Animal Spirits Podcast - How America Invests (EP.180)

Episode Date: December 9, 2020

On today's show we discuss AT&T vs. Verizon, why we could see the highest CAPE ratio ever, the end of movie theaters, why selling is the hardest part of investing, when we'll get the vaccine, the best movies you haven't seen and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by our friends at Y Charts. You still have time to sign up on Monday, December 14th. Our friend, colleague, Josh Brown, is going to be on Y Charts webinar called Charts of the Year with Josh Brown. Check it out. We'll have a link in our show notes for the sign up, but you still have time to sign up for that. Obviously, there's going to be no shortage of good charts to look at for the year. If you are interested in checking out Y charts, go to them, tell them that Animal Spirits sent you, and you'll get 20% off your initial subscription. Welcome to Animal Spirits, a show about markets, life, and investing.

Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the Securities Discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. So on Monday morning, as we went to record, I was telling you before we got started,

I said, did you listen to Bill Simmons this morning? Because he messed up his audio. We both use a Zoom recorder, which is very easy. It's very intuitive. You plug something in. There's four different ports, and you just have to make sure that you're in the right one. A child could do it. But he forgot to plug his into the right one. And so his audio was completely unlistenable to the viewer. It's not a pleasant listening experience. So then we did our podcast. We sent over the files. Matthew Passy, our terrific editor, producer, sends back Michael. There's no audio. What I did, I even know what I did, but I didn't even have my Zoom plugged in, basically. So here we are, Ben shaking his head. It's Tuesday morning. We're running it

back. We had, like, crappy audio as a backup, but you know what? You deserve better than that, because there's nothing worse and listen to a podcast. Well, there's a few things worse. Listening to a podcast with lousy audio is pretty lousy. So here we are. We're running it back. I'm not even surprised anymore because this is, I don't know,

the 12th time you've messed something up technologically. Hang on. Hang on. Hang on. That's fair. How many, we've gone through podcasts where we'll be 20 minutes in and you'll go, oh, I forgot to hit record. It's been a while.

It's been a while. It's been a while. It's been a while. But I'm not surprised. It's a sinking feeling. It's not a good feeling to know that. But anyway, here we are. We're going to run it back.

for you, dear listener. All right, Ben, let's get started. My hot takes have now been cooking for another day, so I'm ready to go. I'm going to see if I can manufacture a laugh for the joke this second time I'm around. Actually, you know what? It's a good thing is we added some more stuff to the doc like this, for example. Yesterday, Christopher Nolan said some of our industry's biggest filmmakers, and by the way, Christopher Nolan is the director of Batman and Tennant and all those movies. He said some of our industry's biggest filmmakers and most important movie stars went to bed the night before thinking they were working for the greatest movie studio and woke up to find out they were working

for the worst streaming service. Ouch. I still think he's bitter because he didn't release Tenant. He could have owned the 2020 movie year if he would have released that on demand immediately. He said their decision makes no economic sense and even the most casual Wall Street investor can see the difference between disruption and dysfunction. So let's talk about AT&T. So AT&T is really going for it with the content.

By the way, I don't think how many people know that AT&T owns HBO. Is that fair to say? Sure. So they bought DirecTV, I think around five years ago. They bought Time Warner, which owns Warner Brothers, the studio and HBO and all the HBO properties. And it has not worked out well for them. The stock price of AT&T is at a 10-year low, I think. Verizon is at an all-time high. And you think Verizon and AT&T, they're both the cell phone carries. They're both the same company. Well, no, that's just not true anymore. HBO Max, as we've discussed, has been a massive failure. I love the service. I don't pay for it. I think it comes with Verizon or whatever. Wait, is that possible? Yeah, I don't pay for it either. It comes with my AT&T U-Uverse. Then you get an automatically

free HBO Max subscription. I think I get through Fios. But anyhow, it's been a failure. It's very confusing. You've got HBO Go, HBO Now, and then HBO Max came along. They should rebrand that. So I don't even think that people know that HBO Max is a streaming competitor. However, it's doing a little bit better. Somebody tweeted this morning, number of hours of engagement on HBO Max are up 36% in the last 30 days. They credit the undoing and other new content for that. But let's just look at the numbers. This is pretty crazy. As of November 2007, AT&T had a market cap of 250 billion in change. Verizon's was 120 billion. Since that time, AT&T has spent $170 billion buying Time Warner in Direc TV, which included HBO, as you said, Time Warner did. But now those numbers are $253 billion for Verizon, $215 billion for AT&T.

So that 13 years or whatever of AT&T and their market cap is down even after those acquisitions. So to quote Trent Griffin quoting Charlie Munger, they should have stayed within their circle of competence. And the crazy thing is they made the right bet if you think about it. They just didn't fulfill what they were trying to do. How about the execution sucked? They bet on streaming. Yeah, you're right. The execution has been poor because HBO, I don't know, is by far the highest quality.

television there is in terms of branding. I'm lukewarm on the flight attendant. I think I'm out. But yes. But obviously they're going to release a bunch of stuff now. But here's my thing. Christopher Nolan can cry all he wants. As a consumer of content, this is awesome. I have every streaming channel there is. These places are going to be competing with each other in putting out movies that they never would have in the past. So HBO Max- Hang on, hang on, hang on, hang on, before we get into that. Just to give you some context for how big of a flop, HBO Max has been. There's 9 million people on the service, 9 million. Disney plus has

75 million and less than a year. Netflix has 170 million. So HBO Max is tiny. That's the opposite. Disney Plus executed on this. Bob Iger did and HBO hasn't. But the stuff that's coming to Disney and Amazon and Apple is now getting into this game. So AT&T on HBO Max is going to release in 2021, the whole slate of movies on HBO Max first. So Mortal Kombat and Godzilla and Wonder Woman and Space Jam, which right now I'm putting it down, Space Jam 2 will be the worst movie of 2021. Mark it down. There's no way I'm watching that. Suicide Squad, Dune. I don't even really know what Dune is about, but if you've seen the preview, it looks amazing. I have the book. I never read it, but it's been said, people think it's like one of the best sci-fi books ever.

They spent so much money on this. And obviously, their thinking is, if we're going to do this, we're going to do this. And instead of someone paying $15 for a one-time movie ticket, we're going to hope that they spend $15 every month for recurring revenue of this streaming service. And so if they want to do this and they fail, I'm fine with them taking all the shots I want because as a consumer of content, if I never had to go to a movie theater again in my life, I probably wouldn't. If my kids don't force me to someday, I would be fine watching every movie from now until ever on my couch. That's how I feel. We didn't say this explicitly, but HBO has decided to put their 2021 slate on HBO Max. So you don't have to go to the movie theater. I'm definitely seeing Kong versus Godzilla in the movies.

Are you kidding me? Assuming that we've got a vaccine, I'm back. I understand where you're coming from. As a consumer of content, the knee-jerk reaction for this to be amazing that I could just watch them from the couch. Yeah, I get it. However, this is going to completely change the economics of the movie industry. It's going to hurt a lot of people inside the industry, which sucks.

Local movie theaters are probably not going to survive. Movie theaters are going to have to give you something you can't get now. So they're going to have to up their services. Like what? A free share in Robin Hood? But wait, hold on. I think it's possible. So everybody is very upset right now in the industry.

Hollywood Reporter did a thing yesterday. People are pissed. I think it's possible that if they don't execute, this is an economic failure, that they don't get another 15, 20, 30 million subscribers on HBO Max. I think they reverse this. and in 2022, they go back to the way it was. It's possible. The other hand, they could force the issue here.

And I'm trying to make an analogy here. Netflix is the Vanguard of the streaming industry. Netflix has forced all these people to take these chances. Vanguard came in with their index funds and low-cost investing and forced all these other places to meet them there. They drove down costs in the industry. Kind of like Robin Hood forced zero commissions on everyone else. Netflix has done this to everyone.

In the fact that Netflix and Amazon and Apple have such deep pockets and can spend this money, that's forcing these other companies to take chances. And again, as a consumer, I'm all for this. So if they swing and miss, okay, whatever, but other places are going to follow suit, too. You know what's interesting, though? I think Netflix has great original content with Queens Gambit and other stuff. They've really stepped it up. Their movies still are kind of trash.

Their original movies, watchable, but not great. There's something missing. I think the library, the catalog on HBO Max is better than Netflix. They have great movies on there. Right? You're coming around. Like HBO Max is a really solid service that nobody knows about. I can finally watch it on my Amazon Firestick, which I couldn't before.

I don't think that this is over. I wonder what other studios are going to do. They're just going to just say, no, we're not doing that. But if you owned a movie theater, you're crapping your pants right now because this is not the end of movie theaters, but this is movie theaters being marginalized to a much greater degree than they ever would have anticipated in 2020. I think the knee trick reaction is we're never going back. I don't know about that. Me, personally, I'm never going back.

Unless my kids force me, I'm done with movie theaters. No, but I'm saying if Warner Brothers rolls this back, if this is a flop economically, it's not viable. Okay, I will say movies that go to the movie theater in 10 years will be a minority versus movies that go to streaming. Yep, I think you're probably right. All right, let's move on to the stock market. Sentiment trader showed that for the first time in 15 years, 60% of the indicators we track are showing an excess amount of optimism and excess of excess, as he says. And you know what? I'm feeling it.

Every stock that I own is just going vertical. It makes... It feels bizarre. You feel like money on the table. I'm playing with house money. That's the feeling you get from this. Right now, I'm feeling a little internally. My giddy signals are flashing. It feels way too easy. Everything is going up. Can you time my giddiness? No. It sure feels like the market should like chill out. Or maybe we're just getting started. I don't know. But it feels too easy right now. I look today on the Robert Schiller-K ratio historical graph. The highest ever we've had is 44.2 times for the K-Ratio, which is in the dot-com bubble. Right now, we're at 33.1 times.

I think there's a world in which we could approach that 40-ish number. I think it's possible. I'm not saying it's going to happen. If rates stay low, inflation doesn't get completely out of control. In the Biden administration or the Trump Jr. administration, what's our time frame? I think in the Biden administration, we could see... Whoa. I will take the other side. That's not that much more of a jump. Yes, it is. 33 to 42. It's a big jump. Maybe the other side of that is if we do see a huge post-vaccine boom, the earnings play catch-up, too, and it's harder from that perspective. But I think if rates stay low, I think I'm saying speculation-wise, we could see something that approaches dot-com levels. I'm not ruling it off the table.

Speaking of hard, Nile Bayer tweeted yesterday, Pfizer is literally about to save the world. Their stock is up 11% year-to-date. That's pretty bizarre. Etsy is literally about to ship you a custom anklet. Their stock is up 254% year-to-date. Investing is hard is a takeaway. Let's get into this Jason Zweig, CMT story. So Jason is a writer at the Wall Street Journal. He wrote a post about how he opened up a Robin Hood account. And he traded his butt off like I did. By the way, I think I said this a few weeks ago. I moved my account

off Robin Hood and onto Schwab because I'm using it like it's like a dating app for no reason. I had not a ton of money on there, but I was just checking it 40 times a day. It is addictive. Okay, here's the alternative for me who uses it as a small piece of my portfolio. Having that release just allows me to forget everything else. So checking Robin Hood all the time means I never check any of my other holdings. Okay. Right? That's the offset. So you're in the minority. So they said most of its customers use a buy and hold strategy. Come on. Matthew, insert a laugh track here. Jason reached out to them and they said 98% of people on Robin Hood aren't day traders. I mean, you're certainly a buy and hold investor, but come on, I don't buy

that for a second. I'm bringing up the average, just like my credit score. Come on. I'm not saying that everybody on Robin Hood is a junkie. I just, 98% of them aren't traders or aren't day traders. Fortune had a story, and they broke down average daily trades by Robin Hood, Schwab, Td, Ameritrade, and E-Trade, which are the biggest competitors, so Robin Hood, obviously. They have about two and a half times as many average daily trades as Schwab. It's actually only about 25% higher than TD Ameritrade, and then they're about four times higher than E-Trade. I would love to see the median. But the average is four point three times. Come on. It's higher for sure. Average daily trades. Yeah, per customer, right? I don't know how they broke us up, but yeah, but it's just showing that how much higher it is

than their competitors, for sure. They've learned how to turn gamification of investing into a fun thing to do and it's easy. So the New York Times had an article. This is insanity. Startups and year in a deal frenzy. In the article, I think this is from, is it CSB? Is that the any of CSB Insights. They said startups have raised 223 megarounds of $100 million or higher so far this year on a pace to surpass last year's total, according to Pitchbook, from Pitchbuck. So let me ask you this. Are we just indestructible? Remember those two weeks in March, though, when we thought that all startups were going to fail? Run out of cash. Yeah. Are we indestructible? If you're betting against the U.S. economy in the U.S. consumer right now, good luck,

I guess. It's hard to, I don't know. I know. I know it's ridiculous to be so. No bravado, but... Okay, so the hard part about this cycle. What ends this? It always happens. Excess. Yeah. There's too much, but again, trying to tell where that pendulum swing is going to stop. Good luck.

So here's the question. Like, when do you sell? You have a bunch of stocks that are up and they seem to be going up every day. So when do you sell? Because on the one hand, well, no one ever broke taking a profit. On the other hand, a lot of companies just never come back. So they had this story in Barron's. When do I sell my shares of Snowflake?

I've got four whole shares. Expensive as Amazon now? I don't know. I was just talking with Josh about this. If snowflake grows at an 100% annualized rate over the next three quarters, if, right? That's an if, which it can. That's not a gimmy by any stretch of the imagination. But let's just assume that it does.

At today's valuation, it'll be trading at like 120 times sales. And Zoom, for example, is at like 60 and that's insane. Crowdstrike in the trade desk are at like 45, I think. at the peak in the dot-com bubble, Amazon was like 42. Maybe this is what stops. It's just people are just going out of their minds paying whatever for these companies. Right. And they just don't care.

And eventually there's no one else to pick it up and pass the baton to. So there was this study from University of Chicago, Carnegie Mill and MIT. And they looked at more than 4 million trades in 800 institutional portfolios from 2000 to 2016. These are portfolios that are like $600 million. This is nonprofit. So there's no taxes to think about here in terms. they found, while there is clear evidence of skill in buying, selling decisions underperform substantially, even relative to random selling strategies. And they said returns were particularly

bad for extreme performers. So really good stocks or really bad stocks went on to underperform, which honestly, this makes sense to me that this is the hardest part of investing. Because you could be one of the persons who made 100% in Amazon in the early 90s and got out and left tens of thousands of percentage points on the table. There's millions of people that sold Apple for a 30% gain and thought they would geniuses. If I did a short Amazon and I bought it, I would have sold it after a 30% gain. Or you held on to GE that's in the midst of an 80% drawdown from all-time highs. So there's both sides of that where you think, I'm not going to sell this thing that is going

to go on to give amazing gains or I'm going to hold on to this thing and it's going to come back. You just wait and see it never does. That's why selling is so hard. I don't think that there's very many intelligent things you could say about what to sell. I just, I don't. Sorry. That's the problem. Buying is the easy part. Selling or holding is really difficult. There is no, like, green or red light. I don't think you could teach somebody, like, when's a good time to sell? You can see the future.

Name one good investing book about when to sell. There isn't one, right? Right. I don't think there is about when is the best time to sell a good stack. I don't know. I get the risk management side of things, but like, so let's say you sell Amazon after every 15% drawdown and then you get back in a cell. I mean, you can't do it because all the best stocks get killed along the way.

Are you going to sell before they get killed and then buy again? That's not realistic. My holding period is forever or until there's a pandemic that causes me to sell my airlines. Is that fair? Are you sub-tweeting? All right. So we've talked about this How America Saves Report from Vanguard that they put out every year. They just did a new one called How America Invests.

And they looked at their five million retail investors to figure out how do they manage their money. It's kind of funny. This is like the other end of the spectrum. You've got Robin Hood over here, Vanguard over here. In the same way that Robin Hood users are probably not representative of, how America invest. I don't think Vanguard's users are either because these are probably the best behaved investors in the world as a group. Okay, but here's the other thing. The amount of money Vanguard has dwarfs the amount of money the average Robin Hood person has. That's, of course,

a fact. I think you can point to the fact that Vanguard has gained so much money that investor behavior on average is improving and they're bringing up the average. Yeah, for sure. But this report should be titled how the best investors behave or whatever. Probably. And I think you could make the case. Vanguard long-term buy and hold investors and rebalance are probably in the top 10% of best investors of the last 20, 30 years? Five. Five what? Top five. I think it's possible. So they said, it's kind of funny. We always joke that no one actually holds a 60, 40 portfolio. The average Vanguard portfolio is 63% equities, 16% bonds, 21% cash. So it's basically 6040. My 529s are at Vanguard. I don't have a personal account there, do you? I have a CEP IRA there that I use

with a just four fund index fund portfolio. But the crazy thing to me here is that the average of 21% in cash for these portfolios, that's huge. That's surprising to me. So a counterpoint, maybe these aren't the best behaved investors. Maybe these aren't the top 5%. I would love to see that cash position over time. Because I bet you that that doesn't fluctuate as much as you would think. I feel like that's probably fairly steady. So you don't think that's higher because interest rates are so low everywhere else? No, I don't think so. I don't think it's a function of interest rates. I think that, and I don't even think that it changes that much with the market because we know that Vanguard investors, by and large, do not have time in the market,

even when the market's getting killed. They're rebalance. And they are very diversified. So, they said only 16% of houses hold no equities. 22% hold 98% or more, meaning just about all stocks. So Vanguard is a pretty well diversified set of investors. It says they only trade only fewer than one quarter of households trade in a given year. And those that do typically only trade twice. So these are probably people that are rebalancing their portfolios. Vanguard investors trade twice a year, Robin Hood investors trade four times a day. Right. But 98% of them are buy and hold.

Yeah, okay. So Robin Hood is setting the price for Vanguard investors who are making all the money. Exactly. They're free riding. Vanguard's free running. All right. We got a bunch of emails that were sort of like this. Hey, guys, I'm really liking your podcast.

I have to disagree about the minimum wage, though. The only reason to think the minimum wage should be raised is if you believe a person should be able to feed a family or four while working at minimum wage. This was never the intent. I appreciate this email. a lot of them that came in like this because I think that we were wrong. At least I was wrong, saying that we need to do something. The federal minimum wage needs to be higher. I don't if I exactly said those words, but I guess that's what I was implying. But on a state-by-state

basis, there's different standards of living, different costs of living, obviously. The minimum wage in Alabama, for example, compared with New York, maybe that should be a state issue. Maybe they shouldn't be the same. But we still need to do something we need to do better. And I understand that local businesses, small businesses, a diner, for example, can't afford to pay cash for $15 an hour. I get it. However, publicly traded companies, I don't know where you draw the line, but publicly traded companies with a $10 billion market cap. Are you kidding me? Pay your employees. Pay your employees a minimum wage. That's more than seven and a quarter. And Walmart's been on the wrong side of this issue. I think they have more,

a lot of their employees are on welfare. I forget what the exact date is. But kudos to them. It was announced this week that they are giving more than $700 million in additional cash bonuses or associate bonuses, I should say, tops $2.8 billion in total cash bonuses to associates in 2020. That's a lot of money. So credit where credit is due. They're the ones that are going to make the biggest difference. The stat I saw the other day, I think Scott Galloway said this. It took like 25 years for Amazon to go to zero to 500,000 employees. This year, they went from 500,000 to a million, like that, which I don't know how they, they were able to get so many people in and indoctrinated in training-wise and get them up and running. So it's

If a place like Amazon is doing this, I think those are the two top employers in the country by far. Amazon's setting a minimum wage at $15 an hour and Walmart's going to hopefully start increasing it. That'll put pressure on everywhere else. It has to. The places that they are in and around, it has to put pressure. Otherwise, people are going to go work there from other jobs. Yep. I think some of the better points people made were the fact that this needs to be probably done at the state level. And honestly, that sounds like it's where it's happening. That's where a lot of stuff's happening these days. There was an article in the journal that I think has significant implications for various reasons I will get into. Cash holdings at non-financial companies go

to a record $2.1 trillion. Some of the biggest hoarders they mentioned, AT&T and Delta, each have more than $15 billion. I guess Delta is going to be able to weather the storm, sounds like. Current assets to current liabilities is 97% in the U.S., so we're good there. See, so AT&T has the ability to weather the HBO storm, right? They've got a lot of debt. Oh my God, they have a lot of debt. David Kotok says, it doesn't make sense for cash later companies to pay down debt in this interest rate climate. That cash is going to be put to more shareholder-friendly uses. So earlier in the year, I think Google borrowed at one something percent. Yeah. So the way to look at this is if you're someone who always looks at the glass as being

half empty, you're a perma bearer, you say, this is ridiculous. Companies have taking more debt than ever. Well, the debt to GDP chart, they love to say Warren Buffett's favorite indicator. Guess what? Compare that debt to GDP chart to interest rates. Interest rates are so low, companies would be stupid to not take out so much debt right now. So they're effectively changing their balance sheet, and they're going to return it to shareholders. And guess what? I bet 2021 is a record year for buybacks. Yep.

This cash on the sidelines is going to find its way into the market. Yep. A rate strategist of BFA said, next year, the expectations are for no meaningful corporate bond issuance because companies are sitting out a huge cash buffers that are no longer needed. And that is going to have ripple effects. So the journal said, that means more investor money chasing returns in debt from weaker governments, compressing the difference between Italian and German government yields further. it could also push investors to seek yield from higher risk junk-rated borrowers, right?

If corporations aren't issuing debt next year to the same extent that they did this year, then that's going to matter. And a manager partner at Eagle Point, credit management said, the unintended consequences of the situation is all of a sudden companies have a lot of cash. That money burns a whole in companies pockets quickly, so they would be looking to be acquisitive next year. So not just buybacks, M&A. Did you say Cape 42?

Because I'm thinking Cape 47. It was 44. Yeah, you're coming around now. See, this guy, Alex Rubikava, is a VC guy in Twitter. looking at financial statements from startups to mega cap companies, I see massive operating leverage everywhere. In response to COVID, management teams took out costs, fixed in variables wherever they could. I cannot recall seeing so many companies posting record EBIT down margins on revenues that are down year over year. When revenues turned back up, there's going to be a real

torque in the system. Everything happened so fast this year that there was a quick flush in expenses from places. And then now all these, they were able to borrow because rates came down. And this is why I said last week that the stock market is probably higher than it would be Ex-pandemic, which there are no counterfactuals, but... Oh, let me ask you this. So Disney is still closed, the theme parks are still closed, pretty much. Is that right? No, they're open, but just not very many people are showing up. Okay. The stock is at an all-time high?

Yes, without Disney Plus, they would be out of luck, probably. You're right about that, but I laughed at the fact that investors are more forward-looking. Maybe this is the poster child for that. This is a head-scratcher. This is one of the... An example, though, where in 2020, investors have been more forward-looking, maybe than any year in history? Because we've never had such defined outcomes of an end of this. There was an article last week saying that it's a bloodbath. That was a headline in terms of the number of layoffs that are going on inside of Disney. That's the tough part to square is that

there's still tens of millions of people. You put in here this outlook on the labor market and we'll get into that in a sec. But Bill McBride posts this chart and it shows all the percentage job losses in post-World War II recessions. And this current one is still at the trough of where the 2007 to 2009 period was, which is the lowest one in the chart post-World War II. absolutely insane, even after this rebound. This massive snapback, it's still at the bottom of that recession. However, because of where we are versus where we were then, I feel way better about the current situation than I do with that one, because there was still so much excess to get out of the system then. And this one, it's just this shock to the system. And then now we're almost

getting back. And again, companies and corporations have had the ability to shore up their balance sheets. And so have consumers. So I think even though we're still there and we have a long way to go, we're in a much better position than we were in after 2008. That's a good point. The chief economist had indeed wrote about this, and he said the Wall Street Journal, panel of economic forecasters, this was back in May. They projected unemployment would be over 11% to December 2020. And it wouldn't fall below 7% until the first half of 2022. And we're already below that level. By the way, can we stop mocking people for not predicting things this year? I know I'm probably guilty of this, but... I'm not mocking, am I?

No, no, I'm not saying you are. I'm saying people are still doing that. But it's like things happen so fast this year. I'm giving everyone a pass on predictions. Hang on. There's a difference. Miles other than wrote about this. The mocking sell side price targets for the S&P 500 is so old. What year is it? We're still doing that. Those people should not be mocked. It's the business. There's obviously demand. Otherwise it wouldn't happen. It's a 90-page report and all people pull out as a price target. Like there's actual thought that goes on in there. Not only should those strategists get a pass, but people that shouldn't get a pass are the people that predict doom year after year after year after year? That's a different level of this, for sure.

They should not get a pass. But yeah, if you make a prediction, you're wrong, you know, and it's a good earnest, good faith prediction, big deal. But getting back to this chart, so yes, the good news is that the headline unemployment, the number that we see came down substantially because a lot of those were temporary layoffs. The bad news is that core unemployment has not recovered really at all. Yes. Unfortunately, there's still tens of millions of people hurting. And that's why people saying, like this is crazy that the government is still spending money. There are still lots of people. The bulk of this money, if they do another fiscal stimulus deal, should go to extending those unemployment benefits, right, for the people who are hurting. And I can't imagine being a restaurant

owner this year and having to open and then close and open and close and go to only takeout. How many restaurants close? Is it 100,000? I don't know, but I can't imagine it's not going to be higher after the winter. That's devastating. Do you see these little igloos going up everywhere to try to do outside seating. I give them credit for trying, but especially in cold places like where I'm in Michigan and you are New York, I feel for that industry. Yeah, I mean, things are still tough where a lot of people. If this is not your life, it's hard to put yourself in these people's shoes and to understand how bad things aren't there. But the Brookings Institute did a piece, what if something happens, a qualitative study of the American middle class before and during the COVID-19

pandemic. So they started doing the study in the fall of 2019. There's a lot of stories like this. I just want to read one and I'll try and read this pretty quickly. Trevor, a white married father from Houston who did not finish college describes his economic prospects as bleak. Quote, living in an apartment and driving crappy cars and having jobs where you're lorded over and threatened with termination or being stagnated and never going anywhere, end quote. During the focus group, he explained doing pest control at most to make $40,000 a year. It was a great job 15 years ago, but now it's just very difficult. At 43, I still feel very. young and energetic, but I don't know if I could put enough money away in 22 years.

In his follow-up interview in 2020, Trevor shared more details about his family's plunged into bankruptcy and their tireless efforts to pull themselves back into the middle class. When Trevor's oldest son was 10 years old, he was bitten by a mosquito and contracted transverse myelitis. Trevor recalls he went from a very healthy 10-year-old kid running around to a kid who couldn't walk. He was basically in a wheelchair through over a decade of rehabilitation stuff.

It left permanent damage. His wife created a job to take care of their son. They spent $1,700 a month out of pocket on medication. It took years to obtain a correct diagnosis. Trevor says simply, we went broke. The family now depends on Medicare, Medicaid, welfare. We're basically on welfare. Most of it is food stamps and then some rental assistance from time to times from charities.

So anyway, it goes on and on. And there's a dozen stories like this. Again, for people like you and me and probably a lot of our listeners, this is so far outside of our daily life. But there are like legitimately millions of people. that are suffering. And it's absolutely insane and infuriating when you talk about things like UBI and us needing to do more and people need to be taken care of. It's always tough to put yourself in that position. And we're lucky. We've had the ability to work from home and a lot of people don't.

We hear, oh, the personal responsibility. Come on. Look at the mirror. Like, yes, where you were born and the circumstances you grew up in and just luck in a lot of ways. So much of it comes down to luck and being in the right place of the right time and brought into the right family or city or situation or whatever it is. So much of it is just based on luck and out of your own control in a lot of ways. Back to this indeed thing that we were talking about. This part was really interesting. I'll just read it. He said both consumer spending and employment shifted from services to goods during the pandemic as people bought pantry ingredients and exercise equipment instead of restaurant meals and gym memberships. This shift might persist if people want to continue

cooking, working out at home and similar activities. Alternatively, spending could go back to pre-pandemic patterns. In fact, we could even be in for a big rebound in spending on services that people deferred or are nostalgic for. All those rescheduled weddings and conferences might cost travel spending to soar, and perhaps people will decide they just pulled forward five years of home improvements and don't need to make more. It could cut either way. All right, Saban, let me ask you this. That last part I wanted to ask about. Homebuilder stocks were on fire. Lowe's Home Depot had incredible years. Did people just pull forward five years of renovation remodeling? This is like the biggest consumer question there is. How much of it has changed?

How many people will, now that they've done online grocery shopping, how many people will continue with it just because it makes your life more convenient, how many people will go back? I mean, the easiest one for me is travel will have the biggest boom it's ever had, maybe, in the 12 to 18 months post-vaccine. Once things really get back to normal, I mean, that's the layup one, right? The housing stuff, I don't know. I think there's going to be housing demand for years, even if it's not as big as it's been now. But this is the biggest question. How much of it has changed? Is there 20% of people that have now shifted to spending more online? Is it 40%? I don't know. That's going to be the interesting thing about this is how much, there certainly

are going to be people that completely go back to the way things were and it'll be like nothing happened. And other people, it will be, no, I'm changing this 30% of my consumption is just completely different. So I guess that's obviously the question. I think that there are certain things that are changed forever. And they're just not coming back to a way that they were. Speaking of housing demand, the chairman and CEO of Toll Brothers just said, we are currently experiencing the strongest housing market I've seen in my 30 years at Toll Brothers, and we continue to increase prices in nearly all of our communities as we focus on driving profitability and managing growth. The stronger demand began for us in mid-May and has continued through today.

So this is probably a perfect storm of obviously of COVID, people being home, of demographics. Connors said tweeted, in October, applications for mortgages larger than. $7666,000, jumped 59%. The biggest gain for all segments measured by the Mortgage Bankers Association. By comparison, the increase for mortgages from 150 to 300 was 13%. So that's interesting. The biggest houses are seeing the biggest jump in demand. Anecdotally, every time I see a new for sale sign go up, two or three days later, it's sale pending or sold. Where I live, there's not much more room to build. There's not a lot of empty lots, which is like that in most places. They're trying to sneak new houses in any little

nook and cranny they can find in these weird angles. And I'm sure if these builders could, they probably would build more in places if they had the ability, don't you think? Obviously, there's going to be demand for it, especially for the young people that are now becoming first-time homebuyers or second-time homebuyers. If there was new construction available for this group, they would take it in a heartbeat. They would have no problem selling these houses. Maybe this is something that does have legs to it, the home-building stuff. I saw a rare, the very rare. It's almost a unicorn on Twitter. A good point and a good counterpoint. So, Rex Salisbury tweeted, home ownership is a worst investment for many Americans than they realize,

I think that's a fair statement, with caveats, of course. He said, why? If you aren't max out your 401K because you need money for a down payment, your effective cost of capital is very high. Okay, fair point, I guess. A bit of a stretch, but a fair point. Then Charles Rubenfeld comes in and says, do you think the average American would have otherwise saved the money? It is forced savings after all. You often hear people say, I have a mortgage to pay when talking about finances. Haven't heard I have a 401k to max out. Boom. That's the problem is people view mortgages as a bill that they have to pay. And of course, you have to live somewhere and you don't want to get kicked out of your house. I feel like

for savings trumps everything else. People don't view their savings for retirement in that same light, which maybe they should in some ways. But you're right. This is the spreadsheet versus behavioral thing. And behavioral emotions typically went out in that situation. Ben, good news. They want influencers to get the vaccine early? I think we're in. I'll say it. I'll do it on YouTube. I'll be that influencer. This Wall Street Journal article said, should star athletes get the COVID vaccine early? And health experts are saying, maybe we should give it to athletes just to show people that it's okay. You know what? If people don't want to get the vaccine and want to move me to the front of the line, I'm fine with that. I'll take

someone's spot if they don't want it. How's that sound? Elvis Presley got the polio vaccine on live TV. So I'm just saying you and I, let's do it. Pfizer, hit us up. But if he took the polio vaccine and he died on a toilet seat, does that mean that's the same thing's going to happen else with this. All right. Look, New York Times has a vaccine timeline where you type in your age and your profession and any health issues you have. I'm bald. What does that put me? Does that move me to the front or to the back? What is that there? Yes. We're going to give you a full mane of hair from this vaccine. But I was like, they give it to you out of like 100 people. I was like 92nd out of 100 to get it. Honestly, no offense. Or maybe this is a good thing. Not no offense. This is a compliment. You should be

very last. Like you're almost 40 and you've got abs. You max out your 401k. You've got like van. Vanguard accounts. You're good. You have pristine credit. You're good. You have your hair. You have a Vanguard account. You can't get the vaccine until the end. You're good. You should be the very last in line. Okay. This is wild. Who knows if this is true. I'm just going to go with it. AirPods made more money in 2019. The Twitter, Snapchat, Spotify and Shopify combined. Twitter, Snapchat, Spotify and Shopify. I guess I could be accurate. Did you see this morning? There's new Apple headphones that are going over the ears. They're 550 freaking dollars. The joke was they're called air muffs. Is that what they're called? Yeah.

That's good. people will buy them. People buy anything from Apple. I think AirPods are one of the greatest consumer tech inventions of the last 10 years by far. I use mine all the time. Except for on this podcast. You know what we take for granted? What's that? Is FaceTime like the greatest invention of all time? Yes. I mean, just for my kids not seeing their grandparents as much during this, we call and say goodnight to my mom and dad with my kids four times a week with FaceTime. And they love it. It's amazing. Yes, I agree. It's totally underrated. All right. So for a list of our questions this week, we got so.

many emails about BlockFi, a bunch that we couldn't answer. So we thought it would be better to have Zach Prince from BlockFi back on so that we can get some clarity on these issues. So Zach, thank you for hopping back on. Yeah, thanks for having me back on, guys. We got a phenomenal response on Block Fyes in from the podcast. So I'm happy to come back on and answer a few quick questions. Actually, last week, congratulations on the rollout. I saw that it was on basically everywhere. You partnered with Visa for that credit card. Yeah, it's the first time ever that they talked about us on NPR, which I thought was kind of cool. So yeah, we launched the waiting list for the Bitcoin Rewards Credit Card, which is built in partnership with Visa and a couple of other folks.

And we got an overwhelming response. Is that public? Yeah, it's all public. You can get on the news now Visa. I mean, Bloomberg. I'm sorry. I'm sorry. Specifically what I meant is the waiting list. Is that public? How many people signed up? Oh. Just between you and us. Right now you can only get on the waiting list if you have a funded account with BlockFi. So I'm on the wait list and I laughed at Michael because he couldn't do it. Yeah, we already have over 50,000 people on the waiting list. And early next year, we'll be making it publicly available. So you can get on the waiting list without even having a funded account.

And then we'll start shipping cards in the back half of the first quarter. Wow, 50,000. Congratulations. All right, let's get right into this. Somebody asked us, I was curious about the fact that BlockFi was offering people up to 8% interest on their money and how you guys weren't blown away by this fact. I was blown away. That's why he's axed on. That is astronomically more than any savings account.

Am I missing something? It feels a little too good to be true. I understand that it is not as secure as a savings account, but why not just move some savings into this and collect the 6 to 8% without even having to get that Bitcoin? Yeah, so we actually see a lot of people use our platform for this exact reason. And the yield environment that we're in right now, 8.6%, which is our rate that we offer on U.S. dollars, which are reflected as stable coins on our platform, is an incredible deal. then the interest is paid monthly, and the liquidity in the account is daily.

So you can hold cash in the account for two days and put it in and take it back out. So it's a great deal. The best comparison to the listener's question in terms of whether it's a bank account or not, the best comparison would be to kind of like alternative lending or private credit. The big difference to alternative lending and private credit is the liquidity profile of, you know, same-day liquidity. So and then the difference between private credit. is that the risk is lower because the lending that we're doing is lending that's secured by

liquid assets, which are cryptocurrencies. So it's a great deal. Rates will come down over time, but we're still so early in the cryptocurrency market getting financing access from traditional banks and traditional financial firms that the rates will probably stay high for quite a while. And I'm a big user of it for my cash, not just my cryptocurrencies. So this is news to me because I didn't even realize this. But one, let's just be clear. This is not a bank account because it's not FDIC insured. Correct. So you're telling me that you don't need to buy Bitcoin in order to collect interest

at BlockFile. You could literally transfer cash in. Correct. And you get 8.6% on that cash while it's sitting in stable coins, which is how it's reflected on our platform. Importantly, those stable coins can be withdrawn back out to your bank account, same day. And you can hold them there.

and if you ever decide that you want to, you can also buy Bitcoin. And then if you buy Bitcoin, immediately after you purchase the Bitcoin, your assets are now partially or entirely in Bitcoin and your earning interest on the Bitcoin. What about people in New York? Can I do that? Unfortunately, you can not earn interest on cash or cryptocurrency. Unreal. But seriously, I know I keep asking you, but is there a catch?

How are you offering 8.6%? Make this add up for us. So right now, if you look at, and we'll talk about this later on in terms of the listeners questions. If you look at the futures curve, so the futures price for Bitcoin relative to the spot price of Bitcoin, Bitcoin is trading at a higher price in the futures market. And the difference between the future price for Bitcoin and the spot price for Bitcoin implies an annual yield of north of 10%. Now, what does that mean? That means that trading firms who we, you know, they're our biggest clients in terms of borrowers. They arbitrage these

things. So they sell the future, they buy spot, they wait until future is expiry, at which point the two prices converge, and they collect that implied yield because of the difference in the two prices. The reason that that exists is because this industry does not have access to traditional financing sources like banks and brokerage firms where you can borrow money at low single-digit rates. So the rates in the cryptocurrency sector are much higher, and that's what BlockFi is taking advantage of and then enabling our clients to take advantage of. So this is like commodities in the 70s and 80s, basically, with such an immature market. And Deer Point, eventually this market will get more mature and those spreads will compress

and the yields will be lower, but it's still the long way from that happening. Absolutely. And this isn't a perfect comparison, but another industry where the same type of kind of fundamental lack of access to traditional credit is true is the cannabis industry. So there's a publicly traded reed called Innovative Industrial Properties, Ticker IIPR, And they do sale leasebacks of industrial properties to companies that are growing cannabis. And they charge those companies double-digit rates, you know, rates in the teens to get access to capital for the exact same reason.

Those companies can't borrow from traditional banks. They can't borrow from traditional private credit firms. And as a result, the cost of capital is higher. One other thing I wanted to mention about using BlockFi, another thing you can do, which we didn't touch about, which we didn't touch on when I was on the podcast, is we have this interest payment flex option. So you can hold cash in an account at BlockFi, turn on the interest payment flex option and your interest will get automatically converted into Bitcoin or the other way around. You can hold Bitcoin and have your interest automatically converted into cash.

So what does that do? It enables someone who's attracted to the 8.6% yield on cash to capture that and then automatically dollar cost average into Bitcoin by converting the interest that they're earning in cash every month into Bitcoin on a regular basis or the other way around. Someone who owns a lot of Bitcoin can earn interest in Bitcoin every month, but convert that to cash and withdraw it to their bank account. Now they've turned their Bitcoin into something that generates a passive income stream for them in dollars. Interesting.

Okay. One more question. Can you open an account for kids? And if you can open an account for kids, could you open it for yourself and then later transfer that crypto to your children? Yeah. So right now we don't have support for accounts for minors. There's two different types of accounts for minors that you can have. We haven't built that yet. We do support accounts held in the name of a trust. So if you're someone that has a trust set up, we can open an account at BlockFi

in the name of a trust. But we don't have a concept on our platform today of having an account in the name of a minor or for the benefit of a minor. But that is something that we're planning to add in the future. Okay, so after we had our talk, I transferred over my Bitcoin and Ethereum from Coinbase to Block Buy. Here's something I couldn't find and I want to know if this is going to be in the future. So I'm a big fan of automation. Is there a feature for automatic investment where you could dollar cost average or is that something that is still manual or if not, will that be there in the future? So right now it's manual. But today, every time you want to send money from your bank account, which you can do via wire or ACH, you have to log in and type in

how much you want to send and make that happen. In Q1, of next year will be launching a recurring deposit feature where you can either just set up a certain amount to come out of your bank account every month and go into your BlockFi account or you can set up a certain amount to come out of your bank account and automatically purchase Bitcoin or Ethereum or another asset on our platform. So not today, but coming soon. All right. Last question. What are the institutions doing with the coins once you lend them? What happens if the price collapses? Are these rates you pay just a bet on crypto prices rising? So the rates are definitely not a bet on the prices of cryptocurrency rising or falling.

One important thing to keep in mind in terms of how the borrowing from these institutions work is that it's denominated in the asset that we're lending. So if Michael, you're Susquehanna and you're borrowing Bitcoin from BlockFi, that Bitcoin loan is denominated in Bitcoin. So you borrow 100 Bitcoin from us at a 9% interest rate. after a year, you have to pay back 109 Bitcoin. So if the price of Bitcoin goes down, you actually owe us less money in dollars because you've got a Bitcoin denominated low. It's kind of like shorting a stock. You owe less money to pay it off if the stock price goes down.

But are these companies shorting Bitcoin? That's one of the use cases. But actually the three most popular things that institutions who are borrowing from us today are doing are all either market making or arbitrage-related activities. I'll give you three examples. Example number one, the cryptocurrency industry in terms of the liquidity is very fragmented. So if you're buying or selling cryptocurrency, there's a lot of different exchanges. They're not all connected like in the securities world where you have central clearing or the same concepts of price discovery.

So a firm will have an account on Coinbase, finance, and maybe five other exchanges. And there will be periods of time throughout the day where you can buy Bitcoin for $10 more. on Binance than you can on Coinbase. So they'll sell it on one and buy it on the other. So they're basically making the market. It's kind of analogous to like what high speed firms do that are talked about in the Flash Boys book from Michael Lewis, except it's way less sophisticated in the cryptocurrency industry today.

So that's one thing they're doing. They're making markets across exchanges where prices vary a little bit minute by minute. Another thing they're doing is arbitraging premiums in publicly traded products. So I mentioned when I was on before the product, GBTC, the Grayscale Bitcoin Trust, which would now be a top 50 ETF by size if it were an ETF, but it's not an ETF. It's a trust. It's kind of like a closed-end fund that just aims to hold Bitcoin in it, and therefore, as an investor, you can get exposure to Bitcoin. That trust regularly trades at a premium to NAV of 10 to 30%. So the institutions that we lend to, they create new shares of that trust, wait till those shares

become liquid and then sell them into the market to try and bring that premium closer to Nav and they benefit from the fact that that premium exists and they borrow from BlockFi to get capital to conduct that activity. And then the last thing is the spot futures curve, which I talked about earlier. They're also arbitraging that. The key theme across all of these trades is that they are market neutral and arbitrage related. So whether the Bitcoin price goes, up or down, you're arbitraging the difference in the price of Bitcoin in two different venues. And as a result, you're effectively hedged. What sort of activity we're talking about in terms of like dollar amounts that are being borrowed in activity and stuff like that?

Well, the total assets on our platform today is around $3.75 billion at any single point in time between 60 and 75 percent of those assets are lent out. Wow. Okay. So that's the business. Yeah. That's a big part of the business. But we also have our our trading product, where folks are buying and selling cryptocurrencies, and we're also entering the payments business soon with the launch of our Bitcoin Rewards Credit Card. All right. This is great. Zach, thank you so much for hopping back on. We appreciate it. Thanks for having me, guys. Yeah, that's two recommendations. All right, a couple of quick ones. This is where I leave you is a movie from 2014. I rewatched it on Amazon recently.

Jason Bateman, Tina Fey. Why did you rewatch this? Be very specific. My wife found it, and I said, oh, I forgot about them. We're going to rewatch it. So it's got a great ensemble cast, Jason Bateman, Tina Faye, Rose Byrne, Timothy Oliphant, Adam Driver, who I think is hilarious in it. It's kind of like a seasonal beer for me. I love watching dysfunctional family movies around the holidays. For some reason, that puts me in a better mood to watch other families be dysfunctional.

And this is one of those dysfunctional family movies. Finish the Crown, which I think season four was probably one of the best seasons in the last 10 years of any television show. It was amazing. The acting is amazing. Are you about to tell me that the costumes are great? Yeah, good costumes. It's good storytelling. Obviously, it's not all that's true, but I don't really care because

I didn't really care about the royal family as it is. Okay, I watched Wall Street because it was on rewatchables, and I wanted to talk about some of the timeless stuff in there. It actually aged pretty well, even though nothing from the 80s can ever age perfectly. This one aged okay. Obviously, it's got cheesy music and some over-the-top acting, but the very opening scene, one of the old guys complains that there's too much cheap money floating around them. There's impossible to make money in the markets. This was made in 1987. The 10-year treasure was 9% in 1987. He was saying there's too much cheap money floating around because it's too hard to make money. There's a locker room scene where Gordon Gecko talks about the fact that no one can beat

the SEP 500. Oh, wow. I forgot that. And he also talks about at a lunch scene how the top 1% owns 90% of the assets and the bottom 90% owns nothing, basically. He's talking on income inequality in 1987. So it's so funny how many of these same themes just transported into today perfectly, aged surprisingly well. You know, sometimes every watch it, for me is good enough. Like nine out of ten times I listen to the rewatchables and I don't need to rewatch a movie. For me, that's like the replacement. It's like the replacement meal. See, that's given me ideas of stuff I need to rewatch because I like to rewatch it after the fact, but that one aged you pretty well. All right, anything else?

No, go ahead. I did this thing where I recommended the best movies that you haven't seen. And of course, this is a tough list to reconstruct because I don't know about you, but if there's a movie that you really like, you just assume everyone's seen it. Like Crawl, for instance? Like Placid. Surprisingly, you gave me this list before you put it out, and I was impressed. You did well here. Credit to me. Thank you. So anyway, so I'm going to share this as an Excel spreadsheet with like an additional 20 or 25 movies that people recommended. So Andy Duke recommended the King

of Comedy, which is a 1982 Martin Scorsese movie where Bobby Dee basically plays Joaquin Phoenix's Joker character. He plays a sociopathic comedian, him playing the late night guy, Bobby De Niro, that is, playing the late night guy and the Joker is like it coming full circle. So that was Jerry Lewis was in that movie. He was the late night guy. Scorsese directed it. Okay. You always give me crap about Bezos, Bezos. You saying Scorsese versus Scorsese is me to Bezos. Martin Scorsese calls it Scorsese. Okay. Everyone calls him Scorsese. I know, but he calls himself Scorsese. Oh, sorry. I didn't realize you guys run the same on that wavelength. That I would recommend. That was very good. By the way,

There's always a debate about De Niro versus Puccino. Everyone loves Al Pacino, including myself. But, like, Al Pacino always plays a variation of Al Pacino. De Niro's got such a wide range. He basically plays himself. Dude, get out of fear. He played this sociopathic comedian, and he plays the guy in Cape Fear. Yeah, trust me.

I'm on Team De Niro for sure. And Jack Burns? Meet the Parents is great, yeah. Got a good De Niro story for another time. You have a good De Niro story for another time? Yes. Well, no time like the present. Out with it.

No, it's a long story. It's a long story. Come on. You were like, what, is this a personal story? No, it's just a good friend of a friend kind of thing. Okay, we'll circle back to that next week. All right, Animal Spiritspod at gema.com. Thank you very much for listening, and we'll see you next time.