Chris Bloomstran – Public Market Update – [Invest Like the Best, EP.171]
At a Glance
Chris Bloomstran (Founder and CIO of Semper Augustus) stated in an April 2020 interview that his core judgment is: stock market returns over the next decade will be far lower than the past decade, tech giants cannot replicate the previous 24% annualized gains, and while the energy sector has been severely battered, cyclical opportunities exist. He maintains a deflationary outlook, arguing that the Federal Reserve's massive interventions cannot stimulate economic growth and will only push up debt levels.
Theme 1: Tech Giants — The Law of Large Numbers and the Ceiling on Returns
Chris Bloomstran believes that the five major tech companies (FAANG + Microsoft) cannot replicate their 24% annualized gains of the past decade over the next ten years — it is mathematically impossible.
- Historical Context: Over the past decade, these five companies posted a combined annualized gain of approximately 24%, with revenue growth of about 19.5%. However, Bloomstran notes that they now account for 20% of the S&P 500's total market capitalization, yet only 8% of its revenue and 14% of its net profit. If they were to continue growing at 20% for another decade, their combined market cap would exceed 100% of the S&P 500's total — a mathematical impossibility.
- Mechanism Breakdown: He employs a three-dimensional model of "market cap × revenue × net profit," assuming the S&P 500's revenue grows 4% annually over the next decade (compared to just 3.5% over the past ten years), profit margins remain at the low 11% level seen at the end of 2019, and the P/E ratio stays at 23x. Under this baseline, the S&P 500's annualized return would be roughly 4%. For the five major tech companies to sustain 20% growth, they would violate the "law of large numbers" — the larger the scale, the lower the marginal returns.
- Historical Analogy: Bloomstran cites Microsoft as an example — in 2000, its market cap was $620 billion, revenue was only $20 billion, and its P/E ratio was 38x. He predicted at the time that shareholders would face losses over the next 15 years, and that prediction came true. Microsoft only became worth buying in 2006 when its P/E ratio fell to 21x. Today, the five major tech companies generally trade at P/E ratios of 35-40x, far above reasonable levels.
- Falsification Conditions: If the five major tech companies can sustain revenue growth above 10% without a decline in profit margins, then this judgment could be wrong. However, he argues, "I don't know what will stop it — it could be regulation, new competition, or inertia," and cites Google's disruption of Yellow Pages advertising as an example of how "disruptors often come from unexpected places."
Theme 2: Energy Sector – Cyclical Opportunities Among "Capital Destroyers"
Bloomstran argues that the energy sector is inherently a capital destroyer, but the current extreme low prices offer a cyclical buying opportunity, provided one selects companies capable of surviving.
- Industry Distress: U.S. crude oil production has risen from 4-5 million barrels per day 20 years ago to 20 million barrels per day before the crisis, but OPEC has always "hung over the industry." U.S. independent producers and service companies have already plunged 95%-99% over the past 2-3 years, with a large amount of debt maturing between 2020 and 2022, and massive bankruptcies are expected.
- ExxonMobil Case: Bloomstran holds ExxonMobil but criticizes its deteriorating capital allocation. Over the past decade, Exxon has gone from the industry's best capital allocator (counter-cyclical investment) to being "held hostage by dividends"—failing to earn back its dividend for three consecutive years (payout ratio exceeding 100%), with debt rising from $10 billion to approximately $70 billion (issuing $18 billion in debt after the crisis). He bluntly states: "If you're not earning back free cash flow, you're borrowing to pay dividends."
- Investment Logic: Bloomstran cites the classic value investing logic of "from very bad to bad"—one can only buy these companies when they are "very bad," and cannot expect them to become "good." He believes that if oil prices return to $45-$50 per barrel, Exxon can survive and generate returns, but "this is not a business you can hold for 30 years; they destroy capital over the long term."
- Risk Warning: The industry remains at the mercy of OPEC, and the high-cost structure of U.S. shale oil makes it vulnerable under low oil prices. Bloomstran emphasizes that "you can only own them when they are very bad," and must carefully analyze capital structures and sources of liquidity.
Theme 3: Deflation, Not Inflation — The Economic Logic Under Debt Saturation
Bloomstran firmly believes that deflation, rather than inflation, is more likely over the next decade, despite the Federal Reserve's massive balance sheet expansion.
- Core Mechanism: He cites the concept of the "Velocity of Money" — M2 × Velocity = Nominal GDP. Currently, M2 stands at approximately $16.7 trillion, but velocity has fallen from 2.0 twenty years ago to around 1.3 and continues to decline. The reason is that "we already have an excess of capital stock" — too much retail space, restaurant space, and global manufacturing capacity. New debt is unable to effectively stimulate the economy.
- Data Chain: Total credit market debt/GDP rose from 250% in 2000 to 350% in 2007, and further to over 350% by 2020 (pre-crisis). Over the past decade, every $3.5 of new debt generated only $1 of GDP growth. In 2020, the deficit will exceed $4 trillion, total debt will surpass $80 trillion, and the debt/GDP ratio will reach over 400%.
- Historical Analogy: Bloomstran compares the current situation to Japan in the 1990s — Japan experienced 30 years of deflation after its bubble burst, despite massive central bank money printing. He believes the U.S. is replaying Japan's path, and "inflation will only appear when the Fed directly monetizes debt (converting liabilities into paper money), but we are not there yet."
- Falsification Conditions: If the Fed directly purchases Treasury bonds (rather than through Treasury issuance), or if the velocity of money begins to rise, inflation could arrive. However, he argues "we are not there yet" and "hopes not to see hyperinflation in his lifetime."
Theme 4: Berkshire Hathaway — Cash Is King, but Action Is Slow
Bloomstran is puzzled by Berkshire’s performance during the crisis — holding $125 billion in cash yet making almost no large-scale investments.
- Comparison to 2008: During the 2008 crisis, Buffett swiftly stepped in to rescue Goldman Sachs and General Electric, securing favorable terms. In the current crisis, however, Berkshire’s only public moves have been reducing stakes in banks and airlines (Southwest Airlines and Delta Air Lines dropped to below 10%) and possibly repurchasing its own stock (Bloomstran speculates Berkshire bought back shares near $160, but this cannot be confirmed).
- Reason Analysis: Bloomstran believes “the federal government intervened too quickly and too aggressively” — the Fed directly purchased corporate bonds and high-yield ETFs, potentially even violating the Federal Reserve Act. This prevented Berkshire from offering capital on favorable terms as it did in 2008, because “the government is providing cheaper money.”
- View on the Airline Industry: Bloomstran argues that the airline industry “will first cut prices below breakeven in a recession” and that demand after this crisis will not return to 100% of 2019 levels. He holds airline supply chain companies (such as Hexcel) but is struggling to assess “what the build curve for wide-body aircraft (787, A350) will look like.”
- Key Observation: Berkshire holds $125 billion in cash, but all of it is invested in short-term Treasury bills — Bloomstran notes “no other institution does this.” He believes Berkshire’s best strategy might be large-scale share buybacks, but “we’ll have to wait for the quarterly report to find out.”
Theme 5: Characteristics of Companies to Hold Over the Next Decade
Bloomstran argues that in a deflationary environment, investors should focus on companies with "essentials + pricing power + low leverage."
- Essentials First: Citing the Great Depression experience—when GDP halved, the consumption share rose from 70% to 90%. "People still need to eat and drink." Therefore, food, beverage, and consumer staples companies (e.g., PepsiCo) can maintain pricing power during deflation.
- Pricing Power is Key: In an environment where price levels decline by 2% annually, only a few companies can sustain profit margins. Bloomstran believes, "If you have pricing power, you can survive deflation; if you don't, you will be crushed by debt."
- Low Leverage is the Survival Baseline: Even with a slight decline in nominal revenue, highly leveraged companies will suffer devastating blows. He warns, "The next decade will be a decade of restructuring," as companies will emerge from the crisis with more debt.
- Specific Case: Dollar General is a perfect deflation play—70% of its stores are in rural areas, selling essentials, and it performs better during recessions. However, Bloomstran has reduced his position (from 4% to 1%) because the stock has already risen too much. He regrets selling PepsiCo, stating, "It perfectly fits the deflationary environment."
- Risk Areas: The aviation supply chain (e.g., Hexcel) faces "permanent demand destruction"—even if the economy recovers, aircraft utilization may remain below 85% for an extended period, and new aircraft orders will disappear. He warns, "This is a game changer."
Mentioned Positions
| Position |
Analyst View |
Key Data |
| Big Five Tech (FAANG + Microsoft) |
Risk Warning |
20% of S&P 500 market cap, 8% of revenue, 14% of net profit; P/E 35-40x |
| ExxonMobil |
Hold (Cyclical Opportunity) |
Stock fell from $100 to $30; debt rose from ~$10B to ~$70B; dividend yield >100% |
| Dollar General |
Reduce (from 4% to 1%) |
Entry price ~$68; stock has already risen too much |
| PepsiCo |
Regret Selling |
Pricing power and essential goods attributes |
| Starbucks |
Hold (Top 5 Position) |
China business accounts for growth expectations; faces geopolitical risks |
| Disney |
Hold |
Debt increased post-crisis (due to Fox acquisition); need to assess demand recovery curve |
| Berkshire Hathaway |
Hold & Watch |
$125B in cash; possible buyback but not confirmed |
| Olin Corporation |
Increase (from small to significant position) |
Dividend $0.80/share; recommends cutting dividend |
| Hexcel |
Hold |
Supplies carbon fiber for Boeing 787 and Airbus A350; faces demand uncertainty |
Judgments Worth Remembering
1. “The five major tech companies cannot replicate the 24% annualized gains of the past decade over the next ten years” (Bloomstran) — Mathematically impossible: if they continue growing at 20%, they would exceed the total market capitalization of the S&P 500 by 100%. Using a three-dimensional model of “market cap × revenue × net profit,” he demonstrates that a reasonable expectation is for revenue growth to fall below 10%.
2. “The energy sector is a long-term capital destroyer, but you can make money going from ‘very bad to bad’” (Bloomstran) — Citing classic value investing logic: you can only buy these companies when they are “very bad,” not expecting them to become “good.” ExxonMobil is a typical example — dividend obligations have led to debt expansion.
3. “The velocity of money has fallen from 2.0 to 1.3 and continues to decline — this is the real cause of deflation” (Bloomstran) — M2 × velocity = nominal GDP. Despite M2 expansion, the decline in velocity offsets the effect. New debt cannot stimulate the economy because “we already have excess capital stock.”
4. “Every $3.5 of additional debt generates only $1 of GDP growth — the marginal utility of debt is exhausted” (Bloomstran) — From 2007 to 2020, total credit market debt rose from $50 trillion to $76 trillion, while GDP only grew from $14 trillion to $21 trillion. The 2020 deficit will push debt above $80 trillion, with debt/GDP reaching 400%.
5. “Berkshire Hathaway has made almost no large-scale investments during this crisis because the federal government intervened too quickly and too aggressively” (Bloomstran) — In 2008, Buffett could provide “firefighting capital,” but this time the Fed directly purchased corporate bonds and high-yield ETFs, preventing Berkshire from obtaining favorable terms.
6. “The next decade will be a decade of restructuring — companies will carry more debt, and deflation will crush the highly leveraged” (Bloomstran) — Even good companies (like Disney) will increase debt due to the crisis. In a deflationary environment, pricing power and low leverage are the baseline for survival.
7. “Global supply chains may be permanently restructured — manufacturing will return to the U.S.” (Bloomstran) — U.S.-China relations have already been damaged, and companies will choose to build factories in Dothan, Alabama, rather than in Wuhan. This poses risks for companies like Starbucks that rely on China’s growth.
8. “Inflation will only occur when the Fed directly monetizes debt, but we are not there yet” (Bloomstran) — All current interventions are “debt swaps” rather than “money creation.” Hyperinflation is the endgame, but “I hope I don’t see it in my lifetime.”