Bill Miller of Miller Value Partners (Trades, Portfolio) made an appearance on the billionaires podcast. Miller is an interesting value guru who sometimes tilts towards a GARP style and even makes bets that most people would consider growth plays. He’s good, he’s outspoken, he shares interesting positions and there’s lots to learn from him so it’s worth a listen.
Short bonds
He’s been right on his short of U.S. treasuries for a while and increased that position. He thinks Europe is 12-18 months behind the FED. He wants to short the german 2 year to take advantage.
A short rant by myself before I get back to Miller. Shorting bonds always sounds like a punishing trade. As you are paying out coupons while you hold it and then there’s the chance it will move against you. Not so with Euro bonds. A 2 year german bond has a negative yield! For some reasons people pay for the pleasure to own these. Even though I’m a Euro myself I’m not one of them. There are two reasons for this twisted reality: 1) The ECB is buying up bonds 2) Euro post 08’ regulation makes it attractive for financial institutions to hold government paper beyond its intrinsic value (what could possibly go wrong with such reform right?).
Back to Miller: He is fairly concerned with inflation. He says when inflation started up in the past it started slowly in the first couple of years The Fed has been clear that they are data driven.They are unlikely to change direction on their tightening path (my own research backs this up, they tend to continue in a certain direction until rates are quite a bit higher). Miller doesn’t think there will be recession but expects inflation will start picking up.
The U.S. is leading the tightening cycle but other Central Banks will follow. We are going to see a less accommodating monetary regime. Volatility will return. The path of least resistance for this year is for stocks to go up. Unless interest rates move much quicker than anticipated.
The S&P 500 P/E got to a very high levels in 99’ while the 10 year yielded 6%. Higher rates don’t necessarily stop stocks.
We’ve had very low vol period that made the market very vulnerable to any headwinds.
After the recent pullback, equity valuations aren’t demanding given where rates are.
Miller also mentions the supply of government paper is going to be significantly higher going forward. The 08’ collapse was preceded by a shortage of safe assets. With new requirements on banks. There is a high demand for assets that are perceived to be safe.
Miller is divided on European banks. He holds a position in Credit Suisse. The CEO is doing a good job and they are executing on a good strategy.
Demand for commodities will go higher. However, the commodity super cycle is over. Just like with European banks his views are commodity specific. Oil has seen a peak in mid 60’s but there are other ones that are more attractive. Most traders in commodities are focused on trends. Prices are ultimately set by supply and demand.
Reminiscence of a stock operator is a valuable book because of its look at market psychology and behavioral finance. One important lesson:
The big money is made in the big move.
Miller on Charting
We are getting into controversial territory now. Most value investors like charts and technical analysis as much as a visit to the dentist. Miller isn’t quite as negative on charts. He thinks chrts can be helpful to visualize supply and demand. He actually looks at 10 day, 50 day and 200 day moving averages. If only because other people look at these.
Miller on cryptos
Bill Miller became aware of cryptocurrencies in 2014 or 2015. He read work by some of the experts in the field and some of their arguments seem to have fit his framework for investing. He mentions one thing that convinced him being the argument that you don’t see technological change like this very often at all. It seemed sound to put 1% of assets in there.
He views Bitcoin as still being in its early days. Miller doesn’t think of himself as a bitcoin believer. Definitely not an evangelist. He is a Bitcoin observer. Bitcoin is showing a very classic path of innovations like the printing press and the internet.
A perfectly reasonable market cap for Bitcoin would be $700 billion. He can’t rule out a $100k or $500k bitcoin. Bitcoin’s current market cap is about $150 billion and they trade for about $8500 a piece.
Bitcoin has a lot of issues but that doesn’t mean it won’t be the thing people stick with. The internet protocol wasn’t the best technology but it won. VHS wasn’t the best technology but it won. There are myriad examples where first-to-market matters when there are network effects involved.
Unlikely Bitcoin will challenge any reserve currency. Other currencies in the world have inflationary aspects. Bitcoin deflates any assets that are priced in it. Everything drops related to Bitcoin. The problem with that is it bakes into Bitcoin where no one wants to sell their Bitcoin. Monetarists argue this makes it has built in higher volatility.
Keep your mind open Bitcoin may not be the winner.
You can listen to the entire interview here.
Disclosure: author is long Bitcoin / short European government bonds
