Stock Market on Shaky Foundations | Blind Squirrel Macro’s Rupert Mitchell on IPO Supply, Oil, and Private Credit

Episode Summary

Executive Summary: In this episode of Monetary Matters, host Jack interviews Rupert Mitchell of Blind Squirrel Macro. Mitchell expresses a cautious, bearish outlook on US equities, citing concerns about the health of the US consumer, the sustainability of the bull market's foundations (buybacks, 401k flows, LBOs), and the potential for a wave of new equity supply from large private companies. He favors non-US equities, particularly in China and other emerging markets, and is building a shopping list of stocks to buy after a market correction. He also discusses short positions in SaaS, boutique M&A firms, and fast-casual restaurants, and provides insights on private credit, commodities, and gold miners.

Main Topics: Bearish Outlook on US Equities (Priority: 5/5): Mitchell argues that the US bull market is supported by fragile pillars: corporate buybacks, steady 401k inflows, and LBO activity. He believes these are all at risk of slowing or reversing, and that a wave of new equity supply from large private companies (SpaceX, OpenAI) could overwhelm the market. Preference for Non-US Markets (Priority: 4/5): Mitchell favors non-US equities, particularly in China and other emerging markets, due to stronger fiscal spending and more attractive valuations. He is building a shopping list of stocks to buy after a market correction, including Tencent, Baidu, and Chinese biofoundry companies. Private Credit and BDCs (Priority: 4/5): Mitchell discusses the risks in private credit, particularly loans to software companies priced on revenue multiples. He believes the asset class is overvalued and faces significant headwinds, though he acknowledges the difficulty of shorting BDCs. Short Positions in Specific Sectors (Priority: 3/5): Mitchell outlines his short positions in SaaS companies, boutique M&A firms, and fast-casual restaurants. He argues these sectors are overvalued and vulnerable to an economic slowdown. Commodities and Gold Miners (Priority: 3/5): Mitchell discusses his long-term bullish view on commodities, particularly oil and gold. He explains his strategy of owning long-dated crude futures and a basket of gold miners, emphasizing the importance of selectivity and jurisdiction risk. Closed-End Fund Strategy (Priority: 2/5): Mitchell explains his use of closed-end funds to gain exposure to specific markets (e.g., Mexico, EM fixed income) at a discount to NAV, and his strategy for exiting them when the discount narrows.

Key Arguments: The US bull market is built on shaky foundations: buybacks, 401k flows, and LBO activity are all at risk of slowing or reversing. A wave of new equity supply from large private companies (e.g., SpaceX, OpenAI) could overwhelm the market. The US consumer is weakening, which will have global repercussions. Fiscal firepower is shifting from the US to the rest of the world, making non-US markets more attractive. Private credit is overvalued and faces significant risks from software loans priced on revenue multiples. SaaS companies, boutique M&A firms, and fast-casual restaurants are overvalued and vulnerable to economic slowdown. Commodities, particularly oil and gold, offer attractive long-term opportunities, but selectivity is key. Gold miners are poised for institutional inflows due to strong operating margins. Closed-end funds can offer bargains during times of stress, but require careful timing and exit strategy.

Data Points: Potential new equity supply from private companies: $120 billion - Rupert Mitchell discussing the potential supply of new stock from private companies. Valuation per outlet for Carver: $25+ million - Rupert Mitchell discussing the valuation of fast-casual restaurant chains. Wingstop's price-to-earnings ratio (historical): Over 100 - Rupert Mitchell discussing the valuation of Wingstop. Wingstop's current price-to-earnings ratio: 36 - Rupert Mitchell discussing the current valuation of Wingstop. Adobe's price-to-sales ratio: 4 times sales - Rupert Mitchell discussing the valuation of Adobe. Adobe's price-to-earnings ratio: 13 times earnings - Rupert Mitchell discussing the valuation of Adobe. S&P 500 price movement since late September: Gone nowhere - Rupert Mitchell discussing the performance of the S&P 500. Cash position in beta portfolio: 50% - Rupert Mitchell discussing his cash position. Current non-accrual rate in private credit: 4% - Rupert Mitchell discussing the potential for non-accruals in private credit. Loss rate that would make returns anemic: More than 4-5% - Rupert Mitchell discussing the potential loss rate in private credit. Year last new crude oil refinery built in the US: 1977 - Rupert Mitchell discussing the last time a new crude oil refinery was built in the US. Percentage of AFK ETF in gold mining stocks: 25% - Rupert Mitchell discussing the composition of the AFK ETF.

Pivotal Quotes: "We're about to see an inflection point in my mind, whereby some of the absolute monoliths in the private markets are coming looking, well, they're planning to come at pretty stretch open AI, perhaps, Anthropic, perhaps, data bricks. I mean, you know, if we're looking at, call it $120 billion of net new supply of stock into the market, you know, and that's before we even talk about whether that $120 billion is really worth $120 billion." — Rupert Mitchell: Mitchell explains his bearish view on US equities, citing the potential for a wave of new supply from private companies. "I think that markets tend to outperform where governments are spending money. This administration has given the rest of the world, Europe, whether it's Europe or whether it's Asia. An absolute sort of prod in the behind to start spending money, whether that's reinvestment in defense, in energy security, all of the above." — Rupert Mitchell: Mitchell explains his preference for non-US equities, citing stronger fiscal spending abroad. "These software deals were being priced off multiples of recurring revenue, right? And, you know, well, what do you want to call EBITDA, right? In a software company, revenue is cash flow, but if you're putting all of that cash flow back into customer acquisition, um You know, there is no real revenue that would support significant leverage." — Rupert Mitchell: Mitchell discusses the risks in private credit, particularly loans to software companies.

Implications: Listeners should consider reducing exposure to US equities and increasing allocations to non-US markets, particularly China and other EMs. Be cautious of sectors reliant on US consumer spending and C-suite confidence. The potential for a significant market correction driven by new equity supply and weakening pillars of support warrants a defensive posture and a focus on building a shopping list for future opportunities.