Submitted by QTR's Fringe Finance
This is Part 1 of an exclusive interview with Chris DeMuth, Jr., who founded Rangeley Capital, an event driven hedge fund in Connecticut.
Rangeley’s strategy is to invest in mispriced securities with limited downsides and corporate events that unlock shareholder value. He also hosts Sifting the World, Seeking Alpha’s SPAC and event driven research product. In his spare time, he climbs mountains.
QTR’s Note: Chris is one of the smartest people I’ve had the chance to meet during my tenure as an investor. He was one of the first people to ever take a phone call from me in the early 2010’s when I first started looking at the Questcor/Acthar scam. He was also one of the first people to be nice to me when I got my start on Seeking Alpha back about 10 years ago and is also widely respected by many people whose work I admire and follow.
All answers are opinion only and do not constitute investment recommendations.
Q: Hi, Chris. Awesome to be chatting again for the first time in too long. Let’s get right to it: in your opinion, who do you think are some of the most underrated and overrated asset managers in the public sphere right now? Name names - and reasons why.
A: I’m a bit of a misanthrope so will start with overrated. Cathie Wood has defined this recent era. Her fund, ARK Invest, is different than a traditional Ponzi scheme – a fraud that lures investors with returns funded by previous investors. But they offer new investors liquidity funded by previous investors. It works as long as it is growing, but when it stops growing, the liquidity could dry up. Her funds are Veblen goods – demand for them increases with price. This goes both ways and we could see what happens to her performance when they get hit with outflows.
Jim Grant once said that “there are no bad assets, only bad prices” which comes close to defining value investing (or, for short, “investing”). Wood takes precisely the opposite approach which she calls “thematic investing” in which any prices are acceptable if the theme fits. Her approach was staggeringly successful as recently as last year. Grant’s price-sensitivity requires counting and mean reversion. Wood’s price-insensitivity requires the confidence of her audience.
But what happens after the last fan is taken in? ARK could be susceptible to a modern day run on the bank.
[For underrated,] Raper Capital’s Jeremy Raper, 507 Capital’s Thomas Braziel, and Praetorian Capital’s Harris Kupperman are three towards the top of my list of people who’ve taught me important things and whose ideas have made me money out of all proportion to how famous they are. But I have inside information and local knowledge to know that the most underrated is Rangeley Capital’s Andrew Walker. I first got to know Andrew from his writing as we repeatedly stumbled into each other when I was looking at stuff that I was sure no one else knew about… but he always did.
I guess what I like is the opposite of what I didn’t like about “thematic investing” – instead of vague, unfalsifiable claims about the future, it is knowing what you’re talking about in the present and then really sticking your neck out when the moment is right. Jeremy, Thomas, Kuppy, and Andrew all do this.
How in God's name do you think the Fed is going to deal with inflation? What's your outlook for prices heading into 2022 and how will they affect the consumer?
I think that what they should do is deal with crises symmetrically – if there’s a crisis-driven reason for artificially low rates, then as the crisis ends, rates should be raised as quickly and as far as they were cut. But since the financial crisis, there has been a downward ratchet effect. They like the crises and like their solution but never get around to the inverse. They’ve figured out the pleasurable and painful parts of the job and decided to just take the pleasure. It is like someone who discovers carbo loading and marathon running but just likes the pasta dinner and skips the race the subsequent day.
What are some of the weakest sectors in the equity market right now?
Unprofitable tech had a great 2020 but is showing signs of cracking.
One of the great spots to find unprofitable tech is in recently completed SPAC deals; a handy place to find them all together is in SPAC ETFs such as Defiance NextGen SPAC IPO ETF (SPAK). They are not all tech and not all unprofitable but unprofitable tech is the biggest category. They had a great 2020. Now things could get tricky.
It is a particularly ZIRP-y sector because while they’re faking it ‘til they make it, they have to repeatedly raise capital. This would probably be impossible for many or even most de-SPAC-ed equities in a market-driven interest rate environment.
Do you think the bond market will ever have a "back to reality" moment. If so, when and why? If not, how can the Fed prop it up forever?
I have mixed feelings about this. As an equities guy, I have long suspected that the smart people are in credit. But I also suspected that they would have been far less tolerant than they’ve been. Argentina has defaulted on its debt an average of once every 23 years and today it’s 30-year yields just over 5% so maybe the US’ creditors will be as lenient. The Fed can’t prop it up forever.
The problem with the endless fiscal and monetary profligacy is that such moves were intended only for contending with real emergencies – winning a world war or emerging from a global depression. Now we’re just doing it because our pain threshold for short-term abstemiousness has reached zero.
So, we can prop it up until an actual emergency arises. Then things get spicy because we’ve already shot our wad.
To put it simply: what's your take on crypto? Is there a chance it could catalyze the next market crash?
The more I think about Bitcoin, the more I want to own US dollars and the more I think about US dollars, the more I want to own Bitcoin.
My long-standing compromise has been about nine parts USD for one part BTC. It is a hedge against the irresponsibility of politicians and central bankers. The supply is more constrained and the demand has picked up over time. Currency is actually on the short list of things that I don’t think should be privatized, but with profligate fiscal and monetary policy, it is nice to see some citizens in a revolutionary spirit.
No, I don’t think that exposure is big or widespread enough to catalyze the next market crash. It is still a relatively new, small, and self-contained asset class. If mine goes to zero, it would ruin my whole day, but it would be survivable and have little impact on the rest of my portfolio.
Part 2 of this interview can be read right now at this link.
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My Disclaimer: I own ARKK puts and nominal positions in GBTC, TLT and SI. I may add any name mentioned in this article and sell any name mentioned in this piece at any time. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot.
Chris DeMuth’s Disclaimer: I have a beneficial long position in bitcoin and am short ARKK, ARKG, ARKW, ARKQ, and ARKF either through stock ownership, options, or other derivatives. Additional legal disclosures here for anyone really into that kind of thing; short version: think for yourself.