoter pret, you know, you don't want to get into politics in a discussion like this. You want to understand policy. And I think, my guess is that the midterms are going to favor a more energy security mandate. A lot of these senators and congressmen who have gone too far out on a limb on green mandates are going to feel it in their local jurisdictions. It won't be pretty.

So that's why I think, you know, Build Back Better as a bill will never happen. My assumption as an investor, and I don't want to speak about the pros and cons of this, is just that Washington now going forward is in total gridlock and will be after the midterms as well. There won't be any significant policy coming out of there to the general election, which is good for investors. We've spent a lot of money; we printed three trillion dollars plus. I think the market thinks that's enough. It's just that all of the things that Biden wanted to do, he won't be able to.

Yeah, so potentially a double flip is what you're thinking of, both House and Senate to potentially Republican?

I'm investing that way, and so I'm thinking that is probably what's going to happen. You know, I don't want to talk about the merits of, you know, that other than I have to make decisions and I deploy capital. You know, I see what's happening. It's ugly for the Democrats. If they don't figure out a way to get energy prices down and food down, voters will take it out on them in about 10 months.

Yeah, what's been your take on the buy now pay later sector? So for example, a firm, they think that they can become the next Visa or Amex, and we haven't seen anybody get into that top four space of the top four credit card processors. You know, with Discover and Mastercard, they think they can squeeze in by using buy now pay later and these contracts with merchants. Obviously, there's Klarna, Afterpay, there's so many other companies.

What's your take? Is this just a gimmick?

No, I think there's merit in these ideas. But you look at most of these business models, is that the customer acquisition cost is significantly higher than the lifetime value of the customer. And so I don't know how many of them are going to survive. But there's lots of these ideas out there, but their ability to raise capital to continue acquiring customers is the only metric you should care about.

A lot of these new iterations of existing businesses like Robinhood or SoFi, I think, you know, Robinhood stock is down something like 80 percent. And I'm not saying it's following the model you're discussing, but it gives you an idea that new entrants can ride away for a while. But in the end, you have to start making money.

Yeah, yeah, that's, and I think growth itself without profitability is not sustainable. And so it doesn't mean that there won't be value created in a Robinhood. I like what they've done in democratizing investing. But there comes a time when you have to figure out how to acquire a customer. So all of these ideas are interesting in the sense that they explore new ways of doing old things. But that doesn't mean the incumbents aren't going to keep hold of the markets for a very long time.

I think you're going to see some innovation in the Visas and the Mastercards. Certainly, there's an innovation coming in Mastercard in a product called Built. I'm an investor in that project. They're providing credit cards to millennials and Gen Zers that pay their rent on their credit card to offset the downside of credit rating.

So all of a sudden, when your biggest expense each month is your rent, and you start paying it each month successfully, your credit rate goes through the roof. And so Built was the card that did that, and it's growing like a weed. But it's basically a branded Mastercard infrastructure product. And so there's a new innovation on top of an existing platform, which is what Built is, and I think that's very strategic in that sense.

Now, do you think that, I mean, you look at Visa and Mastercard, I think they bring like 40 to the bottom line and they're growing, you know, five to 12 percent a year. And so they're bringing so much profitability to the bottom line. Do you think that essentially just makes it impossible for somebody else to compete? Like why bother? Or do you think these larger companies will just swallow up and maybe acquire SoFi, say their price falls another 50 and they just get gobbled up?

Yeah, I think that's more likely. I don't think that, you know, it's the jury's still out on SoFi. They've got to continue providing all kinds of products and services. But where is the profitability in those products and services? We'll see. But you know, it's recently got its bank status, which is great. And maybe they'll become a significant competitor or they'll be acquired by somebody else. It's hard to know. But at least they've got scale; at least they've got a lot of customers, which you can do a lot of things with if you can figure out how to service them profitably.

A lot of these innovations will be experimented with. I'm always, but you know, I own all the credit card companies because the business model is very successful, and they're a big part of my portfolio. Many of them are strong in terms of redistributing capital. I watch these markets like anybody else. I love innovation. But at the end of the day, customer acquisition, the reason that 70 to 80 percent of startups in America go bankrupt after 36 months is that they're never able to solve for customer acquisition. The lifetime value is just a lot less than the cost of acquiring the customer.

That's a fancy way of saying they go bankrupt advertising. They do. And so you have to keep looking at that as the metric that you measure.

But what I'm hearing is short GGPI, Polestar, and Lucid, and all in on Tesla.

Yeah, I don't think that's right. I think the market's going to give a lot of flexibility. But you've got to realize something, for all of the hype about EV, the only company that's mass producing is Tesla. So you may not like the price point, but if you want exposure to that industry, that's the stock. You know, for GE, for all the talk and everything, but they basically made less than 100 units. I mean, it's irrelevant.

Ford has a lot of opportunity in the F-150 Lightning, but they haven't delivered on that yet. Meanwhile, Tesla is miles ahead of them on so many different advances in technology. It's hard not to, when you want to weight that sector, not put the majority of it into Tesla and then just hold your nose at the volatility. I mean, I'm not interested in buying cars that haven't been road tested by, you know, some time in the market. The only company that has that right now is Tesla.

Nice, so you mentioned you're pulling away from financials. We talked a little bit about like the SoFi and the smaller ones. Does that also include Square and PayPal? Are you kind of shying away from those?

I do own some Square and some PayPal. They're the largest in their space. I think they have the most opportunity in terms of scale. So I keep them weighted. But they're not full weightings. Full weighting for me is five percent. These are sort of one and a half percent positions. So I'm, that means I'm not 100 percent committed, but I am exposed because they provide important services. It's a wait and see for me to take them up to a full weighting.

Got it. Palantir, a lot of social media talk about this stock. Kathy Wood just sold her entire position essentially. And Palantir, what's your take on this one? Is it too undeveloped? Any thoughts on this?

No, I do, I've remained an owner of Palantir. It provides, it's what that company does, very few companies can provide the same service. And so when you start to understand how important it is to be able to manage data and do it effectively and do it cost, you know, in a way that's cost beneficial, and the analysis can be done. I mean, you think about any company wants to know what their customers buy, when they use the product, what price point they do it, their size and taste preferences, if it happens to be consumer good or service. And then, of course, to be able to speculate using AI, all of these are within the purvey of Palantir.

I don't know of another company that does it quite the same way. So for me, again, it's a one and a half percent weighting. I'm not 100 percent there yet, but it's volatile and controversial. And of course, Kathy tends to do more concentrated positions. That's not what I do in maintaining diversification. And you know, the remarkable thing is you can take both approaches and get to the same place. I'm pretty happy with my performance, and I don't need to take oversized bets on anything.

Yeah, good point.

What about, I want to pull us now back to the that R word that recession word for a moment. I just pulled it up, the 10-2 right now is at a 22 basis point spread. We last had the inversion in '19. If we invert again here, is this just because of uncertainty, because of war? Or what would you put the odds of a recession at?

I think the odds of a recession are less than 50-50. You know, I'm more, maybe it's six, maybe it's 70-30. But that's still pretty big; you know, I get it. But I mean, I just don't know the outcome or how long it's going to take to get rid of Putin. So that's one variable.

An inverted yield curve has to stay inverted for a lengthy period of time for it to really be the canary in the coal mine signal. Just because it inverts, can be because of, again, geopolitical or some other strain on the system. But if you really want to use it as a measure for recession, you've got to have multiple quarters of inversion.

Gotcha.

So we're not there yet. And you know, we just don't know how fast. I think the Fed will be muted. I said that earlier. And I think it's much a wait and see the outcome of Putin's next move in terms of just how that would affect. Right now, sadly, you know, Ukraine is less than one percent of GDP. It's not a major factor, with the exception of commodities like wheat, which are spiking. We'll see what happens on the Russian oil embargo. My guess is that goes ahead. I just feel sorry for both the Ukrainian people and I feel sorry for the Russian people. Their lives are going to change for the worse in a really big way.

Now, if there's some research out that if oil hits 150 dollars per barrel, we'll easily see an additional two percent to CPI. Now Bloomberg's projecting seven point nine to eight percent for the next print. That means we could see double-digit CPI within the next couple months.

What's your take on the potential of the Fed pulling Vulcaring us and shocking us with larger hikes? It sounds like even if we get large prints, you're leaning towards no, but I really want to hammer on that. If we get consistently high large prints, at what point do they U-turn on us?

Well, you said it consistently. In other words, a big print, a single data set doesn't change anything because you get a lot of variance these days. But if you're going to have, you know, very, very strong prints, I'd say four in a row, then you might get some acceleration on rates. I don't think shock and awe is part of the plan of the Fed here; there's just too much of that happening in the real world. You don't need that in terms of rates.

And so, you know, I'm more constructive on Fed. I think Fed will be, air on the side of slowing rate hikes as opposed to accelerating them, waiting to see the effect of long-term oil prices over 100, etc. But, you know, it's really, you know, the news is volatile. The VIX is volatile. But at the end of the day, I'm very constructive on the economy. I think Vladimir Putin has set his own end game. It's not a good one. I said that earlier, and we'll move on to a more rational leadership in Russia at some point. I don't know how fast that will take. But you know, before he invaded, I would have said he could remain, you know, if his goal was to keep Ukraine out of NATO; just, you know, threatening the invasion was all he needed to do.

But something else clicked in his head, and that's probably disease in my view.

Yikes, yikes. Do you think, sort of last question here that I want to wrap up with you, do you think this emboldens China with Taiwan at all?

Not immediately. There's a leadership rally over the next year. I think China is all of a sudden not the bad guy in the news; that's now Russia. They're probably enjoying a respite to that, which is interesting for them. And there's still lots of China policy to deal with. China could be, in a strange bedfellow sense, an ally to the United States.

I don't know how long they're going to watch this mass murder going on in Ukraine, but it must be getting uncomfortable for them to be endorsing essentially a madman. And on the world stage, where they really want to take a position as a major economic force, it's an uncomfortable place to be.

And they would have preferred, I'm sure, not to see this invasion. But now they have to live with it, and they've got to be very, very careful in how they communicate. You know, if they come out and say we endorse this, that's a very bad place for them. They wouldn't want the same levels of sanctions that Russia is getting right now.

No, any move towards sanctions, they already got terrorists. I think it's playing itself out in a lot of different places, and may in the long run start to support digital currencies and digital payment systems to be more efficient. That's what the outcome of this whole Ukrainian thing may end up being.

Oh, and that reminds me, miners, ESG changes. Are you making big shifts on the miners?

Yeah, I am. This is relatively new information. But, you know, I do a lot of work in indexing, and most institutions, for all of the excitement about Bitcoin, no institutions own it. No sovereigns own it. They don't do it because it's not a regulated asset.

So the reason there's so much volatility in Bitcoin is that there's no bid from an institution to hold a one or three percent weighting in it. It's just owned by high net worth individuals. It's a respectable asset; it's still under a trillion in value, you know, versus almost 12 trillion in gold. So it hasn't proven to be, you know, repository for value yet.

But there's a new problem emerging, and it's coming fast. Many jurisdictions, many geographies are looking at Bitcoin mining. The way that an institution or sovereign up until recently could get exposure to Bitcoin volatility, whether they thought it was going up or down, was to simply buy the public shares of the Bitcoin miners. Because over the last few years, one of the strategies of the Bitcoin miners was not to sell their awarded coin; they would keep it on the balance sheet so that basically their asset base would grow and grow in the balance sheet, and the shareholder would own those coins but not directly through the shares of the company.

So if you're a sovereign, you could buy the shares of Hud-8, or you could buy Marathon or Riot or Hive. What these companies did, because they didn't really have sources of clean energy, that was a concern of ESG, is they buy carbon offset carbon credits.

And for a while that worked. Unfortunately, that's not going to work because remarkably, out of the private sector, it started with Blackrock. A lot of institutions are starting to insist on audits of this strategy to prove that you're really offsetting your carbon. Everybody knows these carbon offsets are so nominal, such a wide margin of error, and it's impossible to audit. And it's impossible to know where your source of energy really came from on a percentage basis.

So they're going to fail those audits. And what I've done, and I'm, you know, I don't know how early I am in this, but I'm sure there's going to be others following me. I've sold all my Hive, I've sold all my Marathon, I've sold all of my Riot. Wow, and all of those stocks. They are essentially dirty miners, and there's no way that they can prove they're not.

What I've done is taken that capital and invested in the new mining model. The new mining model—and there's an example of it in northern Norway, the largest shareholder of that one is a sovereign. A lot of people don't realize that sovereign wealth funds, decades ago, were very, very forward-thinking and ended up taking very large positions in the semiconductor industry. So they are some of the largest shareholders of Samsung and Taiwan Semi and others—and they have access to chips in a way that no one else does.

In Norway, when I was approached by a group that was doing a private investment, they have formed a partnership with the Norwegian government in a small northern village, and they're building out a massive facility, Bitcoin mining. 100 percent of the energy is from hydroelectric at a very low cost, currently under two cents, and they could lock it in at under four.

So there's no risk of a carbon audit because there's no carbon footprint there. In addition, what they've done is built a hydroponics facility that is powered by the heat of the stacks, and they have a giant tomato producing facility beside a canning operation to make canned tomatoes for that northern community. The stakeholders, or many of them, are the villagers. It's 3,000 people in the village.

The problem was, if you talk about building a new mining facility in America right now, your biggest constraint is you can't get any equipment; you can't get any chips. That was not the case in this facility. They got their machines in two weeks because their largest shareholder was a sovereign fund.

In addition, something else to know that they will be making an announcement of shortly, they have found a way, through software, to strip the network award. So when you awarded a Bitcoin, even though you've mined it with hydro, you're still awarded a network reward, and you don't know where it came from. It probably came from a Chinese operator, or maybe one that used coal burning. They can strip that out of the actual coin, and they call it the slag. They separate the slag from the awarded coin, and now the sovereign and the institutions that own that Norwegian mine have no risk of a carbon audit.

Wow! And so now they can own completely clean coin. So in an industry where you can have miners that are clean, ESG compliant, and miners that are dirty, the capital is going to go to the one where there's no risk of audit.

So what's going to happen to the PE values of these dirty miners? I listed them earlier; in my view, it's a personal opinion, their PS are going to get compressed. Their access to capital is going to go down. If you own a company that is using carbon credits to offset, you should seriously consider this problem. I would exit stage left.

Wow.

Yeah, yeah. And then just to be clear for anyone who's not familiar, essentially if you're a dirty operator and you're using natural gas to fuel your operation, essentially, but you're buying carbon credits to say, “Hey, we're carbon neutral,” you're still a dirty company. You're filthy because there's no way you can prove that your carbon offsets offset what you've done with that, you know, either coal or natural gas.

The only sources of energy that are going to be that are going to pass right now that actually functionally work are hydro and nuclear. Hydro and nuclear power, those are the only two. So I'm not investing in anything in Bitcoin mining that isn't sourced from there. That means that states like Montana, potentially upstate New York, are tremendous opportunities for large infrastructure build-outs.

And I have, when I went to the Senate last week, I made sure that I stopped in the Senator from Montana to make myself an acquaintance because I plan on investing a lot of money in his state. If you liked that video, wait, do you see my next one? Don't forget to click right over here and subscribe.