Animal Spirits Podcast - The Golden Age of Fraud (EP.157)

Episode Date: July 29, 2020

On this week's show we discuss why market cycles are happening in record time, parallels to the 1990s, speculative frenzy, anecdotal stock market signals, the red hot real estate market, commercial real estate, how work from home will change in the future, gold going crazy, how much to pay for an engagement ring, and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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

Welcome to Animal Spirits of Michael and Ben. In William Bernstein's The Four Pillars of Investing, which is probably one of my favorite books on understanding markets and portfolio management, I didn't read it until probably 2009 or 2010. It was published in 2002, and he was writing as the markets were still mending from the aftermath of the tech bubble. And for some reason, this piece stuck out to me because we had just gotten through the great financial crisis.

So reading this at the time really just stuck in my head. So he wrote, The Great Internet Bubble will not be the last of its kind, but if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of its senses sometime around the year 2030. If the current generation gets caught out again,

we should be very disappointed as no previous generation has been so dense as to have been fooled twice. But then again, the boomers have shown a singular talent for gullibility, and there is still plenty of time. When I read this after the financial crisis, I thought like, wow, that's crazy that we have. had one so close to it. But now 20 years since the tech bubble, we're seeing the same exact thing play out that did in the late 90s. So tech stocks are going crazy. Everyone is day trading. People say

we've entered this new paradigm in this new economy. Buffett's getting mocked left and right. IPOs are on fire. Value is getting crushed. Yeah, spacks are going crazy. Small caps are getting left in the dust and value is getting crushed. That's the exact same description of what happened in the late 90s, to a T. History is rhyming. But the present is not written yet, so we don't know how this is going to play out. And obviously, that was the greatest economic boom of all time, or one of them, and this is a pandemic. I mean, is it too easy to have it play out the same way on the other side of it? Well, what if the moment that we're in, I hesitate to call it a bubble, but for lack of a better word, let's just call it a bubble.

And let's just say that it bursts. The zooms of the world, docu signs, you know the names. what if they go down 50% or more and the stock market doesn't blink? What if it doesn't take down the rest of the market? Because the market crashing brought down the economy in 2000. Right, even though it was just kind of a minor recession at the time. And obviously, the economy is the big wildcard here. That's the thing that's totally different. But the thing, he talked about how you have to wait a generation.

In the past, that's how it worked. Like the Great Depression stayed with people for decades and decades. In the 70s, too, it stayed with people for a long time. the word about inflation. Don't you think that technology is the new variable that when people say history doesn't repeat, but it often rhymes, but the one constant is always human nature, but isn't technology making human nature just putting it on steroids basically and it's happening so much faster so these cycles are just speeding up and people just don't have time to think through things that technology is making, and obviously there's other factors at play with this one,

but isn't technology just compressing cycles and they happen much faster than they ever would in the past. It seems so. I mean, we had the fastest bear market ever, quickest recovery ever in the market. People would have been bored any time in history if you would have shut down the economy like this, but they wouldn't have had access to trading stocks on their phone. In the past, the stock market probably would have just shut down. The economy would have completely shut down. People were still able to function. Businesses were able to function because of Zoom and Slack and technologies like this. I think it's the double-edged sort of technology that I think it's just amplifying our human emotions and any of these relationships in the past that you could have looked at to how markets

would react, I think they've just been put on a ludicrous speed at this point. And I think it's just making it harder to think through these different market cycles. So you had an anecdotal story the other day about a plumber who came to your house and showed you his portfolio. So last week I was upstairs in my home office. It was, I guess, 8 o'clock at night. I'm writing a blog post on the reason why people are trading. Of course it's the quarantine. Of course it's the free commissions and the Portnoy effect and everything else. But the number one reason, plain and simple, like all of those conditions could exist. But if it wasn't for this one thing, the fact that stocks are growing up a ton, people wouldn't be trading. So I was looking at stocks

and the move that they made from the bottom. And I think 17% of the Russell 1000 at least doubled off their lows. The best performing stock is Wayfler, for example, up 800 something percent since its bottom. And I want to share with you, I already read this on my blog, so skip ahead 30 seconds if you already read that. I want to share with you my favorite description ever of the late stages of bull market. This is from the pseudatomist Adam Smith in a book called Supermoney. He wrote, we are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know by the rules that at some moment the black horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the

survivors. Loes to leave early are saved, but the ball is so splendid, no one wants to leave while there is still time, so that everyone keeps on asking, what time is it, what time is it, but none of the clocks have any hands, end quote. And I filed that up with, it sure feels like the clock is about to strike midnight. And the reason why I wrote that is because, as I'm writing this post, we have a plumber at the house. We have some work being done in our washer and laundry. he walks in and he sees me writing maybe i had a chart on my screen i don't know he goes do stocks you must have been doing some technical analysis on your computer huh so he said do you do stocks so i said to him what do you got and his eyes absolutely lit up he takes out his phone

and he starts showing me his stocks and it's exactly what you would expect nicola lift Tesla, the usual suspects. You know the names. What should I do? And I'm like, whoa, whoa, whoa, tell me what you've been doing. Like, fill me in. He said, I've been trading for four months. I got 130 grand in the market. And I've got absolutely no freaking clue what I'm doing. Honestly, getting to that point where you can admit that is the first step almost, right? I couldn't believe it. So I said to him, this is nuts. I'm literally writing a post about you. No offense. Don't take this the wrong way. I'm writing a post about you. This is my very own shoe shine moment where Joseph Kennedy allegedly said, when the shoe shine boy is giving

tips, you know the top is near or something like that. And I don't think you necessarily need a retail frenzy for the market to top. But every time you have something like this, there has to be some sort of a top coming. And when I say top, I'm not suggesting that the market necessarily is going to top. And obviously this has to be taken with a giant grain of salt because nobody knows where we are in the cycle. Nobody knows what time it is. But man, this feels like we're getting pretty close. My problem with, and I tried to talk about this last week, I tried to give people the benefit it out, because we've been hearing anecdotes like that for so long. Obviously, things now are way, way ramped up. And the Wall Street Journal had a another piece this week.

What? We've been hearing anecdotes about this. But the anecdotes that we've been hearing are Kenny G. Milakunis, the Mike Tyson app, Aaron Rogers v.C. We haven't had anecdotes. where it's literally a retail frenzy mania. I'm there. It's the Wall Street Journal. They said at E-Trade, investors opened up more than 260,000 retail accounts in March alone, more than any full year on record. They interviewed this one woman who said,

scared money makes no money, which sounds like she got that right from the school of Dave Portnoy. She says, I feel like Sonic the Hedgehog collecting my coins, referring to obviously to the old video game. She said she buys box of stocks that trade for less than $5 shares and sells many of them within a day or two, doesn't even consider conventional stock picks.

Obviously, these stories are crazy. Share the other one, the former police officer. This guy is a former police officer turned real estate broker who said he has been making steady six figures since 2010. Now he boasts of how he says he turned 20 grand into more than 450,000 without any prior trading experience. Listen, not going out on a limb. We know how this ends, right?

You and I are the type of people that Scott have people who say this ends badly, but come on, this ends badly. This definitely ends badly. I just don't know when it ends and how spontaneous is going to be. Oh, yeah, this whole bull market behavior. It was spontaneous. It was building and building and building. But then this happened and it just took off. So let's say that you use these anecdotes and you say, you know, I don't want to play anymore. Meaning, I don't even want to invest anymore. I don't want to be in the market because this is nuts. It's going to crash. Look at the retail activity. By the way, TD Ameritrade. Same thing. Average client, trades per day, up 300% year over year, 661,000 new retail accounts. So it's everywhere. It's everywhere. The top 15 trading days in the firm's history, 10 of them were in June alone, okay? So it's everywhere. It is absolutely manic. Let's say these stocks that killed, all these new retail traders get killed. I mean, these aren't big money people anyway, for the most part. Not all of them turn 20 grand into a million or whatever. I'm saying on the individual level is the pain not as great as it would have felt otherwise?

The point that I was trying to make is, what if you say, I want to get out of the market, I'm going to liquidate and I'm going to wait for the crash that is inevitably coming? What if that doesn't happen? What if you get the crash in the docu-science and the Tesla's and whatever, whatever? But the market necessarily doesn't crash. This is an overgeneralization. But how long can you wait in cash? You know what I mean?

Before you're just completely poisoned and your long-term results are ruined forever. What if you wait two years in cash? What if you wait one year? There's a reason to not invest in anything right now because you say, okay, just invest in the tech stocks of the S&P, then the other side of that is, well, no, no, those are way expensive and they're just being led by tech stocks. And you go, okay, well, why don't you invest in small caps or value stocks? And you go, no way, those are down for a reason and those getting crushed. Okay, we'll invest internationally or emerging markets. And you say, no way, they don't have the tech stocks that we do in the U.S.

And then you get to bonds, and it's like, well, bonds have a low interest rate. So there's a reason against investing in anything right now. So the most boring answer in the world is you diversify. The thing that no one wants to hear about. But yes, but these gambling people are not going to do that. And maybe it's the thing that sports never comes back for them because all the sports teams are testing positive for COVID right now. So they won't be able to make the parlay into sports gambling again. But I don't know.

I mean, yeah, historically, these people always get crushed. And that's just what happens. So it's going to happen. Last week, you tried to give Robin Hood traders, their traders, I guess, just the benefit of the doubt that maybe they're smarter or they're not going to write it all the way down or whatever. And we got an email, Ben is wrong. Somebody said, a couple of kids I went to high school with invited me to join a Facebook group called Let's Talk Stocks, three dozen guys, most barely graduated high school. And here they are giving each other tips and options and big pre-market movers. They trade stocks I never been heard of.

And I follow the market pretty closely. It's wild. We are pretty anti-forecast and stuff like that. and not that you should ever act on intuition or anything like that, but I'm pretty comfortable saying that the end is near for these stocks. My whole thing about this is, this is crazy that it happened this year. I still can't wrap my head around it. Obviously, I know human behavior. This is the stuff that we study and you read all these psychology books, and I get the reasons now. But this is rational. It's totally rational.

I know, but I'm just saying four months ago, we were talking about the stock market as we know it coming to an end, basically. And now we're talking about night or just go. going down 70% because the economy was heading for 40% unemployment. I just, I'm still having trouble wrapping my mind around that this actually happened. When I say it's rational, in no way shape, of form do I mean that I anticipated this. But when you think about what transpired, the extra $600 a week, the free trading, the Portnoy effect, and the fact that the stocks that are going absolutely bonkers are Tesla and Palaton and Wayfair and Slack and all these names that are, A, benefiting, but B, names that like these people, these users know

intimately. They use them every day. This is total hindsight bias on your part and my part, though, because when those $1,200 checks were announced, no one said, oh, this is going to the market. That's what's going to happen. No one predicted that at all. Hold on, but I just said that I didn't predict that. But just because it's hindsight bias doesn't mean it's not rational. I'm just saying the way that we got here, I'm not saying that it could have been foreseen 90 days ago. I'm just saying that the chain of events makes sense when you put them together. It definitely does. And I understand why it's happening. It's just I still. It's crazy. I can't Absolutely, we went from Great Depression to 90s.

I still am having trouble racked my mind around it because it is so wild. The books in this are going to be so crazy. Yes, the next charts. Cumulative global sector fund flows. And everything is pretty much flat-ish, flat to up or down. Technology, obviously, just vertical. It's taken in $40 billion over the last 12 months. There's another chart showing, and we showed a version of this,

NASDAQ volume divided by NYSE volume, absolutely going vertical. I was talking to Josh about this, and he made a really good point that, by the way, Josh Brown was talking about SPACs on his podcast and where we are right now in the cycle. And it was, we'll link to that the show notes, highly recommend it. And we were talking about how this ends. And he made a point that I thought was counterintuitive that we always think that it's retail that causes the crash. And it is to an extent.

It's retail going in and there's nobody left to buy. Everybody's on the same side of the boat. And then we know what happens. But what actually happens is the special purpose acquisition vehicles and things like this. It's Wall Street responding to the demand with a wave, a tidal wave of supply. That's how these things end. So the exact same thing happened in the South Sea bubble, the 1700s. They had a couple companies that went bananas.

And then all these other companies started forming out of nowhere. It's the same exact thing. It happens in every boom, right? That they just flood the market with more securities. And at that point, the demand can't soak them up anymore. And then it's see you later. You think that there's going to be anybody on the big short side of this, assuming that we see a crash? I don't think that that's going to happen. I think that's too difficult.

I'm sure a lot of it, people like to blame it all on retail, but there have to be pros and institutions that have hopped in on these trends as well. This can't be all retail. On the long side. Yes, right. So I'm saying these professional investors are probably going to get hurt in some ways with retail, maybe not nearly as bad, but they're definitely there too. So speaking of short sellers, there's an article in the FT about Jim Chano's as Kinneco's hedge fund. obviously they've been having a difficult time. Their assets peaked in 2008 at $7 billion. They're now down to $1.5 billion. And they said, the reporter asked, how do you trade that, meaning everything

that's going on? He said very carefully and painfully. He also talked about how this is potentially the golden age of fraud, which I totally believe that there's going to be some people that get taken massively advantage of through all this. And there's going to be a lot of money loss from people just throwing it away more or less because this is the way it happens. He said the market is setting up to be one of the great short opportunities of all time. So maybe he's going to be a beneficiary. Obviously, Einhorn has been just carried out. I think he coined the bubble basket in 2015. So the idea that there's going to be winners on the short side of this, I don't know about that. In trying to predict when this happens in timing that

perfectly, you could get carried out in a body bag if you get in a couple months early. Dude, a couple of days early. No joke. So Einhorn's bubble basket, was that 2015? Or maybe it's 2017. Whatever it is, these things obviously can go on a lot longer. And by the way, the bubble basket are the now trillion-dollar companies. I think he had, well, not Netflix, but I think he had...

No, Netflix is definitely one of them. Yeah. But I'm saying Netflix is not a trillion dollars. But yeah, that was definitely in there. By the way, speaking of, just thinking with this article, not exactly related to this, but Chano said that the Federal Reserve Audit Cut credit card rates for consumers, which are still 50 to 18%. Thank you.

That's always been my idea. I don't see why they couldn't do that to help people. Unless the stipulation is you can't use your credit card to trade at Robin Hood. Maybe that's the only rule there. I don't know. And obviously, it's not only the stock market. So the housing market too is just on fire. So this is another one from the Wall Street Journal.

U.S. existing home sales rolls 21% in June. And they interviewed an economist who basically said this is just like a red, red, red, red hot. market and people are trading. So compared with a year earlier, sales increase for homes between 250 and 500,000 while declining for lower price and a higher priced home. So people are moving in this and they're talking about Phoenix and Nashville and Jacksonville and Austin are just going crazy. And we've got this change here for the weekly year over year home price appreciation. And it's 10%. That's as high as it's been in over a year, I guess. It's crazy. Yeah, home prices in the Hamptons hit a record. Not surprising. It's weird where the economy is in shambles for some people, certainly some parts of the economy, but all asset prices are growing up. Gold, Bitcoin, stocks, bonds, real estate, everything.

Yes, it's seven months into the year. So Bloomberg showed three percent of U.S. adults have either moved temporarily or permanently and six percent say that someone has moving into their home because of COVID. This is from peer research. In total, more than one in five adults either moved themselves, had someone move into their home or knew someone who moved due to the virus. And they say nearly one in ten Americans, 18 to 29, said they moved. And I'm guessing many of those have just returned home. But obviously, I think you said you're seeing it in your area where people are just, this is just the trigger for it. I don't subscribe to the fact that big cities are screwed forever because of this. I think that's definitely taking a step away too far. It's probably more like a, I don't know, short-term depression for them until this is through.

calling the death of city seems pretty quick. There's such demand for homes in my neighborhood. My neighbor, who has probably been in his house for four years, put it on the market for 30% higher than what he paid for it, not because he wants to move. And he's just like, I'm just seeing what happens. If I get a stupid offer, I'll leave. Testing the water. The problem with that theory is you're going to pay a 30% premium in the place you move

to, unless you move to a different area. Right. So the New York Times set a piece about how the virus is turning midtown into a ghost town causing an economic crisis, basically because of everyone moving to the suburbs, no one is in the city anymore. Well, specifically Midtown Manhattan, which is only for either tourists, which don't exist right now, or businesses which aren't there right now either. So I went in with Josh a few weeks ago, maybe last week, and it's just bizarre. There's very little activity. They showed a building that had, they said it was renovated to fit 8,000 workers and now has probably

500 showing up a day. Yeah. So here's my question to you. Is this, a blip, and then eventually people slowly start migrating back, or do you think in 10 years or whenever our lease runs up, does Rithold's wealth management have an office in the city? Is it possible at some point we don't have one? That's a good question. I'm not sure is my answer, which is not an answer. I think that the residential real estate of Manhattan will be more of a blip. I think commercial is probably more in trouble long term. I mean, couldn't we just have eventually, just like vacation days, it's a perk to have work from home days.

By the way, I could have that precisely backwards. It could be the case that commercial comes back and nobody wants to live in the city anymore. So I don't know. We'll see. But couldn't you see the case where it becomes a perk eventually, like the more responsibility the older you get, especially in these big cities that you have two days a week to work from home or whatever it is or five days. But if you're younger, you have to come into the office.

I don't know. I think it depends on the job. Yeah, but I think a lot of it is like, are you totally rethinking the fact that I need to get on a train for an hour every day to go and a job? office to sit at my desk in front of a computer screen. I have absolutely rethought that I don't think I'm ever, today, I have no plans on going back into the city five days a week. Now, we'll see how I feel in the winter, but things change. But for right now, I don't see myself going back five days a week. And I think a lot of

people are probably in that same situation as you. And if they can prove to their boss or their employer that, listen, my work has been fine and it hasn't disrupted it one bit, why do I have to do that. Why do I have to continue to come in if it makes my life easier and my productivity is the same? So Matthew Klein had an article in Barron's talking about the $600 a week, which is set to expire for 32 million Americans. So the unemployed workers through their jobs and regular unemployment insurance, the total amount of pay received would have been 6% lower in May than in February if it weren't for this relief, which would have been the biggest decline in worker pay since the Great Depression. Instead,

Instead, employee comp plus jobless benefit was three and a half percent higher. So, I mean, they're obviously going to come to some sort of agreement. It's not just going to go away altogether. They're going to come with some agreement. It'll be interesting to see how much of an impact this has in the economy. Because some people are now saying, like, this is the only thing propping the economy up, right? Because these people more or less get the money and then spend it. This money is going through and it's cycling right into the economy.

There was a study in this article cited showing that people that have been getting the $600 a week, their spending increased, their spending is almost entirely responsible for the rebound in consumer spending, whereas people that have been employed the entire time have actually been spending less. And I think the key point that they made is that, here's a quote, it's a mistake to think of this government support simply as a transfer for people with money to people without it. Those whose jobs haven't been lost benefit just as much, if not more, from the weekly payment's worth about 4% of previous GDP. since everyone's income comes from someone else's spending. Do you think that though, if this went away and people are thinking like, well, it'll come back or whatever, do you think that the spending spigot really just turns off like that and stops on a dime? Or do you think people will still spend and just hope and pray that, okay, something else is coming? Some people think it's going to just like end.

I don't think it stops on a dime, but what percentage of consumer spending is made up by people that are receiving $600? I'm going to guess it's not a gigantic portion of the overall pie. But still, even if we saw a 5% decline, that's massive. So percentage-wise, it might not be huge, but in terms of billions of dollars, it could be absolutely massive. I mean, I know that the whole thing is we're taking on too much debt and we're screwing the grandkids. But if you're a politician and you saw some of these studies and you say, like, geez, I can really pull these levers and get consumer spending and help economic growth, why would you ever shut them off right now? It's just so short-sighted. I It's inconceivable.

Because I'm sure that the politicians who did this and signed off on these first rescue plans, they never thought in a million years that it would have worked this well. So what is the point of not allowing it to keep working? What's your take on the stock market is not the economy? I don't know. Isn't everything detached from reality right now? I'm just saying more broadly. So I'll give you my two cents and you could piggyback.

I think that directionally, the stock market and the economy moved to. together, usually. However, I think that you can nail the economy and be completely wrong on the stock market. Would you say that's fair? Yes. Bill Gross and Ellarion called the new normal thing about low rates and slow growth perfectly in 2010. And they were so wrong about the stock market. Everything they said about the new normal in low rates and slow growth and stagnation was totally right on and they got the market wrong. So I think that there's so many economic data points these days. People never knew how much air travel there was 50 or 60 years ago on a daily basis. So we have so many data points you can look at now in like what the

open table reservations are. Some of these little economic inputs that people are saying, see, the stock market is or is not the economy. I think there's so many data points that you can probably point to one or the other anytime you would like still tend to think it's more of a very, very long term relationship. And over the short term, the stock market is going to do whatever the hell it wants to do. That's where I would land on that. So the reason why I asked is because Peter Malook shared this great chart showing industry's contribution to S&P 500 market value versus its contribution to the U.S. GDP. Okay. So tech is 26% of S&P 500 and only 13% of GDP.

Conversely, real estate is nearly 14% of GDP and only 3% of the market. Okay. So, yeah, that makes sense. In a lot of ways, that does make sense. sense. Technology can be used more efficiently. But again, this is why the market cap weighted, the way the stock market is set up, it's not going to ever reflect the economy because there's so many more small businesses than they really are on the stock market. And you can't look at this chart and make any conclusions about the future direction of the market. Trying to predict the market this year is even crazier than any other year, don't you think? It's never easy to predict the short term moves at the stock market. This year, more than any,

it's harder than ever, I would say. I have no clue what's going to happen in the next Five months. I never do, but... Wait, whoa, you don't? Yeah. I was told the stock market is a second half story this year, so we shall see. A couple more COVID-related things. I never realized it was this high. Bloomberg says that the business travel makes up 60 to 70 percent of airline sales in America. This is from an estimate by some trade group. And of course, people are saying there's no way that's ever going to come back because we have Zoom and it's permanently impaired. I guess what's in a worse shape, commercial real estate or airlines at this point? Airlines, airlines. Just based off of this stat alone. Right. So long term, Buffett is probably going to be right here.

That's what I was just thinking. Buffett over Jets long term. So remember last year, there was an ETF that launched with a negative fee. They were going to pay you to own it. It was from Salt Financial. It's in the process of being acquired by PACER. So they managed to raise $9 million. As I'm reading this article, I'm thinking, I'm writing down, why do you think Free Never Caught on? And I wrote down a few things. One is brand recognition. I think that would probably be number one on my list. They weren't Vanguard, right?

Or Fidelity or whoever. Exactly. There's no difference. There's no difference between four basis points and free. Four basis points is free, in my opinion. Until it comes down to trading, I guess. Right? Because we went from, what, $3 a trade to nothing and it just set a wildfire off?

And then lastly, further down the list where I would say capital gains, everything's up. So then I'm reading. And it says Fidelity, on the other hand, they have 40 and free index funds that match more than $9 billion. So that gives credence to the brand recognition part for sure. Right. You have to have a form of distribution to get these out to people. Yeah.

So Russ Kendall had a sticking with this flow stuff, had an article in Morningstar called Flomaged. In May 2020, was the worst month for equity flows since the crisis. Here's a few mind-boggling stats. 1,086 actively managed equity funds are below $100 million in assets. and 63% of them are in outflows. 225 funds have been liquidated or merged away in the first half of 2020, and nearly two-thirds of actively managed funds are below $500 million in assets.

This one caught my eyes. 65% of all mutual funds are in outflows for the trillion three months. Money is fleeing and mass from these things. And remember it was, well, it'll be fine. Once the next bear market hits, all that money will leave passive and go to active. That's not true. it was the opposite. I'm saying people were saying that before a bear market hit, people were saying,

all right, once the next bear market hits, all the money will go into active management. It'll come back. It'll come flooding back in. Obviously, that bear market wasn't long enough for it to happen, maybe, is what the comeback would say. Baltunis nailed this. Baltunis said that the next bear market is going to be the death knell. And maybe that's an over-exaturation.

Active management is obviously not going anywhere. But it's going to be the death knell for certainly a lot of these smaller companies. How about actively manage mutual funds? Not active management overall, but actively managed mutual funds obviously aren't a death spiral. Yes. And I think obviously there's a humongous benefit to index funds, like stating the obvious. But just from like the human side of the industry, it's kind of sad because think about how many jobs there are here. Oh, yeah.

It's a huge business. The amount of money that it brings in because the expenses are higher is still vastly higher than index funds. So even if the assets just stayed flat, they'd still be able to make money for a while. But, right, the human cost of this is going to be huge. Which is why a lot of these places have had to morph into other business models and go into retirement advice. And that's why Fidelity has this huge 401K platform. They needed to merge into these other things because actively managed mutual funds is not going to cut it forever. All right.

Do you still have physical gold buried in your backyard? Of course I do. Did you take delivery? Okay. So gold is now, I guess, today. we're recording this on Monday afternoon, back to new all-time highs, or close to it at least. All-time highs, which was last seen. Not inflation-adjusted, but nominal.

Okay. But you wouldn't say that for the stock market, would you? I feel like people only say that for gold. Okay. I feel like gold gets a bad rap there because no one says, well, inflation adjusted. The S&P is not. So, anyway, I rolled this in like 2014. So in August of 2011.

Hang on, I'm sorry. The reason why people say that, though, is because, so yes, nominal prices are above the 2011. high. But real prices peaked in 1980. That's why you adjust gold for real prices. It's been 40 years. And there was a stat that still needs to climb 52% on a real basis to get there. Anyhow, go ahead. Wow. That makes sense. Because it was up so much in the 1970s, it was up, what, 700% in the 70s or something? You're not going to pair real gold prices today to real gold prices in 2011. Nobody does that, but 40 years ago. Right. That's too short. So anyway, GLD, when gold was in the bull market in the 2011. I think this happened like intraday for one day in August

2011. It became the largest ETF in the world at $77 billion and it briefly surpassed SPY, which is the S&P 500. And from there, that was basically the peak of gold. And it went down. So I looked at the AUM today and it went down from 77 billion at that peak to like 21 billion at the low. Now that it's back in a bull market and it's back to those all time highs again, it's at like $75, $76 billion. So it's basically round-tripped. It lost $50 billion in assets. And part of that was because gold got hammered. And part of it was because people fled. But now those assets are back. But on the other hand, the SPY went from $77 billion to $290 billion in that time. And now there's obviously other ETFs that you can buy for gold and SMPF-100, but not a bad round trip there.

Balchuna said this week, GLD, which is State Street, IAU, which is I shares, and SLV, which of silver. All made the top five list for weekly foes. I don't think I've ever seen that. It's gone from a feeding frenzy to an outright craze. Add it to the list of crazes. Yeah. What do you think is driving the price right now? Here's my, I'm going to put my macro head on real quick, macro guy here. Please. I think it's two things. Low interest rates, because obviously gold has no yield, but if bonds have no yield either, then on a real basis, it's, but I think gold is part commodity part currency, part speculation. So I think the fact that the U.S. dollar is also dropping while we have

low interest rates, I think that is helping gold. I mean, it's hard to say because people who buy gold buy it for different reasons. Some people say I'm going to hedge the Fed, hedge inflation, hedge crazy actions of central banks and hedge all this fiscal stimulus. So you never know what's driving that people are buying. But I would say my biggest reasons are really low interest rates and the dollar is falling. And so if gold is some sort of a currency, then it's like the opposite of that. I believe that gold started to rise, like recently, this year at least, prior to the dollar breakdown, but we're taping this Monday morning, hard dollar breakdown. Gold is ripping. I think it's up another 2% today. This is a great quote from that Wall Street Journal article.

The factors that drive gold prices tend to fluctuate. It is a fickle kind of asset. I think that hits the nail on the head. It could be so many different things at different times. And so we were recently doing some work on this and taking it back to the early 1970s when that price of gold was allowed to fluctuate, the correlation between the S&P 500 or gold is effectively zero, meaning there is no relationship between stocks and gold. It does its own thing. What are we looking at three-year periods? Then I looked at rolling three-year periods, and when you look at that, it's just all over the place. Sometimes they're rising together, sometimes they're falling together. Sometimes one falls and one rises and vice versa, and sometimes

one is going nowhere and the other one's rising. So in terms of a diversifying asset, you'd be hard-pressed to find one that is more diversifying than gold. I think it doesn't do the same as treasuries. And I think honestly, if Bitcoin could get to that place where this risk-on, risk-off asset like it tends to be, where it could just follow its own path like gold, I think that would be a huge win for Bitcoin if it could ever get like that. I think Bitcoin's the same thing. It marches to the beat of its own drum. It basically crashed in line with the S&P earlier this year, which is weird. Did not see that coming. And people have their own reasons for owning it. Yeah. Did you know that Nathan's Hot Dogs is a publicly traded company?

The one that does the hot dog eating contest? Yeah. No clue. I would guess Nathan's is a national brand in terms of it being in supermarkets. Have you ever had a Nathan's hot dog from the supermarket by any chance or does it not exist? I don't know. We probably always get Oscar Meyer or something. I don't know. Okay. Hebrew national guy here, but I guess that's a Jewish thing. So Eddie Elfin Bine, who has an ETF that's based on his buy list crossing Wall Street, wrote about this, called us an orphan stock means that it has zero or near zero analyst coverage. And there's a ton of stocks like this that you would say like, huh, I didn't even know that's a public company. Meanwhile,

this stock since this chart goes back to 2001, it's up 3,500 percent almost. So it's not just the big tech stocks that are winning. Is that the point here? It's cloud computing and hot dogs. Yeah. I guess. I mean, that's kind of the thing like Domino's beating the returns of Google since it went public in the same year. There's a lot of overlook stocks. But, because their market caps aren't big, you just don't notice them. So I was listening to Patrick O'Shaughness's podcast last week, and they were talking about some of the cloud computing companies, this cloud computing index that Bessemer manages.

So I was poking around then their website. And they have a chart showing state of the cloud, the years that it took to go from $1 million to $100 million in annual recurring revenue. And some of the old companies that would take, you know, a decade plus, Twilio and Service Now did it in, looks like, five to six years. Slack did it in three. That's amazing. It's one of those things where it's like all the work people have done up ahead before you to build out the infrastructure have made it easier for you to succeed. That how we got to Nowbook talks about how innovative ideas,

yes, they are the work of a great and intelligent mind, but they're also building on knowledge that came before them. That's probably something similar here. But so these stocks are absolutely changing the economy, changing the way that we work and live, and they're being priced for that. So they're being prices if there's never going to be any competition, that they're going to own this, and they're going to grow at 40% a year forever. And they're all being prices if they're the next Amazon or the next Google. And we just know that companies don't grow for 20% a year, for 25 years. Like, there's just a very, very small list of companies. Go ahead. I've seen this movie before and I know how it ends. Right. That's the intelligent thing to say right now.

It's not even a commentary, and I guess we sound like the boy who cried well for this point, at least certainly I do. It's not a commentary on these businesses at all. It's more just on how the market has responded to the growth here. Then on the other hand, you also have to think, well, how arrogant to think to say. Like, you think the market's that dumb. Good luck taking the other side. That's the thing. The Howard Mark's set level thinking has been proven wrong for a number of years now. It's the whole thing of Howard Marks always said, Apple. It's a great company, but that doesn't make it a great stock because it's already priced in. But guess what? A lot of the great companies have been really great stocks. So second

level thinking has got you nowhere the last seven years for the most part. Correct. I think that either he wrote this or maybe I'm misquoting him, but in one of his memos, Apple is a great company. We should buy the stock. Well, Apple's a great company and everybody knows it, so maybe we shouldn't buy the stock. And Apple's gone from, when was Apple $300 billion? Was it eight years ago? it probably wasn't even that long ago. Now it's $1.5 trillion when everybody knew it was a good stock. So I don't want to say it's a failure for second level thinking. Maybe it's more of a commentary on the market.

I don't know. Third level thinking is just reverse psychology. Square? I don't know. Okay. So I feel like the movie studios missed a big opportunity in the last few months. I know it's probably not going to last like a lot of the sports because I feel like it's just not going to work for so many of them, maybe the NBA.

But they decided to postpone tenant and they're probably not going to bring it back until movie theaters are really open. And the same thing Disney did for Mulan and then Top Gun 2, they're pushing all these big blockbuster movies back. I can't believe one of these huge blockbusters didn't say, you know what, we have a four-month window where no one's doing anything. Let's release it. And then the first week or so, we're going to charge 100 bucks.

And then weeks one through three, we're going to charge 50, and then 20 bucks thereafter. Not only would have they made a ton of money, but they would have been the only thing people were talking about. Instead, we had this stupid Tiger King thing that every talked about. But like, why wouldn't one of these big time blockbuster movies just say, you know what, screw it, let's not wait for the movie theater, let's do it. And now they've maybe missed their window to do this and they're going to all push it back like a year and a half or something. And we're going to have no good movies for a long, long time.

I don't understand why someone didn't decide to just rip the band it off and do it. You're an ideas guy. They should hire you for some consultation. I can't believe it. This morning, Google announced that they're going to keep employees home until the summer of 2021. Wow. Yeah. See you later. Bay Area rental prices.

Okay, we wanted to quick mention our colleagues, Tony and Dean Isola, just created a Facebook group called Teacher Money Matters. And we'll put a link on our show notes. It's for all teachers. They have, like, made it their life's work to help improve the financial outcomes of teachers. And they're doing great work, and they're going to answer questions and have group chats and talk about people specifically for teachers. So it's a really cool idea that they're doing.

We'll put a link to that in the show notes. So if you know any teachers, if you're our teacher, please feel free to share this with them, we think it's going to be very helpful. All right, listen to our questions. All right, I wrote about this one, but I want to hear your take. Any advice or rule of thumb for getting an engagement ring? The whole three-month salary thing seems impractical and outdated. I'm in my mid-20s and think about making a leap in the next year or so.

Well, I didn't have to deal with this. I gave my wife my mother's wedding ring, so I never really had to think about this. What is the rule of thumb? I think I once heard three months salary. Is that rule of thumb? I don't know. I've heard that too. Your way sounds like a great way because that's like the psychic emotional income, right?

Well, not really. my mother passed away so I had a wedding ring. Okay. Okay then. Well, boy. Not ideal, but But what did you say? I just said, like, don't listen to what other people say, because some people are going to say, just suck it up and spend a bunch of money. And some people are going to say, you should never spend any money. It's evil. De Beers controls the diamond industry. Like, I just said, use it as a springboard for talking to your future spouse about finances and having an honest conversation of, listen, this is what it's probably going to cost for the only you want. And this is what I can afford. And this is what our finances are going to look.

click when we get married. And this is not just a decision I'm making. This is the decision we're both making for maybe our financial futures, depending on what we can afford. I'm sure there's an infinite number of stories, suggestions here. So I would say, I don't even, I don't know. I got nothing. But I just remember going through the process and they like put the diamond under a microscope and like, hey, take a look at this. You see that? And you're like, that means anything to me. This one little flaw or spec or something, whatever. Whatever. All right. I'm entering a top five part-time MBA program this fall. I have a stable job, thankfully, that I can pay for with savings if I liquidated my brokerage account. I've been investing

consistently in index funds for five years, so selling would force me to realize several thousand dollars in gains. I'm leaning towards keeping my money in my brokerage account and taking out a variable rate student loan for 2% plus LIBOR. My thinking is that if the market is flat over the next five years, the dividends will help cover almost all of the interest, and the Fed will be unlikely to increase rates. The only doomsday scenario is if the ESP 500 is lower in three years than it is today. But I hate the thought of selling all my stocks. Am I thinking about this right or is just too aggressive? That is a tricky situation. I think you would have to wrap your head around the fact that if the stock market does fall,

then you have to be comfortable sitting out and keep riding that debt payment potentially and paying that interest. What's the doomsday scenario? So you call it a doomsday scenario, but what does it actually mean for your cash flow? I think if this person is trying to paid off when they're done with school and that money is not there because their brokerage account is lower because the stock market is lower. So it's actually not that much of a doomsday scenario because then you could just pay for the monthly payments of the student loan. But I think, I guess the regret minimization framework would be diversify your portfolio a little more or maybe split the difference a little. Look where rates are. Why wouldn't you borrow money

right now? I definitely agree with the fact that the Fed has already said to like 20, 22 they're keeping rates lower. So the chances of these rates rising anytime soon, I'd say are pretty low. This is timely. It's said that Tesla may be added to the SP 500 as an index fund investor. Is there anything I can do to avoid having this obviously overpriced stock crammed down my throat? Short Tesla. What I would say is, aside from doing the direct indexing thing, which is certainly rising in popularity, if Tesla loses $150 billion in market cap, let's just say that it gets added. That's top. It gets cut in half. How many basis points is that going to whack off the S&P 500? Right. It's not much. General Electric is one of the biggest companies in the world in 2000

and is down 75% since then. The S&P 500 didn't blink. Other companies made up for it. Yeah. So I'm making this up. Let's say it's 20 basis points. I mean, in theory, if you could short one share of Tesla and probably be good. Do you think that the S&P 500 committee now after this will look at their rules and say, like, our rules for letting Tesla in made no sense. We should probably think about changing these so this doesn't happen in the future. I'm going to guess that they're not that progressive. Do you think Tesla is such a one-off that it's not even worth thinking about changing? That's what I think. One more on Tesla. Active managers have very publicly been panced by the SEP 500. Pants, where you don't hear very much anymore. True. Give me your thoughts on this

theory. Active managers conspire to drive Tesla to an insane valuation right up to a very obvious inclusion in the S&P 500. I'm going to say kudos for the theory. Probably not the case. The only problem that theory is all the active managers have been shorting Tesla. So, yeah, that would be quite a coup if they could figure out how to drive Tesla up in price and then leave the index funds as the bagholders. All right, let's move on to recommendations. What do you got, Ben? I'm kind of mad at the whole streaming thing because it's just turning into cable on record. I will be the last person in America to get rid of it. But just because we have cable doesn't mean we can't use the app. So we have cable so we can have HBO and stars and showtime

and stuff, but then we just watch them through the apps. And Bravo. By the way, I was listening to my wife talk with her friends about one of the Real Housewives shows. And it sounds like Bravo sort of topped a few maybe 12 months ago. I'm hearing bad things about Vanderpump. Real Housewives is getting redundant. How could it not after 36 variations? It says the guys who talk about the stock market every week. So HBO decided to get rid of HBO Go and now there's this thing every time I open it up saying it's going to be gone July 31st. But HBO Max, which is the new one, is not allowed on Amazon, Kindle, Firesticks, or Roku. And neither is Peacock. So these are like the same fights we had about regular cable, like when a channel goes away or something and

they're fighting over it. Streaming is just cable. It's the same thing. If you try to cut it. So the only way I can watch HBO Max now is on my laptop, not in any of my TVs. It's crap. I finally watched Ford versus Ferrari. This was an awesome movie, and Matt Damon and Christian Bail were amazing. I think Christian Bail has got to be in the conversation for best actor of his generation. Great movie. I love it. Wasn't expecting the ending. And you read the book, right? Was the movie pretty close to the book? Yes, as far as I remember. Well, yeah, because it's a true story. The book is Go Like Hell. Okay. I didn't know how much they embellished if it was the same. Been rereading Against the Gods by Peter Bernstein lately for some reason. I read it very early in my

career and it aged wonderfully. And finally, I took a recommendation for me for every week you do these are the goods. You do stuff you've been reading, listening to, watching podcasts. I didn't realize Dan Carlin had a second podcast, the hardcore history guy, and he talked to Tom Hanks. I could have probably listened to that podcast for 10 hours of Dan Carlin and Tom Hanks talking about history. Was that the best thing ever? It was so good. I could have kept listening to it. Tom Hanks is the kind of guy who, he's obviously one of the greatest actors ever. He's, he would have succeeded at anything he would have done. He could have been like an amazing fund manager. He could have been a CEO of a big company, right? He could have done anything, don't you think?

And it was Tom Hanks talking for like 95% of the time. Yes. And he, he knew historical stories that Dan Carlin didn't know. Yes. That was amazing. Was it hardcore addendum or something? It's like an offshoot of hardcore history. Yes, that was very good. I watched Palm Springs. I thought it was unique and original. I didn't love it. Did I overhype it too much for you? Well, it wasn't just you. People have been raving about it. I think that probably was the issue. I thought it was perfectly fine. I'm glad I watched it. I thought it was good, not great. I thought Andy Sandberg was surprisingly good in that, though. He was good. Yeah, he was good. I'm glad that it came out for sure. All right, I finished defending Jacob, and it did drag a little bit. Probably could have been

six episodes, but I was satisfied with the ending. It wasn't like I saw the ending. I was like, oh, that was a waste of time. Supposedly, the book was different than the show for the ending. Yeah. What was that show, that HBO show, the Stephen King one, that just dragged and dragged and dragged, and did not have a satisfying ending? That pissed me off. Defending Jacob was not like that. There was this incredible documentary on Netflix. I've only watched it for 20 minutes. I can already tell that it's amazing. It's about the five families of New York City. What's it called? Fear City, I think. You'll see it. It's like, it's right on the homepage. I'm very psyched for that. There's nothing to watch anymore because there's no new movies. We've gone through all the shows. So, Everyone has talked about how Kevin Koster show on Paramount Network called Yellowstone. Oh, Yellowstone. Did you ever watch it?

Yeah. I couldn't find it anywhere. It wasn't streaming. We finally had to buy the first season on Amazon. I think it's on Peacock. I can't get Peacock on my freaking Roku player. Oh, man. Anyway, we bought the first season.

After one episode, I'm totally in. I'm sure people have made this before, but it's like Succession on a Ranch. Okay, I heard Sopranos on a ranch. Same thing. Okay, maybe it's like I just watched one episode, but it looks very promising. So I'm in, even though I'm way behind on that. I've heard very good things. All right.

Thank you very much for the feedback, Animal SpiritsPod at gmail.com. We will see you next week.