Animal Spirits Podcast - The Fed's Bazooka (EP.137)

Episode Date: April 10, 2020

We discuss the latest unemployment numbers, the massive help coming from the Fed, why markets are so confusing at the moment, a new theory on forward stock market returns and why investing is so difficult in this environment. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain position, and the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben.

You got some gray coming in on your beard. It's looking good. My six-year-old has been reminded me of that every single day. You know, I think that I've been punished for something because not only my bald, I can't grow facial hair. At all? I mean, do you say it? I got nothing. This is like two days. It's not much. But even when I do, my skin gets bad. I get itchy. Mine's getting to the It's a itchy point. My wife's been asking me to shave it, but I'm staying with it. I've seen on our Zoom set, facial hair is up a few hundred percent, just anecdotally, but not over here. All right. So this morning, we're recording. It's Thursday morning, and we just got a lot of news at 8.30 in the morning. I feel like we could do a daily podcast. What happened this morning

itself could be the entire material for the show. So again, another jobless claim that was $6.6 million. The Fed just threw another huge bazooka. at the market. It's almost like the stuff that Fed's doing, I feel like people aren't even really grasping yet because it's been so much. So I did a little quick calculation. So over the past three weeks, there has been 16.6 million new jobless claims. The labor force in the United States is roughly 165 million people. So that alone in the last three weeks would be 10% unemployment, tacked on to what we already had. I have a question, though. Aren't there a lot of overlaps in the series, or are these new claims? Oh, I guess I don't know how that works. I would

assume you don't you just put it out there once or do you have to do it every single week? No, no, I'm saying, what is this measuring? Maybe I'm a new on this. No, is this measuring new claims by week? I think it is. Yeah, yeah, you're right, of course. Because the total is 16.6. Yeah. Duh. Which is, again, insane. I wonder if the unemployment benefit thing, I don't know how much they set aside for this or if they budgeted. Are they going to, like, break the bank on this and it's going to go over what they said. And maybe the stimulus is even bigger than we thought because of the number of people that are being unemployed. Are people getting their checks? All I know is it was an extra, I'm sure there's still a bit of a lag, but they were giving

people an extra $600 a week for four months, which is a huge amount. So if people are actually getting them and if they filed, then that means hopefully they'll be getting that soon. Again, that's a big help to people who are in trouble and who previously had low income. So this is, again, a good thing. And the Fed stuff, I'm just shocked at the number of people, and this is mostly finance people who apparently want to see the world burn, that are really angry at the Fed for trying to save the system. The Fed is technically the lender of last resort. So this is their job, but they're doing another $600 billion in loans. They're now offering $500 billion to states and municipalities because muni bonds had a little bit of some trouble. And so they obviously see

the trouble coming down there. They're buying ETFs. Potentially now they can buy high yield DTFs along with corporates. I mean, a lot of people step in and say, this is ridiculous. They're just trying to save the market. Why don't we allow price discovery in the free hand of the market to take over? I mean, don't you think the freedom of the markets is pretty much out the window at this point when the economy is literally closed? Yes. I feel like this seems like a period in time where textbooks are going to have to be rewritten. Everything we've ever learned about economics is just out the window and they're going to have to rewrite it on the fly. It's just this massive amount of stuff going on. And we talked about this in our last show,

the fact that on the one side you have an economy that's effectively shut down. On the other hand, you have the Fed that is just lobbing grenades left and right. And it's going to be so interesting to see what happens from all this and what the unintended consequences are, if there are any. We spoke about this last week, the immovable force versus the unstoppable object. And I know the markets don't have to make sense, but it seems like this doesn't make any sense. It's hard to believe that stocks are whatever, 25% off the lows, they're now just 19% off the highs. And again, considering what the economic reality is, it seems like liquidity is winning.

We're not big on market calls. And I understand that the reason, who knows, but it just, I'm very surprised that this bounce has persisted to the extent that it has. Don't you think that the majority of investors right now, professional or otherwise, would assume, okay, this is a dead cat bounce. Like, it's great that it's happening and it's a nice relief rally, but don't you think the majority of people would feel that way? If I was trading, I would have been fading this from the very bottom. So with a three times levered something. I mean, listen, I would have gone home flat. Let's be honest. So listen to these numbers.

So year to date, the S&P is now down 15%. And that's before what's going on this morning, which stocks are railing. Who knows what will happen. All time highs, you said 19%. Over the last year, the S&P 500 is down 3%. If you would have invested from January 1st, 2019, granted, 2019 was a big year. You're up 13%. So this rally, after seeing the quickest 30% drawdown in history, it does feel a little insane. And it feels like when the coronavirus first hit and markets were hitting all-time highs, there were a lot of people saying, this doesn't make any sense. It kind of feels like that again, where the markets are out of step with what's coming. But I don't know. Maybe the market is just taking all its cues. from the Fed and what's going on there, I still think, I mean, there's so much, there's so much more to go for this thing. It's just impossible to say. So some details on what's going on. The Fed is buying $600 billion in loans. They're offering up to $500 billion to states and municipalities. They're offering four-year loans to small and mid-sized businesses, employing up to 10,000 people with revenues less than $2.5 million. And again, as you already mentioned there,

they have the ability to buy high yield. I think it was, sorry, I think it was revenue was less than $2.5 billion. So the Fed is actually in some ways overstepping that small business thing from what I can see. All right. So again, we've been leaning on this book heavily, the Great Depression Diary by Benjamin Roth. This is from 1930. Oh, I just had a grand idea. Go on.

The Corona Crisis Diary by Michael and Ben. Let's do it. This is from 1933. It is also interesting to note that the effort to create credit by having the Federal Reserve Bank by U.S. bonds and the open market has failed. huge reservoirs of credit are available, but banks won't make loans because business is too uncertain. It seems to prove that when business starts moving, credit will expand automatically, but the artificial creation of credit will not expand business. So the Fed was trying to do this back then, but it was not working. Yeah, and the Fed was much more an aspect. This is, I mean,

this makes 2008 look like it's just a blip. But you have to think, if you're an economics person and you're Jerome Powell and you can pretty much do anything you want at this point, it seems like, I mean, who's going to challenge him from doing what he wants at this point? It has to be exciting, even though we're in a dire time. I don't think it has to be exciting a little bit to just try to pull all these levers and see what you can do. It's just, it seems like every week, and it sounds like this was kind of telegraphed a little bit, and the market still likes it. But, okay, so Jason Gepford at the sentiment trader, wanted to look at this bear market rally stuff. So he said, you know, it's common knowledge that we have rallies within a bear market. It happened

in the 30s in 2008 and 2002, he said the S&P bottom 11 days ago, and he wrote this, he wrote this on April 8th, so this was on Wednesday. In that short span, it's retraced nearly 37% of its decline. Looking at historical instances of the S&P clung back, more than 30% of its decline after 11 days, not a single one was just a bear market rally, which I guess, if you want to hang your hat on that stuff, I just think the decline happened so fast that the recovery is it's going to be its own animal and throw everything out the window. But I ran a theory by you yesterday. I wanted to run it by you again. And maybe the listeners can chime in. Let's assume that was the low. The Fed continues to throw bazookas. The virus is bad, but it's not as bad as we

thought. And eventually the economy restarts. And maybe our theory that the economy is worse than the markets comes true. Maybe the numbers in the economy really are worse than the markets. and the market is able to see over across the valley and look forward to 2021 or 2022. If that happened, that would seemingly be insane that the market could actually be long-term thinking for once. But let's assume that's true. Does this mean the stock market in the United States is going to see lower future returns going forward? Now, here's my theory that I ran by you. In the past, this would have been a great depression.

like this would have been 50 to 60 percent decline in stocks, just get completely hammered. Now that we have the Fed to step up to do this, we have this huge fiscal stimulus and the government that's more than willing to act, doesn't that the fact that you take a little bit of risk off the table mean that the returns should probably be lower to? Does that make sense? I hear where you're going with this. In the past, the stock market used to just one of the reasons returns were higher in the past maybe is because the risks were greater. And if you take, if this thing only gives us the 35% decline, that would be, to me, just crazy. That's all that would happen. Now, again, there's a long way for this to play out. Maybe we do go down much lower and this is all moved.

But if that's the case, doesn't that make the case that, well, returns should probably be lower in the future because some people would think the other way, well, they're popping up stocks so they'll continue to go up. But I think the fact that you take that risk off the table means stock market returns in the future probably should be lower. Counterpoint, how far did stocks fall? Because you made the case that if this happened in the past, it would be a great depression. I imagine that the Spanish flu had similar, inflicted similar damage on the economy. How low did stocks fall after that? Well, stock market was already in a 40% decline in 1917 because of World War I. And you remember, the stock market was closed for six months at the start of the war. So I think that comparison is a tough one because the stock market was constantly booming and busting back. that. 1915 was the best year for stocks ever. I think that was probably in that book. It was a very good year. Right. So I think World War I probably dwarfed any impact of Spanish flu. So that one's tough to say. Obviously, the markets weren't nearly as professionalized. I just think if you take those huge risks off the table, the other side of it should probably be true. And I'm putting my thoughts together on this I might write about it. But on the other hand, costs have come down so much that we've talked about in the past, how gross returns were much higher in the past. But on a net basis for what you were paying. It probably was closer than people assume. So maybe that's the case, too. I just think maybe that's the case where you have bigger risks in place like emerging markets and maybe some international countries that aren't as mature developed as the U.S. And maybe because they have a

bigger risk, they have bigger returns going forward. I could be wrong. That's a theory in point pushing out there. So Danny Berger on the getting back to what's going to the market, she tweeted some of the rally earlier this week may very well have been coronavirus optimism, but it looks more likely it was technical, driven by short covering. Nomura says that in recent days, CTAs reduced shorts, S&P 500 shorts by 11%, and 45% on the Russell 2000. So it's possible that this was nothing more than a relief balance. But to Jason's point from sentiment trader, we've never seen this type of balance in what was just a bare market rally. So we'll see. I have a hard time counting like a 25% rally to short covering because couldn't you say in the opposite is true than when they

put out those shorts on for the first time that that should have taken the market down or is that the assumption to that because at that point you're assuming that people who are shorting are pushing the market down and not people who are buying or selling yeah short covering rally seems to me like it sounds intelligent i don't know that it actually makes sense next topic i'm just they're letting it out there okay let's talk about this thing about the 20th century's ending and how things are changing and we're getting a lot of this stuff and this was a tweet from a saying how we have this huge paradigm shift that's coming, and here's what he said. We're going from offices to remote work, the NFL and NBA to e-sports, movie theaters to streaming,

TV news to YouTube stars, colleges to ISAs and MOOCs, K-12 to internet homeschooling, corporate journalism to citizen journalism, and the EU to 27 sovereign states. I tweeted on top of this and said, I would take the other side of almost all of these. And obviously some of them, I think the movie theaters are streaming as much as you like to go to the movies. I think that one's probably already been in place for a while now. Yeah, I'm with you. I mean, this seems extreme. And I think that...

Here's the biggest one. Internet homeschooling, no way. I'm guessing there will be a depression in homeschooling after this when parents see how hard it actually could be. It is, I mean, especially when you have working parents, you not only have to have someone who has the willingness of one of the parents to be the teacher for homeschooling, They have to have the ability to do it, too, which is not that easy. Obviously, keeping your child's attention when they're at home, it can be difficult. Anyone who does that, kudos to them. But there's no way in hell anyone who ever has had kids would say homeschooling is going to see a boom after this.

I think it's a huge bus. Here's the one thing that wasn't on there that I think is probably the easiest layup from all this. I think the online grocery shopping is just going to continue from this. We haven't set foot in a grocery store in probably four weeks. And honestly, I can't see myself going into a grocery store again for the next 12 to 18 months, minimum. We have the online grocery store. It works. They leave the stuff at our door.

Sometimes the stuff isn't there, but having someone shop for you, can you see that being just a huge thing that now is just commonplace for a large percentage of the population? Yeah, that's a good one. I think that's going to continue to grow as well. Junk bond ETFs are up huge today, up 6%. And the funny thing is, is that the Fed obviously hasn't even sort of buying them. they just put it out there that they could. And I think that's all that credit markets want. They just want to know that the Fed has their back. So munies and junk bonds and corporates and all these places that were getting hammered before. And it probably made sense for people to push the Fed on this

and they weren't going to come back in to step in as a buyer until the Fed did something. How about this? Here's an alternate to your theory, an alternate potential reality, is that people anticipate that the Fed has their back and so they get more reckless and take more risk. Yeah, I like the idea of, I mentioned this on my video with Bernstein. We have more micro efficiency in terms of it's harder to pick the right stocks, but macro inefficiency where we're going to have more booms and busts. I could see that being the case where... But more booms and bust in a mature economy, doesn't that go against everything that we thought we knew? Maybe. Again, I think you're right that this gets more to the people than the economy.

So you could have people who take more risk than they maybe would have before. And it's more the risk-taking appetite of people than it is the markets that matter in that case. So, Derek Thompson at the Atlantic has been covering this from all angles, and he wrote a piece about how contact tracing could free Americans from quarantine. And he's looking at what happened in Korea, South Korea, and Singapore. And he puts it out like this. He says, picture this. It's a cool fall evening in September 2020. Bottle of wine in your hand, you slide into the front seat of your car to drive to a dinner party with close friends.

It's been eight months since you've seen them, seen most of them, and at least outside of a computer screen. As you're pulling into the neighborhood, you feel your phone buzz. It's an alert from a new agency overseeing the coronavirus outbreak. On the lock screen, you can read the words, be advised. Your heart sinks as you unlock the phone to read the rest of the message. We have determined that in the past few days, you may have interacted with somebody who has recently tested positive for COVID-19. There's no need to panic, but for the sake of your family, friends and neighbors, we are relying

on your support. As soon as you can, please quarantine yourself. That would be a wild way to live, but it sounds like that is one of the ways forward, correct? Technology. Yes, this contact tracing. Do you think that's realistic that Americans... Why not? They talked about the people are worried about the privacy of it, of course.

I think that stuff should be thrown out the window at this point. I guess they have ways of keeping it open source so people can see what they are doing when they're not doing with it. I'd be fine with that, but there's obviously a ton of people that are way more sensitive about privacy issues. I'm saying, how many people do you think would be willing to follow through with this? Would there be enough people that would be smart about this and, get those messages and take it to themselves to self-quarantine after getting this and the

stuff has opened back up. So they're not being forced to stay home. No, so that's the other part of it is that even if we were to implement this, I don't think that people would necessarily pay attention. I think people are very selfish and they're like, either I'll take my chances or I feel fine. I don't know that this would have a huge impact on behavior anyway. My hope is that there are going to be enough stories from this of people saying, I heard so-and-so friend or family member who didn't know they had it and they infected their parents or my grandparents and look what happened to them. I hope there would be enough of that going around to get people to take some personal responsibility. But I do agree that certainly not everyone would follow this. And some

people would say, I'm just going to roll the dice and see what happens and hope that everything is fine. But that's an odd way of viewing the future in terms of our way out of this. But I think that sounds like it's probably the right way forward and what's going to happen. All right. So we've been hammering this a lot about how individual investors are behaving. Eric Bautchunas had a tweet, while we knew Vanguard would do relative to peers during sell-off, we were surprised they did so well relative to themselves with a record $47 billion in Q1 ETF flows. It was all equity because fixed income netted out to zero. So $47 billion of well-behaved dip buyers. So that was the most for a quarter of that Vanguard has ever had come into ETFs. Yes. Now, again, Vanguard investors

are ninjas in their approach to discipline. Like, they don't sell. So I don't know that they're necessarily great representation of, quote, mom and pop, but that cohort of investors are doing what they've always done. Right. So on the other side, Bloomberg had an article about TD Ameritrade, and they said that millennials were the ones that freaked out. So they said they have this stock market measure that measures the exposure by generations.

And they said, for the first time ever, stock market exposure for millennials dropped below the. average for clients of all ages. So they're saying that millennials sold more than anyone else. So they pull a sample of client base for more than 12 million accounts to see how investors are exposed to stocks. And at the end of 2019, for millennials, it was the highest in a year. But through the first quarter, millennials pulled back. So they're saying they freaked out. I think a lot of these are anecdotes. And I agree with you, Vanguard is probably not representative of most people, but that's a huge amount of money. And I think it's people are trying to come to

conclusions about this stuff in terms of like, oh, we knew buying a hold investors would fold or just wait, they'll sell eventually. My take has always been the people who are going to panic are going to panic regardless, right? Yes. I think no matter what they're invested, they're going to panic. And honestly, people who are invested at Vanguard for the most part, even though they're so big, five trillion dollars or whatever, they tend to be really disciplined investors and they think and act long term. So there was an article in the journal about Target Day funds and just how they're not all the same. And stock allocations are as high as 55% at TRO, to as low as 33 at JPMorgan for the same age cohort. Target date funds have obviously become incredibly popular. They're now 30%

of 401k assets up from 17% in 2014. And yeah, those are big differences, but they basically get you to around the same spot again. I understand that 55 to 33 is a big difference, but I thought that this is a really interesting way of putting it. Somebody said target dates are becoming the de facto pension plans. Pretty much. Yeah. And of course, it makes sense to look at what your allocation is or going to be. And the good thing is, there are so many target date funds and they put them by what every five years, I guess, that if you saw one in your plan that you didn't like, then you could go up or down years depending on the allocation that you want. So the problem is for a lot of people, it's really up to

them to figure out whether that allocation makes sense. And a lot of people probably don't know or understand this. But yeah, I still think target date funds are net to win for people because it's forced rebalancing for them at a period right now, like now. And it just creates diversification for them that maybe they wouldn't have had in the past. So this is the opposite of Vanguard. So AAI conducts their asset allocation survey. And March 2020 was the second largest one month change in aggregate cash holdings in survey history. The largest was August 2007, which was the Quant Quake. So Nick Majuli wrote about this. So this is maybe a better picture. But again, I don't know who responds to these surveys. So it's really hard.

Yeah. How do we feel about the AIA survey? I mean, at least I think it's fairly consistent to people that are responding. So it's a decent sample. What's the Animal Spirits Company line here? Do you think, though, that there's a smidge of people during a bare market that go, yeah, I went to cash in February. Yeah, always. Obviously. I mean, it's hard to say, but. We spoke about this a few months ago, and I'll get myself a little bit of pat on the back. Spitznagle runs this volatility strategy. And I, you know, I, said that I really liked the way that he spoke about this and the way that he communicated with clients.

From the article, Universa tells clients to think of it as a catastrophe insurance that allows them to pursue returns more aggressively without the need for more traditional approaches to risk mitigation, such as diversifying assets and holdings, treasuries, gold, or hedge funds. So it worked. In the month of March, this thing was up 3,600 percent, which turns $10,000 into $371,000. So this thing did exactly what it said it was going to do. So huge kudos to them and their investors. They showed here that they said if you would have basically been 96% in this

in the S&P and 4% in this fund, you would have been more or less flat in March when the S&P was down 12. On the other side, the thing they never show about these funds is how much insurance you pay in the way to get there. And I think that's the problem in investors have a hard time wrapping their minds around is every other month when this doesn't happen, you're pretty much paying an insurance premium for this. And you're probably losing a little bit. The whole point of these things is lose a little, lose a little, lose a little, make a lot. And I think that's probably where investors have a hard time wrapping their minds around paying an insurance premium for something like this. And this is when the insurance gets called in when you need it. I think it's

probably just a lot of people don't understand it. But it's good to see when something like this does what it says it was going to do. So you just took a victory. app, and I'm going to take another one on Disney Plus. I've probably taken four of these already, but you sent this to me last night. After hours, Disney reported they now have 50 million subscribers globally. They've passed 50 million. Their original goal for five years from the launch of this was 60 to 90 million. So they're almost at the lower end of their five-year goal from this already.

And I said this is one of the only things keeping Disney afloat at that moment because ESPN is just gone. I saw something the other day that ESPN.com traffic is down to 40 or 50%. And obviously no one's going to a Disney theme park. There was actually an interview with Bob Iger the other day saying they're probably going to have to temp check people for when they do open that backup. But the fact that they timed out Disney Plus to be released in November had to be a saving grace for them. And they've seen a huge, huge bump in this since they opened it up.

And again, I'm just taking a little bit of a victory lap here because the other day you said, no, there's no way this makes sense. It's probably not. It's just a blip. It doesn't matter. Defend yourself. Okay. So 50 million subscribers. Don't know how many are paid. No, it was 50 million are paid. That's what the number was. Okay, got it. All right. So kudos to them.

$350 million in revenue annually for that. The crazy thing is that's twice as many as reported on February 1st. So it's doubled since the last quarter. Wild. So $350 million in annual revenue. The market, they added $9 billion in market cap after that announcement. which I understand that the market is forward-looking and it's discounting, but that's pretty aggressive, no? Okay. This is recurring revenue, though. This is not just revenue in one period. This is going forward.

So I just think there's a lot of things they can do with this. And I just think that this was just the timing on this was call it luck, whatever you want, but it worked out great. And I think otherwise Disney is just not toast, but they're hurting pretty bad. And they don't have this to, I think this is helping prop up the stock a lot. Well, Ken, argue with that. I'm just saying, I don't even know what I'm saying, but $69 billion in revenue in 2019 and they're adding $350 million. Again, it's recurring revenue. It'll grow. It's nice, but kind of a drop in the

bucket. I think maybe the hope is the growth has been so big at this point that people are readjusting for the future saying, okay, this thing is going to be even bigger than we thought it could be. Yep. All right. Articles, multiple articles about people paying rent. Only 69% of tenants paid any of their rent between April 1st and April 5th, compared with 81% in the first week of March and 82% in April 2019. So at first, it's like the headline was, one third of renters can't pay. But I was shocked that one fifth don't pay ordinarily. So again, in April 2019, only 82% paid. So 82% down to 69%. That's a big drop. But I was more surprised at the 82% number. This is a story where you read the headline, you go, holy crap, one third of people didn't pay

their rent. And then you realize, wait, it was 19% at this time last year, which is, crazy to me that it was that high. I guess I wouldn't have known what that is. That's just people that are pushing them out or can't pay. That's a pretty high number. But yeah, this is the thing where that's still a big jump. And I'm guessing it'll jump again the next month. And I guess we continue to see stories of people who are pushing it out and not making people pay. But this again gets back to the banks. And if you want to know why the Fed is throwing so much money at loans and such, this is one of the reasons, right? Because if people can't pay the rent, eventually that trickles up to the bank. And the Fed, again, is the lender of last resort. And they have to be the

ones to step in and help us out, right? Yes. So this surprised me. So we've spoken a lot about what would private companies valuation be if they were public. So Airbnb, for example, there was an article in the journal about them. So they're saying they're projected that revenue will fall 54% this year to $2.2 billion from $4.8 billion. Here's a few more statistics. They're expected to lose $1 billion through the first half of this year. They lost $674 million last year. So they're raising a billion dollars or they're trying to raise a billion dollars from private equity firms at a 11% interest or so, which is obviously pretty steep. Here's a few questions that I have.

They have a capital cushion of $4 billion. So why are they raising more money at such a high cost? And I don't understand how they're losing so much money. Like, I mean, obviously I don't understand. I'm not an analyst on this business. But their costs last year were over $5 billion. And the journal breaks it down about where this cost are going. Obviously, a huge piece of it is sales and marketing.

But it looks like a billion dollars in product development and another billion over a billion on cost of services sold. Again, I don't know the economics of this business model, but what costs are involved? Well, I mean, obviously a lot of it's marketing and technology focused. But sales and marketing is broken down separately. So I'm saying they have a billion in cost of services, a billion of product. development. What does that even mean? Here's the problem. They have a bunch of these Airbnb people who own 10 or 12 places and those people's revenue is gone. Airbnb is probably going to have to support some of these people because when they come back and when they open up again and when

people are to start to travel again, whenever that is, if those people are gone, there goes a lot of their business. So if they don't have the people out there who are willing to rent, so I think they're going to have to bail out some of their people that are these giant Airbnb small businesses on their own. So I think they're just shoring up capital because they know that they're going to have to fix a lot of stuff to tread water here until things open back up and people start traveling again. And Lord knows when that is. So I'm not surprised they raise capital. I'm also not surprised that the market pushed them at a high cost because this business otherwise could be told. And maybe looking at it in a positive spin, maybe they actually come out of this

stronger if and when they survive because a lot of these smaller firms that tried to do the same thing are probably just toast. So maybe this is one of those areas where after this is over, Airbnb is much stronger, but they need to survive in the meantime to get there. So in the private market, shares drop from 150 to under 90. The valuation went from 50 billion to 30 billion. I think if it was public, it would be getting hit way harder. Probably. I mean, this is probably looks like an airline stock, which is down 60 to 70 percent. Yeah. That would make sense to me. And the other thing is that they've had all these employees who've been waiting for years to cash out their shares that they now can't do. So that puts them on hold. So that's like

a personal finance crisis for their employees too. So you wonder if they're in there probably having to lay people off too, don't you think? Can you imagine if you were banking on your Airbnb shares hitting this year from going public and then you potentially lose your job. So you lose on both of those? That's a tough beat. Yeah, I just, maybe someone could explain this to us. what are the cost of services sold? How is that over a billion dollars? Their cost went from $2 billion in 2017 to over $5 billion in 2019. All right, what's this cruise ship story? Okay. So there was a story in the Financial Times of Carnival Cruise. They also needed to shore up their capital. And they went to the debt markets. And this is a head scratcher to a

of people potentially, but they were able to sell $17 billion of debt. And it was basically a high yield play, even though technically the credit rating agencies have them at above high yield in terms of their credit rating, which is the joke at this point. But they had to give up some crazy things. So I think a lot of people would be surprised that debt holders or investors would be willing to step up to the plate and buy Carnival Cruise Line debt to the tune of $17 billion at this point, as bad as the company is. And they said one of the things they had to do was collateralized $28 billion worth of ships.

So all the hedge funds or whoever is buying these, if Carnival defaults on these bonds, the hedge funds are going to own the cruise ships, which how long do you think it takes for them to name it Alpha of the Cs? Two in 20, two and 20, I don't know. I got nothing. But it's one of these things where, so they did the bonds at 12%,

which obviously is part of it too. They're paying such a high rate. But I think people would be surprised to see that any investor was willing to pay Carnival. Obviously, everyone has their price. So this is one of those deals where the price in yield probably matter more than the company at this point. So I guess there's an investment who made it any price for a lot of people, is what I'm saying. All right. Stick with corporate debt. 13D research out in an article. A corporate debt reckoning is coming. And maybe that's why the Fed is doing what they're doing. One in six

U.S. companies is now a zombie, meaning their interest expense exceeds their earnings before interest in taxes. J.P. Morgan analysts estimated that Fallen Angels, which are companies that drop from investment grade to high yield, will total $215 billion this year, more than double 2005 as a record. So again, this just comes back to like reality versus liquidity. Right. So you're saying this is another point that why are the markets rallying when we have this data staring us in the face of an economic calamity? Put it this way. If you're trading or investing based on the news, I don't mean like the head. I just mean like reality. You have to be smashing your head against the wall right now, right?

I'm sure there's a lot of people. You wonder how many people that sold after we were down 20, 25% and said, I'm sitting this out until we're down 40 or 50% and then this happens. You're right. I'm sure there's a lot of people who are saying this makes no sense. And these are probably, again, the people that are mad at the Fed for saving the system. They want their price discovery. This is what can make markets so maddening because a lot of times they just don't make any sense. Yeah, so I'm sympathetic to people that are in that position because this is tough. But are you really, though? I mean, you have to invest in the markets as they are. And you have to believe that the Fed is going to do everything they can. And so this is just another point to why you don't go to extremes in the market. Of course. I'm just trying to take the other side. How hard is it? What type of mental math lead do you have to be to say, okay, things are so bad and they're going to get worse. This is going to be the worst economy that we've seen in a long, long time. Yeah, it'll be temporary.

it's going to have ripple effects like we've never seen before. However, the Fed is going to do everything they can and therefore I'm bullish. Like, come on, that's really tough. I can't believe anyone would be bullish at this time. That would be a weird wait. But I think you can say I'm confused and I'm not going to just assume that markets are, this is why it's so hard to play in this game because they don't make sense most of the time. And you're trying to think eight moves ahead. And maybe this is a good, people always say, oh, markets are so efficient. Maybe markets are smarter than people give them credit for. Or dumber. Yeah, or maybe the market is naive. And these people are really smart. But sometimes it's like this fourth level thinking that you have to go to in a

situation like this where, again, this is like the first time we've had this known, unknown in our life of the recession was just sitting there on a platter for everyone to say, okay, yes, we're going into recession. And you just knew it. And you know it's going to get bad. You know it's going to get worse. I do agree. It's bizarre that the market is looking past this stuff. And it almost seems like, like the market is like a vanguard investor right now. The market is thinking long term that we're going to get past this, which is crazy. And obviously there will be probably stops and starts where things do look bleak and it lasts longer than I think and the market gets hammered. It'd be way too soon to say we're completely out of this mess. But again, this just shows how hard this

game is. This is not easy. All right. So we did a talk your book this week with Scott Lynn from Masterworks. And this was a really intriguing idea. So investing in, it's basically investing in the arm market. It's like Rally Road, the company that sells fractional shares of cars, but for the art market. Yeah, I learned a lot from this. And I assumed we were going to be talking to someone who is a huge art person. And it sounds like he does own some art. And he said that's where he's made some money over the years. But he came at this with a quantitative tech angle. And this is a way for you to buy pieces in a Monet painting or a Banksy or a Picasso or something. It's actually a really interesting idea. And he, I didn't know what to think

about this going into it. But here's one of the thoughts. So after I talked to Bernstein, you wrote a piece about how, what's a JPMorgan quote about rightful owners? And a bare market stocks return to the rightful owners. And did he actually say that? Probably not. Yeah, this is maybe one of those things that you could attribute it to Einstein or Mark Twain or whoever. I think maybe he did. But Bernstein said in the interview with me that people mistake that for just people who are disciplined and can see through this. But most of the time, the rightful owners are the people who are really, really wealthy. And you picked up on that, and he actually wrote a piece on his efficient frontier, which is actually one of the original financial

blogs that there ever was. It's the first time he's written in a piece in a while. And he talked about how this is probably going to, this panic and crash is probably going to just exacerbate wealth inequality, because the only ones, if this thing gets drawn out a little longer and stocks continue to fall further from here, the only ones at the end of the day who are going to be willing and able to buy will be people with a lot of money. And I was thinking, like, begrudgingly, I agree with this. And it's too bad, but it's probably true that this situation is going to make wealth inequality harder. I wanted to think, it doesn't sound right to think, well, how do I play wealth inequality as an investment theme? But again, you have to invest in the markets as they aren't as they wish

they could be. Wouldn't the art market be one of those places where people have a lot of money? And so they put money in. And he actually, Scott actually in our talk talked about how art is almost like gold, like a commodity, because you have to store it. And he made some comparisons to gold, which were pretty interesting. And nothing like I ever would have thought of before. And he mentioned how Bezos is spending billions of dollars for his art collection. Well, I thought that was interesting. He said the reason why the art market, we asked, is it efficient? Not necessarily because rich people are sort of at some point price and sensitive buyers. Right. So rich people are the Fed and art markets, right? The rich people are the noob whales. I'm saying, but they'll buy at any price. And

that seems to be the Fed. But anyway, that should be out next Monday on Tucker Book. So I think it's an interesting. He also talks about the correlation of art markets to everything else and they actually do have an index for this stuff. So I learned a lot from that one. I think it's interesting for people who want to hear about a different asset that is potentially not correlated in an interesting way. And that's the kind of thing you brag about to your friends at a cocktail party if we ever have cocktail parties again in the future. I'm dubious. All right. Let's hear questions. I'm a 63-year-old retiree who before the crisis had over $1 million in my 401k. Now I find myself with only $850.

My 401k was in a 2025 target date fund at Vanguard because I was okay with the risk. Here's my question. Is it possible for my account to fall to zero, which would completely wipe me out? This is honestly a question. I assure people that when stocks were falling, people thought was legitimate. If you're in a diversified portfolio of stocks and bonds and cash, and this is interesting to see someone with over a million dollars in their forewling, 401K, totally in a target day fund. That's an interesting proposition to me. Short of, I think even if

aliens came down and did a space jam on us and said, we're taking everyone's powers, even then I don't think the stock market would go to zero, right? There would be pockets of strength, defense stocks. I'm cautiously optimistic. But yeah, if, listen, individual stocks can and will go to zero, the stock market as a whole or the bond market as a whole, yeah, you're not going to go to zero. Can you lose a lot of money and risk assets? Definitely. But will it go to zero? It would take the earth would have to open up and completely end for that to happen, I think. Yes. All right. I'm 23 years old working entry level sales shop in transportation. I have an IRA and brokerage account handled by my family's advisors that I don't touch, 401K with my company, as well as brokerage

account with the e-trade that I manage myself, about 80% Vanguard total stock market with the rest in bank stocks. I have additional cash on hand. I'm interested in putting it to work. I wouldn't mind taking on more risk as I am young. Can you give me your opinion on any industries, areas, companies to look into? All right. So this has come up over and over and over and over that the fall in markets is leading to people wanting to be industry sector analysts and taking bets there. Everyone wants to either catch a falling knife or predict who's going to make the vaccine. So we spoke about this last week that Buffett was selling his airlines and a bunch of retail investors were buying them. So if this is not your full-time job, just do less.

It's really tough to pick those industries and winners, especially in retirement accounts. Yeah, it's tough. I mean, if you want to play with a small amount, that's fine, I think. But the winners and losers from something like this are going to be so hard to predict. I think it's just, I would not want to play that game. To say that there are opportunities, there always are. But that means that you're saying that everybody who sold doesn't know what they're doing and you do. Okay, in a market drought down like this, why are there really no equities that can offer protection like a bond? How's an institution view bonds versus defensive sectors in times like these? This is the correlation going to one thing, I guess.

And there are certain companies that have held up really well. Grocery stores, Amazon has actually held up really well. A lot of the tech stocks, but they're not like bonds because they're still very volatile and they'll see big down days along with the stock market. This is just the nature of asset classes, I think. I would say, let's just keep this at its simplest level. When you own a bond, you're lending a company money, and they have made promises to pay you back. And if they can't, and it goes to liquidation and court, then they owe you money first. But if you're buying stocks, you're an owner in the business and you're just taking more risk.

So no need to overthink that. One more. All right. Does the crisis upend the standard three to six month emergency fund rule in personal finance is three to six months now nine to 12 months? How many people actually have a six-month emergency fund and how many people can afford to have a 12-month? one. I will think about writing a blog post on this. Maybe I'll do a talking blog post right now. I don't think there are really any personal finance lessons you can learn from this crisis. Really? I mean, the people who prepared and have had their emergency funds, most of them probably have a job.

And if you lost your job because of this, I don't know how much an emergency fund is going to help you. I mean, a lot of people are probably going to have to dip into other stuff because this is just such a calamity. I mean, what do you think are the personal finance lessons from this? Have a bigger cash buffer. I understand that's not feasible for everyone, but put it this way. Let's say that you had a six-month cash buffer, right? And you're nervous because on the one hand, you were looking forward to the next market correction because one of the reasons why you had six months in cash was to put it to work. And now you're feeling like, well, I can't put that money to work because I need it. Maybe you do need 12 months or you want 12 months. But I just think the people that are most hurt from this

will never be able to have one of those anyway. So you're giving advice to people who could already follow it in the first place? Yeah. There's nothing new from this is what I'm saying. It's the same old thing. But can you say that for every piece of advice that 90% of people just can't take the advice anyway because unfortunately they don't make enough money? That is what I'm saying. Unfortunately, financial advice only works on people that make a certain amount of money. Now, listen, please relax because I can already hear people getting angry at this.

If you make minimum wage, there's only so much you can do. I don't know what the level is where you could start budgeting. I don't know if it's 30,000, 40,000. I don't know. It's so dependent on where you live, what your lifestyle is, like all those sorts of things. No one wants to hear this, but the personal finance lesson here is that the government probably needs to provide a bigger social safety net for a lot of people. That's something that's going to anger a lot of people that don't like big government in our lives, but that's probably because a lot of people are being saved because of this fiscal stimulus, right? Yeah. And so having a bigger social safety net for people that can't

ever save money on their own is probably something that needs to be thought of, I guess. All right. What recommendations you have? So I watched I Am Legend the other day. I still haven't brought myself around to watching Contagion. I feel like that's just way too close to home. Have you watched that movie yet? I don't know that I ever saw it. It's basically what's happening now to a greater extent. And I just can't bring myself to watch it. I watched it the first time and felt like, oh, this is so unrealistic, even though it's very realistic. But I did watch I Am Legend with Will Smith. and that movie holds up really well. In one of the best parts of it, it's only 90 minutes, and it's a pretty quick watch.

I liked it. And I tweeted this out, but all the productivity and life hackers that tell you, like, you need to be really productive, and now is the time to write your book. Will Smith was trying to save humanity from a zombie apocalypse, and every day he'd go hit golf balls into the ocean off of an aircraft carrier and go to a fake video rental store because he needed something to do with his life. So even he wasn't working 24 hours a day. as he was trying to save humanity.

So I'm saying it's okay to take a break and have some me time during this pandemic. Also finished Schitt's Creek. We binge-watched the first five seasons on Netflix and then watched the last one on Pop Network, which I'd never heard of before, but the last season was on it. And I love this show. I think that the family in this show, the Roses, are probably one of my favorite funniest TV families ever. And it's a great binge because the episodes are 20 minutes.

It's not like the biggest laugh-out-loud show ever, but it has some elements of the office where there's a lot of subtle humor. And it's also like every finale was really feel good. And so this is just a good, feel good show to turn your mind off. I absolutely loved it. And I liked the last season. It was great, too. So that's my wreck for people.

So I'm binge watching Seinfeld. And the first two seasons were okay. The third is picking up. Third is very good. I think it took a while to catch a stride a little. Some very good episodes. But here's what I'm thinking on this. It's a tough binge because it's not like Breaking Bad or The Sopranos,

which I know you binge, where it feeds on itself and it just keeps getting better. Each show could be a standalone. It doesn't need their episodes to tell you what's happening. Here's what I would compare to. It's like a coffee table book or a magazine that you leave in the bathroom. Yes. Most of the show in high school and college, I would watch the reruns on TBS. And yeah, you don't need to watch it in order, really, for it to make sense.

So it's just daunting. How am I going to get through 22 episodes for like the next six seasons? How many, eight seasons, seven? Nine, I think. Nine? Okay. That's a lot. It's a background show probably for most of it. Yeah, but you know what? Funny you mentioned that because I know you watched Sopranos as a back when. I can't do background shows. It's like I can't, I can't read and watch TV at the same. I can't do anything and watch TV at the same time. Okay. I need to give you a life hack on how to do this then.

What time do you wake up? I've actually been sleeping in a little bit during this pandemic because what's the point of waking up early? I have nowhere to go. All right. Animal Spirits Pod. gmail.com. Thank you for listening. Hope everybody is staying safe. Have a good weekend. And then we will see you next week.