He had pooled together you know, the joke is friends, family and fools money from those groups. We put together our first hedge fund during a time when markets were just really just incredibly powerfully strong. It was the first of the three booms to bust cycles that I kind of experienced. I was in my 20s. We were very fortunate to be good friends, to trust each other and have some good investors. We got lucky on an IPO in a text tech sector back in the late 90s. That was the rage where these IPOs and pre IPOs. 

If you have relationships or a decent amount of money in your fund, you gei into those. We were really more lucky than smart in our 20s. Our first fund really had a great couple of years. That was a surreal experience. 

It was my first experience and kind of coming out of a law firm. I hardly knew a stock from a bond. We just kind of learned as we went along, but it was a really surreal experience just to see markets and that kind of enthusiasm, that kind of exaggerated valuations. 

Then that kind of busted afterwards from 2000 to 2001. That same market that had given so much joy, gave a lot of pain. By 2003, the NASDAQ was down 80% from its highs, but I was very lucky, really lucky…

I think it was just common sense when I saw the market peaking so crazily, I was able to kind of be more defensive and take some of my earnings, so to speak, out of the market. But that was really where I started: as a friendship with a fellow I really trusted and enjoyed working with. I then left the law and really embedded finance ever since doing different things. 

Once we had that experience, we started investing our own money and other people’s money in other funds and other funny things. We did a little dalliance at Hollywood and film production. That was always crazy. But most of it was going back into family office work or hedge fund investing, creating a couple other hedge funds. But yes, it was really just for my late 20s going to that first super bubble of the year. I was very young. 1999 and 2000 were just incredible times to look into the markets. Everything was just going up and we kind of lucked out that.

Robert Leonard  4:04  

For those listening to the show today who have heard of hedge funds and family offices, but may not know exactly what they are, please explain what a hedge fund is, what a family office is, and how the two are different from each other.

Matthew Piepenburg  4:20  

Hedge funds are kind of mythical. There’s this thought rule hedge funds are just vehicles that make lots of money and have rich guys running them and rich people investing in them. 

What really is a hedge fund? I mean, technically, as an entity, a hedge fund is a limited partnership that’s at the discretion of its general partner or the portfolio manager. That portfolio manager can be an individual or a team, but it’s really a vehicle that pulls together other people’s money and those other people are accredited investors, which means they have to have a minimum net worth of 2 million to 5 million. 

So hedge funds are very exclusive just by their very legal nature to not be SEC registered, that they have to have this legal entity that allows only wealthy investors to be in them with the theory being that those wealthy investors are sophisticated and they can afford to take risk. 

And so, the portfolio manager of that hedge fund really has tremendous discretion to invest in any kind of asset he or she wants, whether it’s stocks, bonds, commodities, currencies or a mixture of those, whether it’s long or short, whether it’s some kind of arbitrage or leveraged strategy. 

Ideally, hedge funds, as the name suggests, hedge, risk… In other words, they can go long, go long by buying an asset or index or a market and they can short it, that means bet against it. So they can theoretically ride that clutch and have some positions long in some positions short. They’re designed to not have lots of risk and then good return. 

Because ideally, that portfolio manager who runs that hedge fund has some expertise and some inside skill or kind of advantage that they can outperform the stock market, and certainly not have the same risk of the stock market. That’s in an ideal situation. 

Though again, like I said, there’s the cinematic Gordon Gekko kind of Wall Street raider type and the Bobby Axelrod from Billions makes it look really fun. But there’s about 14,000 hedge funds out there. I’d say maybe 20% of them do better than the other 80%. And so, there’s a lot of real lemmings. I’ve seen some and I’ve invested in some. I’ve been involved with some real lemmings, where you have these theoretically smart folks who think they know the markets, but really don’t know how to trade the markets. It’s a very different skill to have an opinion about the market, but then how to trade it is very different. 

So a hedge fund is kind of a myth, but there are some good ones. There’s a lot of bad ones. Then you just kind of have to know how to do them. They basically invest in anything they kind of want. That can even be private equity or real estate or non-public securities. 

A family office to your other question is there are two types: there’s a single family office and a multi family office. Typically what a family office is, it’s a family with tremendous wealth. They usually have so much wealth that rather than just give all their money to Goldman Sachs, Morgan Stanley, or HSBC. They basically create their own office. They bring in a CIO and a general counsel. They bring in a bunch of analysts, and they invest that family’s generational wealth in that they typically invest in lots of hedge funds. They’ll invest in real estate, invest in currencies and precious metals. 

They’ll have their own kind of private wealth management office that you’d see in a big bank, but they’ll have it just for themselves. And so, they’ll hire smart folks out of banks and hedge funds to manage their own family money. 

Other times, you can have a multifamily office, which is a pooling together of a lot of other families or individuals, high net worth, and you invest all that money collectively together. You still have the same team of analysts. You have a CIO, who makes the decisions. You typically have a board that makes investment decisions. You have someone who researches other investments. You get together and you decide on the best path. 

I’ve been lucky to work in a single family office and in a multifamily office. What that allows me to do is you have billions of dollars at your disposal to invest. Obviously, you have to be very careful that it’s a single family or many families. You can get in front of a lot of really good hedge fund managers or private equity ideas, energy ideas. People come to you and they’ll take your call because you have money to invest. 

The idea, of course, is to manage that family or that group of families’ money in a way that gives them a return, but doesn’t expose them to those rare but real moments where markets tank and there’s a ton of risk.

So in simple terms, a family office will invest in a hedge fund quite frequently. They’ll invest in many hedge funds. They’ll do their best to sift the good from the bad from the ugly, because there’s all of those things in hedge funds.

Robert Leonard  8:47  

When I hear you explain what a family offices and all the different people that they bring in the CIO, the general counsel or the analysts, things like that, it makes me wonder, and I’m sure the audience is wondering to what is the general assets under management, if you will, generally for a family office? I’m sure you have small ones, you have much larger ones. But in general, what are we looking at for a size of one of those?

Matthew Piepenburg  9:08  

That’s a great question. I mean, as you can imagine, they range but I think if you’re going to be paying a team of analysts, and you’re going to be bringing in legal counsel, you’re going to be bringing in executives to manage that money and business, a guy to go look or a gal to go look at different hedge funds. You’re talking about 15 to 20 people minimum, right?

So to be able to pay those salaries year after year, and to have the team in place, I think most family offices wouldn’t even begin to think of doing that unless they had at least 100 or 200 million to start with.

Then of course you have if you bring in many different wealthy families together, you can pool that money. You can be talking about billions of dollars, but I think $10 million is a lot of money. I’m not laughing at that, but if you had $10 million, that’s probably not enough to start a family office. You would then go to a big bank typically, like a Goldman Sachs or Morgan saying, like I said. They’ll have minimum requirements of five to 10 million, and then the bank will be doing that for you. 

So if you’re really extremely high net worth, you can create your own kind of mini private wealth management arm of a bank, call it your family office.

Of course, that family office is only as good as that as the people you hire and bring into to manage your wealth. Of course, the families themselves have, like every family, you have a mixture of psychologies and personalities. You’ve got the ones that really care about the money and the other ones who like to spend the money. 

There’s always a little soap opera in the families themselves, but typically, there’s someone who takes command of that family office and ultimately makes the decision. I’ve worked with really good families and really good people. I’ve been really blessed in that regard.

Robert Leonard  10:46  

Yeah, it’s really interesting. I’ve actually studied family offices a little bit, but I never really looked into what they need to be in terms of scale and size before they actually make sense to get started.  

You co-authored a book called “Rigged to Fail” and I think it’s pretty interesting timing to be talking about this type of concept and all of the different material that’s in the book. 

I want to start the conversation by talking about how your goal for the book was to inform and prepare main street investors for dramatic market risks and opportunities ahead, what is a main street investor, and what market risks and opportunities lie ahead for us as main street investors?

Matthew Piepenburg  11:26  

Obviously, a main street investor, as the name suggests is someone who doesn’t have a family office, team of analysts, a CIO, a general counsel, the ability, and the blessings to like most of us to have 9 or 10 people researching investments for you and making decisions.

A mainstreet investor is like my parents or my friends, or who I was before I got into finance. It is someone who makes their money or makes their living outside of the markets and typically trusts either the headlines of the financial media or their financial advisor down the street or their 401k, manager of mainstream investors, someone who by their own choices isn’t an expert in the markets. And so, they either have to become educated themselves if they’re interested or they have to trust somebody else. 

When I wrote “Rigged to Fail” with my colleague, we wanted to give main street investors the benefits of all that we had learned as hedge fund managers, or as family office executives, or as in Tom’s case, banking executives. He was in the World Bank and he was at Morgan Stanley high up there. We wanted to democratize the financial industry so that people like my parents who don’t have $100 million or $10 million, like normal people, would be getting the same type of straight talk that we would give to a multimillionaire in a board meeting. 

In other words, we would talk about the same risks, try and make that happen because the markets are complex, but they don’t have to be… I think, if you have a little bit of common sense and some basic understanding of how markets work, you don’t have to talk down to non professional investors. You can teach them the key things to be looking at in cycles and asset classes. 

I know it has a gloomy title, but we wanted to write a book that warned about risk and at the same time informed readers about what these family offices and hedge fund guys, and banks really do look at and what they’re not looking at, what they’re not telling you, as insiders. There’s a lot we see in the banks and the hedge funds. We’ve worked with a lot of banks and in banks.

In finance, there’s a lot that isn’t translated into the headlines, or certainly on whether it’s the left media or the right media, the mainstream financial media is woefully reckless. I think they are undeserving people by not talking about a lot of the risks that are out there.

So this book tries to do that. I think it’s quite good at keeping it simple, but also keeping it substantive. We published that book on February 19 of this year, and that was the date of the S&P’s all time high. 

It’s very ironic to have a book called “Rigged to Fail” on February 19. It’s a funny title, bad markets are ripping, there’s no risk at all. Of course, within two weeks, we were looking at massive losses in the markets. Again, we didn’t predict that was going to happen in two weeks. Though we definitely saw the risks pre-COVID. We can talk about that too. 

There are massive risks out there and they really were there pre-COVID. In the book, the theme that really sticks out in the book is debt in a family, debt in a company, debt in a country in any circumstance. If you’re borrowing more than you’re taking in and you’re borrowing significantly more than you’re taking in, whether you are a husband and wife sitting the kitchen table talking about we can’t send Junior to private school because we just can’t afford it right or we can’t get that new car because the debts are too high and the income is not there. 

Well, what happened even pre-COVID as we were heading into 2020, the debt levels were astronomical. The global level of debt in the last 20 years has gone from 80 trillion to 260 trillion at the US level. It’s the same thing. It’s tripled. 

When you look at household debt, government debt, corporate debt, it’s an all time record highs. At the same time, you’re looking at this massive debt level where you’re seeing no income or very little income. 

The way you measure income at a national level is looking at this boring thing called GDP, gross domestic product. GDP is basically the national income and GDP, as debt was tripling, has been flatlined at the same time. So it’s just like you have a busboy’s income and a Ferrari amount of debt right now in the US, in the corporate markets, in the government market.

Government debt is simply unsustainable. To some extent, we can talk about how the Fed can solve that, theoretically. But we saw that as a massive red flag that debt net GDP, there was massive overvaluation of stock markets. 

When you look at what the earnings of a stock or a company are based on their price, that’s called a price to earnings multiple, they are extremely exaggerated. 

The other thing that we were seeing is because the central bank has kept interest rates so low for so long since 2008, that when the cost of debt is low, and that’s what the interest rates are: the cost of debt. 

So if the cost of debt is cheap, because the Fed has repressed interest rates for so long, companies in particular, and governments are going to go on a borrowing binge, like a keg party. They’re going to borrow and borrow. They’re going to use that borrowed money to buy back their own stocks or give dividends. That distorts confidence and makes people think the markets are healthier than they really are, but they’re really debt driven. 

I always joke that if I gave my son my Amex card, even though it doesn’t make a dime, and he’s in college. He’s running around campus, buying kegs, and renting out hotel rooms for the weekend, renting a Ferrari and going down to South Beach, he’s going to look really sexy and successful. But it’s all credit cards. It’s all debt.

In a lot of ways a lot of publicly traded companies, which I would call zombies, because they’re just debt soaked, and not producing revenues or earnings, are getting away with that facade of looking successful. 

Frankly, our own government does the same thing. They have tremendous amounts of debt and very little income, but they have a central bank that can print money out of thin air to buy that debt. 

Fancy. Let’s call that debt monetization, but it’s really faking it. It’s like Robert, if you published a book, and you were a best seller, because you sold X amount of copies, but you didn’t tell everybody that you have a rich uncle back in Ohio who bought all those books and put them in the garage. So technically, yes, you’re a best seller. But really, you have a rich uncle who kind of fudged the numbers and a lot of ways that fudging of the numbers is what we’re seeing systemically at the corporate level and at the government level. So I call it faking it, but it does create an image of success or an image of sustainability. 

In the book “Rigged to Fail,” we tried to show without drama, but with math and common sense that this market is a completely fake market. Yet, of course, it’s going up right now, but it’s driven by things that aren’t sustainable. 

There’s a great academic economist that I came across years ago, named von Mises. He is at the Austrian School of Economics. His central thesis is whenever you have a debt binge, the recession that follows is always equal or greater to the amount of debt that created that binge. 

And so, what we’ve seen since 2008, is a record breaking debt binge. By simple math and algorithms, we’re going to see a record breaking recession at some point, and we can talk about timing, which is difficult, but to me, it’s a question of math and history and looking at the right data that those debt levels are not sustainable. The market is not sustainable, longer term. To us, it’s just a question simply of debt. That has us very concerned. 

Robert Leonard  18:49  

We’re going to dive into the expected recession that you’ve been talking about, but before we do, if the US government, or the Fed can print money, essentially unlimited, right? In theory, why does it stop? When do we reach a point where something happens? What is that thing that’s going to happen that’s just going to say, “Alright, we can’t continue to print money”? What is going to happen?

Matthew Piepenburg  19:12  

That is the most important question whether you’re a super sophisticated investor or just a guy on the street. That is the question. There’s a lot of different answers. I think, at the broadest level, we’ll start at 30,000 feet and get down to the details. But that is the great question, Robert. 

I think at the broadest level, that tug of war between printing money, faking it, debt, and then the uh-oh moment where we have a recession was that tug of war between the fundamentals. I’m talking about massive unemployment, low GDP, low growth, overvalued bond markets, overvalued stock markets, grossly overvalued…

That tug of war between those facts and then a rising stock market does come to an end. I think it comes to an end at a broad level when faith in that system collapses.  

That’s very hard to time, a loss of faith, right? It’s like in a relationship when you suddenly just slowly just lose interest in that person. There’s something not there and it slowly starts to die. 

It’s the same thing with our currencies and our markets. Right now, there’s a tremendous amount of faith in the central bank, Powell and before him Yellen. Before her was Bernanke. Before Bernanke, Greenspan. There was a sense that these all powerful Fed who had PhDs from Ivy League schools really could have your back and knew what they were doing. They were going to keep us from going into a recession. 

Of course, they’ve been wrong every time, but there’s a faith that the experts will keep us safe. I think that faith is slowly starting to erode now.In *inaudible*I think it’s a matter of faith. 

The other thing, of course, there is no limit to how much a central ban… I’m in Europe. Right now I’m in France with the ECB. The European Central Bank is very much like the Federal Reserve, the Bank of Japan, the People’s Bank of China, the Bank of England… 

All these central banks do the same thing. All of them technically can print unlimited amounts of their local currency. We can print $5 trillion this year, we could print 5 trillion next year. But what happens when you do that? You would know and I would know, and I think even Jay Powell knows common sense is that if it seems too good to be true, it is too good to be true. You can’t solve a fundamental growth problem or debt problem with more debt or printing money literally out of thin air. That’s what we’ve been doing for over a decade now. 

Of course, that can continue, there’s a lot of ways that can continue. I can explain that. But if you imagine a glass of scotch, a good glass of scotch. It’s a cold winter night, and you’ve been wanting to drink that scotch all day, and you sit down by the fireplace, then you drink that scotch. 

However, if you add buckets of water to that scotch, the flavor is going to go away, you’re going to dilute the scotch. 

When you think about the trillions of dollars we’ve printed just in the last six weeks and the trillions of dollars we printed from 2009 to 2014, that has a massive dilution effect on our currency. It doesn’t mean inflation or hyperinflation. That’s complicated. It doesn’t mean that we have hyperinflation yet, but it does mean that the purchasing power of your dollar, yen, or euro, or your peso is going to be highly diluted. 

So like a Big Mac that cost 60 cents in 1970, costs about $5.50 in 2020. The reason is that the power of your currency has gotten weaker, because we have literally created so much of that currency out of thin air, that the purchasing power is there. I think that does eventually lead to some form of inflation. I think as people start to see that, that’s a problem. 

The other problem is really, technically, it’s like that book. If you write a book and your rich uncle buys every copy of that book, you will be a bestseller. You will have sold a lot of books. Technically the Fed can print money to buy assets. Right now, it’s buying junk bonds and corporate CMBS bonds. So it’s really faking it. The Fed is directly purchasing assets. 

Very soon, they’ll probably start purchasing stocks to keep the market going, but the market isn’t the real economy. That’s the big sin of Wall Street and the central banks. I’ve written about that. They’re totally in collusion together. The Fed doesn’t have main street as its focus. Jay Powell was on 60 Minutes. That was nonsense. The Fed’s number one mistress is Wall Street. It’s always been that way. I write about that and I show that.

What the Fed can do is they can keep the stock market going by printing money and diluting the currency. But the main street economy, the one you’re seeing in frustration right now, across the country, the wealth disparity in America right now is the highest it’s been in its history. 

No matter how much the stock market goes up, the vast majority of Americans aren’t in the stock market, or to an extent that they are, it’s a very small amount relative to the top 10%. And so, when you have main street suffering, and everything you buy at a Walmart is effectively made in China. You can blame China. 

China has a lot of reasons to blame. Believe me, but when you guys get executives at Apple or Nike exporting 90% of the jobs for their American products overseas, that means Americans aren’t getting those jobs. Our manufacturing, our GDP is getting weaker. We’ve shot ourselves in the foot, but the main street economy is up to its ears in credit card debt, student loan debt. I think the numbers are astounding.

The vast majority of Americans don’t have $1,000 in their checking account that’s not laughing at them. I understand that. I come from a small town in the Midwest, most people don’t have a lot of money and they have a lot of debt. And so, you can have a ripping stock market but the Fed can’t prevent it and they’re not preventing the crisis on main street. So I think the next crisis may not be a stock market crash although I do think it will crash significantly. 

The real crisis is already happening. It was happening before COVID and it was happening before the race riots. The real crisis is Mainstreet America. The middle class America is quantifiably, mathematically dissipating day by day. These people are struggling again. These are the people I grew up with and Tom grew up with in Pennsylvania.

Yeah, we went to nice schools and we worked on Wall Street in the south of France, but we haven’t forgotten. I don’t mean this in *inaudible* way. We definitely have not forgotten real America. I think our Federal Reserve has… it’s not even a political thing red or blue or polka dotted, whether it’s Obama, Trump, we don’t get into politics. 

But the truth is Democratic, Republican, and Wall Street has walked right past main street. The Fed has walked right over main street. I think what we’re seeing is a really fragile stock market for a number of debt driven reasons.

Even more importantly, we’re seeing an ignored main street, and the recession could come from the bottom up, which happens frequently in history. It’s kind of our own policy fault for years of being in debt. It’s quite sad.

Robert Leonard  25:45  

I just want to say for everyone listening to the show today that the questions that Matt and I are discussing the different topics that we’re talking about, we don’t necessarily have the exact answers. What he’s saying is what he thinks is going to happen. What I’m talking about is what I think might happen, no one really knows. If anybody says they do, you should probably run the other way. 

But I just wanted to put that out there because we are putting out our best opinion on what we really think is going to happen. But again, we don’t know. When you have somebody like Matt on the show, who’s as smart as he is, with all this experience that he has, we want to hear what someone like him. Thanks. 

So that’s, I just want to put that out there that I am asking tough questions of him. So we may or may not have the right answers. But Matt, you talked about the book example and that makes me think of a similar type situation. And so, I’ve been considering potentially writing my own book. I’ve been doing a lot of research on it. 

There’s this “hack,” if you will, on Amazon, that there are 1000s and 1000s of subcategories. What you can do is you can publish your book in a subcategory. Then because nobody else publishes there, if you sell just a couple books, you instantly become a “Amazon Best Seller”.

That was the example I thought of when you were talking about that. It makes me think about what’s going on with the market. It went way down everybody, and then the Fed comes in and buys it all up. But it’s really just a trick that is bringing up the stock market. 

So do you think this is going to be potentially one of the last times that the Fed can come in and do what they did to prop up the stock market? Or do you think it can happen again?

Matthew Piepenburg  27:16  

I think there are many people who know me will probably be laughing as they listen to this, because I was pretty, I was pretty fed up with the Fed by 2016 to 2017. I thought this can’t continue. This is crazy, right? 

Of course, every time you thought it was going to be over.. The Fed, I mean, 2018, I call the crash just because again, I won’t get into details. I saw the bond market, I saw rates rising because of the central bank, quantitative and right raising rates, I knew that was going to be too much of a rate hike for the bond and stock markets. That was kicking in in October 2018. By Christmas Eve of 2018, the markets were crashing. I said… because the Fed will come back in and print more money. AThey did throughout 2019 QE came back. They started printing money. They didn’t call it QE but they did start printing money. 

More importantly, they reduced interest rates. That’s just more kegs at the keg party. And so, I said, risk on. The Fed is going to reduce rates. That crisis we saw at Christmas and New Year’s of 2018 and 2019 was immediately resolved. Then again, this year, when you saw COVID certainly was the trigger.

However, the illness in the market was here long before COVID. The lockdown policies made COVID economically at least far worse than the actual crisis itself. But you saw a 33% drop in the S&P in March. People thought, well, this is it. This is it. I said no. If anything, COVID saved the markets because the Fed in a matter of weeks printed more money in a matter of weeks than they have done in the last many years. And so, it’s like a Lance Armstrong market. 

Look, if you give Lance Armstrong steroids, he’s going to win, right? He’s going to win until he eventually ends in disgrace  and has to give back all his yellow jerseys. 

I think when you hear me talking gloomily about the markets, I’m not saying the markets are going to crash this year. In fact, it’s ironic that despite this massive disconnect between fundamentals and economic indicators… The rally in the stock market… if the Fed wants to continue to monetize that and print trillions of dollars, they can buy us another year, another month, another quarter, I don’t know. They can put a cap on interest rates. They can manage the yield curve. 

In other words, they can still do a lot of tricks, but all they’re doing is keeping Frankenstein alive. They’re not going to get economic growth by adding more zeros to the balance sheet, printing more money or taking on more debt. It’s simply mathematically and historically not possible. You have to get growth back in this economy. 

If we had 40% GDP every year, we’re not going to get past the debt. Think about a cartoon character like Wily Coyote when he goes past the cliff. He’s hanging there for a few seconds and doesn’t realize he’s about to crash. We’ve already passed that cliff that *inaudible* kind of bet. We are going to have a day of reckoning. 

However, I can’t tell you that it’s going to be next quarter next year because you don’t want to fight the Fed. It’s very powerful. I’ve stopped trying to predict when the Fed’s expiration date will come, it gets closer every year. But even JP Morgan is predicting a year on year negative 30% GDP for next quarter. 

Look, when GDP falls by 30%, you can’t have a bull market. That’s just absolutely insane. It’s like me trying to pitch for the Yankees in my 50 years old. My fastball isn’t what it was in high school. But even if it was, I could never pitch for the Yankees. 

The Fed cannot create a bull market when GDP is going down 30 to 40% next quarter. I know companies on the NASDAQ right now that have billions of dollars of debt, literally no revenues, no income. Their debt is going to be due in the next couple months, and yet their stock price is up 20 to 30% this week. That is absolutely unsustainable. 

But to say I’m going to time exactly when that ends is really… No one who times the market is right. Usually the things you don’t see coming. But I always say if you and I go to the beach, we can bring an umbrella or we can bring sunblock. I’m not a meteorologist. I’m not a weather expert, but you and I can look at the horizon. If there’s dark clouds coming over the waves, we’ll take out the umbrella. If the sun’s out, we’ll break out the sunblock. 

I think if you know what signals to look at in the market at a macro level, and at a micro level, you can either take on risks, but you can get out of the way of risk. It’s fairly obvious once you know what things to look at.

The media doesn’t tell you about these risks. Guys like Jim Cramer and that they’re all just positive all the time, because markets are up 70% of the time. But the problem is when you have a 40-50% correction or a 30% correction, and you’re in your 70s, or your 60s, and you’re retired, if you lose 40 or 50%, you have to get 80 or 90% returns just to get back to where you started. You have to remember that you have to avoid those losses. 

Of course, knowing can time the exact moment of a loss, but actually if you have the right tools can get pretty damn close. I think it’s a very simple mantra. You don’t need to go to Wharton or Harvard Business School or you know all that your grandfather, your dad, everyone tells us to buy low and sell high. But nobody does it. Like right now you’re seeing this crazy stampede to get into a market 70% higher than it was at the height of the 2008 crash. 

People are very predictable. They have a fear of missing out on the golf course. Their friends are making money. They pile in at the worst time. They get suckered in because look, you wouldn’t normally pay $1,000 for a Snickers bar unless you could find a greater fool to pay $1,200 for it tomorrow. As of right now, that’s what’s driving people to go into this market. 

You’re literally buying at the worst time, even if there’s 20% more to go up, though smart money. Then certainly in the old family money, the families that I work with, they wait for a bottom. They’ll wait and wait and wait because every market does bottom whether it’s 10 years from now, or 10 minutes from now. It will bottom and if you’re young, if you’re under 40, I tell my own daughter who’s at Goldman Sachs, “Don’t join the Goldman Sachs 401k program, just wait. Wait for this market to tank and buy at the bottom. You’re 24 years old. You’re going to have a huge opportunity to buy a bottle whether it’s this year or next year.”

That’s where the real money is always made at the bottom and if you’re super smart, maybe you can short this market. But right now, you can’t short this market because the Fed is pumping so much steroids that you can’t bet against the market until it is a real obvious trend. So it’s a very difficult market to understand. 

Rather than get into sexy hedge fund strategies or short strategies, I tell retail main street investors, “Look, if you’re older, you gotta get out of the way. Avoid the risk. Get out at the top.”

All of our investors were spared all of the March disasters. So there we’ve been up all year, but it’s not because we’re smart. We just saw the storm clouds coming. We didn’t know it was gonna be March 1 or March 7, but we knew it was coming. So we just got out of the way. 

By simply avoiding losses, you make a lot of money. By waiting for a real market correction of 50-60% correction, we’ll get back in or buy low. It’s that simple. 

However, most people do the exact opposite. They buy high. They get crushed like they did in 2008 or 2000. Then they don’t have enough money to get back in when the market bottoms because they bled out at that point. It’s understandable. It’s sad, but it happens over and over. It doesn’t always happen to the best represented families who have the best advice. I think “Rigged to Fail” was designed to teach people without being dramatic. :ook, you can see the signals yourself and make your own choices, but this market is full of risks. You’ve got to prepare for it.

Robert Leonard  34:45  

We often hear that we should not be timing the market and I hear you saying wait to buy at the bottom. Why is that not considered timing the market?

Matthew Piepenburg  34:53  

Again, no one ever can time the top or the bottom? No one, even Benjamin Graham, who was a great value investor in the 30s. He thought he was going to buy at the bottom of the market, kept going down this guy really smart. He’s smarter than I am and he couldn’t time the bottom. I certainly can’t time when this market is going to crash precisely, when it’s going to hit its all time high, and when it’s going to hit its all time bottom.

I think the best you can do is approximate its reversion to the mean. Markets tend to revert to their mean bottoms. You’re never going to time it right. But again, it’s like that famous Supreme Court justice because I don’t know the legal definition of pornography, I just know when I see it, right? You won’t always know the top or the bottom, look at a chart of the S&P right now, compared to the dot-com bubble which I came into or the S&P bubble of 2008. Then you look at the current bubble. It’s infinitely higher than dot-com or the 2008 bubble. 

So we’re clearly at a top when you’re not at the top, but it’s enough to know that you shouldn’t be all in at the top. That’s where you start taking some cash. You start taking some profits. If the market goes down 40 or 50%, that’s not maybe the bottom, but that’s a good time to start getting money in. 

By the way, with the right signals, there’s always a trade long or short. We try to look at market signals more than just tops and bottoms. First of all, I do agree. 

Market timing, market predicting is absurd. I think preparation and a little common sense, that anyone can do. I think anyone who really stares at the market and studies it for a little bit of time, the time it takes to watch an NFL game, read a little bit, you can tell yourself honestly that there’s too much risk to be all in. 

But there’s a good opportunity, I think a lot of people are looking for that one new Amazon or Netflix stock bottle that they’re going to make millions off of. It’s very rarely going to happen. 

The real way to make money is slow and steady. The real ways to avoid a 40-50% loss, which don’t happen often., but they happen often enough to take away all your gains. If you just look at 2020 again, it’s just right now as a current example, everyone’s so excited about the new recovery now, this raging market, but again, the markets have lost 33% in March. 

So if you look at this rally we’ve had in April and May, the truth is net-net. The S&P is only up about 3%. Depending on when you look at it, you haven’t made much money this year. Yet, you had to go through a lot of volatility in March and a lot of sleepless nights if you were just writing it out. I’m saying you can avoid a lot of volatility by looking at certain signals. 

But of course, not myself or anyone is going to be able to tell you. This is the top. This is when the bottom. This is when it’s going to come. No one knows. You really don’t. 

But you can tell again, if it’s going to rain or if it’s going to be sunny, just by looking at the horizon. We do our best to try and be as honest and blunt as we can about that horizon, whether it’s sunny or rainy. 

Right now based on everything we look at other than the Federal Reserve, though the weather is very, very cloudy. But I do not underestimate the Fed. I think the Fed can buy us years more time before the markets crash. I think the economy is already in a recession based on pure economic terms. But the stock market in many ways can continue to go. 

I think one of the reasons the Fed is so desperate to keep the stock market up is in a lot of ways, because so many pension funds are in the stock market and so many retirement accounts. So much of the US economy is based on the stock market. There’s so much at stake that it’s almost nationalizing the S&P when you’re going to start buying stocks. They’re buying junk bonds. They’re buying corporate bonds. They need to do that to keep rates down, but they’ll start buying stocks too, like the Japanese did after the Nikkei crash in 1989. 

I think they’ll do that because in a sense, the stock markets become one big US 401k. It has invested interest in keeping that thing somewhat above water. That’s just an opinion. But again, I think the Fed can continue to use this stimulus to keep markets up. 

It’s like in college, you don’t want to have a hangover as you just keep one more bloody mary going. You don’t want the hangover. But as anyone knows, whether you’re in college or you’re having a martini, if you have 12 martinis, that has done a great job of postponing that hangover. But that’s not necessarily the best honest approach. 

Even capitalism requires a recession, you need to reset prices. You needed to reset expectations. Otherwise, you create a massive moral hazard of rewarding bad companies for bad behavior by giving them bailouts, cheap loans, cheap debt or printed money.  

I don’t think that’s the best message but I think we’d become so used to the good times as a culture and as an economy that we’re going to be very caught off guard whenever and however this market crashes.

However, I think the recession on main street and you just walk through Michigan, Ohio, get away from Malibu Beach, Manhattan, Park Avenue, the south of France or Palm Beach and go into the real America. People are already suffering. They don’t need me or a Wall Street Journal article to know a recession is coming. They feel it every day.

There’s 480 million credit cards in circulation right now. There’s a massive amount of American families, I think there’s three credit cards for every American adult, because they’re just surviving on credit cards. So I’m not laughing at them, I get it, they can’t make ends meet, the cost of living is high. Wages have not risen in years and debt is off the charts. 

The real America is suffering. Students are coming out of school with grotesque amounts of debt. It’s appalling, in my opinion, it’s criminal. Like I said, the average American doesn’t have $1,000. I think the percentage I read recently was 40% of Americans could not survive a $400 emergency without having to sell something. 

I think without trying to exaggerate, that’s not right for America. Again, those are not the clients I tend to see in hedge funds and family offices, but I didn’t want to forget them, because that’s where we came from. Not to be pollyannaish, but you can’t forget that it’s not even good for our country to have that kind of wealth disparity. But I don’t think there’s any way we can get around the recession to come in terms of just main street economics.

The stock market, yes, that can still have some juice based on the Central Bank stimulus. You don’t want to fight the Fed. But as Tom always says, “Trust but verify.” 

We don’t fight the Fed, we just don’t fully trust it. That’s a long, long answer, kind of over the top, but it really does astound me. If you just take a look at some of the data, you’ll see for yourself. You can verify this stuff without being dramatic.

Robert Leonard  41:24  

So if we think that maybe a 30-50% downturn might be a buying opportunity, why wasn’t this drop of that magnitude? We saw some things drop 30, 50, even 60? Why wasn’t that considered a buying opportunity or was it?

Matthew Piepenburg  41:41  

It was in some ways, I mean, we certainly bought at the bottom a little bit, but that wasn’t our bottom yet. It wasn’t our big bond. 

First of all, one thing to keep in mind, we look at the S&P, for example, which are the Dow but the S&P, the majority of the performance of the S&P and this rally is coming from five stocks. You probably know what they are: Facebook, Amazon, Netflix, Google and those are highly concentrated tech stocks. 

Great story. I love it. But the truth is the FANGS are not the US economy. FANGS are not the stock market, but they generate most of the returns in this market. I remember in dot-com bubble, there were stocks like Cisco and Microsoft, Yahoo and Juniper, they were the golden golden boys of that era. Microsoft, of course.

Now each of those stocks went down 50 or 60%. That doesn’t mean that I think Facebook, Amazon, Netflix or Google are going to disappear. I’m just saying they’re grossly overvalued, including Amazon. Even in this COVID environment, they’re grossly overvalued. 

I just wait for those stocks to go down in price because I think they’re overvalued. But I think the 30% correction slash drawdown crash that we saw in March is just the first tremor. I think there’s going to be many more quakes to come. But I think the Fed knows that too and they are literally pulling out all their guns. 

Like I said, you don’t fight fed. We didn’t fight the Fed, but we just didn’t sucker ourselves fully into it. We were 50% in cash by February. Even at 50% in cash, we completely are outperforming the stock market right now by picking the right sectors. That’s just maybe luck, maybe some skill. 

What was not lucky and what was skill was we did see a major crash coming in March. We just got out of its way. By doing that, we manage risk. 

Again, this is something anyone I think can do if they have the right signals in front of them. It’s not rocket science, it’s just common sense with a little bit of help with the right signals. Most financial advisors don’t talk about risk. They don’t talk about these signals. But it’s just about the risk today that outweighs the reward. The risk reward metrics are so asymmetric, that even if you can’t time, if you can recognize the top, not the top and you can recognize a bottom not the bottom with some basic common sense and if you have the patience, the discipline and not a fear of missing out or keeping up with your neighbors, you can just manage risk.

One thing I’ve seen over and over and this was in a multifamily office that I was with. I had a really brilliant mentor and you know the family patriarch, and he kept a really brilliant guy who made his money in prime brokerage. He made lots and lots of money. 

Good guy but he kept pounding the desk: return, return, return. That was as much as we need to get in return. We need to get a return performance. I would say no, we need to think about risk, risk, risk, but there was always this tug of war. 

The real way to make money is to manage risk intelligently, not hide in the corner and hug your knees but manage risk intelligently I think is kind of an art and a science. Sometimes you can be too afraid and I’m guilty of that. Sometimes I think the risk is just too crazy, so I miss out on things.

I’m astounded by the fact we’ve gone 12 years without a 50-60% correction but I’m also not surprised because I think the Fed ‘s and other central banks in the world are really in full overdrive right now and you don’t want to fight that fed. You really don’t.

Robert Leonard  45:07  

Alright guys, that wraps up part one of our conversation. Like I said in the intro, this will be a two part series and we will pick up in next week’s episode right where we left off today for part two. See you guys next week.

Outro  45:20  

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