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Stock Picks to Play the Coming Inflation Slowdown (Szn 4, Ep 9)

Last updated on April 18, 2022

With Lukasz Tomicki, LRT Capital Management

Lukasz Tomicki of LRT Capital rejoins the podcast to argue his (highly contrarian) case that inflation is due to slow and to provide stock picks that allow investors to take advantage of current dislocations in markets.

Content Highlights

  • Inflation will peak around mid-year and return to historic norms shortly thereafter (2:43);
  • Russia’s invasion of Ukraine and its impact on supply chains have certainly contributed to higher prices for commodities, but markets will adapt (7:01);
  • Another contrarian take: The Fed will successfully manage a soft landing (8:55);
  • “Russia is basically a gas station with nuclear weapons.” The U.S. and Europe can deal without Russian imports so this shouldn’t be a point of concern (14:20);
  • Stocks of two Brazilian companies that have been beaten down but have started to rebound… (20:05);
  • A company that has been directly impacted by Russia’s invasion of Ukraine is an IT consulting firm with a large presence in Ukraine whose stock has predictably been beaten up but could offer huge returns (31:38);
  • The most likely outcome in Ukraine is for the military situation to grind to a stalemate (35:55);
  • A final idea: Buy the Polish stock market through the iShares MSCI Poland Capped ETF (EPOL) (39:50).

More Information on the Guest

Not intended as investment advice.

Video Highlights From Our YouTube Channel

Transcript

Nathaniel E. Baker
Lucasz Tomicki, LRT Capital, joining us here and we are going to talk about we have some stock ideas that you are going to present. But we’re starting with this premise of inflation and your view that this inflation is wait for it. transitory

Lukasz Tomicki
All right. I guess I’m team transitory

Nathaniel E. Baker
you’re still on Team transitory long after the Fed abandoned it. I mean, look at signs of inflation are everywhere. You go to the gas pump, it’s $4 and change now per gallon here in the US. And food prices are off. I don’t know how much. We have all kinds of stuff. That is that is rising prices rising wages are rising. So and the Fed has said they’re they’re they’re fighting inflation. Just last week, Powell or No, yesterday, Powell said that they may actually have to raise rates more. And so but you think now this is just going to kind of deviate and go on its way. So tell me about that.

Lukasz Tomicki
Yeah, I mean, look, this is the contrarian podcast, you have to think about what are the most contrarian position, the Fed doesn’t have a crystal ball, that’s any better than anyone elses. In reality, you know, a year ago, they were telling you, they don’t see any rate increases in the year ahead. When when it was becoming obvious that, you know, both the fiscal stimulus that was coming down the pipe, you know, however many rounds of that we had. And it was talked about build back better, which Biden was trying to do another trillion plus in spending and remake America, and the Federal buying, you know, mortgages and treasuries at a, you know, incredible rate. Back then, I think it was quite clear, there was gonna be some inflation, right, and the Federal telling you, there’s no inflation, and now everyone’s sort of gotten on this bandwagon, as if inflation of six 7% is going to persist. Now, I’m not claiming that suddenly, the economy’s gonna collapse, and everything is gonna get cheaper, like it was free five years ago. But I’m simply suggesting that inflation may moderate to something like a 2% rate that we’ve seen prior to the pandemic. And if you think about the things that were driving this low inflation before the pandemic, I don’t see those things as having changed dramatically.

Nathaniel E. Baker
Okay, so basically, it’ll just be a reversion to the mean, then I mean, interest rates are will factor into this as well, I would think, right.

Lukasz Tomicki
But you have to figure out sort of the rate of change, right? When interest rates and amount of new money has been created. So the Fed is going to start shrinking its balance sheet, rates will go to one and a half percent, maybe maybe two, the yield curve is already flat, you know, for years to 10 years, it’s actually marginally inverted as of this morning, which generally happens at the end of a tightening cycle. You know, what is what has kept what has kept inflation low for the last two decades, right? It’s been the aging population, the fact that there’s actually fewer people in the workforce. Population growth is, frankly, at the lowest levels we’ve had in generations in the United States. Some of that with has to do with immigration, some of that has to do with, with people delaying having children and fine family formation, you look at it, it’s just hard to see why there’s suddenly should be sustained high high inflation. And why it doesn’t come back. Commodity prices are up year over year. Again, that’s showing up in inflation. As you move forward, that rate of change year over year is going to decline. And that’s going to feed into prices somewhat but again, it’s going to stop at some point. So the case for seven plus percent inflation persisting is very low. My thesis as we go down to two and a half 2%. Towards the end of the year. I think that that’s kind of the finger that people are not expecting,

Nathaniel E. Baker
when would you start expect to start seeing this in the data like in the CPI or whatever?

Lukasz Tomicki
Sure. The second half of the year, you know, first quarter, first quarter, August, September, October, you know, okay, it should come down from the levels we’re at. Right and, you know, getting markets always forward looking. Stanley Druckenmiller has this great quote about you want to think about where the market will be and where to calmly be nine or 12 months out. You’re not investing in the present if you got to get in. If you’re going to invest in the present, you got to get run over. So you want to think about what where where things are heading. I think if you play this out to nine months forward inflation moderates, then then we can begin to talk about, you know, interest rates being stable, or maybe even cut at some points, because, again, the economy’s unlikely to be very kind of robust going forward.

Nathaniel E. Baker
Okay, let me throw a couple other things here at you, first of all, this idea that the reason we haven’t had inflation, until recently, in the last, you know, 2030 years, is because we’ve been exporting it. And also, now, when we’re talking about inflation, and let’s talk about commodities here, and this Russia, Ukraine crisis, and what that has done with supply chains, which a lot of people are blaming on the higher prices for oil and a host of other commodities, a palladium and industrial metals too, as those are, and wheat and corn and, and soft, as a lot of those are produced in that region. But what do you make of that? In the whole equation? Yeah, look,

Lukasz Tomicki
it is it is inflationary, and I think it’s gonna contribute to inflation. But again, you know, in the developed world, in the US, Western Europe, food is, you know, worse than record lows in terms of how much money we spend on food. What, what matters, and certainly energy is also part of that. But again, dollars of GDP per unit of energy, or barrels of oil consumed are at record highs. So we’re, we don’t need that much oil in the industrialized world. And that’s why US emissions have actually gone down over the last 20 years, right, US emissions peak, like in 99 2000, in terms of co2, because we’re getting more and more efficient. So yeah, certainly high oil prices, high commodity prices, all of that feeds into inflation. But the question is, does that, you know, does oil keep rising? 70%? Year over year, every year? I don’t I don’t think so. Right? It went from 40 to 100, it’s going to go to maybe 120 150. It’s not going to keep going up 50% every year. That’s that’s really what this is about.

Nathaniel E. Baker
Okay. And this other idea you have, which is what you had, what we’ve talked about so far is certainly contrarian. And what we’re about to talk about is, frankly, completely insane, which is that the Fed can engineer a soft landing here, which correct me if I’m wrong, they have never done in their entire history 100 And whatever your history it is. So tell me about talk to me about that.

Lukasz Tomicki
Yeah, I mean, I think the economy is going to slow down and inflation is gonna come down. I think people have different opinions about what the current consensus is. There’s some people kind of coalescing around what you might call a stagflation airy consensus that we’re gonna have high inflation in a weak economy. And again, I’m just not in the persistent inflationary camp. And the people that are really pushing you the inflation narrative, you know, they’re 70% invested in mining and oil. So I think there’s a reason for that narrative. You know, in, in supply chain management, there’s a well known phenomenon called the bullwhip effect. And the bullwhip effect basically occurs when you have multiple layers in a supply chain from the factory to the wholesaler, and you have lead times between those two. And there’s a lack of information, right? So so what happens is there’s a buildup of inventory and an amplification of the changes in demand throughout their supply chain. So I’ll give you an example. You’re a homebuilder during COVID. And you have some inventory of materials that you use to build houses and you see COVID happens big uncertainty, you see demand drops a bit, you know, say 5%, but you have COVID and uncertainty, who knows what’s going to happen? So you slow down construction, and you order, you know, 15% less materials from your suppliers even though your sales are down only 5%. You know, you want to be careful, you order 15% Less, you’re going to let’s let’s run down inventories a little bit. Let’s be careful. Your supplier sees this and says, okay, my orders are down 15%. And they have, you know, some materials that they use metal or whatever they used to fabricate your widgets. And they say, well, we don’t know what the demand is. Everyone’s telling us COVID lockdowns, God knows what we’re gonna preserve liquidity. Let’s slow down our orders, let’s run down inventory, let’s preserve cash. They ordered 25% less, right and the guy who makes the widgets from iron ore sees 25% that he said well, we got to cut the orders by 40% from US Steel were to get there rolled steel and and so on and so forth. Right. And it’s works both ways. So when demand comes Back, certainly home demand comes back 10 15%. And they’re like, dang it, we need to, you know, increase orders and our inventories down, let’s order 25% more. And and this, this is kind of how it progressed. So you’re seeing that play out in many companies and very kind of strange ways, you know, first quarter of last year, if you look at US Steel, I think they reported a net income of $2 billion. And at the time, this was a company that was a 6 billion enterprise value. And then one quarter to have net income of 2 billion, I saw some very strange things happening. And obviously, they, they, you know, everyone ordered more calls. And of course, coal prices are up. So they’re not going to make 2 billion a quarter. But there’s the strange things happening. lead times for orders, right have risen dramatically. So if you want to order from China, the lead time has increased. And so you had this pile up of ships on, you know, out the outside the harbor and Long Beach and Los Angeles, that’s actually been worked down. So you’ve heard a lot of articles about how there’s a big weight, that’s actually down to normal levels. Now, you probably haven’t, you know, it’s not sensational enough. You don’t hear much about it. But that’s actually back to normal. So you’re seeing that that kind of ripple through different levels of companies. And I think a big part of this, this extremely high demand that we’re seeing is actually related to to this bullwhip effect.

Nathaniel E. Baker
Okay, so basically, they’re the end users or not the complete end users, but the the people who sell the producers are we’re low on these raw materials and had to catch up with their orders. I guess it makes sense. Real quick, turning back to the geopolitical area, though, just while we’re still on the subject. Now, what if this, you know, the Russia the supply of all the stuff that they’ve been producing? goes offline, or just is the US and Western countries can’t import it anymore? And they have to find other. And it’s not just that there’s there’s a big move? It’s been going on for a while this reshoring, this idea of reshoring? And kind of bringing production back to the US. If that happens, which it sounds like it is, and it may make may advance further, then wouldn’t that result in higher prices?

Lukasz Tomicki
If less persistent higher prices? Yeah, let’s get get a few things cleared out. So there’s a bunch of things that you mentioned there. Yeah. Russia, so I’m originally from Warsaw, Poland. So I have some strong views on Russia. Let’s let’s start with that. Russia is basically a gas station with nuclear weapons. You know, it’s classified as an emerging country or emerging market, it’s not certainly emerging. It’s a sub emerging market. Okay. If you look at the economy, they’ve gone backwards and last 20 years. And I mean, in terms of what they produce, in terms of the kinds of products they make, there’s very little advanced machinery or advanced exports that Russia has their effective main export is commodities, of which oil is number one, natural gas is kind of number two, and then we can some agricultural things on yes, certainly, palladium and Nicole and other things. My short answer to all of that is, we’re going to work through it, we’re going to find a way through it, you know, the US doesn’t import much Russian oil, but the EU is going to self sanction effectively. But guess what, the Indians are going to buy it. So, you know, if 2 million barrels go from the, you know, the Western European countries, instead of that India buys it, I mean, they’re not buying it from somewhere else. It’s a global market, it will kind of reshuffle itself anyway. And the Indians are going to get a better deal because, you know, they’re, hey, you know, Russia, you’re in a tough spot, give us a give us a better deal. And it’s their position to do it. You know, they’re billion plus people, they need energy, who’s going to stop them? China, same thing, you know, China wants the commodities, they’re going to buy them. So I’m not that worried about that. Again, if you’re in low income in rural Egypt, and you depend on cheap wheat imports, this is going to be a tragedy for you. If you’re in New York City, and the cost of your bagel goes up 15 cents, you know, it’s too bad, but it’s it’s less of an issue for us. Regrettably, and there’s gonna be other compensating effects, right. So people will plan to more in other countries as well over time.

Nathaniel E. Baker
Okay, okay. Okay, cool. There was another part of that. I think that

Lukasz Tomicki
well, they’re the reshoring question, right. So the reshoring question is a supply chain question. And again, everyone’s trying to always figure out what the best combination of You know, supply security and pricing and capabilities is Russia doesn’t have any advanced manufacturing to speak of. So that’s really not an issue. In terms of reshoring, you know, the move out of China have very low income or very low value added production has been going on for 10 plus years. This is not a new idea. Wages in, say Vietnam are, you know, 1/5 of what they are in China into us from a Western perspective. China, Vietnam, Indonesia, these all seem like kind of poor countries. But you got to look at the numbers. You know, China’s income per capita is roughly the same as Mexico’s today, Vietnam is 1/4. India is one eight, roughly. So, you know, you can read stories about illegal immigrants coming from Vietnam over the river to work illegally in China. Go for it for them. It just makes sense to me. You substitute Texas and the Rio Grande afford this is like the same story all of a sudden, like we’ve heard this before. People are not manufacturing in China for low cost. Okay. They’re manufacturing in China for high quality actually. And for scale. Okay. in Shenzhen, you know, there’s very few places in the world where you can actually manufacture a product and make a million units a day at scale at a high level of quality like the iPhone, right? The pool of industrial engineers, suppliers, the logistics facilities. That’s why Apple is doing it in China that they will go somewhere else it was just about cost.

Nathaniel E. Baker
Sure, sure. Yeah. Very interesting. All right, Lucas, let’s take a short break. And I want to come back then and get into the real meat and potatoes of this which is the stocks but let’s take a first a real quick break and give her a chance from our sponsors to be heard. If you are a premium subscriber Do not touch the dial you will not get a break and to become a premium subscriber visit the website contrarian pod.substack.com and sign up

Lukasz Tomicki
for a free ideas for you. Okay. directly relate to the whole inflation deflation situation and what’s happening in Russia? Sure, look, let’s hear. Yeah, so two companies that are affected by the rise in interest rates, and have really been beaten down over the last 12 months are stone and pack scudo. And so this is ticker St. And he and the other ones, Pa Gs, and these are both Brazilian FinTech companies, but really they are credit card merchant acquires their main sort of businesses, they go out to a merchant, they say, Look, we can give you this credit card processing terminal, you can start accepting credit cards. And we are a relatively low cost for doing that. Brazil is a fairly oligopolistic market, there’s kind of five big banks, for many years, there was a duopoly of credit card companies, seller and reader, they were very high priced, you know, both the terminals were pre priced, the processing fees were high, then banks held on to your money for a long time, it was not a pleasant environment to work in. There was deregulation that happened six or seven years ago, stone packs Gudo are created, they have a lower cost model is priced at a lower price. They go to all these merchants that previously don’t have a credit card processor. And they say, Hey, get our, you know, use our terminals. And that’s that’s the basic business, right? So every time someone swipes a credit card, they they take a small cut. Now, they these these companies have a substantial working capital requirement, which they need to finance somehow. And they generally finance it through issuing debt. And pagseguro is different from stone. And there’s a lot of nuance between them. But what has happened in Brazil, is interest rates went from 275 to 1175. And there’s probably going to be another 100 basis point increase in the short term rates later this year, because inflation has taken off and the bank has been very aggressive. The short term raised hold sell it in Brazil. And so this has really put a strain on their margins. Right because their financing costs have exploded, margins have shrunk and it takes time to pass those additional costs on to merchants. Now both pagseguro and stone are trying to build a more complete ecosystem they have you know, stone has a division called links where they have apps and software they sell to merchants so very similar to square has specific software for a coffee shop or merchant whereas inventory management etc. So they’re doing a very similar business. They have a credit business where they are lending money against receivables and stone, in particular made a bit of a boo boo doing that last year. Specifically, there was a new credit receivables registry that the central bank has set up. And the idea being that you can lend securely against receivables, well turned out the, the system didn’t work really well. And the merchant could pledge the same receivable to multiple people. So a lot of uncollectible debt. So they stopped that there’s other things going on. So there’s a more complex story. They’re also getting in some deposits, because they have effectively a banking product, which you have to remember is, you know, Brazil is a developing economy. A lot of merchants do not have credit card processing capabilities. And a lot of people don’t have bank accounts. So there’s an enormous opportunity for growth and for digitalization of payments in those countries. And if you look at the market share data, you know that the two kind of big incumbents, CLR and reader are donating market share, to say politely to stone and pagseguro. And the market itself is growing. So the top lines for these companies are growing 99% 95% year over year. So there’s tremendous growth there. And they are profitable, their cash flow kind of positive. There’s many moving parts. But the big bet is, you know, we can talk about the nuances and how different pag is different from stone. But they’re both down, you know, 85%, basically year over year. And the big bet is that Brazil turns around, right, the inflation moderates, and the central bank can actually cut interest rates. And what you have to remember is that last that the last cutting cycle took rates down to 275, which is the lowest they’ve been in Brazil for four decades. So imagine, you know, inflation moderates, 12 months from now, the central bank could actually begin cutting interest rates. And you know, instead of being at 12, or 13%, interest rates, they go on to six, it’s not inconceivable, and everyone’s Yeah, no one, no one seems to be thinking about that. If they go to 6%, then suddenly, the reverse will begin happening, that financing costs for for these companies are going to go down and it will take a little bit of time, a few quarters for that to be passed on to merchants. So these are stocks that were you know, in their 50s 60s 70s. So installed case, I think it peaked in the low 90s. And that fell into an eight an $8. Stock three weeks ago, and I think it’s around $14 today, because, you know, they reported earnings last week, and they were not horrible. And they didn’t declare bankruptcy as some people were predicting. They said they didn’t don’t need any additional capital. And you know, top line grew 97%

Lukasz Tomicki
That’s another thing to look at, is beaten down, reasonably well managed. They’re gaining scale. To bet on Brazil. I think probably half of their return here is just a battle. The macro in Brazil.

Nathaniel E. Baker
Yeah, yeah. Yeah. I mean, it’s interesting. If you look at the chart, yeah, over the last year, these two stocks are down 6070 80%. Stone is down. Almost 80 and Pags is down 60. But over the since the Russian invasion, these last three weeks they fought they bounced.

Lukasz Tomicki
Well, they bounce because Stone had you know, the earnings last first day I say close, and they were not terrible. And then pagseguro isn’t a very similar business. So it kind of moves very much in tandem with it. So you know, stone is up, I think 50 or 60% from its low, you know, two and a half weeks ago. And by the way, yeah, all this closure, we have a position. Everything we talked about we file 13 F’s, you know? Sure. Well, wisdom, whatever. See it. Yeah, I’m talking my book here fully. So

Nathaniel E. Baker
yeah, well, that’s fine. I mean, that’s wouldn’t expect any different. So this bait, if I understand this correctly, these businesses are basically sounds sounds like a cross between PayPal and square. Or stripe. Like,

Lukasz Tomicki
yeah, I would say they’re closer to more like a global payments. Okay, we’re FIS plus stripe kind of gravel isotope of that.

Nathaniel E. Baker
Yes. Okay. Okay. So why haven’t the having the other I guess it’s just such a big market and so fragmented. That’s why the bigger players haven’t haven’t expanded into this space.

Lukasz Tomicki
That Well, it’s Brazil, right? So there’s, it’s, it’s a different market. And the payments business is huge. Outside of Brazil, if you’re, if you’re PayPal or Square, there’s plenty other you know, there’s a lot of wood to chop out there. Going still, that you don’t know and already competitors. They’re, you know, I don’t know what square would add by going to to Brazil at this point.

Nathaniel E. Baker
Right, right. Or if so they could probably do it through an acquisition. But here we go. There’s some candidates but no Now how about the the capital structure and the fact that they do have to keep hitting hitting the capital markets for to get more debt? Is that a concern at some point or not yet? They’re silica?

Lukasz Tomicki
No, it’s largely working capital effectively. So I don’t think it’s a big concern. Very interesting. Well manage companies.

Nathaniel E. Baker
Uh huh. And how much of that is a bit? I mean, Brazil is a interesting place. I mean, I’ve been there. And if you have, but it’s there in February. Oh, yeah. It’s a nice place a parts of it. But there are issues, political and otherwise. And, you know, it’s one of these places where just when you think it’s coming back, and Argentina is like this, too, when you think they’re they’re due for to really enter the next stage of growth that kind of seem to fall apart. And that was the case election coming up later this year. Oh, they do, right. Yeah. Yeah. And how many of their former presidents are in jail?

Lukasz Tomicki
Well, believe it or not that one of the Presidents is out of jail, and he’s the front runner now,

Nathaniel E. Baker
is that Lula Lu as the front runner?

Lukasz Tomicki
Well, they’re totally wrong. Lula will be the president.

Nathaniel E. Baker
That’s wild. That is Yeah, only in Brazil, but or other Latin America. But anyway, how much concern is that? And then you also have when you talk about the macro picture, I mean, Brazil is a commodity exporter. And China is probably their biggest client, I would assume. And so if China slows down, we have all these real estate issues in China, blah, blah, blah. Then with that, how much of concern is that? Do you even look at that, as

Lukasz Tomicki
I do look at look at Brazil is effectively in a recession right now? Yeah. The markets always forward looking. So all the concerns you’re talking about are in stock prices already. If you look at you know, valet, right, the major iron ore exporter from Brazil, the stock price fell substantially last year and started rebounding there this year. So certainly Brazil is levered to global commodity prices to agricultural prices. And all of those, you know, for reasons that we talked about earlier, are on the upswing in the current environment now, doesn’t mean they’re, they’re going to be I don’t think we’re returning to the kind of, you know, early 2000s, like we had where China was building everything like crazy. But again, they have great reserves, they’re relatively low costs, and they should do Okay, over time. Now, Brazilians that the Brazilians I spoke to, because I was in Brazil, last month, were overall quite pessimistic about the choice of presidential candidates, you know, the, the croc and a psychopath, those were the two choices. But I think you know, they will muddle through it. And if you look at the stock market in Brazil, you know, it’s gone nowhere for 10 years. Yeah. So again, we’re not asking for a lot here, we’re not, we’re not pricing in a lot. I’m just saying this doesn’t fall apart to some kind of death spiral. And things kind of moderate a little bit. And inflation comes down a bit. And very cool. Brazil, structurally, has been improving its macro economic governance. And that’s why interest rates have come down to up to 75 in the last cutting cycle, and you look at getting the short term rates, every cutting cycle, they’ve gone lower and lower and lower. So that’s a pattern you’ve also seen in most of the developed world, right, where every time there’s a cutting cycle, we go to new lows of interest rates.

Nathaniel E. Baker
That’s right. Yeah, certainly been the case here in the US with the Fed. Okay, cool. And what’s the third idea that you have?

Lukasz Tomicki
Yeah, so you know, since Ukraine has been invaded, one may look for companies that have been really hurt by this. And I’ll give you sort of two ideas on this, again, one. For for the real risk lovers and one for people that are a little more risk averse. The real risk lovers should look at a company called EPAM, which is an IT software business, which they basically work on it software projects. And the majority of their workforce is in Eastern Europe, including Ukraine and Russia and Belarus and Poland and the other Baltic flattened states. They withdrew guidance, you know, and prior to prior to the invasion, you know, there’s got free business that are quite similar. And dava, globin and EPAM. And EPAM, being the largest one of those. They traded routinely at 70 to 80 times earnings. So very, very rich. And there’s reasons for that they were very nice businesses, and they were scaling and incremental margins were very strong, they don’t need capital, many good reasons. But now EPAM, you know, fell at some point over 80% On account of the Russian invasion, it’s been falling before because in high price high valuation and growth stocks have been getting slammed this year. Then comes the extra punch of Ukraine. They withdraw guidance, the stock for 70% So that’s That’s your opportunity. If you think that they will able they’ll be able to move a lot of their people into, you know, safer areas. So Western Ukraine, potentially Poland, the other states and rebuild the business. That then you know, it’s the cheapest effectively it’s ever been since IPO. Wow. And you’re trading the US, you’re not going to get sanctioned, you’re not going to get repeat, you know, you’re not going to get your acid stripped by the Russian government or something.

Nathaniel E. Baker
Yeah, in fact, you may get good good deals with the US government, or the US companies are able to lend to you maybe it’s interesting,

Lukasz Tomicki
that they they’re like, no, they have a great reputation. Clearly, clot, you know, there are gonna be delays in the projects they’re doing. But it’s not like, everyone just fires them tomorrow, because there’s a delay, I think people understand what’s happening. It’s not like so easy. If you have a IT project. And in the middle of that you, you can hire someone else to do it. It’s a pretty sticky business in that sense.

Nathaniel E. Baker
Yeah, I know. So so. So they provide the engineering powers like the people, the programmers,

Lukasz Tomicki
that’s the simplest way to think about it. And again, you know, you can hire top talent in Ukraine for much less you can hire it

Nathaniel E. Baker
ashore. Yeah, yeah. It’s funny. I actually know this, because it’s interesting how many Western companies like the company I worked for Seeking Alpha, they’re Israeli, but they have a big had a big presence in in Ukraine, and very many developers there. I think 70. Last, I heard they were all accounted for, thankfully. But yeah, but it’s just Gosh,

Lukasz Tomicki
another, you know, another kind of company of many people know about coffin, which Yeah, alternative charts and data. Most of their people are actually in Ukraine.

Nathaniel E. Baker
Wow. How do these companies deal with this with without having a business risk disrupted?

Lukasz Tomicki
Well, you know, not all of Ukraine is fighting. Right. So there’s true. I was just speaking earlier to phone us as we were talking, I was exchanging messages with people in Kiev right now. Wow. Life goes on. I mean, certainly, it’s terrible, what’s happening, but but life continues to go on. And, you know, you look at the landscape, the landscape is announcing tax reform in the middle of all this, to help Ukrainian businesses simplified bureaucracy. So you know, that they are they are continuing to fight and they’re continuing to educate children and are even talking about how they’re going to plant crops, you know, between I’ll throw it but between between fighting rounds.

Nathaniel E. Baker
Okay. Since you are from, you know, a neighboring country, and you obviously, a pretty educated on this. What are your views on on the potential end game there and Ukraine?

Lukasz Tomicki
Yeah, I mean, I don’t know if there’s a endgame I, unfortunately, I think this kind of grinds to a stalemate. And, you know, no one’s going to concede, and the US and allies probably keep sending in supplies and munitions for quite a while. And the Russians, you know, can’t really take much territory, but they can continue bombing cities once in a while. And we go into this kind of prolonged stalemate, I think, unfortunately, that’s, that’s one of the likely outcomes here. I don’t see the US really getting involved militarily. For various reasons, I don’t think there’s a public appetite for that, frankly. And I don’t see, you know, how Russia can really win a decisive victory, either, you know, Poland, you know, Poland was occupied by foreign powers, and actually didn’t exist as a country for 123 years. And it kept fighting like ongoing uprisings, and all of them, you know, totally, I mean, seemingly pointless and bloodedly suppressed and 1000 dying. And people just keep fighting so that their mentality, you know, in Poland, and I think, largely in Ukraine is that even if it doesn’t make sense to fight, you just have to keep fighting. It’s like, you never capitulate under any circumstances and keep fighting. So I don’t see how Russia can hope to hold Ukraine in any meaningful sense. You know, the US tried to hold Afghanistan for quite a while, and aggression. And you know, how well that worked out. So, Ukraine is a different story. But the Taliban didn’t have modern weapons that were supplied to them by the West all the time. So I don’t see how he Russia wins in a sense of holding territory, and at the same time, I don’t see how they’re going to concede at this point. You know, there is from all the reports I See, there is quite a bit of support in Russia for this special military military operation is called because it’s not a war, obviously in Russia. And, you know, sanctions, well, they hurt people and they hurt the economies. I don’t know of a country that’s ever changed its political course really, in a meaningful way because of sanctions.

Nathaniel E. Baker
I could argue South Africa, maybe but apartheid,

Lukasz Tomicki
perhaps? Yes. Perhaps, as part of it.

Nathaniel E. Baker
Gosh, yeah. But what you’re what you’re describing actually has has kind of been going on in eastern Ukraine for five for eight years, right? I mean, in that whole region, so it certainly wouldn’t be unprecedented. Do you think there’s any chance that they pull the kind of try to do at Graziani here and just level the place like they did in Chechnya or the Russians?

Lukasz Tomicki
Well, they try. But you know, it’s it’s a bigger place. Bigger. Kiev itself is larger than New York City in terms of landmass the space it takes up. Yeah, I mean, they’re gonna keep firing, and the Ukrainians are gonna keep counter attacking. And you know, just just today, there was a report, they retook a certain neighborhood. So yes, I’m pushing it back. So I’m not I’m not on the ground. Amona military experts. You know, if, if this is the if this is the war going well, for Russia, I would hate to see what what did going badly with me?

Nathaniel E. Baker
Yeah. Yeah. Cool. Well, thanks for that segue, I realized has nothing really to do with economics or investing, although it kind of does, I guess.

Lukasz Tomicki
Yeah. So I told you, I have EPAM for the real risk lovers. Yeah. And I have one more for the less risk lover he told me. And that would be simply by the the worst of stock market.

Nathaniel E. Baker
Oh, right. And is there an ETF?

Lukasz Tomicki
Yes, there is. It’s eapol Ep. O L. Okay. And, you know, the liquidity isn’t the greatest in the world, but you know, trades two or 300,000 shares a day. I think the outstanding shares are 270 million last I checked, you know, PE or the market is 10. Ish. And, you know, you’re not going to get expropriated, you’re not going to get sanctioned. The GDP keeps growing. They just got another million people, you know, from from immigrants. And I think you know, what, one thing to think about is really understand that Ukrainian immigrants in Poland, even though it is mainly women and children, you know, they are, they’re not going to sit in, you know, camps and kind of wait hopelessly for handouts, like, they’re already organizing kindergartens and Ukrainian elementary schools and you know, looking for jobs, and the Polish government issued all of them, like social equivalent of a social security number, so you can legally work and many of them speak some polish. So you know, that they’re going to be very quickly productive members of society, I think, and contribute in one way or another.

Nathaniel E. Baker
Very interesting. Yeah. And here to the stock, the stock sold off after the invasion, but have since rebounded? I guess, march 7, was the bottom here for most of these? Yes.

Lukasz Tomicki
So it’s a lot of that has to do with currency as well. Right. So there’s quite so much money, right? Currency. Yeah, suppose currency at its weakest fell about 15% from the pre invasion level. And the Polish bank is also the Polish central bank is quite hawkish. So they’ve raised interest rates, and Poland is fighting inflation. But it’s doing reasonably well. And again, the economy I think, is not going to collapse. And short of a nuclear attack wiping out Poland. I think, you know, you’re buying at depressed prices now. And there’s some bounce to be had things normalized.

Nathaniel E. Baker
Cool. A couple years ago, as it I edited this book about Poland, being the next economic kind of superpower, is written by a Polish economist. And speaking it talks about speak talk in your book, but it was, but it was interesting. And yeah, and he had a lot of really interesting points about this. And, you know, look, it’s a it’s a growing economy, right, right, in the heart of Europe, and yet with the demographics and things and it seems like it could be in a really good position.

Lukasz Tomicki
Yeah, I think one thing that’s not maybe well known in the West is the energy policy. Oh, you know, so if you look at wholesale energy prices, you know, they are roughly 1/3 of what they are in Germany or other other, you know, Western European countries because Poland never really got on board with the whole green movement. Right? You know, and they, the European Union is always Pooh poohing. They’re like, How could How can you pollute, and you’re doing these terrible things. And you know, and Poland is getting very kind of anti Russia in terms of Getting supplies from Russia. So there’s a natural gas pipeline that’s going to be coming from Norway to Poland almost finished. They’re expecting that to open in August, September. And they have LNG in port terminal. And between those two things pole is actually going to be energy, you know, sufficient independent from a gas perspective, and will not need to import from Russia. And then you have that, you know, imagine you’re, you’re a German company, right? You’re doing manufacturing. And energy prices in Germany are three times what they are in Poland. And by the way, the corporate tax is also half in Poland, what it is in Germany. So you see, you know, you see what happens, right, all the auto parts suppliers for this is not a new trend. For years, they’ve been building factories in Poland and their highways, you know, 100 miles and goes from Poland goes to the German factory for assembly, that kind of trend is likely to continue because, again, wages are lower in Poland. I would say the government is a little bit more pro business. Energy prices are meaningfully meaningfully lower. So you can you can have see that process continuing. I don’t expect Poland isn’t a superpower. But you know that there’s no reason why they can’t take market share from these kinds of jobs or middle tier if you will, from from Western Europe. It’s not just car parts, you know, it’s aerospace. In the south eastern part of Poland. There’s quite a bit of concentration of aerospace manufacturers and Western companies, and Lufthansa has a has a big operation there. So Lufthansa, the airline, most of their income actually comes from non airline operations. They have, they have a maintenance division, they have a catering business, they have 100 things. Wow. So Lufthansa technique, which is their maintenance operation, where they service airplanes and service jet engine and so on. They have an operation there MTI arrow, which is German company began makes many things with many engine parts, they make some of those in Poland. So those kinds of things, you know, are, are continuing, and that there’s an airport in that area in the city called Jeshua. That’s become, you know, a semi semi Forward Operating Base for NATO and other people that are, you know, there’s there were times we’re not in Russian AirSpace, but there’s so many planes now flying around, they’re looking at what’s happening in Russia, it’s become this little military outpost almost.

Nathaniel E. Baker
Wow. Interesting. Are there any growth industries that maybe that people might be able to, or even individual companies that people might be able to get in on the ground floor

Lukasz Tomicki
and join in Poland? Yeah. You know, I think there’s a couple that are worth looking at the index itself, if you look at the index, it’s dominated. Number one, there’s a big Polish bank. And the second one is a copper producing company actually has big operations in I believe, Canada and Chile. So if you feel like copper, the second largest constituent of the index, but then you have companies like Dino POSCO, which is a it’s a retailer, but they target smaller towns, it’s smaller stores. You know, and there’s quite a bit of growth still potential in those areas. There is CD Project, which is a game developer. Yeah. The heck service for their most well known catalog item. There’s other things, you know, there’s a recycling business. That’s interesting, because when polled a small market, you might think recycling is a competitive business. But turns out it’s not in Poland, there’s some recycling companies, I don’t want to give you the whole names because they’re not that liquid. But there, there are a number of things, things of that nature that there’s a flooring company called decor down, which again, doesn’t look particularly expensive. Again, Paul is a big exporter of furniture through the largest manufacturers in Europe. So flooring, furniture, those kind of things make a lot of sense, given where Poland is and how the wage structure if you will. Yeah,

Nathaniel E. Baker
all of these have pink sheets. I’m just looking now. Sorry. A lot of these pink sheets. Dino Polska is the NOP why. Yeah, yeah. Again, very liquid. But yeah,

Lukasz Tomicki
I mean, I wouldn’t buy the pink sheet. I’ll probably go direct

Nathaniel E. Baker
involved. Yeah, sure. Yeah. Which most people can do now?

Lukasz Tomicki
Yes. Yeah, they don’t do reasonably well known company. There are some there’s some coal mining companies. There’s an ongoing project in Poland for the utility companies to pull their so called Dirty assets into one company. Right. So then they would all have this one company, which is the dirty company and we’ll just have contracts with it. And I have every utility you say, well, we’re green, we’re, we’re clean. So the reason it has to do with finance Right, it’s becoming harder and harder to finance your operations if you have any kind of call acid. So so that that’s happening now does a big project occurring. But there are some coal miners as well in Poland, which again, just like sort of miners in in West Virginia, we’re left for dead. We’re not competitive. And suddenly with coal prices where they are, you know, there’s only printing money.

Nathaniel E. Baker
Hmm. Very interesting. All right, Lucas. Mitski. Thank you so much. They say Right. Yeah. Yeah, thanks. Thanks so much for joining. In closing, maybe tell us how we can find out more about you. And your company? Do you have a website? Sure. Yeah, T capital.

Lukasz Tomicki
So you know, I run a fund. It’s myself, an analyst and a CFO. We’re based in Austin, Texas, the firm’s name is LRT Capital Management. If you just search and Google LRT capital, you will find our website which has a ton of information, including monthly letters. And we’re quite open about what we do and what we own. And we crossed 100 million under management last year, so we filed for TNF this year. So yeah, you can look at us, look us up and see everything we own and what we’re

Nathaniel E. Baker
doing. Oh, that’s here. Yeah. Because last time I spoke to you, you guys, were literally just starting out. I think you just said friends and family money back in early 2020. Late 2019. If memory serves, I’m

Lukasz Tomicki
not quite starting out. But we were fairly new in the game in the US. I’d live in Hong Kong prior to returning to the US. So yeah, I remember shortly after that.

Nathaniel E. Baker
Yeah, yeah, we got into that last time. And yeah, but you’re not on the social media. You Didn’t you used to be? No, I’m on Twitter. Um, you are on Twitter.

Lukasz Tomicki
That’s how I contacted you. That’s how we set up this whole interview. was over

Nathaniel E. Baker
Oh, you’re right. I’m sorry, Lucas. There you are at @Tomicki. Okay, great. What an idiot. Okay, I’m talking about me. Okay, cool. Wonderful. Um, wow, where’s that picture?

Lukasz Tomicki
Yeah, that is from my recent vacation in Argentina. That’s Argentina. Wow, that’s, that’s Patagonia. That’s Pluto brands under amico in. Very large, Argentina. Beautiful. It’s incredible. definitely the place to go. You know, when it’s when it’s winter in the Northern Hemisphere. It’s summer there.

Nathaniel E. Baker
Right, right. Don’t do it the other way around, you will probably freeze. Great, man. Awesome. Well, thanks so much for coming on the contrarian investor podcast. Thank you all for listening. And we look forward to speaking with you again next time.