Bob Iger: A modern day Jurassic Park CEO. 

Iger, a man of his times – the death of value – Nasdaq killed the golden goose – Buy gold, sleep nights. 

Old CEO’s die before their companies. 

The 2000’s CEO’s (actually the 1997 to 2020) are the modern equivalent of the Jack Welsh era. They are the inheritors of the economic landscape of their times. They were inside the box CEOs armed with spreadsheets, armies of yes men and Ivy league egos.

My purpose is not to criticize Iger, a brilliant man in his own right. But Iger is, as history will show, a b-school executive of his time. Like Warren Buffet and thousands like him, he inherited undervalued assets and used their cash flow and equity to lever up. 

The basic rule with CEO’s is sell the cover. As soon as they make Forbes, Fortune or Time, their time is probably up. Short the mag cover!

What Buffet sees no one else sees.

When Buffet bought Apple shares, he knew his game was over. He could no longer buy undervalued assets because the simply didn’t exist. To make the point, let’s look at Iger’s tenure at Disney.

2005: EPS, $1.32 Shareholders equity, $30bn Current Ratio, 1 Total debt, $12.2bn.

2022: EPS $1.75 Shareholders equity, $95bn Current Ratio, 1 Total debt, $45bn 

In other words, Iger borrowed $33bn and increased shareholders’ equity $65bn to produce an additional 43 cents. Elon Musk he is not. 

Zero interest rates destroy equity. 

In the 70’s when interest rates were high, CEO’s grew businesses with EARNINGS. This would be unthinkable today. In the modern era, businesses go bankrupt because they can’t get capital. The idea that a business could self-finance by earning money is total taboo. 

If you can image a shoe retailer that started in 1990. Between 1990 and 1997, they used earnings to grow inventory. They had equity… in shoes. By 2010, interest rates were so low a competitor could come out of the closet and build a brand-new store and fill it with shoes for next to nothing. 

This destroyed BOTH businesses. 

I opined about this several years ago and said the mall business would get destroyed. It was an easy prediction. America reached a point where America had more per capita retail space than Japan had living space.

It’s a tale as old as time. 

Things that are free have no value.

One might hope that this concept would be self-evident. Free means having no value, but this concept is lost on society at large.

When money is free (zero interest rate) then equity has no value. To understand this, you must understand accounting, and believe me, very few people including MOST professional accountants understand accounting.

Or at least, they don’t understand how accounting relates to finance.

Now, back to Disney.

Many people are familiar with the NFL salary cap and a concept called free agency. In free agency, a team can sign a star player whose current team can’t afford him due to salary cap restrictions. 

Inevitably, this acquiring team OVERPAYS for the player. Why? Because the player can choose any team he wants to play for, he chooses the team that can pay him the most. 

This is how corporate acquisitions work. You OVERPAY for a company so you can buy the whole thing. The company being acquired can choose its own team, so it chooses the team that pays the most. 

This acquisition premium is buried in the financial statement.

The reason is, according to GAAP (Generally accepted accounting principles) the excess cost is amortized over a term, typically 20 years. 

Think about it this way. Imagine you really wanted a house and were bidding against another family for the same house. Imagine you pay $1 million for the house but the original price was $700,000. In reality, you just lost $300,000, but according to GAAP, you can say you only lost $10,000 per year.

That $700,000 house is only $1 million because of competitive bidding. It’s still the same house. This is how acquisitions work.

The devil is in the details.

And only a nano percent of the population understands the details. (And frankly only a nano percent is interested in ever knowing.) As Barbie once famously said, math is hard. 

Believe me, I’ve sat with enough bankers and accountants in meetings where our clients are getting loans to know exactly what goes on in their minds. They aren’t looking to make secure loans. They’re looking for ass cover when the client goes bankrupt. 

The NASDAQ is filled with acquisitions.

The list of companies that grew by using stock to acquire companies is so long you can probably say almost everybody. But those aren’t the dangerous ones. The future calamities are the companies that used bonds. (notice I didn’t say loans?)

Obviously, a loan is a debt where interest and principal are paid monthly, and a bond is a debt paid back when the bond matures. These are often the S&P component companies. 

These companies NEVER pay their bonds back. They just continually refinance. 

 The long-term bear has just begun.

This doesn’t mean “the market” will go down. You have to remember, what we call “the market” is a set of companies that happen to be growing faster than their peers. 

The average age of an S&P company is 18 years. The average bond duration is 21 years. So far, in 2023, 512 S&P companies have filed for bankruptcy. Were that not enough, today there are 4,000 listed companies, versus 6,000 in 1983.

To summarize…

 Today there are less companies, their quality of earnings are a joke, they carry massive amounts of debt that will never be paid back, and their useful life is 3 years less than their average debt maturity.

The stock and bond markets are going in, as Jim Grant says, a long bear market. 

So, what to do?

One of the best books on investing I have ever read is “The Great Depression, a Diary,” by Benjamin Roth.

The book is a running memoir of Mr. Roth’s days as a bankruptcy lawyer during and after the great depression. In it, he explains how “intelligent investors” continued to buy into the belief that the stock market casino would reopen. 

During the Great depression, millions of people lost their homes and farms. In 1927 the average home down payment to qualify for a mortgage was 50%!!!! 

VERY short-term treasuries are the first go-to.

The only way they will collapse is if the entire world falls apart. Bitcoin will not help you here because Bitcoin cannot be converted into anything other than a currency. 

Bitcoin is not and probably never will be a currency. It’s a capital asset, and although it can replace other capital assets, at this point, it can’t replace money. 

To summarize bitcoin is just another asset…

 On any balance sheet, even though money only represents the cash position, all other balance sheet items are priced in dollar terms. 

In other words, equipment is priced as its original price, less depreciation, in dollar terms. For bitcoin to exist as cash, everything on the balance sheet has to be priced in Bitcoin. The reason is, if (say) a bank has Bitcoin as it’s reserve (cash) asset and Bitcoin collapses in value relative to its liabilities, the bank (or company) would be insolvent.

For any company to hold Bitcoin as cash, its debt has to be in Bitcoin. If not, the company’s assets and liabilities will not balance. In short, if a company uses Bitcoin as cash, it’s unlikely they’ll ever get a loan. 

Gold is the next go-to. 

The biggest problem with non-gold assets including coins is that they can be easily reproduced. If central banks create digital currencies, your bitcoin will be deemed illegal, and you’ll be out to lunch.

There is, at best, 10 years of gold left in the world. There may be more, but mines are extremely expensive and cost many years to start. The mining of gold has been underfinanced for decades. 

Gold’s biggest bullish indicator is central banks.

Central banks have COLLOSAL amounts of dollars relative to the gold in the world. Central banks don’t use gold as a currency, they use it to balance trade. This is why central banks use it and other banks don’t.

To a normal bank, gold would be no different than Bitcoin. A volatile asset. But central banks are in the business of balancing trade by buying back their Euro, Rubles, or Pesos that other central banks hold. This requires a currency that other central banks will accept.

Beyond gold…

Is a whole world of assets. Russia has about $175 billion in gold in its central bank and about $225 billion in the ground. Compare that to $5.5 trillion in oil and $5 trillion is natural gas and you get a scale of the real assets versus Bitcoin phenomenon. And that’s JUST Russia. 

Breaking the growth mindset.

The great depression lasted almost a decade. It took that long people to go from trying to make money with money to simply keeping what they earned. 

The great lesson of “The Great Depression, a diary,” was if you simply bought treasury bonds or gold and didn’t borrow, you’d beat all of the “intelligent investors.” 

Toss your copy of the “Intelligent Investor” and reread your copy of the Bible. One is knowledge, the other wisdom.