What The Recession Will Do To Russians | Meet Kevin

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How do we start? There's so much going on. I think we have to start with Ukraine. How do you handle this when you're investing? You try to figure out likely outcomes, and you know, it's very difficult because obviously, Putin is unpredictable. Everybody understands that.

I'm going to make a speculation about Putin at this point because usually, if you go back in other disputes over time, there's been a conflict between the Soviet Union, then Russia, and Ukraine for a long time. It's, you know, it's a non-NATO buffer state, and it's been well known a long time that Putin wanted to take control of it and exit essentially.

I think the assumption was, as he was building up his troops, that he would roll in there, would not get a lot of resistance, and then the world would just go on with its business. He would probably not attempt to cross into any NATO states. It's not what happened obviously. But there's one singular occurrence that I want you to think about in the context of likely outcomes.

The way I'm thinking about it, for hundreds of years, the Swiss have remained essentially the Swiss. Even during the Second World War, war criminals, despots, all kinds of different leaders from around the world that were dictators or whomever—strong men, you name it—were able to keep their wealth under the streets of Zurich, and they had access to it, liquid access to it, always.

You know, the Swiss were criticized for this quite a bit, particularly during conflicts like the Second World War, et cetera, but they remained the Swiss. They never sequestered or closed those down or restricted access to this capital, regardless of who you were.

For the first time in modern times, last week, they actually shut down the accounts of Russian oligarchs. Wow. Now, that has never happened before. The reason I want you to think a little bit about this is probably—and I'm speculating like anybody else—because the Swiss aren't going to disclose this.

My guess is there's probably about 2500 families that are oligarchs who were made wealthy through the transition of the communist regime to private, when they were granted for free copper mines and oil fields and gas fields and everything else. But there's also all the generals, the people that are in the military that have attained wealth through nefarious means; they put it all in Zurich. That's where it is because they knew with certainty that no matter what happened, no matter what Putin did, they'd still have their family's wealth secured there in Swiss francs.

Well, that's not what happened. Basically, last week, the Swiss shut it all down. They sequestered, shut down their cash card, shut down their credit cards, gave them no access to it. Now this is serious. I know they're taking away their yachts and everything else, right? But that does not compare to what it's like to shut down an entire family's access to wealth, and that's what's occurring here.

My guess, the outcome of this is Putin is going to have a hunting accident. That's what's going to happen because he has basically turned aside all of the support he has internally, and those people don’t want to, after having all these years of wealth, lose it like that or at least never have access to it again. Some way, somehow, he'll probably drink radioactive tea, which he's been accused of doing to many other people that were his competitors or political enemies. Or he likes to go hunting; he probably may not come back. The boar may win this time, not Putin.

I think that's the likely outcome. I believe this is the beginning of the end of his political career. It's over. He has isolated himself from everybody, and that was okay if it was just the rest of the world, but he's isolated himself from his own generals and the oligarchs, and they're not going to forgive him for that. I think his time is short.

And that's also very interesting because you're not just talking about how the oligarchs are having their wealth restricted, but also the military having their wealth restricted. Is it possible that you could see a larger coup in Russia, or is that less likely than, as you've mentioned, maybe the more Lindsey Graham-esque, dare I say, disappearance of Putin?

I think either path ends up with him out of power because within about 11 or 12 months, the full weight of the sanctions is going to put Russia into a brutal recession. People will not even have access to electronics, entertainment, access to any other SWIFT systems, ACH transfers of capital. They have to use a Chinese-based system. It's going to be really nasty in there.

When you put that much suffering on a people in a very short period of time, they tend not to like it. You don't have that base right now. He's actually quite popular in Russia, but they haven't had any of the sanctions weigh on them yet. It's coming to a theater near you—or more likely, no theater near you. They're not even going to give you Disney cartoons.

So the rest of the world has basically shut them off. That would be, you know, within 12 months, I think riots in the streets, etc. When he starts shooting his own population in addition to shooting the Ukrainians, I think that gets nasty.

There's lots of precedence for this in modern times. Look at Mussolini; he ended up upside down dead in the town square. That's the kind of thing I think Putin's on his way to. Or the shorter pathway is you just find some military leader that says, "Well, I think this guy's unstable. He may be suffering from a disease we don’t know about. He may have long COVID."

But it's really hard to understand these irrational decisions and then the hunting accident scenario. But I'm pretty sure that Mr. Putin is not a long-term player, and if he is, he'll end up in jail in the Hague for war crimes.

You got to remember, all these generals, they're also on their way to the Hague. That's the thing about the international tribunal; when you become a war criminal, they don't care how long it takes—you end up at the end of your life in a cell. And that's where a lot of these generals are going, and this time they'll have no cash with them. So I think it's going to be a really brutal outcome, just brutal.

Do you think it's possible that we're in this race of either Zelensky dying or Putin potentially dying or one of them losing power somehow? Personally, I believe the morale of the Ukrainians is being held together by Zelensky, and if something happened to him—he's already had three assassination attempts—that could be a win for Russia.

What would happen in such a scenario, in your opinion? I actually think it's a loss for Russia because I think that just hardens the resolve of the Ukrainian people. Those that remain to fight, there's a tremendous amount of munitions coming into the country now in the form of high-tech stingers, anti-tank missiles, ground ordinance, maybe aircraft—we don't know that yet.

But what'll be occurring if they do assassinate him is that there will be another leader put in place. Obviously, NATO is communicating with him daily. You can see that it's one of the remarkable things about social media tracking this. The resolve will be hardened, and then all of a sudden, young Russian soldiers will be shot in the streets, their tanks blown up, their trucks blown up one at a time.

It'll be a really nasty, grueling guerrilla warfare. Generally, if you look over time, the motivation of people that want to be free is significantly stronger than subscripted Russian soldiers that are in their 20s. This has been well documented by many networks. A lot of them were sent in there under false pretenses, writing back to their parents saying, "I don't know what I'm doing here, but I'm killing babies, and I'm not okay with it." And so, you have a lot of that to come.

I think, again, it leads to the fact that the more of these atrocities occur and the more they come out to the rest of the free world on a daily basis, it's just setting up for the liability of criminal war crimes. The number of people that are going to be involved in that, if you're a general right now reporting to Putin, you're not feeling too good. You don’t have any money, and you're on your way to a jail cell eventually.

Wow. Now, YouTube, Twitter, Facebook—they've banned Russian news outlets like Russia Today from broadcasting outside of Russia. What's your take on Elon Musk saying, "I'm not going to censor even Russia, even Russia Today. No censorship on Starlink." Is that a PR move, or does he have a point?

He has a point. I mean communicating the truth, which eventually gets out. I mean, he'll provide, and over time, these Starlink connections will find their way into Russia. Russia actually is quite a high-tech community of coders and software developers that are very sophisticated. That's one of the reasons they have cyberwar as one of their weapons, because they're very good at this.

That truth will eventually make it into Russia one way or the other, you know, through downloads. So the rest of the world is seeing all of this. Russians are going to eventually see it, but in the meantime, they're going to start to be deprived of all the things that they've enjoyed for the last 10 years as the right, the West, just cuts them off to all of these supplies of financial services and goods and services.

So they're going to start to figure out that they're getting isolated. Not going to be very happy, and again puts more pressure on Putin. It's really hard to understand the upside endgame for Putin, which is why many people, including me, speculate he's ill.

Yeah, that makes sense. Do you—I mean, you had mentioned it earlier—that Ukraine is almost designed as a buffer zone potentially in Putin's mind, kind of like, in my opinion, maybe in a weird way, North Korea is between South Korea and China for the United States. This sort of buffer zone here, right?

What's your take on a potential compromise where maybe they take the non-buss, let's say, and the rest of Ukraine goes back to being Ukraine? Is that possible? Putin's calling for a full demilitarization; it's not going to happen every day. That possibility is lessened because of the number of civilians being basically murdered.

It's hard to see a scenario where the rest of the world negotiates a peaceful outcome with Putin in leadership. I think every single day, his value—if he was a stock, I'd shorter. Okay, got it. Now, speaking of shorting, Elon Musk mentions that he believes a recession is likely by 2023. He had tweeted this in around November/December of last year, a little bit of a warning, maybe a heads up for the market drama that we've seen.

We had one bottom on January 24th, another bottom on February 24th for, let's say, the Nasdaq 100. What's going on in the markets? Is the market starting to price in a recession, especially with that flattening yield curve? It's a very interesting dynamic.

I'm not sure I can agree with him on the timing of the recession, because right now, the Fed is going to be very, very timid. There was discussion on this first rate hike that it was going to be 50 basis points. We now know with certainty it's going to be 25, and then I think they're going to wait and see what happens here because, you know, one of the reasons you raise rates is you're trying to slow down demand.

But when you have hyper—not hyper inflation, but very strong inflation in energy and food, you are starting to reduce demand because people are paying 120 bucks to fill up their pickup trucks in America. That's unheard of for decades, and so that will put some kind of damper on it—and may, on the other hand, slow down the Fed's rate increases.

The idea that they do six in a year? I don't think so. I also don't think that, you know, it's going to be very material. Maybe they raise rates 150 basis points. In historical rates, it's not that much, and yet the fundamental economy is quite strong right now. So usually, when you have rapid increases in Fed rate hikes, you do end up in a recession. When you have very high, sustained oil prices, you end up in a recession.

But I think because we simply don't know the outcome of the reason that the oil prices are high—and that's Ukraine—we don't know yet what that's going to look like. I think the market's going to take a wait-and-see attitude. There's going to be volatility, obviously, and there is. You see it every day. But I think, at the end of the day, what really matters is earnings, and I think earnings will be up eight percent this year, an additional one percent, maybe in income through dividends. That's a nine percent return, which should be a normal year in the markets—a good year.

So I'm a little more optimistic than Musk's predictions. But that's what the market is—it's people making their own decisions every day in terms of where they think. I'm still very constructive on equities. I've bought more recently, and I'm trying to average down, and we'll just see what happens.

Oh, you—last time we spoke, you were about 30 percent cash, and we know that you're big on diversifying. I believe last time we spoke, you were also—you have about 600 positions. But the reason you were 30 percent cash was because you drew down some of your commercial real estate.

How have any of your broader themes changed since then? Are you taking that 30 percent, allocating a little bit more to tech since we've seen this valuation compression? Any changes?

Yeah, you're right. I have started to nibble on tech again because a lot of the stocks have been crushed, yet their growth rates haven't changed. You can look at a name like Zoom, which everybody thought was a stay-at-home or work-from-home platform. It's really a work-from-anywhere platform, and I use it more every day—in the enterprise version, I bought more licenses from them, and the same with most of the tech companies.

Going back into—I use Oh GIG, which is an index I had a hand in through O shares. But that's the internet giants, and it's been volatile, of course, but the underlying growth for these companies—20, 30, 40, 50 percent a year—has not changed. It's just the P/Es that we're willing to pay have gone down.

But as long as they're growing, I still want to own them, and it's one of the indexes I use. The same for, you know, I've moved into more quality names in terms of what I own. I certainly, you know, use OUSA as my— which is a subset of the S&P 500. I don't want to own names where the balance sheets are upside down.

Airlines, for example, have just been torn to pieces on their balance sheets. United Airlines had seven billion of debt pre-pandemic; now it's over 20. Don't want to own that. I've used that as an example forever, but there's lots of good companies in the S&P that are pricing power in inflationary times, and I own those. It's an index called OUSA.

So, you know, I'm just deploying capital, taking advantage of volatility, and staying long—trying to put that 30 percent cash to work, because right now I'm only getting 22 basis points on interest, and inflation's north of six percent. So I'm losing over six percent worth of buying power in 12 months. That's a horrible situation.

Now, Kathy Wood also is obviously increasing her allocation to tech. What's your take with Kathy, though? Should she have taken a break from the market, maybe sold some of these tech names, and waited for some kind of move here? Or is she right to stay with the strategy of innovation tech? Is on sale, keep doubling down?

Yeah, I think, you know, I'm a fan of hers in the sense of the work she does and the opinions she has and positions she takes, but I can't own any of her funds because they breach the mandate that I live under of diversification—no more than 20 in any one sector—and this is where she breaches it for me. No more than five percent in any one position; she takes huge bets.

And way over five percent weightings in some of these funds—I can't do that. And so that to me, just, you know, when things go south—which has happened to her—you really get killed. And so she's seen that happen. You can't ever take away her Tesla calls; she got that one right. But putting in over five percent weightings in any one position, it just breaches every rule I know of diversification, so I just can't touch these funds.

Now, you had mentioned move away—well, you had mentioned move into quality, so implying move away from lower quality. And then you touched on American Airlines—so upside in balance sheets. Are you also moving away from small caps or companies maybe with decent balance sheets but who don't have earnings yet, like SPACs?

Well, I don't do SPACs. I mean, that's complicated. I don't like the time pressure of the capital being deployed. You get perverse incentives. What happens is the SPAC sponsors will buy any piece of garbage just to make sure that they don't have to give all the money back—it gets redeemed anyways—and a lot of garbage is being bought. So I don't like that.

I prefer reverse takeover strategies for taking small cap companies public and using the public markets to grow them. There are some areas that I'm very interested in: centralized, decentralized finance. I've recently made investments in Wonderful Canada, a Canadian listed company where the regulator allows it to be listed. It just bought an asset called Bitbuy, which was the first license ever granted to a dealer-broker attached to a crypto exchange—again, a Canadian asset because the regulator allowed it there.

And there are other countries that are more advanced than the U.S., so I have to invest in those countries: United Arab Emirates, Switzerland, France, Germany, England—they have more liberal policies on crypto. Canada is one of the most liberal, allowing for these new crypto exchanges. So I invest there. Also, Immutable Holdings, a new company that you'll hear about soon—they own NFT.com. I'm very used to the NFT space. We can talk about Bitcoin mining; I've got some projects in northern Norway, partnership with sovereign funds that I'm building out.

Those are because I'm very concerned about ESG. Start Engine, where I'm a shareholder, is really growing. That is providing equity crowdfunding now, and the feds—or at least the regulators—raise the rules. Instead of just a limit of a million, it’s now up to five million at a time for small startup companies, and I've used that for a lot of my Shark Tank portfolio.

Ah, crowdfunding has been bumped—and that must have just been in the last year or two, huh? Yeah, and it's really taken off. I mean, Start Engine has over—it's got hundreds of thousands of investors on this platform now, and hundreds of deals at any one time, so you can build a whole portfolio there. Wow.

Now, crypto—this is a 20 percent sector for you? Or do you lump this in with tech? No, I did end up recently at 20 percent. I have taken some big positions. I've invested in various—you know, the thing to understand about crypto, and I try and when I talk to—in fact, when I spoke to the Senate last week, I spoke in this fashion. They're very fortunate to be invited there to a bipartisan committee to talk about policy on crypto.

And here's what I said, and I believe this. Bitcoin is not a coin; it's software. Ethereum is not a blockchain; it's software. These are software projects written by coders, and they develop these technologies for enhancing economic value. You have to make your own decision on which ones you want to invest in.

I'm very fortunate; I get to see most of these projects very early on. I'm a well-known investor in crypto; I get invited into these rounds, and most of the time I participate. And so I look at it that way. But again, I am applying the rule, and I really believe this, and I've said it multiple times: over the next decade, crypto and blockchain and these technologies will end up being the 12th sector of the S&P.

And so for me, in my rules of diversification, I'm going to own up to 20 in crypto, and in fact, I do now. I have no more than 5 percent weighting in any blockchain, like Ethereum or Bitcoin or Polygon or H-bar or Helium—some of the ones I own. Avalanche, Serum—all of these different projects, which, you know, it's very fortunate that I'm able to meet these developers.

What's fantastic about them—these are the hottest hands over keyboards around the world. I mean, these are the smartest developers that are coming out of computer engineering and, you know, working on these projects because they want to. They're young—in their 20s, in some cases—and building remarkably valuable technologies.

You have to make a bet; you have to decide how you're going to invest, and that's how I've decided to do it. I'm very, very diversified. But at the end of the day, this, to me—and it's a personal opinion—will be the 12th sector of the S&P, and I certainly told the Senate that.

Now, with 11 sectors already and this being the 12th, and you're building that in already, obviously, you can't do 20 in all of them. So what are you underweight in? Is it consumer discretionaries? Where are you underweight? You know, there are some sectors right now that I've been very fortunate to own, but I've started to underweight a little bit.

ESG concerns are starting to starve off oil and gas, and until we get policy change there, I'm quite concerned. The fact that rates haven't gone up as fast—I’ve underweighted financial banks, money center banks. I'm not out of it, but they're certainly not a 20 percent weighting, and they've disappointed of late in terms of stock performance for obvious reasons.

And, you know, the sectors that I have full weighting in: healthcare, 20 percent. I'm very, very optimistic about what happens there. It's, you know, there's been a lot of value created there, and biotech's getting beaten up, so I've bought some more of those as well. Moderna is a big holding of mine, and I recently averaged down.

A lot of these opportunities have been presented because of volatility. But you got to think ahead that the sectors that you want to overweight or at least have 20 percent weightings in are ones that are going to be absolutely necessary in the next three years, and healthcare is definitely one of those.

Infrastructure—that's very interesting because, you know, you've got a trillion-dollar bill that's going to be spent, no question about that—and some of these areas of the technology that have been really beaten up that I've decided to bring their weighting back up to 20. Some of these stocks went down 50 percent, and so they're still growing at 50 percent in some cases.

So it's a really remarkable time in the market, and you've got to be nimble. Yeah, absolutely. If would you care to disclose, are you 20 percent cash now? Or where would you put it? I'm about 18 percent cash.

Okay, and I've started to buy in into real estate again, but not commercial real estate—residential real estate. I've been very active in the Miami market. I've been watching this market now for six years. I've continued to invest in it. Residential has been very strong; rents have been very strong, the condominium market, the multi-family—all very strong—and I'm putting more dollars to work there.

You know, I live here, so I'm very into the concept of local. But I'm also very aware of which pockets are advancing faster than others. And in this city, we have a really progressive mayor in the sense that is making it very easy for technology companies to come here. Taxes are very attractive. Most of the investment I'm making in real estate is in Texas and in Florida, removing assets out of—well, I won't call them if—well, they are inefficient states: Massachusetts and New York and New Jersey.

It's just brutal to see how inefficiently they're operated and how high their taxes are. There's a competition between states. You're starting to see the have and the have-nots appear in terms of where the momentum of growth is—particularly in all sectors, but real estate for all of the people moving here from New York and other states where taxes have just gotten too high.

It really boils my investment thesis for real estate in Texas and Florida. Yeah, absolutely. I mean, we don't even have to start on the California transition, but I love to visit California. But I wouldn't invest a dime there. That place is a disaster.

I mean, my goodness, you can't say enough bad stuff about how they operate that place. And, you know, I shoot Shark Tank in LA, and I love it, but I would never live there. I would never invest there. I wouldn't put a dime there, and I have moved lots of companies out of there.

Wow, wow, that's incredible. Now, rates obviously trending up. Clearly, you're buying real estate, and you did mention earlier that you think there's going to be a limit to how much the Fed's going to be able to raise rates. Is this why maybe you're not so worried potentially about mortgage rates hitting, say, five, five and a half percent, and then maybe dragging real estate prices down a little bit?

Because you don't believe the Fed's actually going to be able to make it past 100 basis points or 1.5? Well, even if they do raise it 200 basis points, it would put mortgages still at the low end of historical rates long-term. And, you know, generally speaking, they would only do that if the economic activity continued to increase to demand. They're fighting inflation with these rate hikes.

But inflation right now—some portion of it may be temporary, not all of it. But certainly energy prices. The reason you don't see a lot of oil companies saying they're going to change their CapEx percentages is they've seen this movie before. You get a big spike in oil because of a geopolitical event like the one we're having now, and then all of a sudden, a lot of it comes on the market and prices collapse again.

So, they've been in the penalty box, oil companies, for decades as they lost so much money overextending themselves on development, and now they're more balanced, and their mandates are more about return of capital to shareholders. And so, you know, that's one of the reasons Buffett made another big investment recently in oil, and I think he believes that it's going to be run with more adult supervision and give a decent return. But at the same time, it's volatile.

So at the end of the day, I like business models that have a little less volatility where I'm not really betting on the price of a commodity.