On this week’s episode of Industry Focus: Wildcard, host Jason Moser chats with Esoterica Capital CEO Bruce Liu about 5G, the digital economy, chip shortages, valuations, stocks he likes, and much more. To learn more about Esoterica Capital, visit www.esotericacap.com.
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This video was recorded on April 28, 2021.
Jason Moser: It’s Wednesday, April 28th. I’m your host, Jason Moser, and on today’s Wildcard Wednesday show, we’re digging more to 5G and the digital economy with a special guest. Bruce Liu is the CEO of Esoterica Capital, an asset management firm based in New York, New York focused on investing in the digital economy. Bruce also manages Esoterica’s active ETF which invests in the 5G enabled digital economy as well. Prior to Esoterica, he was a portfolio manager and partner of PhaseCapital, as well as an equity strategist at WisdomTree asset management, and a sell-side equity strategist at Sanford Bernstein. He received his PhD in business administration from the University of Connecticut, and holds the chartered financial analyst designation. Recently, I had the opportunity to chat with Bruce about 5G, digital economy, chip shortages, valuations, stocks he likes, and much, much more. We hope you enjoy our conversation. Bruce, thanks so much for joining us today. I wanted to start first and foremost just to give our members, our listeners a chance to understand better what you’re doing there with Esoterica Capital. Tell us a little bit about your history, what you’re doing with Esoterica Capital today, what you’re working on.
Bruce Liu: Okay. Thank you for having me, Jason. It’s nice meeting you today.
Liu: Well, just a very brief introduction to Esoterica Capital. We started the firm almost — time flies — almost three years ago in New York City. We actually have offices in both New York City and actually Beijing, China. Five partners now and we got together three years ago, and thinking about what’s the next thing to invest in, 5G cycle is the first one that comes into our mind. We wanted to do it a little bit differently than before. We used to be hedge fund portfolio managers and research analysts. This time around we saw the opportunity to launch an ETF, really serve the retail market. I always joke with the people, my mom missed the 4G cycle, I don’t want her to miss the 5G cycle again. How about creating the investment vehicle, it’s easier for her to put all her money in. Here we go.
That’s really what was driving us to do this, and we launched the ETF WGI. Actually just at the end of March last year, it’s been a year. We were very, very lucky. It’s ironic, we got into the pandemic but our investment strategy actually benefited from that a lot. The whole digital transformation thing, people realized how valuable that is. The portfolio was benefiting. We had a fantastic run since the end of March last year. That’s who we are.
Moser: Yeah. That’s a great observation you made there. Just a year ago launching the fund. That was a really crazy time back in March and into April. We saw an unbelievable situation there on the market. I would imagine launching that fund you probably got in at a time where you were able to get some pretty good deals, along with really investing in a lot of the companies that since then have proven themselves to be really instrumental in this digital economy. There’s a lot of crossover between your portfolio and the stocks that we recommended in our service, and I want to talk more about that. Real quickly, I did want to ask, the ticker WGI, what does that mean? There is a meaning there, I want to know what it is.
Liu: There is actually. That’s how you pronounce 5G in Chinese. When you go to Asia, Hong Kong, Taiwan, China, when you say “WG” and people know you are referring to 5G.
Moser: See, I knew there was a meaning there, and I’m glad I asked. That was just something I saw and I thought, “There’s got to be something there.” That’s perfect, great to know.
Liu: When we were thinking about the ticker back then and it happened that WGI was available, we thought, “Why not?” It’s interesting.
Moser: That’s perfect. I love it. That’ll be very easy to remember. I guarantee you, I will never forget that personally.
Liu: Thank you.
Moser: Let’s talk a little bit about 5G because that’s really what our service is all about. It’s Investing in 5G. Something I noticed with your fund that is very similar to the service that we run here, it’s something that when we started our service here not all that long ago either, it will shortly after, it looks like you started your ETF. But we approached it with a very similar philosophy. It’s not just about investing in the companies that are building out the infrastructure, the tower companies, the chip companies, the infrastructure companies, but it’s also about all of these companies that are benefiting from the technology, right? These companies that are helping to build this digital economy that seems to be unfolding right before our very eyes. I wonder why in your mind, let’s just imagine the pandemic never happened, 5G would still be happening, and it would still be important. Why do you feel the 5G economy is so important?
Liu: That’s a very good question, Jason, and we got asked a lot about that. What do you see from 5G? Why not just invest in the carriers, guys like Nokia, Ericsson? Those infrastructure hardware makers. We see 5G a little bit different from probably some existing products out there. I always use the 4G cycle as a very perfect example to make my case. Think of all the 4G cycles in the U.S. We started the 4G cycle back in 2009, I believe. Also right after a recession, in the middle of the recession, very similar to how we started the 5G cycle. The significance of 4G is what? I keep asking people. It really created a mobile Internet, mobile Internet economy globally. The U.S. started first, then they exported that to the rest of the world. We saw how that has changed the world. 4G is more about connecting people. That changes the way we communicate, we consume information, we entertain ourselves. That’s the significance of 4G. Not only with the 4G technology itself, not only with Nokia, Ericsson, Huawei, those guys who build the 4G infrastructure. Not only with AT&T, Verizon who provided 4G services. It’s bigger than that. Transition from 3G to 4G, that was disrupting the technology ecosystem infrastructure.
From the very bottom to the very top, from the semiconductors, from the computing architecture to the software, how we deployed the software, and until the applications, that’s where you’ve got the Uber, you got Netflix, and Facebook, Instagram, all those new things. I think that’s the significance of 4G. Now 5G, looking back now, for 5G it’s no longer a question, “We’re going to do it or not?” It’s just how long this 5G cycle is going to last, how much the value of creation is driven by 5G. Also, I want to make a case, we called this 5G cycle, now it’s a 5G technology itself. There is a reason behind it because that’s a combination of all kinds of technologies together, not only just 5G itself, you’ve got AI, you’ve got AT Computing, we can go on and on, and I’m going to talk about that later on, we can get to the details. Just looking back, 4G is just a special case of 5G in my opinion. 4G is connecting people. The significance of 5G is connecting everything together, that’s what the purpose of 5G is. You connect more things together, you do it much faster, and there’s low latency.
Liu: Meaning you really can do a lot of things in life. Just like you and me right now talking and once 5G is really here we have the AR/VR or VR capacity. We don’t need to go to the meetings together anymore. I think that’s where the promise of 5G and when everything connected together, what’s the meaning of that? What’s the true thing behind it? We generate tons of data.
Moser: You hit on something there with the data and it reminded me of a question that one of our members asked me recently in regard, one of our recommendations on the service is a company called DocuSign, I’m sure you’re very familiar with it.
Liu: Of course.
Moser: The question was, how does a company like DocuSign benefit from something like 5G, 3G technology, 4G technology that’s enough to send documents back and forth. They’re right, I mean it’s sending things back and forth, the technology needed for that is not really very complicated. But my point in the answer that I offered was, No. 1, it’s not about what DocuSign is doing today, it’s about what DocuSign is going to be doing tomorrow, in a year, in five years, and 10 years from now. It made me think of a traffic jam. I’m living here in Northern Virginia, and I’m sure you’re up in New York.
Moser: You’re very familiar with traffic jams. But really, 5G, it’s about building more lanes, It’s about accommodating more data. You just said it right there. It’s really the amount of data that is being transferred today that is just monumental versus what we’ve been used to.
Liu: Because actually, Jason, we’ve gotten used to 4G mobile Internet. Our life, personal life is already digitized. You do everything online on your phone, it’s all digitized. But the world is so much bigger than our own lives. A lot like business applications, manufacturing sites, there’s just so many things that have now been digitized yet, that the promise of 5G is actually just to digitize every aspect of our life, our economy. That’s why we called this a digital economy. We are really onto the path of digitizing everything in our life. That’s the value creation for 5G, that’s why in this cycle, in our mind, the 5G cycles just started. I don’t know how long it’s going to last, to maybe 10 years, even maybe 20 years. We are in the process of digitizing every aspect of our life, every corner of life is all going to become like online. It’s all going to be stored, memorized, and somewhere in cloud, and analyzed. That’s where we got tons of data. We get to know everything much better, which helps us to make better decisions. Not only on the personal level, also for business. I think that’s one thing special about 5G.
A lot of people were asking, “What’s the big deal with 5G? I already able to do a lot of things with 4G, I don’t need a 5G,” which is true. 5G might be, on the personal level, offer you something better. You can play cloud gaming, you can do real-life engagement better and there’s no latency while you are talking to your friends, your mum, maybe thousands of miles away like myself . But it’s also about the business, I think the most significant part of 5G infrastructure is for business. On the manufacturing side, for example, all your machines are connecting together, and you can manage them better, making better decisions, maintain them better, and the smart cities got all connected. Now to mention the autonomous vehicle, there’s a hype there, you need a 5G infrastructure to be there, to make this really practical.
Moser: I think a lot of people, when we had 3G, and we were talking about going to 4G, and they were, “I don’t need 4G. I can do everything just fine.” Because at that time, nobody was thinking that we would be watching videos on our phones, nobody was thinking we would be streaming music, everybody’s still focused on owning their music. Then once the technology unfolds, and you witness all of the conveniences and the advancement it offers, then it becomes a little bit more clear in hindsight. I feel like with 5G that’s going to happen as well. Five years from now, we’re going to look back and say “Wow, this was a big step forward.” I’m sure you and I will meet again, and we’ll start talking about 6G.
Liu: Exactly. Also, something special about 5G, when the 3G PPP is designing the 5G protocol, they have this vertical application in mind. They actually have that in mind. They we’re not just designing the standard for the 5G communication. When they design that, they are thinking about putting that into work, put into the different verticals, and for the industrials, for transportation, for warehousing, of course, for personal communication as well. That’s why 5G is more significant in my opinion because that’s really from the start. They have that in mind to drive the vertical adoption of 5G. Similar to the 4G cycle, if you look back to the history, every generational transition from 2G to 3G, 3G to 4G, now we get to the 4G to 5G, actually I’m just talking about the technology stack. It’s a process of disrupting the legacy infrastructure, creating the new ones. I’ll give you one example.
With the 5G, we spent so much money, energy on getting the 5G out there. What it really improves is the speed, capacity, latency from your home to the radio access network. That’s what that 5G really improves. But that’s not the whole thing. Think about that whenever you want to use your applications, you start on your phone, the data goes to the radio access network, but it has to go to the central Cloud, to go to its server. When you do the processing over there, the signal comes back to your phone. That’s the loop. That’s the ecosystem. Now, 5G’s game is up so much. They have latency, they have speed. You have to improve the latency speed all over the place to realize the promise of 5G. It’s purely from the technology perspective. That’s what I think sometimes people are missing. 5G is not only that small part, 5G means that whole thing. Now, the legacy infrastructure may now be able to keep up with the requirement for the speed and the latency, so you have to change the way you do what we call computing architecture. I’ll remind you that computing architecture is going to change. Right now, it is a part of the traditional datacenter. You put all the servers there, you stack all the servers there. Whenever you have new workloads, I need more servers, and everything goes to your CPU, you do it there and in there, that’s in the central Cloud.
Then it goes back to, I don’t know where your connected devices are, but that’s the process. Well, in the 5G world, that’s no longer working because it just takes so much time for the data to move from, for example, your phone to the central Cloud, and it comes back. Also, you imagine, and we’ve mentioned this earlier, going forward, we gather tons of that data from all over the place. Think about all the data that’s going from your edge devices and to the central Cloud and come back. This is just now that you’re facing the way to do things. That’s why it’s changing the computing architecture even from the semiconductor level. That’s why the media and AMD, they’re all coming out with these new solutions, and some of that you’ve heard about like DPU, data processing units, GPU is no longer new, and the smart NIC. What that really does, first, you do not put all the workload into the CPU anymore because you want to optimize that. You’ll come up with a GPU, DPU to offload some workload from the CPU. You just allow the CPU to do what they are designed to do, the applications, revenue-generating applications. Well, let others like GPU, DPU do other data handling things like AI and machine learning, you let the DPU do that, or like the network accelerator, you let the DPU do that. That’s where the world is going, and that’s what I’m saying, disrupting the legacy technology stack and putting the new ones. This is very exciting, we are at the beginning of this whole thing.
Moser: Indeed, we’re not fighting.
Liu: Also, to make 5G really work, to realize the true promise of 5G, the computing is not going to stay in the central Cloud anymore. AT computing is becoming a real thing. You have to put all of those computing capacities as close as possible to the edge devices to where the users are, and I think that’s the new computing architecture we are talking about. We’re at the very beginning of this. A lot of people are looking at, take a semiconductor, for example, as a very cyclical sector. It goes up, and it comes down, along with the GDP, PMI, that’s no longer the case anymore. You got a structural change. You can really get a structural change of the whole industry. The need for semiconductors is growing exponentially from here just because of those, 5G, AI, this digital transformation we are talking about, we are going through. 5G is driving that. 5G is enabling technology. Sorry, I might throw too many concepts there, but this really, you want to connect everything together. You really want to connect the dots.
Moser: I think that’s what you’re doing, and that’s what we try to do every day, every week with our services. It is a very big concept to grasp. We’ve talked about things like the Internet of Things, AI, and machine learning, AR, VR, Cloud, and Edge computing. That’s one reason why I was so excited. One of our recommendations in the service is Cloudflare.
Liu: I love the company.
Moser: I do as well, and was very excited to see that crossover. Listen, you have a lot of great ideas in your fund and I’ve been through and looked through the holdings there. I’m excited to see the names that we own. I’m excited to see some of the names that we don’t own because you’re giving me some ideas to dig into. I wanted to ask you, maybe we could talk for a few minutes about a couple of the holdings in your fund that you really like, either a couple of stocks, a couple of holdings in that fund today that you’re really optimistic about it, a couple of ideas that you feel really positive about. Obviously, you like them all, but are there any names in there, any companies in there that stand out to you?
Liu: Well, you’ve said the holdings and so the top positions are of high conviction, like Sea. That’s Singapore-based e-commerce/gaming/payments. That’s only the application of part, the way you imagine the company. Now because the 5G is not there yet but you can envision what kind of applications might have prosper and grow bigger, in the right regions to do that. Well, Sea stands out for us. They really serve the customers in South East Asia and sometimes even LatAm by giving this mobile gaming. So think about it when 5G comes. Can you imagine that part? It’s just going to grow even more. Then they add e-commerce onto that. E-Commerce, no doubt, is going to benefit from 5G. You’re going to switch from the traditional e-commerce to the new e-commerce. Actually, we write a lot above that, you people can go to our website and our Instagram and LinkedIn to take a look. We share that on a daily basis, digital payments.
When the whole world is going to go digital, there’s no doubt that you have to make your payment in the digital way. So they really occupy three big long term things. That’s why we like the firm. Of course, we did our research and we understand the management team. There’s a high-quality management team. Just look at their execution in the past four or five years, fantastic. At the end of the day, this is people business, you have to have the right team there. Well, that’s one. We go down the list and you can see a lot of high-quality Semi names, and we like them. We mentioned Semi is such an important component to really drive the digital transformation, to really build the new infrastructure. Starting from TSMC, AMD, and Marvell, Qualcomm, those are our core holdings. But today, I want to give you a new name. It’s not in our portfolio yet, but we just love the company. We’re actively doing research. Hopefully, Achronix, ACEV is the ticker, and is still in our spec. That’s so far is a very small car. They are not the spec yet, but just take a look at a company, they are the only independent high-end FPGA semiconductor company out there. They really, really compete. The other two high-end FPGA companies, Xilinx and Altera, all acquired by the bigger boys, this is the only independent one. They’re very much specialized.
I’ll focus on this data accelerator, the stuff that we talked about earlier to offload some workloads from the CPUs. They focus on those workloads, computation of storage, artificial intelligence and machine learning, and also being very flexible and power-efficient, and high-performance. You can deploy all those semi solutions to the AT computings. They serve the end market from AI, machine learning, to 5G, to autonomous driving. That’s the company we like, no matter who is going to build an awesome solution out there, you need their tips. That’s the company that we’re always looking for. We feel that’s a very interesting idea. You still grow for […]. You can see the huge potential once we can come to this path. But also that could very well become an M&A target. I’ll throw something out there, Nvidia. I wouldn’t be surprised if someday Nvidia takes a look at, “Okay, you’re my portfolio. I actually need something like an FPGA solution, this is just so perfect.” That’s why we like the firm.
Moser: I love Nvidia too. It’s one that I’ve recommended at another service. It’s going to be very interesting to see what this antitrust process reveals in regard to the acquisition because I’m still not actually convinced that they’re going to let that acquisition happen given Nvidia’s status in the industry, it is such an important business, but not only a lot of important technology, but a lot of customers that really depend on them. It will be interesting to see how that antitrust process goes. You mentioned some other companies in there, Xilinx, which is a recommendation in our service, and so we’re watching Xilinx go through that acquisition where AMD, Advanced Micro Devices bring it in Xilinx. Then the other one that I really liked and I was thrilled to be able to get it in early, was a company called INFY. INFY also recently acquired by Marvell Technology. Very excited to bring Marvell into our portfolio as well. When I saw all those in your fund, I thought, “Hey, that’s great. I love to see that kind of crossover.” But then it made me think this chip shortage has been pretty interesting to follow.
To your point, I think we’re hitting a stage here where the cyclicality of the chip space, of the semi space is going to; maybe there will be some cyclical nature to it, but it’s not going to be as pronounced I think, because to the point you just made, they are so crucial to everything that we do now. I have seen cars, for example, it’s not uncommon for a car to have 50-75 chips in it. I wonder what your thoughts are on the recent chips shortage and how that’s playing out in the market today.
Liu: You know our mind, there are both circular and cyclical factors contributing to this, also, geopolitical things. Well, we can think of three things. First, of course, you’ve got this beauty in inventory. While everybody is saying the pandemic it’s going to be over, people are overbooking. That’s the nature of that. That contributed to the shortage of the chips, that’s for sure. Also, it’s almost two years, and U.S., China, there’s a semiconductor, we call it the semi war. We actually jolt a serious […]. That’s about it. Well, that actually is transforming the semi-supply chain. Back then, the global semi-supply chain was a very standard one. Now this new thinking into this, that does have some impact on the global semiconductor supply chain. We actually believe that contributes to the problem a little bit as well. The third one is really circular. Just because everybody saw this great digital transformation, the demand for those devices are just growing exponentially. We call that circular factor. Well, you have to look at this note by note for the leading-edge note, I mean, talking about TSMC’s seven-nanometer note. There you need capacity. That’s why if you look at the TSMC latest earning score, they’ve committed a legacy of 100 billion for the years for CAPEX. That CAPEX is really just going into the leading edge note.
Well, there is a shortage on the much shorter note like a ticker 28-nanometer note. Well, that’s more cyclical. I think the tightening in that part is going to stay a little bit longer because you don’t see the companies are willing to invest in new capacity into it. All of the capacity CAPEX is going into the leading edge at once. It’s actually quite a complicated picture. You have to really look at end markets and different notes and say where this tightening is going to last. Well, also from TSMC, I’m just quoting them. They say, “This general tightening is going to last into 2022, and even to 2023, don’t be surprised if we get to that point.” But they do say there are auto customers and the next quarter we will be significantly improved. Let’s see. But I don’t think this is going to be resolved anytime soon and a lot of people are worried. The people are over-building. So far we haven’t seen that yet, where people spend the money on are actually the leading edge, ones which have the circular tailwind.
Moser: Yeah, it feels at least even though there are headwinds in the space today, it’s nice to be invested in companies where the demand for their products are so high, the demand is so high for what they do. That’s why we have continued to build out so many of those recommendations in the service based on that chip space because to me, that’s a crucial part to this entire thing working. We talked a lot about all of these different technologies that are being enabled by this. Again, we mentioned AI and VR, AR and LT, and all the stuff. Is there a particular capability or a particular technology that’s being born from this 5G rollout, from this 5G stretch here? Is there a particular technology or capability that you’re more excited about than others are? Is it Edge computing? Is it AI? Is it VR? What really gets you excited?
Liu: Well, my thought process really centers on data. Generating data, moving data, processing data, analyzing data, and storing data. That’s where my thought process is really focusing on. Like […] here, driven by 5G and you need to generate the data from the 5G devices. That’s where Qualcomm’s new RF, Front-End, and also Baseband Technologies are promising. They’re interesting as very high-end and the technology leadership from Qualcomm offering this specific 5G application is actually widening, now, likely closing. That’s where 5G is specific. But thinking out of 5G, thinking about digital economy, once you get tons of data, processing those data, that’s where we actually mentioned earlier, this DPU really separate the CPU, DPU, GPU, have the different, they’re like chips, focusing on what they are good at, then deploy in that way. That’s also something we’re very excited about. That’s changing how the computing architecture is built.
Of course, you mentioned AT computings, we’ll wait to see. Cloudflare is a very promising one. They do all kinds of the right work at this early stage. I don’t know, one day when the big boys come into the picture, try to compete with them. See Amazon, AWS has been working with Verizon providing the AT computing, I forgot the name of the services, in 10 cities in the U.S. already. I think that’s a very interesting part of the whole thing. Well, moving it up a little bit on the software lane. Once you’ll get all the data, how do you just make the best out of that? Store it, analyzing and processing in the most efficient way, and really allow people to do, allow AI, ML work on it. That’s why we like Snowflake. We really do. They’re the frontrunner in that space. They make it this whole a lot easier for businesses to do the data work. Loosely speaking, all data breaks and also […] private companies. Although it’s just a private, we already started doing work on them. Just try to understand that once they go public when the time is right, that we want to put it in. That’s where the most exciting part is. Well, it’s a little bit too early to talk about the application of 5G. Autonomous driving, that’s exciting, but it comes back to semiconductor work, a lot like algorithm work Google [Alphabet] has been doing. We want to wait and see. It’s like what you said earlier, five years later. People are smart, developers are so smart. Once we build the infrastructure, we give them the capacity. They’re going to build something really, really awesome. I have no doubt about that. Hopefully, as investors, we fund them earlier and better.
Moser: That you say the keyword there, you said earlier, and I love how you’re digging in the companies even before they go public. That’s terrific. In regard to something we talked about a lot is the state of the market today valuations, you got a lot of companies like SPACs that are going public, and they’re often pre-revenue, or they are just starting revenue. You have a lot of other companies like Cloudflare, for example, companies that are growing very quickly, but clearly, the financials aren’t reflecting the true potential economics of the business yet.
Moser: How do you approach that valuation coming on from there? Looking at a lot of these companies that seemingly the businesses look very important, and we know they’re going to be crucial, but the valuations, they scare a lot of people off. What do you tell those people who get scared of those types of valuations?
Liu: Well, Jason, that’s a very good question. I get that a lot, especially the investment we do. That’s always challenging. Well, first of all, I think your valuation is a relative concept. A lot of people are making cases so expensive right now. Look at the S&P, look at Nasdaq. The valuation is higher than back to the tech bubble. But think about this, put it into the context. Back then, the U.S. 10-year real yield was 400 bps. Right now what is? Today I just look at it like negative 70 bps.
Liu: That’s what’s supporting the valuation they say, it’s all relative. If you look at the equity risk premium, really taking into account this free rate, it’s not that crazy. I’m not saying it’s cheap, but it’s not as crazy as it sounds, so that’s the first thing. The second thing is a lot of companies that’s where that research makes a huge difference. That’s purely the nature of our business. We try to find those companies, they are in the growth mode. They have awesome ideas, awesome products, and it’s really the time for them to invest back. R&D, sales and marketing, expanding market share. What really matters is really expanding their TAM. They’re in the invest mode. Of course, their bottom line looks horrible, that’s where you need to understand the business. A lot of people are just saying things and they make a beautiful presentation, and they’re telling good stories, but actually, the potential for them to deliver may be very low. But for some other companies, their execution is great, fantastic in managing the team, fantastic theme, and great products. You see the potential for them to grow, become the next Amazon. Think about this, debate for Amazon has been around for how long? People keep missing it because of this, “This is so expensive.”
Even today, you heard about people arguing about that, same thing for Netflix. Now everybody realizes Netflix is going to become like a cash call very soon. This is more art than science. That’s where you really need to do your homework rather than just blindly looking at the valuation match rates like, “This is so expensive, this is cheap.” No, focus on the fundamental, focus on the company, and being able to tell, are they able to deliver? That’s the thing. But in general, I agree with you. Just think about what’s going to happen in February. Stop talking about this year, I’m not even talking about this year. From the beginning of the year to the mid of February, the market had a nice run, why? It’s very easy if you put a real yield on there. Real yield dropped to almost -100 bps. That’s really supporting the equity evaluation. Although the interest 10-year is rising, but real yield is staying low, inflation expectation is rising high. This is a perfect setup for the risky assets. That’s why we had a nice run. But since the middle of February, the dynamic has changed, and now everybody knows that.
But if you focus on our charts — sorry, I should insert a chart here, as we have very telling charts, we even wrote about that. Since the middle of February, 10-year treasury yields keep capital rising up, but the dynamic has changed. That was more driven by the rising up of real yields, which might be a proxy for financial condition. Financial condition was tightening for many reasons. Japanese buyers didn’t want to come to the market. We had a horrible seven year, like an auction. You got tons of narratives out there, but that’s what’s driving that. When that happens, when real yield was rising up fast, within almost just two weeks or even just one week, it rose up from -100 bps to almost -50 bps. That’s a huge change.
When you have the real yield while it’s rising up, who is more vulnerable? The long-duration assets allow a growth in stocks, because your term value decides your valuation, so that’s why we call them long-duration assets. Also, the expensive ones, because this real yield was supporting your valuation now, and it’s less supportive. The market was in the mood of, “Shoot first, then ask the question later,” so that’s why we went through this. People call it the huge rotation, it’s really just killing high-growth, expensive stocks. It happens to all those thematic portfolios. That’s what was happening. Going forward, I still believe, if you have a long-term view, stay in the lane, stay investing in hyper-growth companies. This is where the future is. Well, you have to be very mindful of the valuation now. Well, if you don’t think real yield is going to go back to the next few 100 bps which we don’t think that’s the case. If you don’t have that, but real yield hopefully is going to stay tight range, stable, but still low.
My assumption is in the near term or midterm, 10-year treasury’s real yield might stay in the range around negative 50 bps, which historically is still very good. It still supports the risky assets, but not good enough to support the high fliers. I feel that the high fliers, the companies, I call them dream stocks. You have to be able to tell who is the real deal, who are the dreaming stocks. I don’t think they are going to go back to where they were back in January and February, they’re under a lot of pressure. But the high quality ones who can deliver the growth, you can see gradually, they’re going to come back. That’s my phase, so that’s how I look at the markets and how I pick my stocks.
Moser: I love that. It’s very much in line with the way we think here. Not only in next gen, super-cycle, or service. But really, The Motley Fool, generally speaking, believes that time is the individual investor’s greatest advantage or at least one of them. Being able to be patient, finding good businesses, and then taking that five to 10 year time, that view, that gives you the freedom to weather those ups and downs, because we know those ups and downs, they’re going to happen regardless. But it certainly sounds like you think about investing the way we think about it too, and that’s why this conversation has been so fun.
Liu: We’re at the beginning of the whole thing. I keep telling my friends, don’t be afraid of the volatilities. Don’t gamble, don’t take unnecessary leverage. Don’t even take leverage. Let the company’s leverage work for you. I always keep telling my friends, finding those companies, let them work for you.
Moser: I think that’s absolutely the right way to look at it. Like we told so many folks, if you want to invest in 5G, if you wait until 2023 or 2024, you’re going to be too late. You have to start now because it’s starting now, it’s going to take a little while. I think a lot of folks think 5G is just like hitting a switch. It’s really not that way at all, it’s going to be something that is going to be a slow process, an evolution, so to speak, here I think over the next decade, certainly, in the next five years ought to be great.
Liu: Also finding the right exposure. 5G hardware makers like Ericsson, Nokia, we don’t like them. We do not like carriers and we can go on and on, but we don’t even like the smartphone makers this time around. Think about 4G, smartphones are from 0-1, that change is significant. But from 4G to 5G, it’s no longer from 0-1, it’s just a replacement cycle. Instead of betting on the smartphone, betting on the semiconductors in the phone.
Moser: The companies licensing that technology companies like Qualcomm.
Moser: […] followed a company called CBA, but a very similar business, one that is a very small company, but they license a lot of that technology and —
Moser: […] want to follow.
Liu: Yeah, exactly.
Moser: Bruce, this has been so much fun and I know we’re pressed for time, so I’m going to go ahead and cut it off here and let you go because I want to save some time for our next conversation because you can rest assured, I’m going to reach back out to you. I want to talk to you again.
Liu: Thank you very much. This is so fun.
Moser: Well, for folks who want to learn more about Esoterica Capital, and what you all are doing there, really quickly just tell folks how they can find you.
Liu: Well, it’s easy. We actually, actively reach out to our audience. We want to serve retail investors, we walk the talk, we meet. Come to our website, come to our LinkedIn, come to our Instagram page. We do share everything on a daily basis, what we observe and what our latest thoughts are. We share a lot of stuff out there, and just come to find us. Well, also you can email me, and I’m always open to a conversation.
Moser: Absolutely. Hopefully, we’ll be able to meet actually in person someday sooner rather than later.
Liu: Looking forward to it, Jason.
Moser: Me too, that’ll be a lot of fun. I will say having visited your website already there at Esoterica Capital, everything you just said there, sharing the information, you’re active, you’re always putting new stuff out. It’s a really fun site to peruse, so I absolutely recommend everyone to check out Esoterica Capital because you’re doing some great work over there. Bruce Liu, thanks so much for taking the time to speak with me today. This has been just such a fun conversation and I look forward to doing it again soon.
Liu: Thank you, Jason. Thank you for having us.
Moser: That’s going to do it for us this week, folks. You can learn more about Esoterica Capital by visiting their website at esotericacap.com. Remember, you can always reach out to us on Twitter @MFindustryfocus or drop us an email at [email protected] As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. I’m Jason Moser. Thanks for listening, and we’ll see you next week.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.