TIP445: The Fall of Netflix and Overlooked Assets w/ David Stein

Episode Summary

Executive Summary: David Stein argues that the biggest market opportunities now are in overlooked, less crowded areas rather than headline tech stocks: he is cautious on U.S. equities, bullish on cheaper markets like Japan and India, and sees closed-end funds and business development companies as underappreciated vehicles for income and discounted asset exposure. He also frames current macro risks—food, inflation, rates, China—as nuanced rather than catastrophic.

Main Topics: Supply chains, inflation, and food risk (Priority: 5/5): Stein says fertilizer-driven supply issues could create localized food shortages, but not a true global famine; rice supply is actually ample and prices have fallen. He views commodities as a crowded trade and says the contrarian move is to short them rather than chase them. Recession, stagflation, and the yield curve (Priority: 5/5): He does not forecast stagflation as a base case, though he sees recession risk rising. Stein stresses that yield-curve inversion is not a stand-alone recession signal and should be interpreted alongside policy rates, inflation expectations, and term premium. China, Evergrande, and demographic headwinds (Priority: 4/5): Stein says Evergrande remains deeply troubled but has not triggered broad contagion. He is more concerned about China’s slowing population growth, falling birth rate, and limited share of global market capitalization than about any single property company. Valuation of U.S. versus global equities (Priority: 5/5): He argues the U.S. market remains expensive relative to history and other regions, using earnings yield and CAPE-type comparisons. In contrast, Japan, Europe, the UK, emerging markets, and ex-U.S. global equities appear cheaper and more attractive on a relative basis. Growth stocks, Netflix, and the risk to high-multiple tech (Priority: 4/5): Stein views Netflix’s collapse as an example of how growth stocks can disappoint when expectations are too high. He thinks rising rates pressure future cash flows and therefore weigh more heavily on growth-heavy indexes like QQQ than on value stocks. Closed-end funds and business development companies (Priority: 5/5): He highlights closed-end funds (CEFs) and BDCs as overlooked market vehicles that can trade at discounts or premiums to NAV, provide income, and offer access to credit/private lending strategies. He prefers buying them in the secondary market at discounts and watching leverage, fees, and distribution quality.

Key Arguments: The current commodity trade is crowded; the contrarian stance is to short commodities rather than buy them after a major run-up. A recession is possible, but the yield curve alone does not prove one is imminent; context matters, including what inflation and the Fed are doing. Evergrande is still distressed, but China’s larger issue is demographics and slowing growth, not just one company’s failure. The U.S. stock market is expensive versus its own history and versus most other regions, so global diversification matters. Growth stocks are vulnerable when interest rates rise because future earnings are discounted more heavily. Closed-end funds can be attractive because discounts to NAV create a margin of safety and boost effective returns, especially in leveraged income strategies. BDCs and CEFs are niche but useful tools for retail investors to access private credit-like returns and income streams. Retail investors should focus on the structure, leverage, fee composition, and underlying assets rather than only headline yield or price performance. CEFs and BDCs can be used tactically: buy at discounts, harvest income, and exit when discounts compress or valuations become excessive. Dividend yield alone is not enough; investors must verify whether distributions are being funded by real income or by return of capital. Stock buybacks are often favored by CEOs because EPS is easier to influence than long-term innovation or CapEx. The U.S. market could still outperform, but that would likely require faster earnings growth, more buybacks, or further valuation expansion.

Data Points: Fertilizer prices: up 12% - Stein attributes potential food shortages to rising fertilizer input costs tied to Russia-related supply disruptions. Rice prices: down 20% - He notes rice supply is ample, reducing famine risk despite higher prices in other grains. Assets managed by surveyed managers: about $800 billion - He cites a Bank of America manager survey showing commodities as the most crowded trade. Long/most crowded trade: commodities - BofA survey of 200+ managers identified commodities as the most crowded position. Fed tightening cycles leading to recession: 6 out of 8 - He references the last eight tightening cycles to caution that recession risk is real but not guaranteed. China birth rate: down 30% vs. 2019 - He uses this as evidence of China’s demographic deterioration. China share of global stock market: less than 3% - Stein argues China’s market presence is small relative to the attention it receives. UK share of global stock market: larger than China’s (implied) - He says China’s market cap share is less than the UK’s. U.S. share of global stock market: 61% - Used to show how dominant and expensive U.S. equities are globally. U.S. share of global GDP: about 20% - Highlights the gap between U.S. market weight and economic weight. China market share versus global GDP: smaller than GDP contribution - He argues China is underrepresented in stocks relative to its economy, though structural risks remain. U.S. earnings yield: 4.3% - March month-end valuation measure used to compare U.S. equities with bond yields and global markets. U.S. average earnings yield since 1969: 6.8% - Shows U.S. equities remain expensive versus historical norms. Japan earnings yield: 6.9% - Indicates Japanese equities are cheaper than U.S. equities on this measure. Europe earnings yield: 6.5% - Supports Stein’s preference for non-U.S. equities. UK earnings yield: 7% - Part of his argument that developed ex-U.S. markets are cheaper. Emerging markets earnings yield: 7.1% - Shows emerging markets also screen cheaper than the U.S. All-country world earnings yield: 5.2% - Near long-term average, but pulled up/down by U.S. weight. World ex-U.S. earnings yield: 6.4% - Suggests the rest of the world is broadly cheaper than the U.S. Shiller CAPE: 33.8 - He says the U.S. remains elevated even after recent pullbacks. Historical average Shiller CAPE: 21.3 - Benchmark showing U.S. valuations remain high versus history. U.S. valuation relative to history: 1.5 standard deviations above average - He uses this to argue the U.S. is still expensive. Closed-end fund market size: about $300 billion - Approximate size of the U.S. closed-end fund universe discussed. Number of CEFs: about 500 - He references a CEF universe screenable on CEF Connect. BlackRock Debt Strategies Fund (DSU) distribution rate: 7% - Example of a closed-end fund yielding above traditional bond funds. DSU leverage cost: LIBOR plus 80 basis points - Explains how the fund can earn spread income by borrowing cheaply and lending to bank loans. Number of credits in DSU: 1,200 - Used to show diversification within the fund’s bank-loan portfolio. Business development companies in U.S.: 40 to 50 - Shows BDCs are a niche market. BDC market size: about $53 billion - Indicates BDCs are much smaller than mainstream equity funds. VanEck BDC Income ETF (BIZD) assets: about $650 million - Example of a fund investing in a basket of BDCs. BIZD historical return: 6% to 7% annualized - Stein cites this as evidence that the strategy can be productive. Pantheons of U.S. inflation perception in 1980s: could be viewed as closer to 20% - He notes inflation measurement and methodology differ over time. Netflix stock move: down 40% - Used to illustrate how fast high-growth stocks can reprice.

Pivotal Quotes: "The time to buy commodities was two years ago, not today." — David Stein: He argues commodities are already crowded and no longer the best contrarian bet. "The U.S. market remains the most expensive stock market in the world." — David Stein: He uses valuation metrics to justify underweighting U.S. equities. "I’d rather buy $100 worth of assets for $90." — David Stein: He explains the appeal of closed-end funds trading at discounts to NAV.

Implications: Listeners should focus less on headline narratives and more on valuation, structure, and market crowding. Stein’s framework favors global diversification, income-focused niche vehicles, and buying assets only when discounts or expectations create a margin of safety.