Animal Spirits Podcast - Never Bet Against America (EP.193)

Episode Date: March 3, 2021

On this week's show we discuss the recent rise in interest rates, how much rates really matter to the markets, the latest Buffett shareholder letter, when value stocks turn into momentum stocks, bubble debates and 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 YCharts. Last week, Michael and I went through a test of a new feature on Y charts called Customs Securities. And they walked us through this. It's great because you can upload your monthly returns or quarterly returns, but monthly is probably easier, I think daily even, and input your own set of returns onto Y charts. So they told us, let's say you have historical returns for something like Enron back in the day, which no longer would be on any research services. You could put those in and see what Enron's stock price did back in the 90s before it crashed. I think it crashed a little. What would have happened if you put $10,000 into Enron stock, right?

But for someone like us, our firm has our own tactical model that we use. We have monthly returns for that. We could upload it and have all the tools that Whitecharts has for the research and do a look back for our monthly returns. We also have other data that we could put in here. So it's a really cool thing. Customs securities and white charts, go to Y charts, tell them Animal Spirits sent you and get 20% off your initial subscription to the site. 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 manager, may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. You prepared me for, you were ready to take the other side on interest rates for me. So we've got a lot of questions on rates lately because they're finally running a little higher.

There was almost a little flash crash up in interest rates, which would be the bond prices falling last week. I think it went from like 1.5% to 1.6%. And everyone lost their mind. Tenured treasuries finally rising. I think it was more than people losing their mind. I think some funds were actually blowing up. Yeah, so a lot of people, the original thought is, okay, we have all this government spending. People are worried about inflation. The economy is getting ready to heat up and potentially go berserk in the summer from people pent up demand and spending. And so it makes sense that bond yields are rising, but hey, what happens if it gets away from them here? And that's the first big worry. And then you had Tracy Allaway from Bloomberg come in and say, she thinks, wait, J.P. Morgan is saying maybe it's these CTAs that are rebalancing. And I'm really latching on to her. flows over pros thing where people worry about the data and what's happening in macro and all these

things. But really most of the time when things go a little haywire in the markets, it's because flows are moving things around more than actual market dynamics. So this is basically could have been, you had this big jump in rates because it was all these technical traders that were moving things around because they hit their rebalance bands or their trading signals hit. And they were selling bonds because the Molina is not there anymore. Obviously, it's probably a little bit of all these things, but that's the stuff. And now, of course, people are worried. Bonds are going to get crushed. They're off to a pretty bad start to the year. I looked last week, the long-term treasury TLT, ETF was down 18.5% at one point

from highs, so almost a bare market for long-term treasuries. And I said, okay, interest rates matter. But then I wrote a piece this weekend where I said, but do they really, or interest rates to be all end all the people want them to beat? Because people think the only reason stocks are up for the last dozen years is because the Fed has kept rates low. And so that's the only reason that risk assets are on fire. I think you're putting thoughts in people's mouths. Nobody's saying that. Oh, I think there's plenty of people saying that. That interest rates are driving crazy behavior. And my point is just maybe we overrate the importance of interest rates. So I went through a bunch of examples. You can read my piece, but it's, you had the 1960s,

you had the go-go years where growth stocks went crazy. Inflation was rising. Rates were the whole time. Average 10-year treasury yield was over 5%. The dot-com bubble, average 10-year treasury yield, 6%. You could have gotten 6% on your money at the end of the dot-com bubble and no one wanted it. Maybe sometimes investors just need an excuse to sell. We had this little, what, two-and-a-half-day correction, and then now everything's fine now. We're taping this on a Monday. I don't know. And the other piece is getting back to the flow thing, at what point do pensions, and insurance companies and retirees and sovereign wealth funds stepped in, because people are now worried, well, rates are going to go straight to 6% here. And I think people are getting a little

head of themselves. So I'm just saying, yes, rates matter and probably from more of a psychological perspective now than anything, but people don't need interest rates to go crazy and gamble and invest in lottery tickets style stuff. People aren't trading options on margin because interest rates are low right now. Is that one piece? Yes, but it is, is that the whole piece not even close. I feel like we've had this discussion a million times. But how about this? One of the reasons why there is a favorable market environment is due to low interest rates, right? That's not controversial. That is clearly one of the reasons. Yes. And then in a market environment where the wind is at your back, where risk is rewarded, people take it too far. Am I saying anything controversial? I don't think so. But I'm going to go out in a limb and say, this pandemic happens and rates were 5%. I think we still get a crazy speculative. of boom regardless of the level of rates. Okay. They added a little fuel to the fire, but that fire would have been raging either way. Here's where I'll take the other side. I do think it's possible. Well, it's funny. I just wrote a quick piece that Sarah Ponzac had this really cool chart showing

that companies with weaker finances staged their best relative run since 2009. So in my mind, this is where it gets sort of muddy and maybe the value growth thing should be thrown out the window. When I see this chart, I think of cyclicals. I think of industrials, materials, materials, energy financials, these tend to be value stocks. Somebody tweeted to me like, well, don't growth stocks have weak balance sheets? Maybe. But I think that this chart in particular is showing weak stocks with weak financials, weak balance sheets outperforming. It was basically the inverse of what we saw in 2020. In 2020, if you had a weak balance sheet, you got murdered, which makes sense, right? If you have a weak balance sheet in a pandemic, when there's zero

economic activity, that's not good. So the reverse has happened. And so if higher interest rates are bad for growth stocks, then shouldn't they be doubly bad for the front of the cruises of the world? Right. And the one thing people say is like, well, the reason it's different this time is because all these firms have more debt now. And if rates rise, they're screwed. It's like, guess what? The bonds they sold have already been sold. And if these companies were fine on 3% interest rates two years ago, what's going to make them put them in such peril if rates go back to 3% now? I think companies can adjust. They always do. Here's where I said,

I'll take the other side from you, is that if enough people believe that high interest rates going to crush growth stocks, then that can be a self-fulfilling prophecy, right? Yeah, I agree. If people start to stealth because that's the narrative, like the more we hear a narrative, even if it's not true, but maybe it is. But even if there's a kernel of truth and people believe it, then it can become true. Do you agree with that? It's the George Costanza.

It's not a lie if you believe it. Do you agree with that? Yes. I think that's my point is that it's probably psychological more than anything. If people are like anchoring to one percent interest rates or whatever they were, and then they say two and they go, oh, this is crazy. But, I mean, do you think interest rates going from 1% to 2% is going to make Apple or Amazon business any worse? That's not the point.

I know. You're right. It's right. Could that take people's PE ratios from 50 to 30? Yes. Yeah. That's, again, psychological. Let's just assume that rates rise, which is far from a given, but let's just grant that that happens.

And growth stocks do get killed. We still won't necessarily be able to make the link that it was rising interest rates that did it. because it's not the only part of the formula. Exactly. There's so much more to it. So my other one was from 1975 to 1985, mortgage rates averaged 12%. People still bought houses.

The baby boomers came online. Guess what? Housing prices were up 133% in that time because demographics overwhelmed those ridiculously high interest rates. So it's not like people say, oh, well, the Fed is propping up the housing market too. Guess what? Millennials are getting older and buying homes. interest rates are not destiny demographics are yes so millennials would be buying homes whether

mortgage rates are at three or five percent right now i can guarantee you that when we bought our first home our mortgage was six point two five i guess in your terms that would be six and a quarter six and a fourth six and fourth sorry six and two eighths we were going to buy a house regardless of that interest rate now maybe that that determined what kind of house we could get in the size or whatever but that i think that's something that a lot of people don't spend as much time worrying about as as financial pundits do all right so we were talking last week that maybe demand from pensions, retirees, et cetera, can put a cap on interest rates. Did you read, like in other words, they're salivating at 2%. It's just too juicy to pass up.

Right. And that's the other side of the psychology where they think 2% is high now. Did you read the Buffett letter? I did. I mean, this has got to be like the least amount of fanfare ever for one of his. It seems like it's kind of, I mean, he's 90 years old, right? So it's bound to happen eventually. It seems like it's kind of run its course. Like this is the kind of thing where four or five years ago, the fin to it would just be blowing up with stuff about Buffett and now it's kind of like, oh yeah, Buffett has a letter today. I forgot. I still liked it. I understand why people were sort of mad on it. I mean, there wasn't anything quote unquote new in here, but it was just maybe reaffirmation of his teaching. So I enjoyed it. But he said,

how much do you think he's still doing it 90 years old? I don't know. I mean, I think he's still writing this with Alice Strader. Oh, wait. Did they break up after the snowball? I think they did. That's a good question. I mean, yeah, he's still like, the letter came out. I thought it was great It reminded me one of his old ones, for sure. But yeah, it's just weird how it seems to, I mean, maybe that's the sign of the times, too. Even if he was wildly popular like it was in the past, people wouldn't care as much because it's not his type of environment. Anyway, so he wrote fixed income investors worldwide, whether pension funds, insurance companies, or retirees face a bleak future. And take a look at this chart.

I pulled this up, Mobeson did this chart on the asset allocation from U.S. pensions and endowments. and look on the right. Look at this chart. Fixed income and cash? It's not much. It looks like they've, I'm just eyeballing it. Looks like there's under 15% of their portfolios are allocated to fixed income. Yeah, and it used to be that they basically only invested in fixed income and equities were kind of the thing you didn't touch because they were- By the way, this is, this goes back to 1990. In 1990, they had 40% of their portfolio in fixed income. Now, like I said, it's just over 10. Obviously, obviously that's a function of rates falling and alternative assets just exploding in their portfolio.

So the last two years have not been kind to Berkshire Hathaway. Last year, the S&P was up 18%, Berkshire was up 2%. The year before that, the S&P was up 32%. Berkshire was up 11%. Do you think it's fair to compare the returns of Berkshire Hathaway to the stock market as opposed to looking at his actual investments? No, I think it's perfectly fair because that's a huge company. It's diversified.

And I think the fact that they were given a premium in the past to book value, and now maybe that premium is coming in, I think that's completely fair. And he even compares himself to the S&P 500, right? Why am I struggling with this? When people say, like, Buffett hasn't beaten the S&P 500, in my opinion, and I can be, I can change my mind on this, but should you not be comparing, if you're going to say that, should you not be comparing his stock picks versus the S&P 500? Obviously, I see both sides.

I'm just, just devil's advocate. Okay, but I mean, that's his goal is to beat the market, though, right? I think that that's his kind of state of goal. I don't know. We're splitting ears here. The craziest thing to me, out of this whole thing, you put it in here was, so they have a 5.4% stake. They own over 5% of Apple, which has done extraordinarily well. That should have helped. And they, I think they've like quintupled their investment in that. Their cost is $30 billion. It's now $120 billion. And it's their second biggest asset. That shocked me. And they only bought it in, what, 2015? No, I think I think 2018. Is that

possible? Yeah, maybe. But then he talked about how the fact that just from Apple doing buybacks alone and them doing nothing else. They get like $775 million in dividend payments. I can't remember it was per year or per quarter, but it was a huge number. And Apple's buybacks like took their position from like five to five point four percent, just from Apple doing buybacks to showing how much they've done in that. I think this is probably a simple explanation for why the Berkshire Hathaway stock has not done well over the last two years, really over the last, it's been longer than that, but really over the last two years. Buffick wrote, Berkshire owns American-based property plant and equipment, the sort of assets that make up the business infrastructure.

of our country. With a gap valuation exceeding the amount owned by any other U.S. company, Berkshire's depreciated cost of these domestic fixed assets is $154 billion. Next in line on this list is AT&T, with property planted equipment of $127 billion. So there are capital-intensive business, and obviously that has been out of favor to state the obvious. Right. So they still have tangibles and everyone else that's been doing well as intangible, basically. To me, the overarching message of his post was really don't bet against America. He wrote, in its brief 232 years of existence, however, there has been no incubator for unleashing the human potential like America.

Despite some severe interruptions, our country's economic progress has been breathtaking. And that's the takeaway. Every time I read him is just we pay so much attention to the day to day. But take a step back and there are some marvelous things happening in our country and not just on the coasts, which he mentioned. That's the best thing he's done in terms of communicating to the regular investor is having a long-term mindset and being a long-term bull. the country and people getting better.

Then you hear this other stuff for people just constantly negative in looking for the downside. He doesn't do that. By the way, I forgot to mention this. There was a chart from Ben, what's this? Ben Breitoltz showed all of the instances where the U.S. 10-year

broke out to a new six-month high since 2000. And you go back to 1994. Obviously, there was a huge year for interest rates. January 2013, 1999. Go down the list. These are not bad years for stocks. Right. The history shows that rising rate environment, stocks tend to do fine.

Because if why interest rates rising, in theory, because of the prospering economy, it's usually that simple. So the other day I wrote a post called Everything is Oversubscribed. And I forgot to include this part. So this happened. I think this was before the Treasury explosion. Two-year notes were sold at a premium for the first time ever. And this quote, Ben, this quote is just the coup de grace.

Glenn Capello said, when the feds committed to keeping rates at or near zero, twos are probably cheap at 10 basis points. It's a little crazy. It's a little crazy that you have to buy them at that yield, but that's your choice. Twos are a little cheap at 10 basis points. Good Lord. Well, here's the other thing that we didn't talk about. So if the rest of the world, a lot of the rest of the developed world has negative

rates in the U.S. gets up to 1.5, how great does that look when they're seeing rates over here and they make other countries come in by them too? So that's why it just, I don't know. This is why you get a two-day little correction in the stock market. And gross stocks, you know, to be fair, a lot of gross stocks got whacked pretty good. Tesla was down almost 30%. There was a lot of carnage. And guess what?

People stepped in and bought. And I just think that's going to be the M.O. for a while. Like, I think that's just the way it's going to happen for a while with this stuff for for rates and for stocks. By the way, I'm creeping more and more into this camp that this is just going to go on for a lot longer than most people think. I've been writing about, like, what if this ends badly? What if this doesn't end badly? I don't know. I'm having some internal struggles, but I feel like this can get less a lot longer. I think we have to define ends badly, too, because

absolutely. It ended badly in March when stocks fell 34% in four weeks. Yeah, what do you call that? Right. So that happened in 1987. Then you had, you had a recession in 1990. That was actually worse than most people remember. It was, that was kind of a housing-led recession. And stocks didn't fall that much that year, but that was actually kind of a nasty recession. Like, the economy definitely did way worse than the stock market for that one. And then you had this time when things just kept going. And, man, I don't want to say that. But yeah, could we experience these other 19 or 20% corrections or even a 30% correction that happens really quick? And then people step into buy and then back, like, I think ends badly means like you have like an 18 to 24 month drawn out

bare market. That was 2007 and 2009. Oh, I think longer. Or 2000 to 2002. That. That's That was, I don't think, honestly, I don't think we're going to have these longer-term ones in the, like, okay, so I was going to mention this at the end in my, my, hold on. Before you do that, I just think when, and badly, I think people mean like a 40 to 50 percent decline that doesn't snap back. You know, that just sort of takes years to recover. I think that's what people mean, where there's just washouts everywhere and write downs everywhere. My book recommendation I'll give it earlier was wealth, war and wisdom by Barton Biggs. It was written in 2007. Maybe it got lost because right after. he wrote it, that we went to a crash. But he talked about how, like, there was just nothing going on in the markets. No one wanted to work for them in the 30s and 40s. And he talked about how by 1937, the Dow had almost quadrupled from the 32 low, still down 60 percent. But he said equities in the United States and Europe sold at five to eight times depressed earnings and discounts to book value and had yields considerably higher than bonds. Now, the yield thing has happened.

But I think unless rates go to 15 percent for some reason in the future, because we have an alien invasion or something. I don't see how the professionalization of markets these days ever lets stocks as a whole trade at five to eight times earnings. I just don't see how we get to that those depressed levels again. Like people want to believe, oh, we're going to hit the lows like we did in 1980 and then in 1920 or 1932 or whatever. Like I don't see how the professionalization of markets ever lets that happen. There's no way that investors would let them get that cheap anymore barring some sort of independence day two. Yeah. Three. No, I guess there's been a two. You have to be invented to say three.

I think I'm with you. By the way, Grant him was on Patrick's podcast last week. I found him to be like delightful, which was really confusing because my God, he's, if you, he's not just Bayas for the next five years.

He's like cataclysmic on the next 50. Yeah, he's the opposite of Buffett, right? But didn't you find him to be somewhat charming? Yeah, I've heard him speak before and he, he's really good. Yeah,

he's, he's delightful. You know what? Because there wasn't like, there wasn't an anger in his voice. He's not like, he doesn't, I don't get the sense that he hopes things ends badly.

He just, He genuinely feels that way, but I don't think he's, like, actively rooting for that to happen. Who knows? So he talked about there being this just massive bubble, and he thinks it's here, like, this is one of the big time bubbles. And he's been saying this for a while now. It was interesting to hear him say that he thinks the lack of babies coming on board, like, population is going to start decreasing in the developed world. He thinks that's a problem because in 2011, he said that, like, we're going to run out of natural resources in the world. I feel like that's like a 2030 call, though.

He's like, or 2040. But so I feel like we not to not to dunk on him, but you have to mention this. In 2011, they were calling for negative real returns on U.S. stocks. So it's been a decade of this. But to actually put some substance on this, the one thing that he said, because I was, I found myself nodding along with what he was saying, right? I don't really take a hard disagree on on what he's saying. But the one thing that he says that I will disagree with is profit margin. He's big into mean of a version. And profit margins. have not mean reverted for a long, long, long, long time. Like the dynamics of our economy, of our businesses, I know, oh, it's different this time. No, it is. It's very, very different these time. These capital-light businesses look nothing, nothing like companies in the 50, 60, 70s, and 80s. They look nothing alike.

So I don't know that there's reason to think that profit margins are going to like mean revert, like there's some sort of gravitational pull on them. I feel like he did not give enough credence to the fact that the underlying structure of the market is completely different now, which is something we talk about a lot. The other thing was, so he said, listen, this is a retail bubble. He said, you know, in the past, and I think that's why, where he might be wrong, because I think he's right about that. It is a speculative retail bubble, but in the past, in the dot-com bubble, everyone was in the pool. I mean, the analysts were, on Wall Street, were shilling for this stuff, the IPOs, everyone was involved in that. That was retail, the institutions to everyone. And then in the

housing bubble, Wall Street was front and center pushing these toxic loans. So institutions for those last two big bubbles we've had, institutions and Wall Street were there. This time, Wall Street's not really there at all. Institutions haven't been jumping into the deep end of the pool for this. It is a retail speculative bubble. So that's why I think, again, GameStop goes to zero tomorrow, and what does that do to the overall market? Nothing. So I think you could have the retail speculative bubble pop where some of these stocks and stuff that they're in get hit hard and they get a slap in the wrist, and it doesn't lead to a 50 to 60 percent correction like he's looking for. Right.

So when he says it's like one of these all-time bubbles, I don't say it. I disagree with them. By the way, I mean, listen, I do see it. Of course I see the mania and I see what's going on. I just, I don't think that this ends with an 80% decline in the overall market. I just, I just don't. Obviously, we could be wrong. I just don't see it. So Dahlio did a piece also on bubbles. And these charts are awesome. So he's showing the top thousand companies, the share of market cap that's in a bubble, and these are proprietary. I don't know what's exactly in here. But it looks like it was about 12% of companies they defined as it being in a bubble in the late 90s. We're at 5% today. If you look at the S&P 500, he had 10% in companies in a bubble

then and just about under 3% now. Aren't these pretty sweet charts? Yeah, that's pretty good. He tries to make it more quantitative. And they realize the reason that it's so hard to predict to bubbles because so much of it's qualitative. So William Bernstein wrote about this. He gives like his four signs of a financial market bubble. And he wrote up this a few years ago. He said, number one, is everyone around you is talking about stocks or real estate or whatever it is. Chuck. Number two, everyone begins quitting their jobs to day trader become a mortgage broker. Kind of. Half a check. Three, when someone exhibits skepticism about the prospects for stocks or financial assets, people don't just disagree with them. They vehemently do so and tell them they're an idiot for not

understanding things. Check. And four, when you start to see extreme predictions, like Dow's 36,000 and 99. That's not happening. You can, but my, counter to this is there's just so many more opinions today that if you're looking for the anecdotal signs of a bubble, you're going to find them whenever you want. I got an anecdote. So we're doing my bedroom. I don't want to say redoing because we've been in the house for, I guess, coming up on two years and have not done anything to my bedroom. So we're doing it, right? We're trying to order some stuff to fill it out. And everything is on back order. We're getting stuff from all over the place. So we're spending a little bit of money on stuff from pottery barn, but it's a lot of like T.J. Max target stuff

as well. It doesn't matter what we're getting or where we're getting it from. Everything is nothing like things are on backwater until June. Okay. So we ordered our top of our dishwasher, the rack broke in November. One of the kids was probably pulling on it and it fell. It took three months. I just got it last week finally. The Wall Street Journal had this excellent article on the lumber shortage and why lumber prices are shooting up. And supposedly the bottleneck is where they're taking this lumber to be put in the mills and sent out. And so it's really, this is like the kind of story only the Wall Street Journal could write. Like the people who grow the trees, so Grantham has been pushing timberland prices for a while, people that grow their trees aren't becoming rich because they can only

take a certain amount each year because it's like 5% of the crop is taken. So the real bottleneck is at these mills where they're finishing the lumber and they're the ones who are making out like bandits. And so because we had this supply shortage where, you know, in March and April, people thought, okay, everything's going to slow down like a normal recession and for COVID, the plants completely went offline and then demand search back. And you had all these restaurants who wanted to build decks and you had people who wanted to build houses. So now supply is way constrained and demand is way higher. The Wall Street Journal also had this article about how there's a semiconductor shortage. And so they're having a hard time making cars because, again, most

of the car lines stopped producing in March and April and then demand search back and people are moving to the suburbs, and Biden, I guess, is directing his administration to, like, try to get ahead of this semiconductor production stuff. You see this everywhere. Peloton is going to invest like $100 billion for the supply chain. So here's my countertrend call. What if we need to spend more money to avert inflation? People are saying, like, there's two different ways of looking at inflation, right? It's like too much money chasing two few goods. The problem right now is the two few goods. And that's because supply got constrained because, one, people shut down their supply chains in March and April. But two, demand came surging back way faster because

this wasn't a typical recession. And so we actually need to like invest more for some of these companies to speed things up. And so again, if we want to avoid just having either long delay times or higher prices, like maybe the everyone needs more money to get this stuff back online. would you prefer more money be spent and like we get this because we have this huge housing shortage too like we need to build more houses yes and so a lot of this stuff it's the infrastructure they need more money sent out I'm not saying we need to send more checks to people but we need to get this the supply chain back to where it was so it's humming because it got thrown offline and that screwed everything up how is that how is that a government issue how is that a fiscal issue well

when it really starts messing up with consumers and companies that so that's what this is like a so Biden said this is in Bloomberg they're like addressing the semiconductor production because that can like we're so relying on China for this stuff like they want to invest in the United States to do it here and produce it here instead of getting it from China. Okay. So I wrote a post last week. Credit to me. What happens when value turns into momentum? And I ended it with I'm interested to see what happened. Hey, hey, hey, credit to me. I gave me that idea. I literally told, I literally gave me the name and said you should write about this. I forgot about that.

Conveniently. Conveniently. I forgot about that. All right, credit to you. Credit to you. I wrote, I'm interested to see what happens when momentum strategy starts scooping up energy of financials. It feels like we're already here.

And then a few days later, there was this post by, who wrote this post? We'll look to this in the show notes. The person that tweeted is Warren Pyes, and they did some excellent work showing that it's actually already happening. They wrote, beginning in March, momentum funds will enter into what we believe will be the highest turnover period ever. Financials and energy will be bought, tech and health care will be sold. You know, it's interesting, what if this starts to affect growth stocks? And this is part of the story that might go unreported on how higher growth, how higher interest rates might affect growth.

But this is the point. There's so many parts of the puzzle that it's never only one thing. So, yeah, it's flows. So Fang stocks relatively underperform and all the junkie stocks do well, and the things that take those small. caps in energy and financials to another level is momentum traders getting in because they like the way that their charts look or whatever. Right. Yeah, that's interesting. Exactly. All right. So it sounds like Robin Hood is preparing their IPO. This is from CNBC. It looks like the valuation could be highest $40 billion. And I looked after their fundraising in April 2020,

which is, you know, in March they had some problems. They were valued at $8.4 billion. In March 2020? Yeah, so a little less than a year ago, about a year ago, they were looking at like four times what their IPO is going to be. And I would imagine it's going to trade higher than that the first day. Here's the thing. Bloomberg had a piece saying Robin Hood is in the, and they're trying to get this out as quick as I can, I'm sure, because things are going so well and they've raised so much money. They're going to try, it sounds like, to do their damnedest to get people on their platform shares of this IPO. Because the way that it usually works is company goes. on a road show and they do it through Goldman Sachs or Morgan Stanley, and clients of Morgan

Stanley or Goldman Sachs are given a lot of shares at IPO price. Or Dean Witter. Yeah. But that's how you get that relationship because then you see a first day pop and the people who are trading in the public exchanges, they get it after it's popped a huge amount or assuming it does. And so Robin Hood is actually going to try to do this. I don't know, we don't know the details that are how they're going to do it or how much they're going to allocate to people on their platform. I'm sure they're still going to give the banks a little bit something, but I give them credit for this because this is them, they say they want to democratize finance and I always, I don't always think that these places are doing what they say. If they do

this this way, I think that they're, they're kind of living up to it. Oh, yeah, what are the chances they stick the landing? It's, it'll be, right. I wonder how. What if, what if they give, what if they give, what if they give shares to Robin Hood users? And let's just say they give them a 5% discount, which I don't know if they can, but let's just assume that they do that. And then they do like, but there's like a 90 day lockup. And by the time the shares, by the time the lockup expires, shares are 30% lower. I mean, do you think that they're going to stick the landing here that people are going to actually make out? They can't, they can't determine what the price is going to be. If you're buying a stock for three month holding period, shame on you, because that's

your fault. Right? Who holds stocks for three months these days? That's what I'm just saying. If they're going to give access to this, whether the stock price works out and does wonderfully or performance poorly. I think that's a win for normal investors than a Robin Hood who have an average account size of a few thousand bucks or something. They are actually, I think if they do this and they give a decent chunk to their own investors, I say good on them. All right, fair enough. Another company that's going public is Coinbase. Are they doing a direct listing? That's what it sounds like, yes. Okay. So there were some sweet charts in the S1. Interestingly, Coinbase is also trying to democratize investing, right? I'm not mad, but they take

0.5% on the value of every transaction they process. That's a lot of money. So a lot of people are pointing this out saying, wow, Coinbase is just making bank on the people that process that. And you'd think eventually getting to that size that they would scale a little bit and those fees would come in. By the way, their fees have come in when you compare it to Square. So Square, for example, Bitcoin revenue was, so I think Square reported earnings last week,

Bitcoin revenue was $4.57 billion in 2020, up approximately nine X year over year. holy cow. And they write, Bitcoin growth's profit was only, and I'm using quotes, only $97 million or approximately 2% of Bitcoin revenue. So Coinbase looks like an absolute bargain compared to Square. Square's doing 2% of every transaction. So here's the problem. No one cares about these fees right now because Bitcoin has been going crazy and crypto is going crazy in general. People start to care as it becomes a more mature asset class. And that's when these places run into trouble. I mean, I guess they hope that they have enough scale. But, you know, You have to. I mean, this stuff is going to come in eventually.

So I sent you this the other day. I didn't realize this. I heard this on a podcast or something. We have to talk about it. So this is in the heat of the battle. So this is published on March 13th, 2020. In the heat of every, I think this is the day after, two days after the Tom Hanks night. Bitcoin lost 50% of its value in two days. It went from like 8,000 to 4,000. And this is somehow we miss this time because I think there's so much else going on. We were doing two podcasts a week at the time and we still someone missed this. it's almost hard to remember. Wait, hold on. What did it do? It went in a two-day period. It lost 50% of its value. It went from 8,000 to 4,000. Wow. I do forget that. I think it's easy to forget that now that things are going so well. And it's important to remember, like, this is an insanely volatile asset. And it's still, even though it's getting much bigger, it's so much more immature than people realize, I think. And this thing is going to fall 50 or 60% in the future. The question is, does it fall from 50 to 25 or 20? Or does it fall from, 100 to 50 or 40.

And that's like the question you have to answer yourself, which is impossible to answer. Do you paper hands or do you diamond hands? I'm laser eyes, by the way. So somebody tweeted, real John Bovi tweeted, Coinbase reporting $193 billion in total transaction volume and $1 billion in gross transaction revenues for 2020, implying a fee capture of over $5,000 per million. For reference, this is more than 1,000 times greater than the fee capture listed for listed derivatives.

again, I'm not mad at Coinbase or anybody that's making money as a business. It's just sort of interesting looking at this through the lens of democratizing finance. No, I agree. They're playing Wall Street here. Coinbase is a Wall Street like firm. And I think that's kind of who they want to be. And maybe they've never really been like the crypto libertarian place as it is. And I think I heard the Brian Armstrong guy was a CEO and the founder on a recent podcast with Tyler Cohen. He said, listen, the crypto libertarians give us crap and the Wall Street people give us crap. And we're kind of the middle. So we get it from both sides. So I can kind of understand where they're coming from, but yes, you would eventually assume this stuff has got to come in.

So in Q4, institutional trading volume on Coinbase was $57 billion compared to $32 billion for retail. That was interesting. Here's another quote. Retail trading volume is more influenced by Bitcoin price and crypto asset volatility than institutional trading volume. And Ben, you've been sort of saying that like you wonder if institutions would shy away from it. It's been the opposite. They're sort of price insensitive. So last week we found out that square and micro Strategy, both paid $51,000 for Bitcoin. They didn't care, did they? Square is a little different than micro strategy.

Micro Strategy... They're making a bet, a levered bet, where Square is really acting as a broker. I'm pretty sure the guy from Micro Strategy is using Fortune Cookies as his strategy these days based on some of his tweets. That guy is either going to look like a genius or a moron. I don't know which is which, but they are... Yeah, it's binary. It really is.

It's wild that the board is letting him do this. I guess, whatever, he's been right so far and good for him, but it's, that's a crazy bet with a publicly traded company. Like, do it. If he had a crypto hedge fund, have at it. But he's doing this with a, it's, it's just wild that he's doing it with money for that's, anyway. So, all right, last thing. Crypto interest is just exploding. On Robin Hood, they said they saw six million new customers trading crypto accounts, six million. By comparison, that number peaked at $401,000 in a single month last year. So, so it says their average transaction size is around $500. Okay. So good. So responsible investing. Yeah. Again, Robin Hood is democratizing stuff by making crypto easier, even though you can't take it off their platform. And by the way, I don't know what the spreads are on Robin Hood. If I'm paying 2% honestly,

okay, I'm not too badly by it. Yeah, I think that that's kind of the price of admission. But it is interesting that now that Wall Street is so much more entrenched in this, and I think that's a good thing for it long term, but Wall Street being involved takes away a lot of the benefits that people wanted in this initially. Meaning what? Meaning you have a middleman or a third party where, like, if you have crypto and Robin Hood, you can't transfer it to somewhere else. So I guess if you want to have the cold storage thing and be a true Bitcoin person, you have to have it there. I don't really mind either way, but I'm just saying, like, the middleman getting involved takes away a lot of the stuff

people have been pushing on it. Yeah. So you shared this article with me. We've spoken about this in the past, the fact that real estate broker commissions are still roughly 6%. I think that's still like the rule of thumb. So there's an article in New York Times saying that even as median home prices have climbed, even as people have been doing more of the legwork, involved in home searches from Zillow and all those sort of sites, that the commission still hasn't budged. So we'll link to this to the showt us if you want to read the article, but I went into the comment section because I sort of wanted to find out what a realtor would say, because

of course, there's more to it. There's more to the story here. So I just want to read this. This is a comment from the section. Real estate commission is not set in stone. In this market, some homes I've listed for a total of 4%, some homes I've done a total of 6%. There's so many variables here. I have a listing from a lead that I got from a referral partner. I have to pay them a 38% referral fee off the top. I'm not complaining, but that's a lot

of money. The way I see it is without the lead, I would make $0,000, so I take it all day. Of course, there is a brokerage fee. But then I also have the professional photos, the videos, the 3D tour, and the drone shot. So it might be a $10,000 paycheck gets down real fast to about $4,800. I've had some really easy sales, and then I've had some seller. I eat up hundreds of hours of my time with a 30 to 45 day escrow. and sometimes the deal falls apart. Sometimes the seller wants not to sell because now they can't find the replacement property. I signed them to be a realtor.

I eat that marketing cost. I shake hands. It's all good. Nobody sees all that money and effort wasted. Okay. So you get the point. So I sympathize with this. Maybe being a realtor is just an incredibly difficult job and it's just a lousy career

unless you're in like the top 1%. And so maybe I buyers are the solution. Maybe I buyers are the future. That just pairs people together. Yeah, it's got to be hard work. Obviously. It's not as easy as it sounds like us. So like, right?

Like we're talking about like, oh, it's a 6% commission. That's crazy. But like at the end of the day, it's not as if a broker is getting rich off of this. I'm just surprised there's not an easier peer-to-peer way of lining people up that a website just lines you up and handles all the easy. I mean, that's the eye buyer stuff, I guess. But that just with the speed of which this market is moving right now. What if just like some stuff, sometimes you can't take the human out of the equation?

And maybe with the housing, there's just too many variables that people need to be involved. I don't know. I'm pretty bullish on my buyers. Yeah, I am too. Okay, same from the times as well. Number of homes for sale listed has gone from 1.3 million in 2015 to about 4668,000 right now. And they listed some reasons like a lot of people in the pandemic, who would want to put their home up for sale and have people coming in and out? So that's part of it.

And the majority of people who own homes are boomers. How many boomers right now would want to go to a pandemic? an assisted living center during a pandemic because of all the bad stuff that was happening there. So that's obviously part of it. So it's not just the demand side from demographics. Part of it is this is another constrained supply thing. And they had these crazy charts about the number of homes available for sale in like Atlanta and Austin and Chicago and have just fallen off of a cliff in a lot of these, but even like New York, Washington, Cleveland, all these places they can, they compare home prices versus rents or diverging like Atlanta is this crazy to

divergence in Austin, all these places, you're seeing home price gains and then rents fall. I guess a lot of that you would think market dynamics would bring that back in. Eventually, as people feel like, okay, well, if it's cheaper to rent New York, I'm going to rent as opposed to buyer in Atlanta or whatever. But this is another shortage area, and this is the kind of thing where we're talking like a, I don't know, multi-year, maybe decade-long thing where if you tried to invest to make more houses, this is not the kind of thing you can fix overnight. And maybe this is the kind of thing where rising rates, I don't know, could it help a little?

Maybe I'm contradicting myself from earlier in the program. But we, by the way, this goes to my saying that. You need something. You need something to slow it down almost. Everything is oversubscribed. We got an email from this, from the site called Collectible, where it's sort of like Raleigh Road, but only for for jerseys, for Andre the Giant's jockstrap, for baseball cards. And what's really cool is there's like a social aspect. So there's a Tom Brady, was it a card or a jersey?

I can't remember what it was, but they got an offer and the shareholders voted to say no, they didn't want to sell. It would be like a record sale and they said, no, let's hold out for more money. Everything is oversubscribed. Yeah. Last week we spoke about that site Kalshi, where it's just a binary yes or no. And a listener sent me a workout tutorial. And so, okay, cool. But the problem is I can watch the workout video, but I don't know that my form is right.

So I started with 15 pound dumbbells. I lifted something and I went, uh, right? We joked, like, well, Michael hurt himself working out. The answer is, yes, thank God I didn't hurt myself seriously, but I called you and I seriously hurt my shoulder like two seconds later. So you told me to chill out to do even maybe no weights. So I can't do no weights. That's a bit ridiculous.

But I did five pound dumbbells. So I did this exercise. I think it's some sort of deadlift where you hold the dumbbells at your side and you just bend at the hips. And it's to exercise your hand. hamstrings. I haven't exercised my hamstrings since I was 13 years old. This is why even like the greatest athletes in the world pay for trainers because sometimes you need help with this stuff. And it's not always as easy as just, well, just do it yourself. Sometimes you need a little

extra help. So anyway, I did, I was using five pound dumbbells and like three days later, my hamstrings are still sore. Right. You're going to be sore for the first few weeks at least. So there you go. You're going to be sore all the time. Let me ask you this. I got a, an email from Chase. Do you recognize this transaction. I asked Robin, hey, did we buy something from whatever? It was 88 cents. She's like, no. So I didn't think much of it, and I canceled my credit card, which was a giant pain in the bucks. I had to reconnect all my auto pays. But I went to buy Starbucks yesterday. Wait, you didn't call them for their fraud department first before canceling your card? You cancel your card over an 88 cent charge? Do I have new bail on my forehead?

A little. Call the fraud department and say, hey, I didn't make this, and they'll boot it out. I'm embarrassed. Okay. That's okay. You live and you learn. All right. Never again. Anyway, so I have my Apple, my credit card connected to my Apple pay for Starbucks, right?

So I just reload it on my phone. And my new credit card is in my phone already. How is that possible? Is there something I'm missing? I didn't do that. I don't know how that works. Magic? Yeah.

I don't use that. So I don't know. If anybody can answer that question for me, how did my new credit card get linked to my Apple pay without me doing it? Listen, I'm all for convenience. Like, I'm not bothered by this, but I know some people that might put their antennas up. I'm okay with it. Yeah. Well, obviously, you didn't mind being inconvenienced by canceling your card for an 88 cents charge.

That was in hindsight. That was very foolish. Oh, wow. Okay. So the vaccine stuff. I'm still thinking this is like our one giant leap stuff. So this is from Wall Street Journal. This is one of those giant leap moments for us said, see Buddy Creatcha, director of

Vanderbilt University's vaccine research program. These are fundamental shifts in how we build vaccines for the future. this really ushers in a golden age of vaccinology. So they said that they're not working on this mRNA vaccine for malaria in Africa. They're also working on vaccines for HIV, influenza, and certain types of heart disease and cancer. This doesn't mean that these people are trying to like, this was like amazing news and people were talking about it, but then other people are trying to pull it back in like, hey, we're not there yet. This is just still in the early stages. But wow, if this, if this stupid pandemic could lead to something really good in health, like if it

actually had a net positive over the long term, that would be just amazing. that the stuff that we could do now with this. I wish Hans Rosling was alive to be writing about this stuff. Yes, I agree. It is kind of crazy to think like how much we could potentially get out of this that never would have happened otherwise. All right, listener questions. Timothy asks, I'm a senior at Georgia Tech and I graduate in December of 2021. I have some student loans and I'm saving feverishly to avoid them next semester. I have a broker's account that exceeds the total amount of student loans. That's pretty good for a college student. Is it a good idea to sell the amount needed to clear my student loan balance? Or should I just use employment after graduation

to slowly pay down the loan over the next year or two after graduation. I'm scared of disrupting the compounding that I've worked so hard for. Good for him. He eats his Charlie Munger. Seriously. I mean, good for him. This is the kind of thing like the question we got with a person who has enough money to pay their house off.

You know what Timothy didn't ask, though? He didn't include like with the P.E. where it is. Oh, okay. It doesn't matter with the P.E. Actually, if you were a college student, you have years and years. I guess it depends what your rate is these days. that that would come into play for me. But if you don't want to upset your compounding, you're young, you have plenty of time

to pay off your student loans. What are we thinking? Where's the line in the sand for you? If rates are over what, 6%. That's pretty high, yeah. I'd say that's pretty good. So if rates are over 6%, maybe, and how about this? Split the difference.

It doesn't have to be all or nothing. Well, he's scared of disrupting his compounding. And I agree with him. Let your money ride if you're going to do it. I say hold off and paying off your loans. That's me. All right. I want to start posting these on Seekin Alpha, but I'm struggling to develop my own writing

voice. I know with repetition, writing gets easier, but I'd be interested to hear how you two develop your own unique voices in your writing, since so many authors in our industry are very bland. Well, I would say there's no secret here other than like just repetition, and I'm still not a very good writer. Like, I can have an idea, and it takes me way longer than I would like for it to come on to the screen, whereas, like, Ben, you write something in about 20 minutes. I think it's the kind of muscle that you can, I was never a writer before. I think it's muscle you can kind of do, the more you do it, the easier it becomes. But I think you also have to, I talk with advisors occasionally every couple weeks I talk to an advisor who wants to know

about producing content. And I always tell them, write about stuff that interests you, because if you're not doing that, then people aren't going to be interested in it. They know if you're just trying to writing for the sake of writing. But I do think it's something you can get better at. You just have to carve out time to do it on a regular basis because I think it is something you can get better at. And try to speak in your own voice, I think. I think that's important too. When I first started writing, I tried to write like all these other people in it. it didn't work because it wasn't me. I would also say to start slowly because you don't want to go from zero to 100 and pull a hamstring like I did.

Yes. All right. Recommendations? What do you got? I already mentioned wealth, war, and wisdom by Barton Big. So he goes through World War II. And it's basically a history book. It's like two of my favorite things.

It's the history of World War II, but also the history of the stock market at the time and how the stock market was more or less predicting the end of the war. And I shared with you last week the stock market bought it in the 1942, even though the war wasn't over until 1945. And there's a lot of parallels between now and that. So we were only one episode in, but I am extremely bullish on this, on this show. I heard about it. It's called For All Mankind. And it's on Apple TV. I think the second season just started. How come we didn't hear about the first one? I watched the first episode also, by the way, on your wreck. I'm surprised, too. So, yeah, it's what would have happened if the Soviets would have landed on the moon before we did, which, by all accounts, was very close to happening.

Like, they probably should have beaten us to the moon, and what would have happened. And I'm only one episode in, but I'm bullish. And speaking of space ones, I think I kind of pooh-pooed this one the first time I saw. and I only watched it once, but we started rewatching Interstellar this weekend. Oh my God, I love that movie. The movie, the ending left a bad taste in my mouth because it kind of made my head hurt. I love that movie.

And so I think it kind of ruined it for me, but now I rewatch it again, like, okay, even with the ending that I didn't totally care for, it's a great, great movie. I really like that one. Yeah, I love that movie. So I'm glad that I stuck with Wanda Vision because, again, credit me too.

Credit to me. I had faith. If you just watched the first episode, the first two episodes, you said, I'm out. This doesn't make any sense. I almost did because they were so annoying. But I knew that there had to be more to it. And I can't even say that I love watching it, which is weird.

But I just think that what they did was so impressive, how they tied everything together. And there's just so many different storylines. And Elizabeth Olson is amazing, right? I told my wife that I said she's the best actress in the family. She's incredible. Yeah. So anyhow, do you see where we're coming from, though? I don't think it's like the best viewing experience.

I don't, you know what I mean? I'm not like on the edge of my seat. I'm just. It's a very intelligent show. You go, oh, I see they brought it around. Right, right. It's kind of like, ah, it's like a comedian. There's different kinds of comedians.

There's comedians where you belly laugh. And there's comedians where you kind of think yourself, that is so funny. This is a that's so funny kind of show, right? Yeah. Well done. What else do I? Oh, I watched Nomad. Nomad Land.

You're so right. Not for me. And Francis McDormand is, you know, predictably incredible. and I feel like, oh, I think it won the Golden Globe last night, actually. I think it won some awards, yeah. It seems a kind of movie that critics would love. Yeah, but I'm sorry if I just, I didn't respond to it.

Yeah. When I was done, I was kind of like, ah, okay, that's it. Yeah. It was interesting how they brought Amazon into it, and I guess that's a thing where Amazon has these seasonal employees who otherwise. Yeah. So it was all right. Oh, come back Friday.

We're having a repeat guest for talking about Paul Kim. I think he has some of the most ambitious ETS that I've ever seen. these things are crazy right it's bet it i said if if if this works he's going to be a trillionaire they are these ets are wild they're some of the crazy he's got four new ets that we're going to talk about that are just overly ambitious and crazy and i can't wait to talk about them yes i'm psyched as well all right animal spirits pod at gmail dot com we'll see you next week