Animal Spirits Podcast - Is the Stock Market Wrong? (EP.147)

Episode Date: May 20, 2020

We discuss what a potential vaccine means for stock market, we could see a bubble after this, retail bankruptcies, the food delivery business, why the stock market is so confusing right now, inequality in this crisis, active fund performance during the bear market 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

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 position, and the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Yesterday, the stock market went crazy. We're filming this on Tuesday morning. Stocks were up... Define go crazy. Well, stocks were up 3 to 4%. And on the smaller end, small mid-cap stocks were up 6, 7% in some cases in terms of the indexes.

That seemed like a pretty crazy day to me. And it sounds like the reason for this was because this company, Moderna said that they had some promising early signs of a vaccine. And does this stuff surprise you at all when you get data like this? I mean, are we going to have some massive volatility from the vaccine in the coming months where you get some good news and markets go crazy and then you potentially get some bad news and then they give it all back? Doesn't it seem like that would be a fair assumption of what's going to happen? Obviously, it sounds like it's going to take a while for this to actually happen. Yes, I could definitely see that happening. So this company that I had

never heard of before was $6.5 billion market cap at the beginning of the year. As of yesterday, they're like a $30 billion market cap. They're up 350% this year. It's crazy. Think about this. I'm not trying to get ahead of myself here, but if when we do get a vaccine that works, and is that the kind of thing that's priced in at that point? Can we get to the point where it's so telegraphed and we know enough from these trials and then the ramping up of production that that's one of these weird sell-the-news events, like when it actually happens? Oh, absolutely. Is that getting too far myself?

I think that's absolutely possible that the economic opening is not as strong as the market has already anticipated. And I think that the market is too sanguine here, not to be so arrogant to call the market wrong, but... You've been calling the market wrong for like four weeks. Come on. If the economy... Excuse me, sir.

Sir. You're a non-believer. The Dow is going to be at 40,000, and you're going to say, It just doesn't make sense anymore. Dead cat bounce. Dead cat bounce. The market go to 50,000, I still wouldn't trust it. Here's what I'm getting at.

If we have an economic reopening, what do you think we get back to? Like best case scenario. And I'm not saying three years now. I'm just saying next six to 12 months, we open up, everything's up and running. Are we 90% of the way back in a best case scenario? I think that if we got to 90% people would be thrilled. There's no way we're getting back to that. I don't think.

Okay, exactly. So I think it's, I am pulling this number directly out of my butt. what if we get 80% of the way there? I don't understand how the market is where it is. We've been through this a million times. I understand what's driving it, but I think that this. But I'm saying in some ways, it makes zero sense. In other ways, is the market willing to forgive that 80% number under the assumption that we're going to have a vaccine and then this is all going to be over? So is the market able to be forward-looking enough to say, let's just throw the next 12 months out? Is that possible. It doesn't seem like it would make sense because people think the market is so short-term

looking. No, I'm having trouble wrapping my head around this. Trust me, I am too, but that's the leap I'm trying to make, that maybe this is what the market is saying. Okay, we know the next 12 months is going to be bad, but we know what the end is going to be. All right, but hear me out. It's not like we were trading at a 12 forward multiple or anything like that. You know what I mean? It's not like stocks are cheap before this. So the idea that earnings are going to recover 100%, which are not, And the idea that investors are willing to pay the same multiple pre-crisis, post-crisis, as they were pre-crisis, that sounds completely inconceivable to me. Do you think it is also conceivable that, let's say this isn't a sell-the-news event?

Could this thing lead to a stock market bubble after this? Could we not get like a crazy, euphoric, oh my gosh, this is over, release instead of the stock market giving it back? Here's how potentially that could happen. That's a possibility that we could see a bubble from this. How crazy would that be? I feel like you won't let me speak. How do you like it?

I like being on the other end of that. If the economy reopens and all of this relief money comes flooding in and consumer spending somehow hits an all-time high, I suppose in this crazy world we live in, perhaps a stock market bubble cannot be taken off the table. That sounds so, so ridiculous coming out of my mouth. I don't believe it. I'm throwing it out that that could be, I mean, think about how this is. We went from, dude, we went from depression talk to bubble talk in five weeks. That is some serious mental gymnastics. Yesterday surprised me that stocks were up that much on this news. CEO said the data couldn't have been better. And they're doing human trials, which, you know what I was saying. Oh, the CEO said that. That's so weird. Yeah. Obviously, they have something to gain from this. But obviously on the other side of it, if he's lying, they're going to see the downfall if and when that news came out. But who are the people that are signing up for these human trials? Where do they find

these people? I don't know. I commend them. But I mean, is this like the people that are asked surveys? No one ever asks us to do surveys? Like, no one asks me to do a human trial. So data came out about Buffett's holding. And I think this is not I think. This is some stale data. But nevertheless, he dumped, I think, 84% of his Goldman Sachs stock that he held for about a dozen years now. I think he bought that in 2008. And there's a great chart from Bloomberg showing Berkshire's cash and the value of the stock market holdings. And if this continues, it's possible. Well, I guess it depends on what the stock market does. Now, it's going to take a while. But any other point is that cash is a percentage of the total pie between cash and stock market holdings is grown dramatically and has been rising for some time now.

Hindsight Capital here. Don't you think he wishes at like 85 he would have just walked off into the sunset? No. Not at all. He wants, no. He's 89 years old. So what? What else would he do? He's not retiring. I don't know. He played bridge. every day with Bill Gates over the internet or something. I don't know. It's, yeah, he's taking a big L here. There's no other way to look at it, right? Correct. You know who's taking a big L and a big W? Bill Ackman. So Bill Ackman was on CNBC, I think on March 23rd or maybe something right. More or less the bottom. Sounding absolutely hysterical. And I guess the government did what he wanted.

He said we need giant relief, giant Fed intervention, and he got it. And at the same time, so he was sounding completely, completely despondent over the situation. I think he basically said we have to close everything and just stop the, stop everything. Simultaneously, he was buying a big buyer of stocks. So he probably has done phenomenally well for his investors this year. Yes, but still the optics don't look great. Optics don't look great. And again, so David Tepper, his filing came out last week, and this is why you should not take advice from billionaires, or of course, from anyone, but David Teper cut his stake in Amazon pretty dramatically to just $500 million worth. He's not trying to fund his retirement.

He could also change his mind tomorrow, and you would never know. It's so easy to get wrapped up in what Soros is doing, what Teper's doing, what Druck and Miller's doing to state the very obvious has no, no, no, no impact on what you should be doing. Right. And my point was when he says the market is so overvalued, the stocks that he wants to own are really overvalued. There are obviously areas of the market that are extremely cheap that no one wants to own. Good point. There's reasons for that. All right. So Uber just announced that they're cutting 3,000 more jobs, 45 offices. And I think this is now a quarter of their workforce has been laid off, give or take. Yeah. Those are big numbers. And they did it twice in

the same month. So it was earlier in May and then a couple weeks later. So they did 3,700 jobs before and then 3,000 more now. That's a lot of people. Here's the weird thing. Here's why people get mad at the stock market. The stock is up 18 or 19 percent year to date and it was up 8 percent yesterday on news that they were laying off 3,000 people. Imagine you're at home and you've been unemployed, which a lot of the country is for a long time now, and you're seeing headlines of Dow surging. How does that make you feel? Can you imagine, like, don't you think that if you're that person who's really down on their luck, again, a giant percentage of this country right now, you have to feel that the market is rigged. Yes, I wrote about all the ways inequality is manifesting itself through this crisis.

And some of it is no one's fault. Like, no one decided to make this happen. So a lot of the outcomes, unfortunately, are just keeping up with trends that have already in place. But you look at the, we talked about last week about how the unemployment rate is the people in the lowest end of the income and wealth scale. are getting hit the hardest. But how's this for the stock market explanation? 10% of the population, the 10% that are the wealthiest, hold 85% of the stocks. Again, they're the ones who have the ability to either buy more or sit on their hands. And isn't that a simple explanation for why the stock market is just stronger than it otherwise would be, especially in an era of

interest rates that are just nothing? I don't think so because if you have 85%, whatever, they're permanent holders, for lack of a better word. They're not. buying, they're not selling. Maybe they're buyers at the margin. But that means that everybody else is setting prices. Like, it's the marginal buyer and seller that's working. So, Blaine is on Robin Hood then because those are all the people rushing into the market to buy, right? Thank you, Robin Hood. It's all those $1,500 accounts that are pushing around the markets. But we're having trouble squaring the circle of what's going on in the market. Imagine you're just an average American and you don't really know anything about the stock market. It's easy to think, okay, this is obviously

rigged for the super wealthy. Yes. And the system is rigged against me. Yes, I totally am becoming more understanding of that position, especially that is just widening the results between that. All right. This was interesting. Ten of the largest retail chain bankruptcies since 2012 involved companies that private equity firms had acquired. This was an article in New York Times, quote, retail used to be kind of a golden goose for private equity firms because in order for an LBO to work, the company has to be fairly mature with fairly regular cash flows. It was estimated that J. Crew, which is, I think, is filing for bankruptcy, has paid more than $760 million in dividends and fees to its ownership group since 2011,

which obviously upsets people. Question for you. Do you think that these companies would have gone this way with or without the debt that was laid on them by private equity? Or do you think that if it wasn't for the debt they had to service, that maybe they would have had the money to build out their infrastructure, to go online, the e-commerce route. What do you think? I think a lot of it is probably that private equity made a bad choice into a dying business model here in retail. And this was, the writing was on the wall here. And I don't want to be one that defends the private equity industry because taking all those dividends out and those situations are ridiculous to me, especially when the company ends up

failing in the end. So the private equity company still wins, even though their company goes out business. Maybe these companies would have failed sooner if it wasn't for the private equity cash injection in the first place in helping them out. And so I think especially in retail, it's hard to, there are no counterfactuals, but it's hard to say that a company would have just made it. And so, I mean, you see on the other end of this, JCPenney, which is a publicly traded firm, they're at $80 in the summer of 2007. Last week, they traded at 23 cents. That is crazy. And obviously you see those on, I don't know, one out of every five malls, a JCPenney. We have one at our mall that's right down the street from my office.

Let me put my technical analyst head on. I'm seeing support at zero. Strong support. Potential support. Funny thing is, the other day, it was up four cents and that was a 25% bounce. They missed a few debt payments that they owed. And on Monday, the company announced that they paid a $4.5 million bonus to the CEO and bonuses of $1 million each for the CFO.

And this one surprised me, the chief human resources officer, a million dollars each to those people. And J.C. Pandy said the big paydays are designed to keep its talent on board. Quote, our compensation program is in line with those of other companies in similar situations and is aligned with milestone-based performance goals to continue incentivizing our team to drive results. They have about 90,000 employees. I don't know how many of those jobs are in jeopardy, but the idea that they're paying a million dollars each to their CFO, chief human resources officer. I really hope that these payments were made in stock and not cash. That would be the only fitting way to end this, but I'm sure that they probably were.

There's some potential clawbacks, but the idea that it's in line with those of other similar companies, I don't know if that's, I mean, that's, the whole situation is just pretty lousy. Yeah, that's, again, not a great look. I understand these people need to get paid, but four and a half million bucks when you're declaring bankruptcy? I mean, are a lot of these companies just done, or are they going to restructure and come back? I'm guessing a company like J. Crew will be fine and continue to operate, but shouldn't JCPenney just probably go away? I mean, I forgot how many stores. They have so many stores. I think there is a world that they can exist. It's probably one-eighth of the size.

This gets back to the what happens to all the mall space. I just don't, especially with these department stores, just dying left and right. Do you think that they get bulldozed? Like, what could go in there? It's built for stores. Could they become hospitals? Or, Something else? I've got nothing. What else could take 600,000 square feet? I mean, maybe they knock them down and build apartments or something, and housing that is actually affordable for people. I honestly have no idea. And a lot of these, they're just dying, it seems.

So there was a blog post that made the rounds last week called DoorDash and Pizza Arbitrage. Blog posts of the year. It was pretty good. Easily. So this is by a guy named or Jean Roy. And we talked about DoorDash last week about how it doesn't seem to make sense as a business model. and the fees don't make sense. So he wrote a piece talking about, first of all, he showed all the places that he said Grubhub lost $33 million in Q1 on $360 million of revenue.

DoorDash lost $450 million on $900 billion in 2019. Uber Eats, he says, is the most profitable division of Uber and it lost $461 million in Q4 of 2019 off of revenue of $734 million. So again, I think a lot of people are learning throughout this that restaurants are a very low-margin business. And so trying to add another low margin business on top of a low margin business just doesn't seem to make sense. Tell everybody the punchline here. But the crazy thing about this is as these companies were trying to gain customers, and a lot of them do so at a loss because they're being funded by venture capital firms.

And the idea is get a bunch of customers, bring them on board. Then you can, once you have them and you have scale, you can start making money. He looked at a friend's pizza joint, and DoorDash was selling $24 pizzas for $16. And he said, this is an arbitrage because you're getting $24, the restaurant owner is getting 24 and DoorDash is only getting 16. So he started buying hundreds of pizzas, I guess, or maybe dozens of pizzas to pocket a difference for the restaurant owner. So he was buying them for 16, but he was himself being paid 24 and DoorDash was eating the loss. Obviously, they were doing this to gain customers. And now that they have customers like you and me, they've decided to jack up the prices and go the opposite.

direction. And they still can't make work. So these are my two favorite lines in the post. Raise a ton of money, lose a ton of money, and just obliterate the basic economics of an industry. He later said, this sometimes feels like the greatest ZERP story ever told. And at the epicenter of the ZERP story has to be obviously the Federal Reserve. And business models like this are largely funded by companies like we work with their vision fund. I'm sorry, soft bank with their vision fund. That's where he lost me, though, the ZERP thing. Zero interest rate policy had nothing to do with venture capitalist funding a company like this. Venture capitalists don't care about interest rates, right? Why would they care about interest rates? Hold on. Let me try and put this into words.

I think that this all comes full circle in terms of just money is free, do anything, cost nothing to borrow. And I understand they're not raising money from banks. But I think it's just this mentality of reach, reach, reach, reach, reach. It's a risk appetite thing. I can see that. But yes, this is also Silicon Valley thinking, oh, we're going to be the Uber of, and then they decided the Uber of food delivery, and then they got in there and realized this is a really tough business model. And honestly, even if all these big places, Postmates and DoorDash and Grubhub and Uber eats, they all came together and formed just one entity, I think it still wouldn't work, right? I agree. The economics doesn't work. But here's the thing. If money costs nothing,

then what's the problem with lighting on fire in the short term and you'll figure it out later in the long term? That's what it is, I think. You've gone fully, you're fully there as a the Fed hater. You should start wearing a bowtie. The reason this doesn't make sense from a venture venture capitalists have always taken huge risks. And they're not borrowing money to do it. It's not about VC. It's about the system. I just don't think that technology, like I don't think that people are funding venture capital things in Silicon Valley depending on, well, if it was 4% versus 0%, I think I would be making a different decision. Listen, if DoorDash borrowed money at 3% to start buying back their stock, you would be all for it.

Oh, man, he's a Fed truther, folks. All right. So, yesterday, SoftBank came out with one of their presentations, and they've got some really, really unbelievable visuals. Did you see the Valley of the Unicorns? I feel like some of the stuff you couldn't make up in the Silicon Valley show. It looks like an eighth grader did that. It's pretty bad.

Yes, exactly. So WeWork had a private valuation as high as $47 billion. SoftBank marked it down to 2.9. billion dollars based on a discounted cash flow method, which is like the lozziest thing of all time. You have to be kidding me. I think they pumped like $15 billion into this company. Maybe more. My favorite part of the whole thing was Masa son, the guy who runs soft bank, said Jesus Christ was also misunderstood. He compared himself to Jesus. Was he? Which might not even be the worst comparison from someone in the venture world this week because a lot of the venture capital

people were comparing themselves to Michael Jordan after the last dance. So that might not even be the most egregious analogy of the week, actually, from this sector. Unbelievable. By the way, since you mentioned it, the last dance, I'm, like, really sad to see it. And not only was it nostalgia overload, but wasn't it so well done? That's probably the best sports doc I've ever seen. The documentary that I've seen a hundred times, I watch it every time it's on NBA TV, is the dream team. I've seen that a million times. And I feel like this is going to be one of those where I'm going to watch it with my boys one day. I'm going to see it a million times.

I loved, obviously, like everybody else did, the behind the scenes with Larry Bird at the end of the Easter Conference finals, and even like seeing Carl Malone come on the bus to say goodbye to the Bulls and seeing MJ talk to Stockton him alone behind the scenes. It was just... I would watch a longer director's cut that added like another few hours. I would watch that if it existed. So good.

Yes. Okay. So one of the hardest hit areas is obviously the retail business. that we talked about in clothing. And so there's this, all of these crazy economic charts are flooding around where you see this huge drop off. This one is from Fred, which is the Federal Reserve, advanced retail sales, clothing and clothing accessory. And it's gone from, it fell off the map, basically. It's lower than it was when this started being reported in the early 1990s. And this piece in the New York Times talking about what's going to be left when people tried to go

out shopping. And one of the areas I found out here that was interesting was not just this whole retail sector, but we interviewed one of the people who has gotten the unemployment benefits and who was laid off from the retail sector. So obviously, that's awful. These people are being laid off. But she said, because of the extra $600 a week, she's making more than she was making at this bookstore, where she worked before, and said she's been able to pay off two credit cards. So again, this extra money is actually helping people. It doesn't seem like it. It seems like this is all a big bailout for corporations. For some individuals, this actually is helping. And this is actually one of the better things that the government has done, assuming, hopefully, again, that they keep

it going and keep pumping this in when it runs up for people. So we spoke about this a few weeks back. Discover Financial and Capital One have not really bounced that hard. Oh, in terms of the credit cards, because their spending has gone down. Discover is still down 51% year-to-day. Capital One still down 38%. So if you didn't bounce in this latest stock market rise, that means you're really in trouble, right? Because we've seen some crazy bounces for us. I mean, the cruise ship places have doubled. The one you posted last week, Chipotle is up 100% since mid-march or something. That was a weird one. What was the stats you posted about how? The company was worth $25 billion in January. It got cut in half to $12 billion, and then it doubled to $26 billion.

And now, yeah, now it's back at an all-time high. What was interesting about yesterday, I did a quick post about it, was the winners became losers and vice versa. All the beaten down value sort of stocks had a huge rally. The stay-at-home stocks had their worst day relative to the market since the market bottomed. So the market is acting like this thing is the beginning of the end, is what I said. I mean, obviously, it was one day, so way too early. In a vaccine world, we would have this like risk-on situation where the junkiest stocks take

off. Probably. Low quality beats high quality, value potentially beats growth and all the things that have worked so well don't work anymore. That would be the hope, I think, for a lot of. of people that have been banking on mean reversion. Or we could see a mean reversion. We could see a catch-up trade last for like a week. And then it's like, okay, enough of that. And then things go back to normal. The leaders start leading again. That's possible too.

Wouldn't surprise me. Okay. So Jerome Powell, the Fed chair was on 60 minutes this week. It's funny because people think it's like a marketing moving event when he says stuff that people have been talking about for months. I think it is interesting to hear what he's saying. They asked him, first of all, like, how much more can the Fed do? And he said, trust me, what did he say? I will say that we're not out of ammunition by a long shot. There's really no limit to what we can do with these lending programs that we have. So there's a lot more we can do to support the economy and we're committed to doing everything we can as long as we need to.

Maybe that was part of the reason that the stock market did so well yesterday. The interviewer asked him, is this the second coming of the Great Depression, which a lot of people really think it is and that this is going to linger for years and years. He said, no, this is more like a natural disaster. And he said, in the 1920s, when the Depression, when the crash happened and all that, the financial system really failed. Here, our financial system is strong and has been able to withstand this, and we spent 10 years strengthening it after the crisis. By the way, you're on record as a depression person. You said this as a depression. I think you can call it one, but I think...

Well, I know you think that. You said that. But I think the worst part about the Great Depression wasn't necessarily the three years that it lasted. It was that it lasted for 10 more years afterwards. And you had this malaise that lingered and the unemployment rate lingered. So, because in the past, even before the Great Depression, you had these short periods where you'd have like a 12-month depression, but then immediately when it was done, the economy and the market would take off. The reason why I was so hesitant to cause the depression is that I think the depression lasted a lifetime.

There was people whose entire psyche was shaped by the depression, and that experience never went away because the depression started, I guess, whatever, the market crashed in 1929. We didn't really get out of it until World War II. Right. Yeah, exactly. It lasted the whole 30s and into the 40s. But my point is there have been periods where you have.

something worse than a recession and that this is just a terminology thing. Economically, data-wise, this is a depression. One of the things that Powell said in terms of what the risk is, he said the real risk is that if people are out of work for long periods of time, that their skills atrophy a little bit and they lose contact with the workforce, and then went out to say, you could say the same thing about businesses, the small and medium-sized businesses that are so important to this country, if they have to go through a wave of avoidable insolvencies, you've lost something that's more than just a few businesses. And I think that is a really, really interesting

point that it's more than just financial assets. It is the mentality of the nation and people that get left behind is just really, really bad for everyone. And there is a cost to companies having to hire someone back. If people decide to change jobs or whatever, it's not like it's that seamless of a process for companies just to bring people in all of a sudden and make it really easy. There's a cost involved there and there's time and effort and it's not easy to just all of a sudden flip on a switch and bring people back into the fold. So that's what I'm saying about the economy opening back? What about all the supply chains? They get everything up and running. How are we going to get back to where we were and how are investors going to pay the same

multiples or more? I just, I have a hard time seeing that happening. Yeah, you could certainly be right. This could be the mother of all dead cat bounces. Alternatively, here's glasses half full in terms of keeping things going. Don't you think it's kind of amazing that things have worked as well as they have? The internet has completely been fine through all this. Maybe people have had a few interruptions, but people are obviously using the internet more at home. It hasn't really had a big interruption. Supply chains, we had the beef shortage stuff, but for the most part, people have been able to get stuff that they need, and we're not having like riots at the grocery stores or anything. Isn't it kind of crazy that we shut everything off

and things more or less continued to function in this country? Yes. Without having big riots and people getting looted and robbed. Because that's certainly, if this thing got really bad, that certainly could have happened, right? Glass is out full. Maybe we are able to be such a dynamic economy that we're able to slowly introduce these people back into jobs. I don't know. I agree. It's a stretch, but it's not out of the realm of possibilities. Cannot take anything off the table, ever. And if we don't get lower stock prices, I've been beating the drum that this has to be the worst crisis ever. If we don't get lower stock prices, but we get all the economic pain and we don't

get lower housing prices. So Redfin had a thing. Wait, hold on. Before we go there, before we go there, before we go there, I just want to make one final point. Obviously, I sound very bearish right now or cautious or whatever. But this is why, like really and truly, this is why you can't make all in or all out decisions with your money. If you took all of your money out of the market, even before the bottom, sometime in mid-March, and you saw the market fall 15% lower, you felt like a genius or whatever, what do you do now? How hard is it to get back in at higher prices? Isn't that one of the lessons coming out of this thing. Again, obviously this thing might not be over, but I think the basic

lesson, this is not about active versus passive or anything like that. You have to have a plan. Investing with your gut is probably not the right way to do it. And if you're trying to be like this huge hedge fund person that is investing with their gut and making difference, those people have no emotion invested in the process at all for the most part. A lot of other people do. And isn't this also a good advocate for dollar cost averaging was probably the best strategy anyone could have had for kind of timing the bottom. If you're invested once a month or once a week or every two weeks and you just dutifully put your money in and didn't try to time the bottom and wait and hold, you probably did better than 80% of investors out there who were trying to

be cute with their cash and wait for the fat pitch. Don't you think dollar cost averaging was just the easiest less stressful route for everyone? Dollar cost averaging is definitely a winner here. You know as a loser, your home equity line, a credit that you would have taken out and dumped it in the market. Never saw that play out. Yes, I was ready. I was waiting for 40% down, 50% down. I was going to back up the truck. And who knows? Maybe that'll happen. If your view of the world wins out, maybe that will happen. But yes, I have my home equity line of credit ready for when that happens. But maybe by that point, you'll be ready to buy gold coins. So I don't know. So if stocks don't go down more, people are going to probably be angry because it's like, what was the point

of this crisis if we can't buy assets, price is cheap? That's like one of the benefits of an economic crisis. And housing, it sounds like, is not going to go down either. So Redfin had this thing where they said home buying demand passes Cree coronavirus levels, even though inventory is down 24%. But they have this graph where they show their home buyer demand index. And I think it's based on the number of people reaching out to buy a home to them. And again, it's higher now than it was when this started in March. So it had a huge swing down and now it's come back. And they talked to a few people. They talked to someone in Seattle and they said, my client, this was a realtor in Seattle. My client was in a 24-hour bidding war for a 1960s home that grandma had never updated.

Is that Morgan Housel? Yeah. Listed for 360 and we bid 400 and didn't even come close. They also interviewed someone from Grand Rapids where I live. And she said that buyers from Chicago are seeking lower prices to skip the three-hour drive around Lake Michigan and just stream the home showing from their sofas. So it also sounds like people are becoming more comfortable just doing video tours and buying a house site and scene or putting an offer down. That's interesting.

Yeah, that would be tough for me to make that leap. I mean, unless I'm buying like an investment property or something, that would be tough to buy a home site and scene only from a virtual tour. Because if you look at the photos, you've done this when you went through the process, you can make a house look way nicer than it really is through the photos. And then you get in there and you're like, oh, this is not it at all. but it sounds like, yeah, housing is going to remain stronger than people expected, I think. We've been talking a lot about income inequality, corporate inequality, all that sort of stuff.

There's an article in New York Times. The higher earning a neighborhood is, the more likely it is to have emptied out. And this was looking at New York City, but I imagine that this holds across the country. There's two amazing charts in here. Percent of residents who are home by Income Group, and it showed the bottom 80% basically didn't move because they only have one place to go, which is their primary residence. The top 5% and the top 1%, there's this top 1%, absolutely emptied out. About 30% of the, it looks like about maybe more than 30% of the people left, just incredible

things. And there was a quote in there, something about how people said like we're all in this together, not even close to the case. Yes. And a lot of those people on the lower end of the income scale, not only learned some them laid off, a lot of them had to continue working and going to work at grocery stores and food delivery and restaurants and put themselves in harm's way. And they just didn't really have a choice. I mean, sure, there's going to be a lot of people here who were probably

approaching retirement age. And before this crisis, we're thinking I'm going to walk off into the sunset. Maybe their finances are just destroyed now and have to continue to work, not because they want to, because they have to. What if this is an opportunity to raise the minimum wage and also give some sort of corporate tax cut? Yeah. Raising the minimum wage seems like a no-brainer from this. Raising the minimum wage right now is tough. companies that are going to have to come back and their financials are not going to be what they once were. So at the same time, you raise a minimum wage and you give some federal relief at the same time to the corporations. Yeah. Are you on board? Carlson Batnik 2020. Let's do it.

Oh, wait, it is 2020. We're over there. We have an election this year still. This is the weirdest year ever. Unbelievable. Okay. So, and the other thing is, so this is from Deutsche Bank. Deutsche Bank. You love saying Deutsche. Yeah? Come on. That's how it goes. All right. So this looked at households for the 70s, 80s, 90s, 2000s, and today, so it's by decade. And it looked at the net savings rate. And it shows in the 70s, savings rates were actually pretty surprisingly, bottom 90% saved

more than the top 1% in terms of their income in the 1970s. That flipped in the 80s. And then we got to the 90s and the bottom 90% had a negative savings rate. It went really low in the 2000s and the 2010s still today. And the top 1% is just way, way higher. And again, it just shows that people on the lower end just, a lot of them just don't have the ability. I mean, I think this bottom 90% is probably a little misleading because much of that probably comes from the bottom 25 or bottom 50 or whatever it is.

But just a lot of people at the bottom of the income scale just can't withstand something like this. And maybe just don't have the ability to save for something like this. Well, this was scary. Last week, I think it was Sunday night or Sunday night. I can't remember when RIP capitalism was trending. And I just picked one random one. capitalism has brought about levels of income inequality that are unjust and unsustainable. Three men in America own more wealth than the bottom half of the country.

This is disturbing. Unfettered capitalism is not the path forward RIP capitalism. Don't you think this is just always the case, though? We're watching this new show on Netflix, and I need someone to write in a listener to tell me whether it's worth it to keep watching. The show called The Last Kingdom. It's in like England in the 1800s, or the 800s. And all the kings had all the money, and no one else had anything. else. Hasn't that almost always just been the case? I feel like we had this one little window

from the 50s to the 70s, where after the World War II, we had this burgeoning middle class and things went wild. And I think that was the outlier. And I think that the inequality, unfortunately, is just the way the world has always worked. I don't know how you solve this. I agree. Don't you think they're talking about how Jeff Bezos is potentially going to be the world's first trillionaire? Doesn't he kind of deserve it? If you're going to give it to any Anyone? I'm not saying anyone deserves that much money. It's ridiculous. But if anyone deserves to be the richest person in the world right now, isn't it kind of him? Could you make that case? Sure. You have to stick together with him. You guys are bald brothers, right? That's true.

I'm not trying to justify him being worth that much. Obviously, it's ridiculous. I know what you mean. This is another hammering data point. Households withdrawing money, again, from Deutsche Bank, households withdrawing money from retirement accounts. The question was, in the last 60 days, have you taken any money out of your retirement savings account due to coronavirus-related circumstances. By the way, this is the type of survey that I'm here for. It's just a yes or no question. Not are you going to? The question is, did you? And if we can't get accurate data of did you, then we have bigger problems. Here's why I'm not here for this survey, though. It was 1,200 Americans. Stop saying 50% of all Americans when you survey 1,200 people, though.

Stop. It's enough. That's enough. Whoa, whoa. Now you're not anti-serve anymore either. It's not 1,200 people from this one little town. I don't feel like I don't even know who you are anymore. All right, 30% said yes, 19% said no, but plan to. So doing the math, nearly half of all Americans, at least according to the survey, plan to take money out of their retirement account. That's painful.

Yes. And this gets back to the fat pitch thing of, yes, it's great to buy during a bare market because that's when forward returns should be a little higher. And a lot of people just don't have the ability, especially in a crisis like this, unfortunately. I will admit, I did not swing at the fat pitch. I made two additional contributions into my brokerage account on the way down. They were equal to the amount I invest every two weeks. It wasn't like anything larger than that. I was probably a little early and a little late. I was buying throughout the month of March. I made a few extra purchases. And then I did so

afterwards as we started to rise to. And no one nailed the bottom on this, right? Except for Ackman. Okay. But he was crying on. NBC. So that's like the Larry David gift. Like, okay. So here's someone else who did not do very well in the first quarter, which is through the end of March. This is from Athwaftamotron, who wrote a great piece on everything that's happening with the markets through the virus. And active funds in the mutual fund space got slaughtered, basically. He looked at the mutual funds versus their index. And again, this is through the end of March of the first quarter when things were the worst pretty much. Actually, you know what's funny?

The only places of the market that did good on the active side relative to their benchmark was mid and small value because their benchmark was the weakest out of everything. And the opposite is true. They probably invested in growth stocks or something. Who knows? But all U.S. equity funds underperformed by 1.4%. A lot of them, large cap growth managed underperformed by 4%. Midcap growth underperformed by almost 4%.

Small growth is over 3. A lot of these are huge, huge divergences. I have a question. Because I was going to say, I'm not surprised to see large growth with the largest underperformance because large growth was so top-heavy with the Microsoft Amazon's of the world. But then you see the same thing in mid-cap growth. So I'm not sure it's a market cap thing necessarily. Well, there's this old rule of thumb. The name escapes me. John Rack and Taylor used to always write about it. And it's basically like when you're the best performing segment

of the market, that's when you want to index. Because it's really. hard to beat when you're the best performing. And if you're an active manager and make any little deviation. So if markets are going crazy, you want to be an index funds, especially for the best performing one. I'll have to figure out what that one's called. I can't remember. Alpine macro showed each decade has been dominated by one key investment theme in the 60s and the early 70s, it was the nifty 50. Then it was gold, then the Niki, then the NASDAQ, then crude, then fang. And it's question mark, what is the next decade going to be? Any want to take any wild guesses? here? Cruise ships? Not bad. I mean, I guess the hope would be it's something on the science

sector, some sort of science, research, biotech. If that was the strongest candidates for the next decade, that means hopefully we did good against this virus. How does that sound? We'll take it. If that was the case, I would be happy. So Vanguard put out a report called the benefits of private equity in a volatile market. And Bogle is rolling over in his grave right now, reading this right? Yes, but they had some pretty good charts in here. Okay, well, the general idea was they talked about how private equity returns reflect the appraised value of the underlying portfolio companies and public equity returns reflect the prices at which participants are able to transact. They're basically saying because you have still market value appraisals of your

companies and private equity, it's a less volatile way to invest. This is like Schrodinger's portfolio here. If you don't look, you don't know. I'm all for it. A lot of investors don't have the ability to just not look. So now, of course, there's a tradeoff in terms of expenses, everything like that. At some point, it's too expensive. I don't know where that level is. But this chart I really like. So look at figure two. It showed global public equity volume, global public equity volume as a percent of listed equity, and then private equity volume as a percent of assets. And private equity, there's just no transactions compared to public markets. Right. Again, that's what happens during a crisis.

people don't want to sell and people are kind of scared to buy, and the LPs don't want their... This is not in a crisis. It's just across the board. But yes, I guess especially in a crisis. Now, yes, this is, it's interesting to see this coming out of Vanguard, but nevertheless. But can you imagine if a firm said, we're going to buy publicly traded small cap value stocks. We're going to put 30% leverage on them. Every quarter, we're going to tell you what we think they're kind of worth, but we're not going to use the market. we're going to use our own valuation discounted cash flow methods, and you're not going to really know what they're worth, but we're going to charge you a way lower fee. The SEC would say, no, not going to happen. Like, that's what private equity is. Isn't that kind of when you think about it

that way? Like, those are the rules. What if a public equity manager said, you can't touch this money for 10 or 15 years? We'll give you a few distributions here and there, and we're going to kind of make up the numbers every quarter to tell you what they're worth. Who's in? I'm in. Okay. All right. Listen to questions. I have a Roth IRA that's 100% invested in the Russell 2000. I'm relatively young, early 30s. Maxes it out every January 1st. Obviously, the Russell 2000, which is small cap stocks, has been underperforming during the sell-off, which is to be expected, but it's been underperforming for a few years now. Thoughts on switching from the Russell 2000 to the S&P 500. My original thinking was I wanted to be in the stocks with the most potential upside, but now that my thesis has been largely disproven, do I rip the band it off and take the hit?

I've got some thoughts. Go ahead. Now it's probably not the time to rip the bandit off, considering how wide the gap is. But maybe this is a really good early, relatively inexpensive lesson on the benefits of diversification. Yes. Even if you're going to be 100% in stocks, I would have a hard time telling someone be in all of one segment of the market. Yeah. I mean, small can diversify large, potentially.

So if you want to start to diversify into the S&P 500, I think that's not a bad idea at all. In fact, I would probably encourage that. But I wouldn't go from 100 to 0 to 100. I would try and get wherever you want to get, but do it over time. Don't do it in one fell swoop. And especially since if you've already done the contribution for the year. I was going to say you could rebalance with new contributions. You could also do your own form of dollar cost averaging by making sales at specific points in time. Once a month, I'm going to sell a little bit of this and I'm going to diversify more to the S&P 500 or midcaps or international stocks or whatever it is.

But I think even if you're 100% in equities, I think taking a more diversified approach would be my way of thinking about the world. I think that's if you're in one extreme, that's a tough place to be if and when it underperforms. All right. One more. CPI data suggests that inflation is very low for years, but it doesn't consider the value of risk assets.

I think you'd agree that the price of risk assets has gone up in value relative to earnings they generate. Isn't that inflation. So this is basically, is there such thing as asset price inflation, which has been a rallying cry because of Fed policies for the past 10 or 12 years? If you say yes, then you've completely gone to the dark side. No, there's no such thing as asset price inflation. Stock market has gone up over the long term for a very long time.

Whoa, whoa, whoa, what do you mean there's no such thing? Asset price inflation is terminology charlatans use. Come on. Is it not? Asset prices are supposed to go up over time because of risk premiums. and you're taking risk in them. I think the fact that asset prices have gone up when inflation has been high, low, economic growth has been high, low. I think trying to make the correlation there is a stretch. Well, before this all started, if you look at earnings, sales, margins,

I mean, everything was at all-time highs. So it's not exactly surprising that asset prices followed fundamentals. Yes. All right. Recommendations. What do you got? I've been putting this off for a while. I didn't want to watch it because it was going to hit too close to home, but we watched Contagion, which is the 2011 Stephen Soderberg movie about a pandemic. We finally watched it this weekend. Good cast. I'd seen it before, but when I saw it in 2012, whatever, it just went over my head and I felt like, oh, this is an okay movie. Matt Damon's in it, Guineff Paltrow, Lawrence Fishburn, Kate Winslet, so it's a really good cast. It was eerily prescient in how they saw the world and the terminology they used. So everything that you're seeing,

if you follow any of the epidemiologists on Twitter or follow the news, the stuff about social distancing and the R-not, the terminology they used was actually really spot on. The difference between the movie and what's going on now is that it happened over a way quicker time horizon and people got sick way faster. Was Fauci in it? They found a vaccine really fast. But I was shocked at how it seemed relatively lifelike. Again, it happened faster so they showed some riots and they sped stuff up a little bit.

but I thought it was going to be a tough watch because you're basically watching what's going on now, but actually it was kind of interesting to watch and it made it a better movie now that we're going through this than it would have been otherwise. One of the interesting things, Jude Law played a blogger who was a conspiracy theorist guy

and he would spot off conspiracy theories about what worked and what didn't and you shouldn't trust the government. And someone told him, a blog is not writing. It's graffiti with punctuation. I thought that was kind of funny. So we've been watching The Last Kingdom,

which is on Netflix, but I think it was on BBC or somewhere before and it's four seasons and we're like three episodes in it. It's really good. It looks like this epic. Who's going to take the throne between the Danes and the English and all these things from the 800s. And I want someone to let me know if it's worth continuing because it's four seasons and it's a big investment of my time. So I don't know if I'm in for it. So that's all I got. All right. I got nothing more of the same. Billion, Soprano, Seinfeld. Very busy. When's the last time you picked up a book? My book reading is in a 99% drawdown.

I just, I don't know. I have no motivation to read. You know what? I'm reading all day at my computer. At 5 o'clock, whatever time I'm done, I get up with the kids, bedtime. I don't feel like reading a book. No energy for it. It's tough.

Yes. I'm not going to create calculus like Isaac Newton during this thing because it's just, there's very little down. If you have little kids, there's very little downtime right now at all. So, all right. I don't know if we're back on Friday or not. We'll say. Talk your book next week. This is actually a return.

We did one with them last year, the net lease ETF. This is perfect time to talk to these people because commercial real estate has been walloped to say the least. And we'll talk about what's going on, the future, everything like that. Yeah, this is something that we've been wondering a lot about, too. Like who's the bag holder and who's going to get hurt the most in commercial real estate? Because obviously a lot of these businesses are not going to be able to pay their leases.

So that should be an interesting one. So what happens to malls? We'll find that next week. All right. Thank you very much. Animal Spiritspod at gmail.com. Hope everybody is doing well. Staying safe and we'll see you next week.