Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on mainstream.

Frank Curzio: It’s gone out there. It’s August 28th. I’m Frank Curzio, host of the Wall Street Unplugged podcast, white breakdown of headlines and tell you what’s really moving these markets. Yeah. I’ve been so stressed out lately. Oh, if I told you guys this, but I had a flood in my house last month, so a pipe burst in my bathroom, and water spilled into four separate rooms. So I had to replace the floors and call a plumber. They brought in like 15 of these big drying machines. They had to dry the walls and the floor so you don’t have any mold. Those machines are in the house for like nine days, and it’s extremely, extremely loud, and not only that. They have to take up quite special powers. They take up the outlets in for the oven and the fridge and things like that. I mean, it was so bad that my kids and my wife actually slept in my mom’s house during that whole period.

Frank Curzio: Then I had to call my insurance provider, and of course, that’s always a process. It wasn’t actually too bad, but yeah, we had the floors ripped up, the entire floor, right? The entire floor was ripped up, that first floor. It’s a two story house. We got to wait for those insurance to come, which took a few days. Then you had to order a new floor and just go to a shop and everything, which took two weeks for those guys to get the materials and another week to install. So my floor was just a dusty pallet cement pretty much for most of August. Now, after the floors are put in, we decided, “Hey, you know what, let’s paint the walls because we have to paint all the baseboards anyway.” So we said, “Okay, let’s just paint the walls and everything.” Needed paint job.

Frank Curzio: So we decided to paint the bathroom, living room, kitchen, separate rooms. Now, the collar of my bathroom is doctor’s office blue. I call it that because my wife chose the color when I came home one day, and she was like, “Oh, what do you think? I like it.” I said, “I felt going in the bathroom is the doctor’s office.” So I call it doctor’s office blue. Outside of the bathroom [inaudible 00:02:11] we have an accent wall that used to be painted magenta, like a purple-ish red color, and it’s just one wall on our living room, getting to the point here. So we decided to change it and said, “You know what, let’s change it. It’s a little bit dark. Let’s change it to a nice grayish blue color.” It’s like a really nice, gives the house a beachy feel since we’re all close to the ocean.

Frank Curzio: So my painter has come in, and I tell him, “Hey, you know what, I want the accent wall painted with a new grayish blue paint, right, that actually bought already.” We bought two months ago. My wife and I were going to paint that ourselves, but we figured, “Hey, let these guys do it.” I told him to paint the bathroom with the same doctor’s blue color, right? So I had half a can left of that. So very simple, right? The other can was brand new. That’s the greatest we want in the accent. Well, and they’re like, “Sure, frank. No problem. We can do that.” Now, my wife is always running errands every day. She’s taking the kids to school, picking them up around 2:00 PM, driving them, cheerleading, gymnastic, music classes, chess. I swear, my kids do more shit than most adults do in a lifetime. But they love this stuff. My wife loves keeping busy.

Frank Curzio: Anyway, with me working and my wife basically running around, the painters went in the house by themselves. So when we both got back around dinnertime, we noticed something strange. The painters painted our accent wall with the wrong color. So they painted it doctor office blue. Obviously, be calling that, I’m not crazy about it. Instead of that really nice grayish light blue color that we told them to do. What a fricking surprise, right? I get a quick reminder that we’re in Florida again. Anyway, so they had to repaint the wall, and they’re actually still painting my house right now, which I think they’re on like day five. That seems kind of long to me. I think it’s like four to five rooms, but five days of just that’s all you’re supposed to do. Give me five days, I’ll paint an entire house, I mean, if that’s the only thing that I’m doing. I’m just surprised it’s taking that long.

Frank Curzio: But they come in at 10:00, have an hour lunch, smoke breaks and leave around 4:30. That’s kind of the normal here in Florida. Yes. I wish, and I know a lot of you wish you had those hours, but we don’t. So when my wife and I saw that the color of the accent what was wrong, we were obviously really ticked off. So remember, our house had been a wreck for a month due to that flood, and now, it’s taken another week or so to paint, and there’s drapes everywhere, and the house is a complete mess. It gets to you in a while. Every time you walk through the front door, it feels like you live in a shack because everything’s just torn up. So yeah. We’re kind of losing patience as well.

Frank Curzio: So my wife’s like, “Whatever.” She’s pissed. She’s like, “You know what? I’m going to run. I’m going to go get a coffee. I’m going to go to Dunkin’ Donuts. So she goes, and she takes the kids there. Decides, you know what, I’m going to move for a bagel. Dunkin’ donuts has been open for eight years over here. Coming from New York, we love our bagels. Dunkin’ donuts don’t even compare, but there’s not a lot of place to get bagels. Sometimes she’ll be like, “All right, I’ve got a great bagel over. That’s fine.” So my wife asks for three poppy seed bagels toasted. Dunkin’ donuts lives by us. Never had poppy seed bagels. They never had them. So my wife said that by accident because we love poppy seed bagels, which she meant to say with sesame. She’s like, “Oh, I’m so sorry.” She’s like, “I meant sesame.” The guy’s like, “No, no, we have poppy.”

Frank Curzio: My wife’s like, “Wait a minute. You didn’t have a for eight years.” He’s like, “No, we’ve had it for the last 10 years.” She’s like, “All right.” She knows the guy’s full of shit. She like, “All right. We’ve been coming here. I’m telling you this.” So she’s in at the right drive. She tells the guy, she’s like, “All right. Just give me three poppy seed bales toasted then.” So she gets home, and she opens a bag, and it’s three toasted bagels, and they were all sesame seeds. Now, my wife has a pet peeve, and we all have them. So I’m not making fun of her. Hey, when people wear those dumb neck pillows around the airport terminals, I don’t care if they go, “Are you wearing them on a flight?” I get it, but just I don’t know. I just want to take it off and throw it down, the terminal. For some reason, that just bothers me a lot. I know I sound weird, but we all have our pet peeves.

Frank Curzio: My wife, her biggest pet peeve is when she orders takeout, after she gets home, the order is wrong. Now, imagine buying a brand new car, and you just drove it to your home to show your family. You want to show it off, it’s amazing. Before you even get into the house, another cop comes roaring down the street and crashes it completely totaling it. Think of how pissed off you would be if that happened. Now times that by 100, right? That’s how mad my wife gets when someone messed up the food on her when she gets home. She goes crazy, which by the way happens like 75% of the time in Florida. She calls the guy in Dunkin’ donuts, gets the guy on the phone, and she starts kind of going off on him because the guy was just telling her, “We serve poppy seed bagels for 10 years.” So the guy’s like, “I did give you a poppy seed bagels.” My wife’s like, “They’re sesame seed.” Apparently the guy doesn’t know the difference between poppy and sesame.

Frank Curzio: Again, no surprise, but to see my wife’s reaction is awesome. So this happened on Monday and now we have yesterday, right. My wife’s driving our daughter to school. Again, the house is still a wreck. She got pissed off about the painters, which she does, and we do have every right to be, it’s taken a long time. After she drops the kids off, a few hours later, they call and say, Brianna, my oldest daughter has pink eye. We need to take her home. We don’t want everyone else to get it. I get it. I understand that. If you have something contagious, usually, it’s the right thing to do as a parent. Hey, if you got something contagious, whatever it is, a cold, sit them down for a couple of days where the whole entire school isn’t getting. I mean, it’s different when you’re really young, but she’s 12 years old.

Frank Curzio: So my wife’s like, “She doesn’t have pink eye.” We just have tons of dust in the house right now because the sandy walls and stuff like that, and she has allergies, and she was rubbing her eye. That’s why it’s red. So the person at the school says, “Really? If she’s allergic, then why is it only one eye that’s red?” I was like, “Like we don’t know our daughter, right?” So my wife drives the school, picks up my daughter, notices the principal there. So apparently, the lady at the front desk who told her this, she thinks my daughter has pink eye, told the principal, who was really cool by the way, but she must have told her because my wife was questioning saying, “Do we really have to take her out of school?” The principal was like, “Yeah, you should take out of school,” whatever.

Frank Curzio: So wife barely takes her out, goes right to the doctor. Got to pay 30 bucks, wait 30 minutes, stops, sees my daughter, and says, “She doesn’t have pink guy.” Right? So he’s about to write the doctor’s note. My wife’s like, “Could you do me a favor? Could you write in big bold letters just that Brianna does not have pink eye, she is not contagious?” The doctor actually did that, write a note. So my wife’s got to talk to the lady at the front desk again, which is today and handle that note. I’m telling you; I wish I could be there when my wife gives that lady the note because my wife’s really cool. She doesn’t hold back. She’s not fake. She doesn’t like someone, she doesn’t talk to them. If she likes you, she’ll give you the shirt off her back. But when she gets pissed, watch out. I’ve been there, I know. It’s pretty pretty impressive actually. It’s really cool. Just like everyone gets angry and pissed off. So I’m not picking on her because she does have every right to be really pissed.

Frank Curzio: Anyway, sorry for long drawn out story here, but it’s been really stressful over the past few months. We’re launching several new products over the next 45 days. Got a lot to look forward to. Just closed our security token off the cards, equity owners, so very busy at work as you guys know, just like all of you on these days, right? We’re working hard for our families. Man, when you just throw in the family stuff and all the things going on with the house, it’s a little crazy sometimes. I could see why marijuana is just getting bigger and bigger these days. People looking to relax and calm down. But it is crazy out there. You just need time to distress. You know what? That’s why I love this podcast. It’s like therapy to me. Said all the time, just gets everything off my chest. You guys are like family. You know everything about me.

Frank Curzio: But, now that I get that off my chest, sorry, you had to listen to all of my nonsense and personal nonsense as I share with you, but now I feel much better, and it’s back to work, and I’m laser focused, which is a great thing for you because I have an awesome show for you today. Starting with my interview, my guess is Andrew Horowitz, who’s a regular on the show. Andrew hosts the second best financial podcast in the world called The Disciplined Investor. He manages money through Horowitz and Company. Andrew’s a good friend, brilliant analysts, awesome guy. He is going to debate me on several big topics today, including tariffs, the impact of the US and China, recession fears, the car administration, Donald Trump and his tweets.

Frank Curzio: We had a couple of back and forth on Twitter, and back and forth, I mean friendly debates, the way it’s supposed to be. Not that I hate your freaking guts because you have a different opinion than me or what we normally see in the media today, especially on the political end. Guys, pay attention to what we’re saying. You’re going to get two different opinions, which is fine. We’ll see who’s right later on. But you should take that in. You always want to just hear both sides of the story. It’s important. You always hear my side of the story. I have guests on. I love having guests that have different opinions because I learn from them, and sometimes they’re going to be right, and sometimes they’re going to be wrong. But I want you to look at this with an open mind and say you don’t…

Frank Curzio: Pretend that you know nothing about a potential recession come in, like the terraces new or you don’t have an opinion on these or where it’s going and just listen to both of us because we’re going to make some really good points about how you should invest and if you have to change your asset allocation long-term because we’re seeing so much freaking volatility out there, which is nuts these days and a lot is being driven by these macro indicators. We’re going to get into it really deeply today. Trust, it’s going to be fun. It’s good interview. I don’t say that often. It’s going to be really, really cool, and you’re going to learn a lot. More important, Andrew is also going to share his favorite ideas, few really interesting names and quoting one stock that he believes you should short right now. It’s really great stuff coming up.

Frank Curzio: My educational segment, I’m going to break down the new norm of algos, that’s algorithms. If you’re a subscriber toCurzio Venture Opportunities, you’re going to be reading about algos, what they are, how hedge funds are using them to front run the markets, how to create more volatility in stocks, and I’ve seen in my 25-year plus career. You’re also going to read about how you can take advantage of this system and beat Wall Street at its own game. So I break all this down in CVO, Curzio Venture Opportunities, which, if you’re a subscriber, and that’s one most expensive prop we have here because it’s really focused on unique ideas that we bought that you’re not going to find any place else and also private equity deals and stuff like that.

Frank Curzio: But you should have that issue already because this is Wednesday that we’re doing this, and it comes out Wednesday after the close, around five, six o’clock. This gets published around that time too. But you should’ve got that issue, right? Make sure you read it. It’s really awesome. This educational segment, I’m going to go over some of those details. Some of the data is going to completely blow you away. So be repaired of how much volatility we have in the market, especially over the last two years. You’d better be prepared because if you’re not, you don’t adapt to the new norm of algos or at least understand how they’re being used. You’re going to be left in the dark. By being left in the dark, I mean, you’re going to have trouble generate market beating returns without understanding the volatilities algos have created, especially, guys, over the past two years.

Frank Curzio: You know what? It’s going to get a lot worse going forward. More money managers turning to these quant systems, and more important, the largest institutions, sovereign wealth funds, tee-shirt retirement, California… All these front police, fireman retirement funds. Trillions of dollars is looking to flow into money management firms who are using these systems, whatever you want to call, quant system, machine learning algos. Tons of money is going into that right now. That’s what they want. There’s a reason why I’m going to break down educational segment, but you need to understand this part because you’re going to see tremendous volatility. It’s going to get a lot worse going forward.

Frank Curzio: So really great educational segment coming up. Definitely want to listen to it. But before we get to that, let’s welcome back my buddy Andrew Horowitz, who is about to debate me on several major topics. So again, it’s got a really fun interview. Well, let’s get to it right now. Andrew Horowitz, thanks so much for being back on the podcast.

Andrew Horowitz: Hey, Frankie Curzio, Frankie X-ray Curzio, which I am thinking stands for Xavier. Am I right?

Frank Curzio: That’s a very good guess. That’s correct.

Andrew Horowitz: What else could it be?

Frank Curzio: I know. What else can it be? Anything else?

Andrew Horowitz: Frank X-ray Curzio.

Frank Curzio: Yes. Frank X. Yeah, right. There’s not too many ideas. So not too hard to figure out. Now, we’re going to have some fun because you and I debate in a professional way. Guys, Andrew and I like each other. We’re good friends, but we have different opinion on things sometimes. It doesn’t have to be Democratic, Republican, you have to hate each other. So we’re going to go over a couple of topics that are very relevant to today’s market and go over the points. More important is we want to give you our take as individual investors of what you should do for your money, what you should be worried about, what you’re not should be worried about. So Andrew, I want to start off, and actually Andrew has a new soundboard, a new studio. I’m hoping that you’re going to do it when I say the word tariffs. Can you do it for me on the spot?

Andrew Horowitz: Tariffs.

Frank Curzio: That’s it guys. That’s probably going to end right there. We should end it right there. So Andrew, let’s talk about tariffs. I want to get your thoughts on what lays between Trump and China to a new so much. More important, individual investors be concerned. By concern, I mean, should they change their long-term asset allocations based on what’s happening now? Something I thought would be over a while ago, but something else has said that keep the money in US stops. You’re going to do fine, and they have done fine up to this point, which a lot of people were worried about millions of things, but this has lasted a lot longer than what I thought. What do you think is going to happen? What are you telling your clients?

Andrew Horowitz: All right. So let’s just also recognize that the whole idea of the tariffs, the nature of tariffs themselves or higher prices, taxing goods and putting some kind of an extra price tag on goods is inflationary in general, or at least it should be. That is either going to be absorbed by the company that is importing it or the consumer. So it’s the priority, depending on how things are going, and more importantly, how long these tariffs stay in, in fact. So if tariffs look short and companies are like, “Okay, we’ll absorb it for a little while, not a big deal.” But over time, they’re going to have to push that onto the consumers. So that’s why we’re not seeing a lot of a lot of inflation right now.

Andrew Horowitz: In terms of the allocations, I mean, I would say at the beginning of the year we’ve generally for our global allocation shift a little bit to the left in terms of safety, getting away from some areas around the world that were more concerning, extremely shortening up our bond exposure, which has been doing very well. At the same time, depending on how long you’re looking, do you want to say, “Well, if I have a 10-year horizon, does it matter?” Well, maybe not. But I got to tell you something. The longer this goes on and the more escalation that we see in terms of the level of tariffs and the rhetoric, the more difficult it’s going to be on the global economy. Then there’s this whole idea that, well, things are doing well in United States. Yeah, we’re doing much better, and we’re doing fine, generally speaking, from an economic standpoint, not great in terms of GDP growth, jobs growth is wonderful.

Andrew Horowitz: We’re seeing manufacturing slowed down significantly. We’re seeing some durable goods sell off and do better and very choppy. But generally speaking, I don’t see any real holes at this point in the US economy. However, we are not an island alone. The fact is for the last 25 or 30 years, we built up a significant relationship with the rest of the world in the whole globalization process. We’re essentially trying to break that down in a matter of four years. The way it’s being done, the haphazard and obviously flippant, way this is being done is I think very detrimental to the confidence, and we don’t have confidence. That’s where things fall apart.

Andrew Horowitz: So depending on how long of a time period you have and timeframe, depending on your risk factors, and more importantly, whatever your spook factor is, you may want to adjust your portfolio to bring down equity exposure just temporarily and look for an opportunity if we do see an economy rolling over the tariff and trade war dispute expanding. But it all depends on kind of where you are. Then you have to also look at what areas do you want to be in. Large caps are doing really well. Small caps are doing terrible. Banks are doing awful. Energy is doing terrible. So I mean, it all depends on where you’re picking your positioning, right?

Frank Curzio: So Andrew, I agree with it. But for me, when I look at trade, I thought that this would end sooner. The reason why I thought this will end sooner is because I look at numbers, I look at data. China is getting destroyed. I mean, their GDP is at a 27-year low. If you look at their market last year, crushed more than twice ours and also rebounded twice our market when things and negotiations were going pretty good, right, earlier this year. So when I see the numbers in China getting worse, they have a mess. I mean, that GDP is what? 300% plus. I don’t know how they could stay in that. But more important, you’re seeing. Even Google announced I think today or yesterday that they’re moving their supply chain out of China. Companies have been doing that.

Frank Curzio: I’m listening to conference calls. Not entirely, but they just can’t… It makes sense, right? If you’re a company, if you have your supply chain in China and you’re worried about tariffs and based on every single tweet that Trump has, you can’t really run a business that way, right? Because you’re talking about very, very high costs, a big percentage of their overall cost structure, and they don’t want that uncertainty. It’s kind of like hedging fuel costs for an airline, right? You just don’t want that uncertainty. Wet Wall was 120. It was $29 in a five-year period. It’s crazy. So you want to hedge it this way. You can run your business.

Frank Curzio: We’ve had different opinions where I said that this has to end. I was just on the impression that it would end. But you were like, “Well, there’s a lot more to this, and there’s a lot of stubbornness.” Explain that because I’m hearing that a lot, even from people who listen to this podcast who are listening in China because this podcast, both are podcasts are international. Explain that a little bit more and just so we can get the audience in.

Andrew Horowitz: So let me help you with something, seriously, Frank. We go back a long way, right? So I want to tell you something. You’re thinking like an American, which is fine because you are. You’re thinking like an American, and it’s very difficult to understand a different culture and their mentality. The problem is that when you have a culture like we have here in America, where I can call you up and say, “Hey, I could pick up the phone.” I can say to you, “Hey frank, I need you do me a favor. This is what I need you to do.” You’ll be like, “Okay.” End of conversation. You wouldn’t think twice about this, right?

Andrew Horowitz: You call somebody in China or maybe in Asia. You have to start with pleasantries, a whole different way of being. You’d have to say, how’s your families, thank you so much for taking my call. If it wouldn’t be too difficult, there’s something that I would like you to do if you could do it, but if not, I understand. But here’s what I’d like, please. Of course, if you do so, I’ll be forever grateful. Whole different discussion. You follow what I’m saying so far?

Frank Curzio: Absolutely.

Andrew Horowitz: Next, you have here a hot-headed and very emotional and a very politically motivated president who is utilizing American process and at a New York level, okay? Not a South Carolinian level, a New York level of trying to beat down another country saying that, “You know what? Here’s the deal. Take it or leave it, otherwise screw you. We’re not going to do business with you.” You have China who says, “Wait a minute. This is no way to talk or negotiate or do any of this.” In a way, it looks like we’re trying to conquer them on trade. Now, let me just back up and say one thing. You and I are both in agreement about, yes, there needs to be reforms, no question about that. We’d love to talk about the intellectual property. We talk about the unfair trade knot. So okay. Put that aside. We both agree with that point.

Andrew Horowitz: It’s the process as to how we’re trying to turn this around that’s the problem. China was conquered, I mean for decades and centuries. A matter of fact, in the 1800s, they had the opium wars back then. I was in China. I’ve talked to people in Shanghai about this. You had something that was called the century of humiliation, a time when they were just conquered, and people came in over the 1800s, where they came in, and they had these… They were forced to weaken the Chinese government, weaken the Chinese economy to see territories and sign these unequal trade agreements. Then what happened was that once that passed and once they got beyond that, they decided they are never going to let this happen again.

Andrew Horowitz: They will never be conquered from a land-based conquering or an economic or a psychological or any other way. Now, what’s happening is they’re getting a taste of this again, and you have a different culture, and it’s coming at them hard and fast. Whereas, by the way, we set up a lot of this in China over the years. We wanted to be in China. We wanted cheaper products. We wanted to have cheaper labor and manufacturing. We set this all up, and now we’re like, “Hey, you know what? This isn’t fair anymore. We want it back.”

Andrew Horowitz: So there’s a kind of a psychology that’s going on here that I think is the basis of the problem. On top of that, whether they pulled out of the trade agreement, whether we changed the rules, who knows what the real answer is here, right? Because there’s so much going on between tweets and news and headlines, and then you got Fox and CNN. Who knows what the real truth in all of this is. You have China’s newspapers and all. So the problem you have is that. Then on top of that, you have a political issue that’s a really big problem. Trump’s been in his position for four years and potentially four more, but four years right now. Two and a half years into it or so, he has to start now making good on some of these promises and making sure the economy stays good and all the other things related to his attempt to tame this China economic situation.

Andrew Horowitz: He has the potential to lose political points if this thing doesn’t go right or if he doesn’t close the deal because he’s the greatest deal-maker in the world, the greatest and smartest deal-maker that ever was. So he has to prove his point here. On the other hand, the president of China is now in for life. More so, now, all of a sudden, there’s been some discussion about, I think the word is Lin Zhao if I’m pronouncing that correctly, which means spiritual leader. This is coming into the discussion and vocabulary describing Xi Jinping or in terms of his up his heightened level of overall power, not just the president, not just the leader, not just the premier, not just the leader of the emperor, whatever, but now kind of at the next level, spiritually. This isn’t in the news the last few days.

Andrew Horowitz: Now, you have a situation where he’s in for life. He doesn’t have to worry about losing political points. They’re looking at him as the chosen one, really, in China. Whereas president Trump was saying about himself, laughingly, maybe. So you have this weird situation, and this is why I think there’s going to be a much longer process. You just look at what happened last week, 8:02 in the morning on Friday, China comes out and says, $75 billion of increased tariffs or $75 billion worth of goods going into place on September 1st and December 15th to have a reciprocal and direct tariff as we’re doing it moving forward. They’re not backing down either. What do they do? They manipulate their currency down, the yuan is down 14% since the trade war started, defraying some of the costs on the goods, right? Not really great. Not really great for them.

Andrew Horowitz: So I think that there is a lot that’s going on here, and you’re starting to see a lot of manufacturing slow down here. It’s coming in and being… We’re importing the slowdown to a degree. We saw that the market PMI index, manufacturing index, the flash number came out last week below 50 for the first time in a long time. We’ll see what happens with the actual ISM numbers. But I mean, I think that we have to realize that this is not going to be a short-term process. If I was a gambling man, the under over, this is not going to be resolved before the election.

Frank Curzio: No. Well, you said a lot of things now. One of the things you said you mentioned looking to conquer China and going back to opium wars, and how did you put it, where it’s like a century of humiliation, I think you said. So when I look at that, and because this is what I mean when we see media and we see people take things, you just go with it and run with it and go crazy with it. I mean, we’re comparing the opium wars, right? I mean, even if you look at the second one, it’s not even closer comparison what’s going on today, right? I mean, you’re looking at [crosstalk 00:27:04]

Andrew Horowitz: No, of course not.

Frank Curzio: … the British merchants, drug traffickers, cartels pressured London into the bandit Beijing pay them, just full street value for the narcotics that they did that. China said, “No way.” They seize British ships, confiscating the opium, burn their properties and then the British troops wound up slaughtering tons of millions, I think, of Chinese civilians, right? I mean, that’s-

Andrew Horowitz: And got them hooked on opium.

Frank Curzio: Yeah. I mean, real quick, right? So I understand that. I understand that. But we’re not asking China to sell more of our legal drugs. We’re not asking them to change their way of living or change their military, anything structural, right? We’re asking to stop stealing our shit basically and lower the trade balance a little by buying more of our goods, soybeans, our culture, natural gas, oil, to make it more fair. That’s what we’re asking, right? Especially the intellectual property, which that’s factual. Everybody agrees on it. Both sides. You want to clean that. That’s what we’re asking for. We’re not asking for, “Hey, allow us into your nation. This way we can take it.” Oh, it’s not that crazy, right?

Frank Curzio: So when I look at this and see what’s on the table, and I look at China, we’re a 20% customer of China by far the largest. If you take out Hong Kong, which basically China, anyway, I think the next largest is South Korea at 6% and Japan at like 5% or 6%. So, if you’re a company, you think of your company and you lose your 20% customer, that’s not going to happen. It’s not going to be all or none. But what’s going to happen? I mean, where do you sell those goods to? Who’s China going to sell those goods to? We could buy them-

Andrew Horowitz: [crosstalk 00:28:24]-

Frank Curzio: We could buy them from anyway. We are going to pay more for them. It is people lined up around the block, all the countries, Taiwan, Vietnam, that would produce this stuff like crazy for us. I mean, the amount of money that they’re going to make is going to be insane. But we’re going to pay a little bit higher prices. So if you look at the numbers of what’s going on in our economy, we have 5% off our highs, whatever. Yes, we have a whole bunch of fears and everything. China is in a depression. I mean, their GDP is at a 27-year low, the growth, right? So that’s how much they’ve slowed, If you look the numbers and the massive amount of debt. So I understand the culture, and I understand that, hey, the president is in for life. So he’s going to sit on his hands, Right? That’s what people are saying and saying whatever.

Frank Curzio: Does he really want to be the person? Because now you’re seeing companies actually move out of China. Okay? It’s not like, hey, if this thing gets resolved, everything is okay. No. A lot of companies are moving their operations out of China. Yes, that’s going to start hurting us. It didn’t hurt us last year because we had the tax cuts, and I get it, and it will hurt us a little bit because we’re going to have to pay higher prices, more inflation. But it’s going to destroy China. I mean, does he want to be the guy that destroys 25 years of economic prosperity? Is that how he wants to go down? I don’t know.

Andrew Horowitz: What I’m asking you is if it’s all that easy, Frank, if it’s so simple.

Frank Curzio: Oh, it’s not easy. I’m not saying it’s easy.

Andrew Horowitz: Yeah. Let me rephrase it.

Frank Curzio: I’m saying that we’re asking-

Andrew Horowitz: If you’re saying we’re not asking a lot, which we are asking a lot in certain areas and not in others. I get that. Okay. By the way, I agree with you some of this. What is the freaking problem? Why can’t we-

Frank Curzio: I think stopping this.

Andrew Horowitz: What’s the problem?

Frank Curzio: I think it’s stopping this between just… One is we’re not seeing China really buy our agriculture goods like they used to. I mean, we’ve signed things so many different things than before, and they reneged on a lot of it. I’m not picking on China. I know I have a lot of good people at… I know how aggressive and how crazy Trump could be, right? But that’s how he is. All right? That’s not going to change, and same with China. But when you’re looking at these kinds of… Let’s say if this goes on through the election, where’s China going to be? You bring up something with culture, and I get, I understand. I’ve been to China. I have a lot of contacts in China. I understand cultures and I respect all cultures. But when does it get to a point where your generational wealth trumps culture? Because people’s home values are going down 30, 40% now. They’re losing jobs. Unemployment rate’s going to go higher. They’re not going to be building as much. They manipulated the markets again, let you know lower their courtesy tremendously.

Frank Curzio: So when does it come down to people say, “Hey, could you…” Because again, we’re not asking for major stuff here. That’s why, for me, what’s on the table, and you can go behind the scenes and how many things they could do behind the scenes, things that we couldn’t even dream of or think about, right, to get this solved just like we did in the Cuban missile crisis and getting removing the missiles out of Turkey. Most people don’t even know that we had missiles, whatever it is. For me, I just cannot believe that we cannot come up with a resolution because it doesn’t seem like both sides are asking that much.

Frank Curzio: But when I read the media and looking at it, it just seems like it’s crazy. Then you have Trump with Twitter pushing the issue, being an ass and just saying, “Oh, I got to push more tariffs on you.” Which basically, it’s a $15 trillion economy, and it’s 10% of 300 billion of goods, which is nothing. I’m just surprised that it lasted this long, and my take is China would be crazy to wait till election because it’s going to get a lot, lot, lot worse for them. You take it a 20% customer away right now, and our companies are starting to adjust, and where are they going to pick up the balance in that because all the rest of the world’s really seeing slow growth? I just think China has a lot to offer us, and we have a lot to offer them for this deal to actually go through.

Frank Curzio: Plus, we have an election year. I don’t know. You may be right. You have been writing saying, “I thought it would end six months ago, so I didn’t think China would do this to our economy, but they destroyed a ton of generational wealth.” That’s okay.

Andrew Horowitz: It’s not just China. Wait, wait. It’s not just China. Look what’s going on in Singapore, disastrous. Because they’re shipping hub of Asia. Look what’s going on in South Korea, horrible, Japan. Let’s not even talk about what’s going on in the bond universe. That’s a whole different discussion here, right? But-

Frank Curzio: Well, let’s get to that discussion because-

Andrew Horowitz: Before we do that, tariffs. Yeah.

Frank Curzio: I love that. Don’t make me get [inaudible 00:32:23]. Well, they wanted me to do that with Kramer if they took over his podcast, and I said, “No, I don’t want to be exactly like Kramer.” They were pissed at that. But yeah, that’s pretty cool. That’s funny. Love it. So listen, guys, and take everything what Andrew is saying and I’m saying again, it’s your portfolio. It’s your money. For me, I think we’re on the same page where we think that the market’s going to be okay, and we’re going to get into that now. We’ll talk about recession because recession is the biggest… Yeah. Again, you guys know how we feel on tariffs. So let’s move on and get to the recession because the recession argument, that’s the most used word in financial media right now. Like you said, 17 trillion in government bonds now have negative yields in very yield curves everywhere. Europe slowing, we know China is slowing tremendously.

Frank Curzio: So earning is very weak, manufacturing. What are your thoughts here? Because you also mentioned some positives. We don’t hear the positives in the market. People want to give the positives. They don’t read about that. That doesn’t generate page views. But we have much… The Fed’s going to lower rates tremendously, right? Possible resolution on tariffs, maybe, who knows before the election. We are heading into election year and you know our president can do everything you can, like you said, and I agree with you 100% everything in his power to keep the markets up, right, including influencing the Fed as much as he can. Consumer spending is solid. So there are positives, but there’s all negatives, and it seems for all markets, and you know because you’ve been doing this for over two decades, Andrew, a probably over three decades.

Frank Curzio: When you have like a goldilocks economy, not too hot, not too slow, you measure a lot of these risks and a lot of the positives, that’s usually when our market performs best. But what are your thoughts? It’s a tough question because a recession is the financials, you know, it’s two straight quarters of negative GDP growth. But if we grow 0.1%, 0.1%, that’s a recession, right? Even though it’s not negative technically. What do you see on the horizon, and are you worried about a recession?

Andrew Horowitz: So one of the things that I’m worried about in the terms of recession is our ability to talk ourselves into it. What I mean by that, looks like it’s becoming a bit of a self-fulfilling prophecy. Just yesterday, I did an analysis of a Google trends search for the word of recession back to 2004. It goes on a scale from zero to 100, being the most utilized search term for that term. You can see a chart of this. Back in 2006, 2007, it spiked up to about 100. In other words, during that time period, from 2004 till now, the most used search term or the frequency of the search term was at 100. Then it backed off a little bit back in 2009, 2010. It came back into the 80s, and then it kind of petered off, and it was not used at all to speak of, I mean, a little bit here and there.

Andrew Horowitz: We just spiked 87 in the last two months. So that means there’s a lot of search going on for the word recession. So people are now all of a sudden very sensitive to the idea. And why? Well, somebody came up with this whole discussion about the two 10s inverting the yield curve, inverting the rest of the world in recession. News media picked it up, and they started just flying with it. Oh, well, the recession signal. Look at this and look at that in the trade war. So all of a sudden, it’s everywhere. Are we going to recession? Could we be going into recession? What are the recession odds? You see this. Now, all of a sudden, it’s becoming into the vocabulary, the search of individuals.

Andrew Horowitz: The problem with that is this, if you didn’t know this, if people out there listening didn’t know this, the stock market and the economy is all a confidence game. I don’t mean that in a negative con game, but it’s all about confidence. If you have, for whatever reason, a great economy, great earnings, and for some reason, investors and consumers lose confidence, all bets are off. Because what happens is if they think that there’s going to be recession, and they start planning for that, or at least gets into the back of their mind somewhere, and they’re like, “Okay, let’s go buy that car. Oh, you know what? Maybe I shouldn’t buy that car. Maybe I shouldn’t buy that house. Maybe I shouldn’t buy that. Maybe I shouldn’t spend so much at dinner. Maybe I should sock some money away. Maybe I shouldn’t be so highly allocated to stocks.”

Andrew Horowitz: That’s what we’re seeing. We’re seeing that individuals have pulled record amounts of money out of equity funds over the last several months, seeing the highest level of money market balances. Now, some people say, well, that’s money on the sideline. Just get looking to get put back in the markets. Maybe it’s possible, but there’s something going on.

Frank Curzio: Wait, wait. Before you go any further too, don’t forget that everything is bad that happens is also good because that means the Feds get a little rates, right?

Andrew Horowitz: Right. Right.

Frank Curzio: Kidding, but just how people interpret different news. Keep going.

Andrew Horowitz: But it’s funny that you mentioned that because when confidence is down, if the Fed drops rates, that reverses that concept. People are like, “Well, you know what?” That confirms their worst fears. Oh my God, things must be bad. So while you have those people on TV giving excuse, a lot of rationalizations these days. Have you noticed? Don’t worry. We get $17 trillion of bonds that are now negatively being issued a negative rate. Well, that’s just because the experiment’s going on in Europe. We got $1 trillion of corporate debt that’s now at negative yield. That’s amazing.

Frank Curzio: Yeah, that’s okay. I mean, even the latest… This was yesterday, I think it happened, where the [inaudible 00:37:41] is falling below the yielding S&P 500. This only happened one time since whenever they’ve been tracking this. I think it’s 40-plus years. The last time it happened was late 2008. So the person who actually posted this, and I saw it’s on a research report on a sell side research report. But he was talking about this being a negative, and I was like, “Yeah, it’s just how we interpret news.” Because I’m like, “Well, is that a negative?” Because the last time that happened, if he bought stocks, then you’d be up over 200%. Yes. You would’ve had a period where your portfolio would have declined around 30% through March, but if you bought stocks then and held them to now, does that mean that’s a… Again, all markets at a high, and back then they just crashed.

Frank Curzio: So it’s different. But it’s basically the way you interpret it and all the yield curve inversion. I mean, there’s so many things out there and so much noise. But I think you’re going to agree with this, Andrew. Recession isn’t the worst thing in the world. It’s not a bad thing. I mean, look, it happens. We slow down. It’s usually a good time to find great names. It’s not a depression. I think everyone has in their mind because we haven’t seen a recession since the credit crisis, right? That it means holy cow, that I’m not going to get paid from for my company anymore. All debt is frozen. I think people have that in their mind where, “Oh my God…” Because for the market, the full 800% simply because there was an inverted yield curve.

Andrew Horowitz: Wait, 800%?

Frank Curzio: 800%. It fell 900% now, 800 points. In one day, right, right? This is the last week. Right when, what was it, the two-year and the 10-year, I think inverted for minutes. Then it didn’t even close like inverted. It crushed the market 800 points, I mean, a massive, massive move for something [crosstalk 00:39:22]-

Andrew Horowitz: Oh, that was the algos. That was an algo tree that said somebody programmed in. If the two-year ever gets above the 10-year, you know what, we’re going to sell this position in equities and just with the limited amount of volume, less participation in the markets, primary driver of stock being buybacks right now, it just overwhelmed the market. So that’s what happened there, I think.

Frank Curzio: I’m glad you brought that up because I’m going to have a whole educational segment after this about the algos. Maybe we could switch students here because I agree with you with the recession and the risks out there. But I love to talk to you about this because you’re a great trader. How are algos impacting how you trade now because the last two years, it’s been insane, the volatility. You’re seeing stocks that report bad earnings that are down 7% to open. They finish down 25%, and all they’ll finish up. If they report good earnings, the stock will be up 7%, and the thing is all the way through the roof, like 15, 20%, and I’m not talking about short coverings, a lot of shorts or the percentage of the float that’s short.

Frank Curzio: How are you adjusting because these things are blowing past moving averages. Have you adjusted being a trader to this mass? Like you say, oh well, that’s just algos. Yeah, you’re right, it’s algos. But it’s an 800 point move. I mean, that’s significant just for algos, and what happens the next day isn’t rebounds to 300 points.

Andrew Horowitz: It’s a problem because you have to obviously widen your stocks, make better calls. It kind of sharpens you a little bit to try to figure out what stocks you have more confidence in and look for those levels that would be supportive. I mean, some of these algos are very basic to just, okay, they touched the bottom end of the range of the day, and we start buying until that fails, and we’ll drop it down. Or you get to the top, ticket down, shorter at that point, and then we’ll see if it kind of falls through. If it doesn’t, we’ll buy back. That’s why you see also the reversal’s very significant because the positions are being unwound and redone each and every time. So it is a problem for that.

Andrew Horowitz: I mean, when it comes to individual stocks, if you’re buying individual stocks for a reason, for a fundamental underpinning, and you don’t see exactly necessarily what’s so bad about what’s going on and why there should be a 25% sell off if they’ve met earnings, but guided down by two cents, a cent, whatever the number is, right?

Frank Curzio: Yep.

Andrew Horowitz: Then it may be an opportunity, and that’s what happens the next couple of days. The cooler has prevail, and they start buying in. So on a swing trade or a short-term trade basis, I think you have to be a little bit more, I don’t want say patient, but just more aware, widen your stocks out on the trading basis. But yeah, these become very volatile. But it feels much thinner. The markets feel much thinner.

Frank Curzio: I agree. I mean, it’s just you’re buying stocks because even small capsules have been decimated. It’s amazing. You really don’t see that big of discrepancy. I think it’s the biggest in 20 years, difference between large caps and small caps. That was about three weeks ago. I don’t know what it is now. But just how much-

Andrew Horowitz: They’re probably [crosstalk 00:42:17]-

Frank Curzio: … large caps have performed. Yeah, have performed small caps. You’re seeing so many names on no news, like really fall, a number point earnings will be decent, and maybe it’ll go down 2%. Next thing you know, next two, three days, it’s like 15, 20% selling off. So I guess I’m asking you, when you see these selloffs and you’re looking to get into some of these things, usually traders have tighter stops. Maybe it’s 5%, maybe it’s 7%, maybe it’s 10%, I don’t know. But we’re seeing the markets move. I mean, these stocks move 20% in trading range right now. So I mean that’s got to be difficult because you’re probably trading even more in and out of these things a lot quicker, I would think, right?

Andrew Horowitz: It is potentially, yeah. I mean, I really like to find some basing patterns in this kind of market environment, where you find things that have fallen down, not catching a falling knife with a basing pattern where you see it really holding a good level of support volume based for a period of time, and then all of a sudden, it starts to see a little bit of momentum move from some of the indicators that we built. Then you start to see that this turnaround happens, look for those gaps that are looking to fill. To this day, the market is still been, in my opinion, generally speaking, very kind to move stocks up off of the low. I mean, you’ve got a company like a stamps.com. Stock fell from, I don’t know, some ridiculous number, and I mean, it was I think 150 down to like 60 then down to 30, and now it’s rising right back up again, even though they still don’t have the US postal service deal.

Andrew Horowitz: So why are people getting there? I mean, there’s still a lot of really significant amount of confidence and baked-up speculative action going on in markets. I think that is helping to hold things pretty well. You just look at Facebook. Facebook is-

Frank Curzio: Before you get to Facebook too, I just [inaudible 00:43:59] stamps.com guys and definitely take a look at it because you’re talking about a stock, and again, I know they lost that deal. This week’s kind of low is… 256 is the high, 32 is the low. So it was 256. Around a year ago, they lost these deals. It came down tremendously. This is what I mean. It felt like 87. You’re like, “Went 250, 87.” You think, “Wow. Okay. Trade at a good level.” Then it crashed again to third… What is it? I don’t know, so the 30s. But now, it’s up 100% off of its lows. So I mean, when do you figure out because it looked like, wow, a 70 was a level, 80 was the level. I mean, that’s how difficult this market. I’ve never seen anything like this in my 25-year career of how crazy these stocks move.

Andrew Horowitz: I think it’s because there really isn’t a lot of participation from individuals. I think it’s ETFs. I think it’s mutual funds. I think it’s buy backs that are buying shares. I think it’s algos that are running things. So therefore, you don’t have that middle fat if you want, that protective level [crosstalk 00:44:59]-

Frank Curzio: You’re never going to… You’re never going to get it. I mean, 80% of the-

Andrew Horowitz: Not any more-

Frank Curzio: … prettiest machines, right? Now, it was 15% [inaudible 00:45:04]. Now, it’s 80%. I mean, it’s not going to change, right?

Andrew Horowitz: I don’t think so. I think that the more volatility you have, the more it spooks people out of being in the market. Not everybody. I’m not talking about your traders. I’m not talking about your people that are investors that really believe in it and all that, until something really ugly happens. But at the same time, we’re… One of the things I think is the problem is we were in this world of buy the dip and the constant rebound and the one day down, one day up, one day up, one day down. We’re staying in a pretty good consolidation range right now. We look at the rest of the world again. We’re saying, “Oh, Brexit’s on the horizon.” We’ve got these negative yielding debt. We have a massive amount of debt pile in the US. We have Europe nearer or in a recession. All these things that are going on, and we’re ignoring some of that, I think.

Andrew Horowitz: I think that is because there’s not a lot of people to spook out of the markets necessarily anymore because the way it’s being held up, so it’s a little bit of a different environment. It’s got to be a little bit more in tune with the fact that you’re playing chess against a machine now, you’re not playing chess, or you’re playing poker against a machine. So understand that there are some moves that they’re going to make that are pretty much scripted versus emotionally driven.

Frank Curzio: They’re going to make them… I’m not even saying this as a… This is a million times faster right now, and it’s going to get faster with 5G, but they’re making it so much more faster than the human can possibly be.

Andrew Horowitz: Yeah, of course. Yeah.

Frank Curzio: It’s getting faster and faster, which is crazy. So yeah, I’m glad you covered that. I wanted your view because I’m going to cover that later in my educational segment, but just from a trader’s point, I appreciate that. I love the basing pattern. I love that. So let’s get to the fun part, which is we talk in economics. We try to make it interesting and have different opinions because it is related to the market, and it’s moving stocks, and those are big topics. But let’s get down to individual stocks people love. You have a couple that you usually send me a couple of bullets of things that you want to talk about, and you’re very high on the home fitness market. I thought that was interesting. Could you talk about that a little?

Andrew Horowitz: Well, no, the whole fitness market I’m thinking about shorting it. You have companies coming out, this product called Mirror Peloton, which I know you have a couple of those, and you do this every day because you’re a big [crosstalk 00:47:15].

Frank Curzio: Of course, yeah. Absolutely, yeah.

Andrew Horowitz: You’re pedaling 150 miles a day.

Frank Curzio: I’m [crosstalk 00:47:19] here, right/

Andrew Horowitz: Right now, it’s powering your… Podcast powered by Peloton. You’re pedaling, and it’s running these things.

Frank Curzio: Can I tell you a quick story? So when I interviewed Jim Rogers, this is about five years ago, he started this exercise regime, and he was doing the interview on the treadmill, and he lost his breath inside a coffin, and he couldn’t stop. I’m like, “Are you all right?” He’s like, “Oh, [inaudible 00:47:38].” I said, “Look, I’m going to be honest with you. You dying on my podcast is going to get me a ton of freaking downloads, but [crosstalk 00:47:44]-

Andrew Horowitz: How great was that? Oh, yeah. How great would that be?

Frank Curzio: Then [crosstalk 00:47:44]. But anyway, no, I’m not on my treadmill right now.

Andrew Horowitz: But there’s the tonal also, these home fitness gyms. Now, some of them are a little expensive, $2,000 for a Peloton, $40 a month for the subscription. But I’m thinking, there’s a company called Planet Fitness, one of the probably the only fitness companies I’ve seen in a very long time that’s done so well. But they’re doing well in an economy that we have, a lot of jobs growth, which is good, general confidence, which is good. People want to go and exercise and all that good stuff. Okay. Now, what happens when they have this opportunity, and you have a Peloton come out or a mirror that… Peloton is out, but a mirror that people are really going with, and this expansion of home fitness, where you have the opportunity to be social at the same time.

Andrew Horowitz: So a lot of the part of going to a gym is there’s some social aspects to it, right? So you get to be in a clean bathroom. It doesn’t stink from underwear. You get to be in your own home with air conditioning, whatever you want to do this morning, noon or night, late night, whatever. Yeah. You pay something for it. I’m thinking, you know what, Planet Fitness, this stock is looking a little like it’s rolling over here. So I thought that was an interesting short candidate in this big picture of the home fitness environment and possibly looking at Planet Fitness as maybe something that won’t do as well if it really takes on, just something to think about.

Frank Curzio: Yeah. No. I thought you were kind of like high in them. I know you shot Planet Fitness and think that child looks a little bit vulnerable. But yeah, I didn’t know that. I thought you were kind of thinking that market was really good, which is surprising. But let’s get to Sunday night that you really like here, which is Luckin Coffee, which a lot of people don’t talk about off everyone’s radar. I love your thesis on this. Actually, I started looking into the stock a lot. Talk about why I like that?

Andrew Horowitz: So one of the things that we talked about at the beginning here is this whole trade spat dispute, this kerfuffle, this trade war that’s going on. One of the things we’re seeing is a little bit of anti-American psyche that’s growing in China. Well, if they’re going to treat us like that, we’re not going to buy their products. So in China, they have, of course, Starbucks doing very well. Well, they have another chain that opened up called Luckin Coffee, symbol LK, and the Stock IPO, I don’t know, a few months ago. Generally speaking, it’s losing money. But again, I think that Starbucks got the Chinese market hooked on coffee away from tea as much, and the opportunity for them to step in behind Starbucks and really pick up a lot with the idea that the Chinese will say, “Hey, I want to buy Chinese. I want to buy a coffee from my own country, from a company that’s in the country,” is something that’s pretty appealing. I think it’s kind of interesting.

Andrew Horowitz: You can get it below 20, better below 19. I think it’s a good play. We traded this back and forth several times with some very good success, and I think there’s an opportunity here, especially as you start moving up and over that break point when it came off of I think 25 or so. This thing could really jam up pretty well. So, I think there’s an interesting thesis on this and an opportunity on the long side.

Frank Curzio: Then finally, another name that you mentioned, also play in China, Wyndham Resorts. So talk about that a little bit because just when people say Wyndham Resorts, at least, when I see it, I think of timeshares floor and things like that. But you have a different angle, a China angle here.

Andrew Horowitz: I mean, there’s some exposure in China, and I think what I found interesting was I looked at the chart, and I saw that when the Hong Kong protests broke out. There’s some concern about tourism in China and with exposure, just generally speaking in that area, that there may be some concern about the lack of tourism for a period of time because people are scared away, rightfully so. The stock really came down. They increased their dividend recently. Their earnings came out. Their earnings, they did pretty well. There was some softness in the area on the outlook, but generally speaking, again, that was due to this problem in Hong Kong and all the protests, et cetera.

Andrew Horowitz: So the problem is, even if it resolves today, our tour’s going to go right back. If it doesn’t resolve, by the way, you can have a really big problem because you can see financial firms and major institutions moving out of Hong Kong not wanting to have to deal with this stuff. That’s the one risk that you have there. I think it’s a longer term idea. I think the pricing is reasonable on the stock and symbol WH, I think there could be a long-term play, especially if we do see that there is some kind of resolution calming in the Hong Kong protest situation, the umbrella protests.

Frank Curzio: What’s going on there? So-

Andrew Horowitz: Something to look at.

Frank Curzio: No, love it, love it. Shared a lot of names there. So short the home fitness is like Luckin coffee when the resorts definitely take a look at. So Andrew, I mean, we covered so much, which is awesome, and I love that. I love having you on the podcast because we can go anywhere, and it’s relevant, so everything’s going on right now. So someone wants to learn more about you, how could they do that?

Andrew Horowitz: Very simple. You’d go over to thedisciplinedinvestor.com, all the different strategies that we manage there from our TDM managed growth strategy, which is a long short strategy where we utilize core… But can I mention something to you? I’m going to mention something here.

Frank Curzio: Sure.

Andrew Horowitz: Every quarter, we rotate our stocks. This is something I… this is a really important, actually. Every quarter, we rotate our stocks. We go through 5,000 stocks. We do a quantitative screen. We look for earnings growth. We look for revenue growth. We look for margin expansion. We look for relative numbers according to the peers. Oh, 15 or 20 different components that make up this screen. What happens is that we get a number of stocks that come out of that screen. What we do from there is, let’s say we have 50 stocks, we have, depending on the exact strategy and direction marks, but we’ll have at least a 50% allocation to the core equities, okay? We have 70 stocks, we’ll have 70% allocation.

Andrew Horowitz: We just, in the last quarter, July 31st when we did the rotation, only 30 stocks made it through that screen, which is telling me that stocks are no longer able to keep up with their earnings growth. Maybe it’s their ROE is a little bit lower, maybe their revenue growth is tailing off, maybe margins are compressing. Something is going on, that stocks are not able to meet this high level of screening criteria that we put on, and therefore we have a much lower exposure, which has worked out very nicely in the last month, of course.

Frank Curzio: Yeah, definitely last month.

Andrew Horowitz: But I’ve only seen this once or twice before in the last number of years. Each time has been a really interesting precursor to some stuff coming.

Frank Curzio: Negative stuff coming, or-

Andrew Horowitz: Yeah. Yeah. Because why else would stocks not be able to meet earnings growth criteria or revenue growth? Earnings growth is one thing, but revenue growth. Revenues obviously can’t be fudged as much, unless you’re Disney.

Frank Curzio: Disney is in trouble, man. I’m telling you. Could you tell me… Let’s finish with this. Could you tell me why the entire world wants to get into streaming when there’s not a company in that industry that can make money from it? I mean, Netflix is not going to make money off streaming forever. That’s okay. That’s their business model. People understand the original programming. That’s fine. You analyze companies different ways. Disney is not a company that’s used to not making money. You just spent 71 billion to acquire Fox Entertainment’s assets. You spent another, what was it, billion and a half to AT&T that increased your stake in Hulu to like 60%. Hulu’s losing $1 billion a year. You have all this content, and you’re spending… How are you going to make up $71 billion by selling a service for $15 a month?

Frank Curzio: You’re going to get 10, 20, 50 million subscribers. But you’re competing with hundreds of their… I mean, ESPN is a big deal because that’s the biggest deal of streaming and sports, and a lot of the companies lack that. But I don’t know. I cannot believe how many people are just going into this industry and overspending on every single thing they can content wise. It’s just crazy right now. I’m just surprised.

Andrew Horowitz: I think it’d be a lot easier just to buy all of Hulu and work that with all the Disney stuff through there, right? Wouldn’t have been easier?

Frank Curzio: They own 60% of it. So yeah.

Andrew Horowitz: Right. So they could’ve bought the rest of it and be done with it. They had the whole platform. It was done. But I don’t know. it’s pretty amazing. I don’t know what’s going on with the current claims about them double dipping on the revenues and all that kind of stuff there. Obviously, they have some great content with Marvel and all the other things in ESPN, blah, blah, blah, blah, blah, the whole list. I don’t know how they’re going to make money either. It seems like everybody wants to be streaming, and there’s only so much room. Something’s going to have to give somewhere.

Frank Curzio: Yeah. It’s such a saturated… People realize, if you have Roku who is suddenly… I mean, every time, I can’t even get the setting off, but it automatically downloads channels, new channels, new streaming channels. There’s probably several hundred now and just focusing on live music and documentaries and all these different topics.

Andrew Horowitz: Curiosity stream.

Frank Curzio: All this stuff, right? I mean, it’s pretty cool. But how many services are there? People think, “Oh well, it’s Disney, and it’s Netflix, and it’s Hulu.” No, there’s hundreds of companies now doing this and the hundreds are going to be thousands of services. But I haven’t seen anyone yet make money off of this. Again, that’s okay for Netflix. That’s the way their model is built. People are fine with the not generating profits. I don’t even think if they did their own just kind of casual, they wouldn’t generate profits in the next seven years. But Disney is going to be losing a… You got to lose a ton of money on this business to make it work. For Disney, that’s not their model. It’s not why people buy Disney. It’s going to be interesting to see that transition. I know you’re looking for growth, but you have to pay for that growth, and they paying a fortune for it. So I don’t know. Pretty crazy.

Andrew Horowitz: Pretty crazy. Just mentioned to go over to thedisciplinedinvestor.com, and you can check out all the different strategies. Of course, you can follow me on my podcast, which is The Disciplined Investor. But there’s also stuff about [inaudible 00:57:02] type advisory platform, Investology is on there. So just go over to thedisciplinedinvestor.com and sign up for the newsletter and all that, and you’ll get all sorts of goodies from us.

Frank Curzio: Awesome. Before I let you go, one more time, you got to do for me.

Andrew Horowitz: Tariffs.

Frank Curzio: That is all. You’re going to maybe get a soundboard now. You’re killing me. You’re freaking killing me, man. That’s awesome. So Andrew, listen, thanks a lot. I know my audience loves you. Again, we’re able to talk about everything and get real. So yeah, love you coming on. I really appreciate it man.

Andrew Horowitz: All right. Do the best.

Frank Curzio: All right. Talk to you soon.

Andrew Horowitz: [crosstalk 00:57:33]. See you.

Frank Curzio: Great stuff from Andrew. If you want to take anything away from that, it’s the soundboard, right, [inaudible 00:57:39] soundboard. Okay. They want me to use that like early on with Kramer, and he just started… I want to say help, but there’s a couple of things on there that were on my suggestions because he just started the show when I was there, when I was working for him for that four- or five-year period and just new ideas and different things, different markets that we had to cover everything. But it just blew up so fast the show and thinking the soundboard and what sounds Kramer say. We could use buy, buy, buy, sell, sell, whatever it is.

Frank Curzio: It’s just funny. I was like, “I don’t really want to do.” But if I took some of the things that I’m saying and the words that… I think it’d be pretty funny, yeah, to get a soundboard these days. But anyway, I’m joking that that’s all you should take from that interview because we really covered tariffs and death recession. I cut him off a little bit because the topic’s off a little bit because I wanted to get as much in and get to the stock picks, which I know you love, but you heard two different opinions there on some of the things, and just take it, learn from it, and yeah, you want to welcome as much… not as much information as you can because there’s a lot of noise out there. But Andrew’s been in this market for a long time. I’ve been in this market for a long time, and now you have two separate opinions.

Frank Curzio: I think overall, we came to the conclusion that, hey, if you have a long-term perspective, then guys, don’t change your asset allocation. Also, with algos, which he touched up a little bit, which I’m going to go really detail in a minute, it’s going to create tons of volatility going forward. You need to be prepared. So I loved that interview, but I always say this podcast is about you, not about me. Let me know what you thought, frank@curzioresearch.com. That’s frank@curzioresearch.com. Now, let’s get some educational segment. Andrew, I covered a lot of the risks in the marketplace. Global debt levels are soaring. Most major emerging economies are slowing. I mean, there’s tons of them, right?

Frank Curzio: I mean, you hear about them all the time. But central banks around the world crushing low rates, 17 trillion. Government bonds trading at negative yields. That’s an indication of extreme fear. Investors are desperate for safe haven assets, geopolitical risks in the Middle East, fellow reserves, and to change policy and go on and on. You know about the risks. President Twitter, all that stuff. But as you know, what I taught you is if we’re talking about these risks, that means they’re priced into the market. They are. We’re talking about them. What’s not priced in the market is what you don’t see. That creates danger. Okay?

Frank Curzio: One of the biggest risks to the market by far is algorithms. That’s what scares the shit out of me. All this other stuff, we see it coming. If worse comes to worst, if our economy starts falling through recession, Trump’s going to say, “Okay, we’ve signed a deal with China. We’re going to lower rates to 1%. That’s factored in right now. That’s really going to stimulate economy.” I’m actually bullish on stocks through the election because a lot of things we could do, and we’re going to try to keep that economy this Trump is because he knows the unemployment rate is nearly zero. It’s never happened in history in this country when unemployment rates are this low that that person then get reelected to a second campaign.

Frank Curzio: Getting that could change. I don’t want to get political. I know people hate Trump, love Trump, whatever it is. But for me, when I’m looking interest rates coming low, I think it’s a good market for stock. But the biggest risk I think is the one you can’t see, and that’s the algorithm evolution. Now, trading algos is a process of using machines to automatically execute traits. So these systems use pretty much my top hedge fund managers with hundreds of billions of assets and management, they can execute millions of trades in seconds. So basically, they desire to take advantage of short-term inefficiencies in the market. What that really means is these systems don’t care about who runs a company, how much money it earns, how much cash flow it generates, how fast sales are expected to grow, no, to design and make profits buying and selling stocks in nanoseconds.

Frank Curzio: 15 years ago, this wasn’t a big deal when algos accounted for 15% of the total volume in US markets. That was in the mid-2000s. But algos now account the 80% of all trading on US exchanges. I brought that number really quick in my interview with Andrew? But 80%, we’re saying again of all trade in US exchanges is algos, machines rating. There’s no secret. More and more hedge funds are adopting this method of trading, explains why we’re seeing an unprecedented increase in volatility, especially over the last two years.

Frank Curzio: You want proof, here you go. Dow index swung by about 1,000 points in a single session, five separate times last year. You want to put that in perspective. That’s only happened three times in the 123 year history. Again, we’re using 1,000 points in that, and that was not even 100 years ago. But you get the point that much more volatility than we’ve seen that after hitting all-time highs in September, the market crash more than 20% to end the year. Where did it crash on? That was early on in the year. We were kind of in good standing with tariffs towards the end of the year, get along a little bit more. But it crashed because of Fed policy concerns that they would not ease as fast in 2019. Really? That pushed the market down 20%? Because earnings weren’t that bad. Consumer spending was so strong. Unemployment is still lowest in history. Crazy.

Frank Curzio: When you look at December alone during that selloff, the S&P 500 fell 9%, making it its worst December since 1931, 9%. In December, that included nine separate days where the index fell more than 1%. So nine straight days in December alone, the major index fell, that’s [inaudible 01:02:56] more the 1%. That only happened eight times in all of 2017. It happened nine times just in December. Yeah. You say, “Well, that was 2018, a lot going on.” 2019, what do we see? The markets quickly surge back, right? Basically recouping all of its loss from September through December like it never happened, right? So we’re getting pushed much, much low with algos, and we’ve already seen five sessions with the Dow climbed by more than 600 points this year, 600 points or more.

Frank Curzio: So if you’re looking at this month, you want real data, real up-to-date data right now, because I’m talking about 2018, full year 2019, let’s talk about August, this month. The S&P 500 index swung more than 1% for 14 straight trading days this month, 14 straight trading days. That’s massive volatility, and we’re talking about the large cap index. So in new age of algos, I mean, volatility is only going to get more extreme. Streams of institutions now expected to flow into these system-based hedge funds, and it’s going to get a lot worse because all these guys are competing. What are they competing for? Speed to get in and out of trades.

Frank Curzio: Now, before I get to speed and how fast these things are, let’s cover volatility really quick. Something I mentioned a lot, especially over the past two years. I just mentioned a lot in this podcast. It’s simply the pace at which a stock decreases over a certain period. So everybody knows that the main gauge track that is the VIX, right, which is the fear gauge. So cap relates the option prices on the stocks in the S&P 500 and from that data and measures what the anticipated market volatility to be on the next 30 days. Please stay with me. I’m going over a little definitions here, but it’s going to get… Trust me, I got to explain this before I really drive home the point.

Frank Curzio: So when you look at the VIX, it’s basically the leading indicator of where stocks are likely headed. So when the VIX rises, it’s just investors are basically scarred to own stocks. When if falls, it suggests investors see few risks in the market. Today the VIX is trading at around 19. I think it was as yesterday. That’s 60% higher than it was trading one month ago. All right? That indicates investor becoming increasingly fearful of owning stocks. That could be true. I mean, there’s evidence to that where you’re seeing more money flow into utilities and negative yielding bonds. I mean, you see it, right? You see the evidence behind that.

Frank Curzio: Now, to better understand that the VIX, I want you to think of it as a percentage. For example, with the VIX trading at 19, and we’ll say 20 to make it easier means the S&P 500 has a very high probability of trading within a 20% trading range over the next 12 months. What does that mean? It’s a telling indicator considering the S&P 500 declined by 20% plus just two times since the 2008 credit crisis. That was October, 2011 and then the period I’ve mentioned early, September to December, 2018. But the VIX suggest is going to happen over the next 12 months. Pretty crazy. Now, when it comes to small cap stocks, which is my neck of the woods, and a lot of people don’t talk about this. Andrew mentioned how small caps have gotten killed.

Frank Curzio: We’ve seen it. I have a small cap newsletter. You’ve seen a lot of these things will up on a lot of situations. It’s definitely more difficult market. I think it’s a great time. This is a bullish on stocks to buy some of these small caps that are depressed, which I have a great small cap that was pushed down for algos and CVO that again you guys should have received already in that issue. But for small caps, there’s a separate volatility index. I want you guys to look it up. It’s RVX. It calculates option price of individual stocks in the Russell 2000 small cap index.

Frank Curzio: The RVX is up over 65% from its July lows. I mean, July low, 65%. We’re talking just what? July? It’s August. It’s in August. It’s trading around 25. So it indicates investors are scared to own small caps right now, which could be good from a controlling point of view, but more than that later. But the RVX is suggesting the Russell 2000 index, we’ll trade in a 25% range over the next 12 months. That’s a pretty big number. I mean, if you look at the Russell 2000, and we’ll talk about trading ranges, I’m just going to talk about pullbacks here of 25% pull backs, the Russell 2000 only had 10 pullbacks of more than 25% in over its 40-year plus history? Yeah, that’s what the RVX is telling us, that you’re going to see a big movement in stocks. Again, it could be up, or it could be trading. But I’m just trying to put things in perspective of how the VIX is telling us something, right?

Frank Curzio: It’s predicting, again. It’s one indicator. It’s not a factual indicator. It’s kind of like, hey, this could happen. But if you’re a believer in the VIX and a believer in the RVX, it’s telling us that the markets are going to be more volatile than pretty much the most they’d been in history over the next 12 months. You need to know that? Because I mentioned earlier the increase in volatility… There’s no coincidence, right? When 80% of all shares trade in US stock exchanges are coming from algos, and the biggest funds using the system, they’re going to argue that algos are good for the market. It creates more liquidity for investment. It proves accuracy. You don’t have to worry about humans making… Machines aren’t going to make it the mistakes executing trades. No, it can be inputted in the computer wrong.

Frank Curzio: But it’s much, much better, right? That’s these funds argued, which is complete horse shit, right? The players are basically using algorithms to front run the market. Now, if you’re looking algos, they can predict price movements based on current market orders. The fast algos can then place… guys, listen to this, millions of trades in less than a half a millionth of a second. Okay? Think about that for a minute. That’s more than a million times faster than the human mind can make a decision. That’s right now. We have 5G coming, advances in the cloud. This is going to become faster and faster. I mean, throw in data analytics and how quick you can analyze that. There’s a reason why the biggest retailers, insurance companies, car companies, they know exactly every move you make on a daily basis. No coincidence that you’ll talk about something, and two minutes later on your Facebook account or your Twitter account, you’re going to see an ad for it. That’s not a coincidence. It’s crazy, but they monitor it.

Frank Curzio: That’s how fast it is. Yeah. Let’s get back to Wall Street and the algos. The companies that are doing this, right, means better performance, which internally is some more client fees. We’re talking 2% of assets, 20% of profits are trading firms like Bridgewater, Renaissance, and those are the two biggest quant funds out there. For Bridgewater, I think it’s 3% of assets. So that means no matter what they do, they collect 3% fees. To put that perspective, I think to own the S&P 500 through Vanguard, through the ETF, the fee is 0.04%, right. These guys are charging 3% no matter what, plus 30% of everything they generate. I mean, it’s insane. It’s insane. But they have the returns. They have great performance. Why? Because they’re basically front running the market.

Frank Curzio: Yeah. Michael Lewis Flash Boys, he wrote that book 2015 about machine trading firms rigging the stock market. No one really paid too much attention to it back then. It’s interesting because Netflix just acquired the movie rights to that and plans to release the film over the next 12 months. I want to see how in depth because this is such a secret society the signing NDAs that will put them in jail if they say anything. I mean, that’s totally proprietary, these system, these Algos. We have Bridgewater high and the best mathematicians from every single college who are probably making a few hundred thousand dollars, and they pay them $3 million, $4 million a year because they’re generating billions in fees, right, which is crazy.

Frank Curzio: So when you’re looking at this and how crazy it is, it’s a race for speed because speed is everything when it comes to algos. I mean, I’ve done research on is what experts say, a connection that just one millisecond faster than the competition can boost a firm’s earnings by as much as 100 million dollars per year. How crazy is that? So it’s a race to be first. That’s why you’re seeing all these funds. Let’s put this in real world. When you see a stock that beats earnings and they’re up 5% pre-market, right? If they reported the day before early that day, they’re up 5% free market. The algos are able to get in… The best ones are able to get them first, and you’re seeing… What are you seeing? A lot of times these stocks will go up 10% 15, 20% close of the day. That’s more and more algos… So there’s a race to become first. It’s why you’re buying it first, and you’re accelerating those returns and increasing those returns.

Frank Curzio: So you’re looking XP, it’s one of largest trading firms spending upwards of, I think it was $300,000 per month, I read, to place their servers as close to the exchanges as possible in order to boost transaction speeds. Now, not every expert on Wall Street believes in this system, right? Because there’s a lot of people hate Wall Street, and they’re getting over on you, whatever. I mean, Leon Cooperman from Omega Advisors, great hedge fund manager. He’s on CNBC a few months ago. I think it was actually December or January. He actually said, I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly without saying anything and allowing these algorithmic trend following models to wreak havoc with what has up to now been the best capital market in the world. Torsten Slok, which is Deutsche Bank’s chief international economists listed algos as one of his biggest risks for the market in 2019.

Frank Curzio: I agree. I don’t know if it’s going to be 2019, but yes, that’s a huge risk unheard of risk, black swan. Pretty crazy. That’s what scares me. Not all the risks that you’re reading about. Again, we know that we’re reading about it. We’re adjusting. If you really think we’re not going to be able to pay our debt, you’ll see it show up an interest rate. You’ll see people stop by an insurance, CEOs, things like that. That’s not there yet. The bond market’s fine. Not saying that we’re going to have a recession. Yes, you have inverted yield curves that sometimes predict a recession or indicated recession. But we know about these risks. When you know about them, you could adjust because you see them coming. I don’t think anybody knows how big of a risk this actually is. 80% of all trading, these guys are front running the market. They’re not looking at fundamentals and good stock pickers. No, they’re looking at orders in the market.

Frank Curzio: Not only that, they have a place called spoofing, tons of orders in the market that are not going to get executed to make it look like something and trying to get traders and create even more volatility so they could eat a dumper stock. I mean, there’s a lot of manipulation going on, and nobody’s monitoring this. Nobody, no regulation, nothing. We had how many flash actually? Two or three where the market has crashed by thousand points, like, wait a minute. Next day, few minutes, they’re up. But the race to speed and all these guys and all the funds and the trillions of dollars that I want to get into this because their returns are so much better than everybody else because basically it’s almost like they’re cheating legally. Right? Because the law’s against it. It’s fine.

Frank Curzio: But why am I saying all this stuff? Right? Because I have a lot of guys on Wall Street that have quant funds. I get it. I understand. I’m picking on them. But my job is to give you advice to individual investor. You need to adapt to the new norm because you’re looking at stocks that normally fall 10% a week earnings and now falling 30% plus in days. Stamps.com, which he brought up, I mean, look at that move. Should it be $30? Obviously not. It’s up 100% from its lows. Right? I mean, you would love to buy it at 30 and get to 60 in a couple of weeks, but you really to… You want to try to use this new system of what’s going on and take advantage of it. How do you do that? Be patient. Watch the market. Follow the technicals. if you’re not technical enough, just look at the 50-day, 200-day moving averages to start because when they break, that’s when you’re seeing these crazy movements.

Frank Curzio: But technicals are becoming much more relevant today in the new world of algos, and you have to pay attention. You have to adapt. I will look for inside of buying stocks that got crushed. That’s the one that I recommended in CVO. That’s down 70% in three months or from 80 to 13, and now it’s like 17. It came back a little bit. This is company is going through a change, and based on the numbers I looked at, it should have announced 20%. It should have been trading at 60. It went down to 12, 13 so much so that five different directors started buying the stocks. If you look at what Andrew said, you want to try to find a base. We’ll wait to see if it’s… Say if the stock went from 80 to 20, and it went to 23 went to 20 again, keeps bouncing off that, you can say, well, you’re getting a lot of demand, buying at 20, and then you see insiders buying.

Frank Curzio: Now, you’re buying a stock that’s completely artificially oversold at a completely dirt cheap price, and in months, you’re able to capture great returns. That’s what we’re doing in our newsletters. We’re adapting to the system. That’s the new norm. It’s not everything that we’re doing, but you have to pay attention. If you’re in for long-term, fine. But just know when you’re looking at your statements, it’s going to be crazy. We saw a 20% correction from September to December last year, and then what? The market roared higher, 15, 17, whatever it is, 17%. Now, I think it’s up like 13%, 14% for the year. These are major moves for the S&P 500 in eight months, nine months? I mean, it’s crazy. So it’s going to continue. You’re going to see more and more volatility, especially when we have a president that loves to tweet about the markets and the Fed and companies. You got to get used to it.

Frank Curzio: If you’re long-term holder, try not to look at your statement every month, maybe looking at every quarter because you’re going to see 10, 15% fluctuations in that even if you own conservative stuff. Maybe not so much if you’re in bonds and things. I mean, in very, very super conservative bonds and municipals. But if you have equity exposure, man, it’s going to get crazy out there, and I kind of feel bad for individual investors because it’s a crazy market. But you want to adapt, and you want to beat Wall Street at its game, be patient. When these companies report earnings, you’re seeing moves of 20% either direction, especially over that week that they report. Be smart about. Analyze the numbers. Don’t just try to catch a falling knife as we’ve seen with stamps.com, 70. It traded 70 for a while for maybe like a month, and then the stock dropped again from 70 to 35. You want to see insiders buying, which is important. They know the most about the company. They only buy for one reason. I think stocks going to go a lot higher.

Frank Curzio: Not only you don’t have to hold these stocks long term, it’s almost like a short-term trade where these things bounce back tremendously off their lows. Then you could sell half and have a little bit smaller sized position and just, hey, let it run. If they get things right, it’s going to go back to the old highs. If not, then you’ll see some bumpiness. But it’s a quick way to generate very, very quick profits. I want you guys to know more about this. I’m going to be talking more about algos. You have to adjust to the new market. I just brought so many different stats, a ton of research on this. Just, if you look at the evidence, you look at the data, I mean, volatility is just off the freaking charts right now and it’s crazy.

Frank Curzio: For me, I just want you guys to be prepared because it’s going to get nuts out there. It’s driven by stupid news, just crazy things that accelerate, like the recession fears dropping. The Dow dropped 800 points in one day simply because we had an inverted yield curve for minutes. I mean, crazy. Maybe dropped 200 points. I get it. What happened? The market came back to 300 points. That’s the market. Get used to it, especially when we have a president as well that’s just tweeting like crazy about China, about the Fed, about market moving things. That’s what’s driving the news right now. So bullish on the markets, but you’re going to get a great opportunity. For me, I’ve seen great opportunities, especially in small caps right now. Amazing small caps has gotten older sold, but that’s the game plan and just be very, very patient.

Frank Curzio: Maybe look for insider buying. You want to try to catch the lows on these without trying to catch a falling knife, and look at the technicals and see what levels are holding for a little while, and you can really jump in a lot of these names and get 30, 40% profits in months as they just rebound and bounce back. Because the algo’s just the only short-term trade. They trigger for a couple of days or maybe a week or so, and then after that, you’re going to see just more and more buying coming into that stock and a lot of these things are moving high. That’s a strategy I’m using. So got into a lot of numbers there, guys. Hopefully, I didn’t lose you. If I did, please listen to the segment again. It’s not that I want you to hear my voice again, which sometimes can be annoying. I’m trying to teach you what I’m seeing, the institutional side and how as an individual investor, you can take advantage of it.

Frank Curzio: So guys, that’s it for me. I covered a lot today. Wow. Pretty cool. Love covering a lot, a lot of fun. Thanks so much for Andrew for coming on the podcast. Again, if you have any questions, comments, frank@curzioresearch.com, that’s frank@curzioresearch.com. That’s it for me. Thank you so much for listening. Love you guys. I’ll see you in seven days. Take care.

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