Animal Spirits Podcast - S&P 5 (EP.158)

Episode Date: August 5, 2020

On this week's show we discuss tech stock monopolies, Microsoft potentially buying TikTok, why more people are buying houses, what to do if your friends are speculating in stocks, Vanguard vs. Robinhood, the counterintuitive nature of this recession 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

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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 Rittholds wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben.

Nakerasi shared a chart showing the total market value of the Big Five stocks increased 266% from the start of 2015 through Thursday, through Tuesday. The value of the other 495 S&P companies rose just 25% over the same period. Don't you think these companies are so big now we don't even need an acronym anymore? Everyone just knows what they are. Yeah. So last week, these companies were in the spotlight for a few reasons, which we'll get into in a moment. One was the antitrust hearings.

And then I think that was Wednesday. And then Thursday blowout earnings from Apple and from Facebook. For years now, literally years, I think since 2015, we've been talking about bad breath how, as shown by this chart, the market is being driven by a narrower, a narrower slice of leadership. And is this always a case? Yes. However, this current example is certainly in the extremes. Jonathan Krenski put some of this into perspective. And I thought that this was really wild. Last week, I think it was Thursday.

The NASDAQ was up almost one and a half percent. Okay? So the index was up one and a half percent and more stocks fell than gained. He inverted it and said, looking at it the other way, there have been 645 days since 2004. By the way, that's when they have data back to, 645 days since 04 that had at least as many net decliners as on Thursday. It was Friday. I'm sorry. Prior to Friday, the best performance for the index on those days was 67 basis points. Okay. So the previous high on a day where there was 970 net decliners, the previous high for the index for the day was 0.67%. And on Friday, the index gained 1.49%. Quoting Krinsky, the top three most lopsided breadth performance days in the last 16 years have

come in the last seven weeks. And there's a paradox here. And that is this. This breadth thing, the old line about, you don't want the soldiers falling too far behind the generals, that really was a worry on the way up. And now it's no longer a concern because these big five have sort of reached escape velocity where it doesn't matter what the rest of the stock market does as long as these don't crash. And by the way, if they do, they're taking them market down with them. But Krinsky made the point that Microsoft Apple and Amazon alone are 35% of the NASDAQ 100. And they're as large as the 87 bottom stocks of 100. So really, wherever these stocks go at this point, that's where the market's going. The numbers are almost

impossible to leave at this point. So Apple is up 10%. How the hell can a company that's already over a $1.5 trillion market gap be up 10% in a day? How does that happen? So they had blowout earnings, I guess. So here's the context I used. Exxon was the biggest company in 2010 in the S&P. It was the fifth biggest company in 2015. Now it's down like 30% this year, so it's like the 30th biggest company. But Apple added the equivalent of Exxon on Friday to its market gap in one day. I mean, it's truly hard to believe. It's, it really is insane. And yeah, I think you're right that it's probably the way that you think about these things being good or bad, it's becoming muddled because they are so big that I wrote in mid-April,

What would have to happen if we get another leg down? And I said, you have to effectively bet against these huge companies. If you want to take the whole market down, the S&P 500, you would have to take these big market cap down. So I looked it up on Whitechart says the ability to look through on all the indexes. So the Russell 3000 is bigger than the S&P 500 because it includes all the small and micro and midcaps that aren't in there. So the Russell 3000 is $36 trillion total. So that's effectively the size of the entire U.S. stock market, 36 trillion as of Friday. Those five companies, these Apple, Amazon, Google, Microsoft, Facebook, make up 21% of that, $7.8 trillion for those five alone. I don't know what else to say at this point. Remember sweep the leg in Karate Kid? Yeah. These five stocks are the leg. Right. You'd have to. But who's insane enough to bet against them at this point?

So last week, we talked about how all these things were so similar to the tech bubble. You have day traders and tech stocks going crazy. The other big difference that we didn't mention, obviously, is that interest rates are just on the floor. So that's the huge wildcard there. But the companies like this, it wasn't like this in the late 90s. I mean, Cisco got huge and didn't last and treaded water. Of course, Microsoft didn't came back. But it wasn't like this.

Well, the main difference. And I think we should make the distinction that when we're talking about the pockets of bubbles, we're not necessarily talking about Apple and Amazon. We're really more talking about the Kodaks of the world. And we'll get to that in a minute. But Tom Lee said, we hear about the craziness of this market. is the top five are now 22% of the S&P. We just don't see the bubble. The top five stocks are 18% of earnings and more than 80% of 2020 EPS growth. So their market cap share does not seem

out of line. Right. Their fundamentals are backing up their performance. That's what's so crazy. So that is probably the craziest part about this. So Apple reported fiscal third quarter earnings. Total revenue was $59.7 billion, the highest ever for the third quarter. And this is so insane. services are 13 billion, wearables are 6.5 billion. So services and wearables are 33% of the revenue. The iPhone is 44%. Remember when it was like, what's the next innovation? Can Apple still innovate? Services and wearables went from zero to 33% in under a decade and are now, they might surpass the iPhone. And by the way, personal anecdote here, I feel lost if I don't have my Apple watch on now. I got it. And I'm like, I'm never going to use this thing. What's the point of it. I love it. I use it all the time. Yes. The iPhone is now the smallest percentage of overall revenue that it's ever been with obviously, like I said, services and wearables taking up the lead. So yeah, these companies are crushing it. Because they're doing so well, I mean, these companies are effectively monopolies. If they have competitors come in,

they buy them out or they just take them down like Microsoft is doing to Slack right now. Slack came in and Microsoft decided to just build teams and put it right into their suite of office product. and just crush Slack with their team's thing because it's like the same thing. Do you think that Apple is the least monopolistic of all of these companies? I guess maybe they own the App Store, which they're taking incredible fees from. But in terms of, I guess, if you think about the smartphone being 50% of the revenue or 44% of their revenue, they have tons of competitors. Yes, I don't see how Apple is.

And Google, the easy one of them would be, okay, you have to sell YouTube and just focus on, you already have the search corner. But I understand why they brought them in front of Congress, but. Are they actually ever going to do anything? Probably not, right? It sounds like the European Union is doing more for anything. I just think it's hilarious that they brought all these tech CEOs in on Skype or Zoom or whatever the other day to talk to Congress. And then three days later, we hear that Microsoft is going to buy TikTok.

The fastest growing social network that there is, the biggest competitive Facebook we've seen probably since Snap, and it certainly seems like it's bigger than that. It's on its way to being as big or bigger than Instagram. If you're Microsoft, you almost have to do this deal if it's going to be handed to you, but doesn't that just make them even more entrenched in mind? Microsoft has never really competed directly with Facebook. Facebook has a TikTok copy account or their own version of TikTok coming out soon. I think it's interesting, though, that Microsoft would say, all right, let's get into this because TikTok sounds like it could be the only thing that could compete it with Facebook.

And it is kind of funny, though, so a lot of people said, oh, the government is trying to shut down this site that has teens dancing on it. What's the point of it? Ben Thompson actually has been writing about this on strategy for a while about how it actually makes sense to break this up and pull them out because China is more or less trying to push their ideology out through these things. So he made the point that when the Hong Kong protests were happening, you could search for that in TikTok and not find it because China was more or less censoring it. He was actually saying he agrees with this, the fact that TikTok needs to be spun out

and something needs to happen, which is pretty interesting. And they've been censoring us our companies for a decade or more. It seems like a weird fit for Microsoft to take them on, but if you're Microsoft, why wouldn't you do this? If they're going to let it happen, I just think it's just buying another competitor, though. Did you see some Mark Zuckerberg's emails between him and the CFO of Facebook at the time were leaked? Yes, when they bought Instagram. So Zuckerberg said, these companies have the properties where they have millions of users, fast growth, a small team, and no revenue. The businesses are nascent, but the networks are established. The brands are already meaningful. And if they

grow to a large scale, they could be very disruptive to us. These entrepreneurs don't want to sell, largely inspired by our success, but at a high enough price, like 500 million or a billion, they'd have to consider it. They bought Instagram for a billion, right? Yeah, I think they had like 13 employees at the time. Do you think the guys who started Instagram? Now, it's possible they don't get nearly as big without Facebook's help, but do you think that they look back on that and say, we should have just stayed with it? Why did we ever sell? Maybe. It's hard to say. There was two lines of thinking around this for people. Some were saying, Markleberg is a genius. He figured this out before anyone else. The Instagram was going to be huge. Other people say, this is ridiculous. They bought out one of their main competitors and supercharged their own business by using them. This is exactly the point. This is how they squash competition. I mean, this is like the standard oil thing back with Rockefeller where they had to break them up. This is the same thing. He was buying his competitors. That's exactly right. So the CFO responded to Mark. He had like four questions. Like, why would we do this? He was almost like asking if this is really a good idea. And one was,

do you want to do this to neutralize a potential competitor? And another one was, do you want to do this so that we can integrate their products with ours in order to improve? And Mark responded, it's a combination of one and three. In terms of neutralizing them as competitors, he said, one thing that would make this more reasonable here is that there are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it's difficult for others to supplant them without doing something different. And then, and terms of number three, which was to integrate their products, he said, what we're really buying is time. Even if some new competitors spring up, buying Instagram, path, four square, et cetera, now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. And quote, Ben, that's exactly what's going on. And don't you think that these tech CEOs are always going to be so much further ahead than the government who doesn't really understand what it is that they're doing? Government is probably at this point for the next, I don't know, five years, seven years, unless something else

new comes on, government is there only risk here? Is that fair to say, barring the entire internet going down for four years? Well, I think that what's not a risk to these companies at this point are new competition. I mean, maybe Walmart's new prime competitor is a competitor to Amazon Prime, but I don't know. And maybe TikTok steals some of Facebook's luster, but they seem fairly entrenched. There's not much they can do. And if they put regulations on, I think the only thing they could do really is break them up, that would make sense. Otherwise, if you're just putting regulations, then you really snuff up a competition. But let me ask you this. What does breaking these companies up really do to the underlying

problems, which are competition? In other words, if YouTube is spun out, what does that really matter? I mean, maybe the dominance will not be under the parent company, but YouTube is still going to be impenetrable, Instagram would still be very fortified in their moat. But the thing is that they can use the same strategies that they used at Facebook and improve them in Instagram. And so you have the economies of scale there where you have them all under one roof. So I think if you spun them out and have them as their own companies and they're kind of competing individually, I think that takes a little bit of the luster off. Yeah, but I think the toothpaste is out of the tube. Potentially. But on the other hand, I mean, it seems weird that

TikTok is just not going to be spun out on its own as U.S. TikTok, it's going to go Microsoft. They've shown that you can build a competitor to these places. Yeah, it's an example of one. Okay, but people have been saying for years that it's impossible to do it. It can happen. It is. It basically is. There's TikTok. What else have we had over the last 10 years? Yeah. Okay. Not much. So, Facebook reported earnings, and they absolutely smashed. Sorry, before we get to this, I'm surprised, though, that we haven't seen more of this.

Maybe they don't want to get as much scrutiny, but they have so much equity right now. They have so much money to work with. I'm surprised we haven't seen more huge. Slack hasn't been bought or Twitter, or I'm surprised that they're not just going on a buying spree. Yes, they could use their stock right now. It's at the highest level it's ever been and just buy up companies at will if they wanted to. Maybe they're being held back because they're worried about this regulation. But I'm surprised we haven't seen more deals happen for Zoom or some of these other companies.

I can't believe that hasn't happened or that won't happen in the next six to nine months. months or something. So a few data points. During the first three weeks of July, Facebook said overall ad revenue grew 10% year over year. The top 100 advertisers, so remember the boycott, the top 100 advertisers did spend 12% less than they spent last year. But that might not be necessarily the boycott. That could just be that they're pulling back on spending, ad spending, as everybody is. But this surprised me. The top 100 spenders contributed 16% to its total revenue in the second quarter. It means they're incredibly diversified. Again, the top 100, only contributed 60% of its total revenue.

Nothing? Okay. One more thing. In terms of Facebook being so dominant, of the 60% of DEG clients that joined the July boycott, four out of five are planning to return in August, with many having, quote, decided it's too much for them during a difficult economic time to remain off. They have no choice. And honestly, when you look at the chart about them, their biggest advertiser's boycotting,

the thing is, they're diversified. they have a ton of small businesses that basically have to advertise with them. Otherwise, their competitors will and they're screwed. So they have like a hugely diversified business in this. You see that dip in June? Right. All back. Yeah, it didn't matter. And the ones that were boycotting, like the very public visible ones, you'll see it's negligible. It's a tiny piece of the pie. So the top spenders, yeah, dip, but then it came back. And again, actually does look like it's more the boycott than COVID-related. But the whole tech industry, like the tech media, loves to complain about these companies, but everyone still uses them. So it doesn't matter. It's fun

to complain about these companies and what their practices and what they do, but no one will stop using them because they can't. So I just want to talk about Bezos for a second. Bezos said Amazon accounts for less than $25 trillion global retail market and less than 4% of retail in the U.S. Okay, end quote. I don't know. That sounds like fun with numbers. I don't buy that. Because in retail you include like automobile sales and stuff. Yeah, give me a break. Yeah, that is fun of numbers. So he said, there's room in retail for many winners. For example, more than 80 retailers in the U.S. alone earn over $1 billion in annual revenue. Okay. Like any retailer, we knew that the success of our store depends entirely in customer satisfaction with their experience. Customer satisfaction, the fact that everybody loves Amazon is not germane to this argument. It's not what's relevant. He said every day Amazon competes against large established players like Target and Costco, Kroger, and Walmart, a company more than twice Amazon size. Okay, these are all fair points. Yes, they're winning. But again, doesn't change. It's the fact that some of their practices are completely predatory and anti-competitive.

But again, are we too far into this? How do you go back? Yeah, and how do you do so without angering the consumer who loves them? I love Amazon. I love Amazon. Right. That's the thing. If you regulated them and made it a worse experience for the customers somehow, what government official is going to want to do that? So in a way, it's good for each of us, but it's terrible for some of us. It's just these weird things. And so we talk a lot about the concentration in the U.S. market, these five stocks, as you've heard at Nozum at this point. Forgive us for a keep on talking about this, but it's just such a big story. They're now 22% of the market. Somebody shared a chart.

Taiwan Semiconductor, for example, is 29% of that market alone. Taiwan Semiconductor is 29% of their market. Right. The difference being that market in Taiwan is not 55% of the global market cap. The U.S. is completely different. I always try to make the case that this is the same because the top companies have always had a greater share of the top. This time, basically all five of the biggest companies have a monopoly too. That has never happened before, where the biggest companies have total control over their industry and can basically do whatever they want. Those top companies in the past were churning over much more. Maybe it doesn't happen this time unless the government steps in because these companies are just so entrenched. So let's move on to some of the fun

companies. We got an email from a reader talking about his dad. By the way, we've been getting some great anecdotal speculator emails. Some of them we can't read, unfortunately, but there's been some good ones. So keep those coming. He said, I need help with my dad. Basically, he's buying all these stocks. You know the names. He historically has a poor judge of tail risk. He gets greedy for the upside and seems to ignore the downside. How do I convince him of this? I've tried, but I love some advice. Okay, my answer, unfortunately, what do you say? You can't say. There's nothing You can say to these people sometime. Literally nothing to say. And listen, these stocks are on fire. And people that are in these names are making a killing. So what are you going to say? Be careful. What are you talking about? I'm up. I double my money over night. Yeah, be careful. Great advice. Thanks. I'll be careful. That's like trying to talk your friend off the blackjack table after there's six drinks in and playing two hands at once. And they're winning. They're getting lucky for winning. Like, you're not going to talk them out of that.

It's such a bad position to be in because, let's just say that these names do fall apart. You don't want to be like I told you. I mean, it's a no-win situation. Maybe you try to help them have some sort of sell discipline or stop loss or something. That's the best you can do. Just so they don't get completely crushed if this thing falls apart. I would say that's good advice. The best you could do is, hey, listen, I understand this is great.

This is fun. You're making a ton of money. But if you have these enormous gains, at least put some sort of stop order in where you're not going to allow it to go past a certain level. So last week we spoke about my plumber. And listen, I'm not trying to be a dick. I'm not making fun of these people that are investing in the market, these young traders that are learning and are going to potentially maybe take a loss. I'm not making fun of them at all. That's not my intention. I think this is terrific. And some of the lessons that they're going to learn this year are invaluable. Will some people take it too far? Obviously, it's more of a commentary on the state of the market than

I'm not trying to dunk on these people. Right. This could be tuition. So I look at it like, this is like your brothers or sisters where you can talk crap about them, but you don't other people too. So there was a story in Bloomberg last week. And Seth Klarman, who's this legendary hedge fund investor, talked about how investors are being infantilized by the relentless Fed activity. And he said, it's as if the Fed considers them foolish children unable to rationally set the prices of security so much intervene. When the market has a tantrum, the benevolent Fed has a soothing yet enabling response. Then he goes on and says, as with 30-year-olds living in their parents' basement, we can only wonder whether the markets will ever be expected to make it on their own, which is just a jerk thing

to say. It's very condescending. This makes me want to, like, totally defend the day traders and be like, you know what? Shut up, just because you've been wrong. Get out of it. You manage billions of dollars and you're rich. Just so what, you've been wrong about the Fed for like 10 years. Leave them alone. So that's the thing where I want to like talk some sense into these people, but you also want to be like, you know what, they're paying tuition into the market gods right now. Let them do it. Whatever. What's the average account says at Robin Hood? A couple thousand dollars, probably. Okay. So let's say it goes to zero. for some of these people. They're going to take away lessons from this that are hard to quantify.

If you're a hedge fund manager managing hundreds of millions or billions of dollars, why do you care about Robin Hood? Right. Leave it alone. Right. It shouldn't matter to you. Now, if you have a podcast like us. Yes. I love, the stories are amazing. All right. So last week, I spoke about my plumber. So he sent us a proposal for the work one night. I guess it was Wednesday night. And then Thursday, he called my wife and said, hi, can I please speak to your husband? I got on the phone. Robin's like, Michael, I don't want to say his name, wants to talk to you. So I'm like, hey, how's it going?

And he's like, man, I bought Kodak yesterday at $9. I was going to call you, but I figured you were busy, you know, I bought it at $9 yesterday and I sold it at $20. I know it's at $57, but I didn't want to be greedy. So I sold it at $20. See, he has sell discipline. Good for him. And by the way, he literally hung up.

up the phone with me without even asking what I thought of the proposal. He actually called me to talk about Kodak. Oh, that's great. So they said last week, Kodak attracted 43,000 Robin Hood traders in 24 hours. They signed some weird government contract where they're going to get into the pharmaceutical business, which I don't know, makes zero sense to me. I said on Twitter, you could have told me, well, when you hear Kodak, isn't the first thing you think of a vaccine? I said, you could have told me Kodak went out of business 12 years ago and I would not have been shocked, which apparently they almost did. They went bankrupt 13 years ago and started over again. This was obviously a huge story last week. So what happened was, as far as I gather,

is that the local news in Rochester released the story on Monday. And then the volume that day was like 10 times what it is on the average day. The stock gained 25% that day. And then they deleted the story. They deleted the tweet. I think that was Monday. Yeah, that was on Monday. And then on Tuesday, the news officially became public. So people were up in arms about insider trading. And that part of it didn't really necessarily bother me because it was a dumb release by, I don't want to say dumb like it was a journalist's fault. I don't know how that got released and then deleted. That's obviously incredibly bad corporate stewardship. Like that should clearly be disclosed at one time for everybody to see.

What pissed people off was the fact that at the beginning of the week, they handed their chief executive $1.75 million of stock options that went to $50 million in 48 hours. And that is some horrendous, stinky, lousy bullshit. Yes. Here's the difference between now and the 90s. Now, because of social media and Reddit and all these different networks, people can talk, doesn't it seem like everything when these speculators hop into these tiny bankrupt or whatever stocks, that it seems like it's more planned out and it happens all at once, like a swarm of bees? Whereas in the past, people were just kind of doing it themselves and flinging money at IPOs and stuff.

It just seems like there's actually some thought being put into the speculation. That's what I've been trying to get at. It's like a swarm of bees. You're absolutely right. There's zero time between information release and this. But I think this is horrible. This is chronic capitalism at its finest. And I don't know what the connection is exactly between the executives at Kodak and the administration.

But again, he got $1.5 million in stock options two days before this news is released. That is enough to get anybody incredibly angry. And, of course, Ben Hunt was all over this. And that's something that's more based on corporate governance than in CEO pay than it is on stock market, obviously. Yes, but that was pretty lousy. All right. So Matt Levine was all over this in an article codec as well if it again.

Forgive me, I'm going to read this paragraph. If people are buying stocks irrationally without any concern for economic fundamentals, than someone else, some cold-blooded rational investor should take the other side of that trade, selling the overpriced stocks and arbitraging them back to reality. A specifically annoying feature of the modern Robin Hood market is that that mechanism seems to have broken down. The surges of retail enthusiasm are so fast and sharp and overwhelming and often focus on such small stocks that nobody wants to take the risk of getting on the other side of them. So you see bankrupt stock soaring, equivalent investments trading at wildly different prices,

professionals who shake their heads at wild prices for weird tiny companies but aren't foolish enough to short them. Stock markets are supposed to be smarter than any one person. They're supposed to aggregate everyone else's view about the economic future and to have built-in mechanisms to reward well-thought-out economic views and ignore silly, whimsical, non-economic views. Now, though, they often just aggregate people's incoherent views about what is fun and where is the fun in that, end quote. So this is the thing about the swarm of the bees. These people have decided I'm not going to play the Wall Street game and try to go after these huge companies. We're going to try to play in a smaller field, and it actually makes sense, don't you think? That's what I think

the speculators are a little smarter today. That doesn't mean they're not going to get crushed. I think they're a little smarter than they were in the past. I think not to be rude, but I think maybe that's true, but I think you're giving them too much credit. This is on the back of this working very, very well. Things are all going up. I'd be curious to see what happened to Kodak, because Kodak's getting crushed now. The full story has not been written yet. And by the way, I don't know that these people are ever going away. That's a thing. If sports is weird for a while and we have like stops and starts if the Major League Baseball

postpones and starts again and the NFL has weeks on and off. Maybe people say, you know what? Maybe Vegas backs off and doesn't do the sports betting. These people just stay day traders for a long time. And eventually, there's going to be people left behind. They've got to be having so much fun right now. But don't you think, I'm making a number up, 10 or 15% of these people are getting in at the right time of the wave

and getting out before it gets hurt? And then everyone else probably gets in a little too late and stays a little too long and gets hurt. But there are a certain amount of people who are getting in at the right time in these things. No doubt. there's got to be massive winners that are playing the game and not being greedy, not being greedy, just selling with their shares double overnight.

But eventually you realize luck does not last forever in the market. And eventually you have to have some sort of process other than just chasing the lights or whatever, the flashing light. So eventually you have to have something. And hopefully people realize that eventually that just speculating all day long is not the way to make it. And I mean, I don't know, once you get this feeling, what's the next dopamine hit? Obviously, people have already got into crypto before.

Do they go into 4x markets? eventually stocks are going to become too boring because this stuff is going to go away. What is next for these people? Well, for certain people. And by the way, when we're talking about this, these are generalizations. Please understand that we're not talking to you if you're a listener and you're offended. These are over generalizations. It's very hard to talk about groups of people and say these people, this, these people,

that, yes, certain people are going to take it too far. For certain people, the dopamine of this will wear off. So yeah, you're right. For certain people, not all. Yeah, that's just natural human behavior. But yeah, when people say everyone, when you're talking about markets, you can never talk about everyone because they're always competing goals in time horizons and risk profiles and amounts of money and resources. So it's always different. And the other side of this, this is from Vanguard.

They had a piece put out last week talking about it was called Cash Panickers, Coronavirus, market volatility. They looked at people in their self-directed investors. So that's their just retail. People have a brokerage account or the defined contribution plans. They said less than 0.5% of all Vanguard investors panicked and traded to an all-cash portfolio. And the people who did were in their mid-50s and been to them for 12 or more years, but tiny, tiny amount of people panicked, which maybe they just weren't given enough time. But it's odd to have, on the one hand, the Robin Hood people speculating and going nuts. And on the other hand, the Vanguard people sitting there doing nothing. Is this what's making it so much harder for active professional managers is that there's

no middle ground anymore? You have the people who are just going crazy for the speculative stuff on one hand, and then the longer term people on the other hand, in the middle, it's kind of like wealth inequality where there's no middle class anymore. There's no middle class of investors who are making enough minor mistakes that professionals can take advantage of. I don't buy that. I'm working on theory here. Sorry to shoot you down. I think that the middle is the people that have self-directed accounts at Fidelity and Schwab and Ameritrade, and there's trillions of dollars there. I think that what's making this so hard for active managers to keep up is very simple. It's the five big stocks. And boy, do I empathize. I really feel for large

cap active managers that are trying to keep up. And it's like, what are you supposed to do? What are you supposed to do? I mean, you index. No, don't be a jerk. I'm just saying that large cap space because of the market cap bias, that's why it's impossible to outperformer the long term. I'm just saying like for people that are managing large cap equity portfolios. And you and I talked about this last week off the air. This is also a difference between young and old. So old people have probably already gone through it. They went through the dot com or they bought houses and they speculated in the past and they settled down and now they're vanguard investors, whereas all the young people are coming in and trying something out new and they're trading

and their Robin Hood account and they're learning. So guess what? Eventually, those young Robinhood speculators are going to grow into vanguard investors. It's going to happen. People grow older. They don't have time to pay attention to the market all day and trade in stocks that are trading up 100% in five minutes, whatever. So that's a life. cycle of an investor, right? Do we sound jealous? Because I'll admit, I'm a little jealous. It sounds like a ton of fun. Stocks are going straight up. I wish I was doubling my money overnight. Yes. There are sometimes where I wish, I just wish I didn't have a process in place. My whole financial ecosystem wasn't automated. The backhanded compliment. No, no, no. If you're buying Kod, unless you have a fun portfolio, you don't have a process in place.

But that's the other thing. Maybe some of these people who are doing this just have a fun 10 or 15% of their portfolio. True. And the other stuff that their 401k is automated and they're saving. So you never know with this stuff. It's not like you can say that someone's putting all their life savings into these things. So it's hard to say. The other dichotomy, and I wrote about this briefly last week, was the persistent pessimism from AAII investors makes a lot of sense to me, actually. Usually people's sentiment follows the market, but in a global pandemic with parts of the economy shut down, maybe it doesn't line up anymore. I'm guessing the median age of the people who answer that survey has got to be like 65. It's high, for sure. There's no 30-year-old who's filling

the AAI survey. The other thing is, so this is a survey, and what they're specifically answering when they're bearish, that means that they expect stocks to be lower over the next six months, which tells you absolutely nothing about how they're invested. Right. It's a watch what they do now. They say a thing. Exactly.

All right. I love this data point from Balchunis. He had a tweet about people who say that index funds are bad for capitalism and they manipulate stocks or whatever. he said he shared four stocks that were added to the SDP 500, not recently, just added to the SEP 500, whose shares got killed while they were inside of the index. So, for example, this company called Capri Holdings, they were added to the index in 2013, they're down 82% while they were in the index, and 24% of the company is held by index funds. So square that circle. Right. So just because you're in an index doesn't mean that your stock is going to do fine.

And we spoke about this early in the year with General Electric. It used to be a top five holding. Right. Or top 10 holding. I mentioned Exxon earlier. Exxon was the biggest stock in the world in 2010 and has gotten crushed ever since. Just because you're in an index or ETF does not make your life easier as a public company. You can still get crushed. Okay. This new U.S. homeownership data is crazy. So the U.S. homeownership rate shot up to 68 percent, recently. In 2016, it was at below 63%. From the second quarter of 2019, it's up over 3%. That's a huge move. So the U.S. homeownership rate, yeah, it's just, it looks like a chart of one of the tech stocks from the bottom, doesn't it? This is not a char crime. I'm just saying the move looks larger

than it is just due to the y-axis. But also because it doesn't move this much, usually. True, very true. This is wild. Yeah. So, I mean, the U.S. homeownership rate went up to roughly 70% in 2004-2005-ish. And it's in that range again. And it hasn't been that high. I mean, in the 70s, it was down in where it was earlier this year. Now it's approaching real estate bubble levels, basically. I also misread this chart. Okay. So this is showing it by decade. Each box is a decade. Yeah. So each box is a decade. And it's quarterly data. And this goes back to the early 1970s. So it's at the highest level. It's been in a long time. It's getting back to basically the real estate boom year. and if you look at it, so over the past five years, housing prices are up 27% or the last 10 years

are up 52%. U.S. home vacancy rate, this is from Y-Charts as well. All this date is, it was at a high of about 3% close to it at the great financial recession. Now it's down to 0.9%, which is the lowest on record going back to the 1960s for this data. I still am making the case. I think everyone is focused on the stock market now. Real estate, I think that this whole, if you add up the pandemic, which is pushing on trends that would have happened anyways with millennials and the potential work from home trend, I think real estate for the entire 2020s could be just on fire. There's two more factors.

By the way, so yeah, so these charts are more of a demographic real estate thing than they are a COVID thing. That's what I thought originally. But you're forgetting two things. One is interest rates, of course. Yes, interest rates are low. But no, that rise in home ownership rate, though, that's all COVID, I think. That was happening.

And then COVID put that on steroids. Well, my point is I thought that decline was COVID-related. And I was confused. Oh, no, no, no, yeah. That's what I meant. That decline was after the housing boom. And then the fourth factor that you're not considering is all the gains from robin hood money. That's down payment cash right there. I couldn't resist. Yes. But you have the boomers who, if you're in the middle class and didn't save a lot for retirement, your nest egg is your home. So something's going to have to be done with that home either sold or tap it through a reverse mortgage or home equity line or something.

So housing is going to be extremely important in the coming decade is what I'm saying. And now is a good time to plug what we're doing on Friday. Yeah, so we're going to start doing, we're going to do a handful over the next couple months of more evergreen podcasts. So for a while, probably we'll have two podcasts a week, much to the chagrin of Michael Batnik, who was a little overworked at the height of the pandemic. And now it's had some time to catch his breath. So the first one will be Friday. And we're going to look at the economics of homeownership from a million different angles. All right.

So there was a chart. This is survey data. So I guess, is this survey data? I think it is. this is horrible. In 2016, there was 2.3 million evictions. There could be that many evictions in August. So it's showing renters, unable to pay rent, and at risk of eviction. I thought that these numbers seem ridiculously high to me. Yeah. And I thought that banks aren't doing evictions right now because, for example, it's 58% in Tennessee. I mean, I just pulled a random one.

They're high all over the place. So this says renter households, unable to pay rent and at risk of eviction as a share of total renter households. So in Florida, it says 51%. I don't know how they're measuring this. You're not going to affect everybody, because there's nobody to replace these renters. Yeah. But obviously, this stuff has got to be a huge risk for a decent segment of the population right now. That's the point, right? For sure.

So we got GDP data last week. You have some thoughts? Well, what are your thoughts on the annualized stuff? Do you care? It kind of annoys me. Tell me why it annoys you. Because people were trying to say that the GDP dropped by a third, and no, it didn't. So it really dropped by 9% in change, but if you annualize that, that would be a 33% drop.

I see your point, but I'm kind of okay with it being annualized because it just shows how grand the number is. Yes, it's huge. I understand that it gets misinterpreted, but I think I'm okay with it. So Beespoke showed the quarterly data for Germany, Mexico, U.S., France, Spain, Italy, and they were all down. Germany was down 35%. Mexico was 53, France was 44, Spain was 55, Italy was 41. that made the U.S., again, annualized numbers. These are not real.

The economy did not get cut in half or fall. But basically, it didn't matter what your response was to the crisis for this data. In the future, maybe the response to the crisis will matter in the future. But for that one quarter, it did not matter because either the economy stopped because the virus just slowed people down in their tracks or your economy was shut down. So these numbers are the same for pretty much everyone. It's not just a U.S. thing. Bank had a chart showing the top 10 worst quarters or bottom 10 for a real GDP over the last century. And it looks like 1946. So I guess after the war ended, we contracted 42%. Again, these

are annualized. The Great Depression and 32. Did they have a meeting about this? Do you think like back in the day they said, all right, we're just going to annualize it because it sounds better? Someone said that and then they do it the same ever since because that's the way we've always done it, right? 1921, the end of World War I. There was a recession then. There's another quarter in 1932. Wow. So two quarters in 1932, we're down more than 35% on annualized basis. And then 2020. We are in rare company. Wow. This is like the dumb jokes to get on Twitter for the first day of the baseball season where they go, this person is on pace to hit 35,000 home runs this year. Isn't that the same thing? I'm sorry. I don't get the annualized thing. It doesn't make

sense to me. All right. So this is a pretty good myth buster because there's this idea that they're paying extra $600 a week in unemployment benefits. And that must mean people are not going to go back and get their jobs. Yale put out a finding a research paper and basically found that was false. They said, we find that workers who experienced larger increases in the unemployment insurance generosity did not experience larger declines in employment when the benefits expansion went into effect. Additionally, we find that workers facing larger expansions in UI benefits have returned to their previous jobs over time at similar rates as others. We find no evidence that more generous benefits disincentivize work either at the onset of the expansion or as firms look

to return to business over time. Can we do two things? What's that? Can we say that in the aggregate, what you just said is true? But can we also say that there are people that absolutely are not going back to work because they're getting more money than they would have? Are those two things fair to say? Probably. The way that I look at it is I'm sure everyone thought, you know what, this is just a one-time bonus. I know this isn't going to last indefinitely. So I'm going to have to find a job and get back to work. I think that's probably the line of thinking because there are people who said, oh, you're going to get people that want to go back to work, I'm sure there's a lot of people who just, guess what, they did not want to be laid off. They

don't want to be furloughed. They didn't want to accept this unemployment. The bonus helped them. And for some people, they're making more money and it was great, probably. But they knew it was a short-term fix, probably, and it wasn't going to last forever. That's my thought process. So this part of it was probably unforeseen and really interesting, in my opinion. So there was an article in the journal talking about how the percentage of U.S. credit card accounts that are 30 days and more past due has actually declined every single month, which is probably not what people thought would have happened. So they gave an example of an administrator at a college upstate. She received $900 a week in unemployment benefits, which is about twice

her normal salary. The extra money gave her the opportunity to start paying the $10,000 in debt that she had accumulated on multiple credit cards since she was in college. She paid off two cards worth around $2,500. I think this is fantastic. Okay, so big deal. So she was making more in unemployment than she would have if she was working. She's going to go back to work. This is not disincentivizing her. It's just she's using this as an opportunity. Okay, so maybe people at the bottom are getting a break for once. Is that such a tragedy? It's amazing that people are repairing their personal balance sheets during a pandemic, is it not?

It's fantastic. During the 2008 financial crisis, according to the journal, delinquencies rose when the unemployment rate increased. Again, that's pretty intuitive. This time it fell because, it actually fell by more than a third because of all the stimulus. The U.S. stimulus, according to a Brussels-based economic think tank, has to leave it at an immediate economic boost worth more than 9% of GDP according to economists.

And amazingly, they're trying to end the $600 a week because it's disincentivizing people to go back to work. Yeah, I don't get it. The poor people are ripping us off. When will they stop? I'm saying if you would have told a politician, listen, we know exactly how to pull the lever and make economic growth.

People are always talking about, my policies are going to make GDP growth go from 2% to 4%. This is it. you get people money. It's amazing that politicians don't go, yeah, let's do more of this. We can make economic growth out of nowhere, basically, and maybe we'll get inflation someday. It's amazing. It's working. That's not my problem to worry about. So here's another amazing anecdote from a guy that owns a pawn shop.

They said lenders of all stripes were expected people to borrow more when the lockdown began, but exactly the opposite happened. People came in and retrieved their jewels, gold, watches, and other valuables. U.S. pawn shops which typically serve consumers with low or no credit scores report that lending activity has fallen sharply because of the stimulus, pawn shop borrowers have become buyers, and sales of electronic equipment at pawn shops and other goods needed during lockdowns have surged, which is incredible. The exact opposite of what you thought would happen, happened. This is going to be the weirdest recession ever. I mean, it already is kind of, right, but everything happening is counterintuitive for the most part. Okay, listener questions.

I'm having difficulty understanding what purpose bonds serve my IRA at this point with real yields negative and spreads this tight. Why should I not allocate more to consumer defensive stocks, gold and other alternative assets? You just wrote a post on this. I wrote a piece about why people would even own bonds right now. It's obviously becoming harder for people to think. It really depends on what you think your alternatives are. Some people are saying, I'm just going to put money in CDs or cash or money markets or my online savings account at Marcus or ally or whatever. And that seems to make sense for me. It's a different conversation when you're talking about going into dividend paying stocks and gold and alternative assets because those are completely different risk profiles.

So it really depends on what you're using this money for. Is it a stock market hedge? Do you need it for spending purposes? Volatility Reducer. A lot of it depends on what you're going to do with that money in the first place. Cash, in my opinion, is the only acceptable substitute for bonds in terms of building a portfolio. Gold and defensive stocks and whatever alternative assets, that's a different conversation. Everybody speaks about the PE ratio of stocks. With respect to tech stocks, why the hell is the P.E. ratio important if they are not paying any dividend at all. The money is left on the company. At the end, it is a matter of cash and cash equivalence, free cash flow, short-term and long-term debt and earnings per share. But if they're not

paying a dividend, why is that ratio even important? Would you agree that the P.E. ratio for companies that don't pay any dividend is getting too much attention? I mean, okay, so let's say that it's not priced or earnings specifically. But all of the metrics, price to sales, price to book, price to fee cash flow, they're all telling the same story, which is that these companies that are growing extraordinarily quick, DocuSide, Zoom, you know the names, you have to compare it to something. And are ratios the answer for everything? Have these companies disrupted ratio analysis? Certainly they have for the last three years, is that going to continue forever where there's no price too high for these companies? I don't feel

comfortable saying that. Now, is using the PE as a baseline for investing decisions, the right answer for everything? No, of course not. Because a stock that could look expensive today could be wildly cheap if it grows into its valuation. So I think there's a ton of nuance here. Yeah, here's the thing. If you're going to pick a handful of individual stocks, they're going to be grand slams, it's going to be qualitative, not quantitative that's going to get you there. Fact, yeah. Well said. That's the way I look at it. Okay. Any recommendations? Yes. All right. So I'm getting back into the Malcolm Gladwell podcast. I listened to a really interesting one where he talks about a

Democratic lottery. Did you hear this? Yes. That was a good one. This was very good and sort of made me a little bit uncomfortable. It was kind of mind-blowing, right? Because the idea is that I think this was done at certain schools or universities in terms of their student governor, their student electives. One of the anecdotes that he gave or one of the examples that he gave was like, people have no idea who's going to be successful in terms of who's going to be a successful leader and who's going to cooperate well with others. You just can't know. And in fact, science has a little predictive power. There's this company, I don't think it's a hospital actually, that determines who gets grant money. And their success rate is abysmal. So I was reminded of this when reading a blog post by

Vitaly Katzenelson called Letter to a Young Investor. He wrote, we have probably employed 30 interns over the years to help us with research. We have learned from experience that educational background, prior experience, and even working toward the CFA designation, had very little predictive power as to whether a person would end up doing great or just mediocre research, end quote. So the idea that maybe schools like Harvard and the IVs should have a lottery, where you have, okay, these are the top 10% of potential applicants, and you just do a lottery. Right, which people would think was totally unfair, but the way that things work now is not fair either. This might be way more fair.

Did you get to the Gladwell four-part series on the bombing yet with Curtis Lameh. Okay. He's got a four-part series on World War II in the aftermath of that. That's amazing. Okay. That's very good. All right. Sticking with podcast.

Somebody recommend the Foundering or Foundering. It's a Bloomberg podcast on WeWork. So I'm all in on this. These are 30-minute episodes. So if you listen on 1.5 times speed, I don't know, what is that, 22 minutes, something like that? Remember WeWork? Doesn't it seem like that's just gone at this point? So this is such a better format than reading the book.

Like, whenever the WeWork book comes out, I'm good. I got my fill. You know what I mean? Yeah. It's honestly hard to have a book these days written about a company that's happening right now because it gets dissected so thoroughly now. Well, Mike Isaac's Uber book was excellent. Super pumped?

Yeah, that was good. I would have been very satisfied listening to that in podcast format. I watched The Old Guard on Netflix, which is the action movie with... Oh, Shirley's Throne? Yeah, oh my God, I was showing a blank. Was it any good or not? Okay, so it's very watchable. Okay.

But again... Wait, do you have to premise that with a Netflix movie? Because I thought the Thor guy, extraction? I thought that was very watchable. It wasn't great. You don't think it was watchable? I turned it off after an hour. I just didn't think it was that good.

So then I was thinking like... So there's always just a little bit something odd about it. And I can't put my finger on it. But what are some great action movies? They don't make action movies anymore. Like, for example, other than John Wick, what's an amazing action movie that came out in the last five years? That's a good question. Yeah, there haven't been many good ones.

So is it more the genre that's tough? When we were younger, for example, how great was The Rock and how great was Conair? But if you watch them today, they're kind of silly movies. Oh, whoa, what? No, those movies hold up extremely well. I'm sorry. I'm going to strong disagree. Both of those movies are wonderful.

What's the last time you saw them? honest. A couple years ago, probably. When Nicholas Cage puts his hair in the wind, like on the GIF. The end where they're flying through Vegas, I mean, it's silly. Yeah, but Steve Bouchemmy's in, I mean, that's a, I'm sorry. Anyhow. Conair. Good movie. Take that back, sir. Question. You ever notice how, like, Audi is the official car for every movie? Just like how Apple is the official computer? Yeah, that makes sense. How does that work? Does Audi strike a deal with Netflix or these movie companies? I don't know.

I watched some stupid movie this weekend with Will Smith called Gemini Man. Ooh, supposed to be terrible. It was really bad. And they were drinking Coca-Cola and Stella. It was like they placed the can perfectly so you could read the label. I'd be curious with the economics. How much does Coke or Audi pay to be, is that $50 grand? Like, I wouldn't even know where to begin for that number.

Yeah, I don't know. But that, yeah. Gemini movie, Strong. No, no on that one. Okay, yes. I've heard. I scroll through HBO Max just to see what's going to. going on. And it reminds me of the early Netflix where there's a million titles and there's like

one or two movies that you actually want to watch. So they have old movies like Casablanca and Citizen Kane that I've never seen that I might check out. But like... Let's be honest. Are you really going to watch those? Probably not, but I kind of want to. I like the idea of watching them. All right. So I did watch this on Peacock, which is free, but there's like five or so commercial breaks. Only 40 seconds. So, you know, it's free. So what do you pay if you don't want commercial? commercials? Ten bucks a long? Okay. Yeah, I don't know. So Jeffrey Patack recommended this. Eastern Promises. You ever see that? Ego Mortensen? Yeah. Yeah, it's a good one.

Strong, strong recommend. Yeah, I like that one. With the caveat. It's incredibly dark. There's a couple of scenes in there you wouldn't want to watch with your parents. Let's put it that way. It's a lot of full frontal. It's not a feel-good movie at all. It's incredibly violent and gruesome and savage. So if that sounds appealing to you, it was excellent. So thank you, Jeffrey, for that recommendation. All right. Did you watch HBO Max on your TV somehow? Or on your laptop?

No, I just scrolled on my phone. Yeah, because you can't get it on your TV. It took me like 10 minutes to get to the catalog. And I was like, oh, that was a waste of time. All right, new comedy special. Guy's name is Pat McGahn. I've seen him twice. He's the opener for Sebastian Manascalco, Chicago guy.

I think I had to pay five bucks in Amazon for it. It just came out. I think I like him because it's very Midwestern comedy. It's one of those where... What has been to Western comedy? I don't know. It's just, he's a Chicago guy. I think if you watch it, you get it.

But it's one of those, it's really funny because it's true kind of things. He's got little kids and he talks about marriage and having little kids. And it's one of those where I laughed out loud so many times because it sounded like it was something that was happening to me with his little kids. So that's a good one. I'm into the new Rob Blow podcast called Literally. Okay. So he had Chris Pratt on. He's got friends with.

He had Magic Johnson on. He was friends with. I didn't realize he was such a big Lakers fan back in the day. He's shockingly. likable. He was great on Conan. It's really good. So he had Conan on, too. He had Gwyneth Paltrow on. And she actually said that at her recent wedding, she got married again. The person who videotaped her wedding was Steven Spielberg. He did the home videos for her wedding. But then he had my favorite one is Mike Myers, who was a far more thoughtful guy than ever would

have figured. He was excellent. And finally, I'm reading The End is Always Near, but Dan Carlin, who I mentioned last week. And he talked about how he talked about how he talked about pandemics. It was written in 2019. He talked about how crazy it would be if we had a pandemic, which was kind of eerie to read. He had a whole chapter on nuclear weapons and how that's probably a risk that we humans don't pay enough attention to. And he talked about how the bomb they dropped in 1952 is like the biggest bomb they've ever done. And he said, when the bomb exploded on island in the Pacific, this is the U.S. did it like a week before the presidential election for Truman. It created a fireball more than three miles wide. Lightning crackled inside of it. The subsequent

Crater measured more than 6,000 feet across and the hole was more than 150 deep. This super bomb was somewhere between four and five hundred times more powerful than either the bombs that were dropped on Japan in the Second World War. And so he scared the living daylights out of me. He's like, that's comforting. He's basically like, he thinks it's going to happen someday. We're going to get into a nuclear war. Like, oh, awesome.

So anyway. 2021. Good book, though. He talked about like the fall of Roman Empire and pandemics and, yeah, good book. Anyway, we haven't talked about this in a while. Give us a rating. It's been a while since I looked, but I look for a review. Here's one of my favorite reviews lately. This podcast is garbage. These guys don't know how the economy works or money is affected by inflation or fed manipulation. Don't waste your time. Thanks, John. I actually took that one as a compliment because obviously this guy is a fed manipulator. Anyway, leave us a review. Send us an email Animal Spiritspod at gmail.com and we'll talk to you on Friday.