Animal Spirits Podcast - The Mother of All Credit Bubbles (EP.34)

Episode Date: June 20, 2018

Some suggestions Barron's has for Warren Buffett, the latest Howard Marks letter, the "mother of all credit bubbles", why computer programmers should consider moving to the midwest, the source of the investor behavior gap, unrealistic millennial retirement goals 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, the podcast that takes a completely different look at markets and investing, hosted by Michael Batnick and Ben Carlson, two guys who study the markets as a passion and invest for all the right reasons. 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 positions in the securities

discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. There was an article over the weekend in Barron's preparing Berkshire for a future without Buffett. What were your thoughts on this one? I think that as Buffett approaches 88 this year, they said, my prediction is a bull market in stories of giving advice to Berkshire. I'm sure that they've, wait, Berkshire or Berkshire? You could stick with Berkshire. I'm going to take the traditional rap. Okay, we'll call it my Midwestern accent. He gave eight talking points about the things that Buffett should do now to prepare the public, I guess. And I'm guessing Buffett probably just doesn't care. They probably thought about this stuff internally, obviously. I think Munger is what, 95 probably. Buffett's almost

88. They obviously have to have this stuff figured out, I would imagine. And some of the quick things that they talked about were, you know, opening something up to the public, addict's successor, consider paying a dividend, buyback stock. I don't know. I'm guessing none of these things will actually happen. So it's kind of just an exercise in intellectualism, I guess. Yeah, I thought some of these suggestions were okay. Others I didn't really care for. The author said over the past five and 10 years, Berkshire shares have trailed the S&P 500. The shares are only slightly ahead of the index over the past 20 years. So maybe it's time to start giving something back to shareholders. I think this is sort of nonsense because over the last 20 years, it's up 262%. The S&P is up 257%. So I think it has given

plenty to shareholders. I don't think that people, I don't think that Berkshire shareholders are there for a dividend. Right. Yes, I agree. And that's something that Buffett's always kind of been again. So I think buying back his shares would make more sense. And he says that they should raise the book. So they have a target of 1.2 times book value, which is when he would buy back stock because that's when they assume it would get cheap. So he says raise that to 1.3 times. I don't know if changing the decimal point is really going to matter a whole lot there. That's splitting hairs. Yeah. So I don't know. But I think the impressive thing that you gave that stat about over the past 20 years. Some people say, well, Buffett's lost his touch. I think when you get

this big, the fact that they've even been able to keep up and be maybe something of a closet index fund is actually fairly fairly impressive, considering how poorly a lot of other investors have done against the S&P in recent years. There are a tax-efficient index fund, which is not so bad. And then the one that I really, really disagreed with was his suggestion for the board. He said, the way the Berkshire's board operates may need to change as well. It met only three times in 2017. The fewest number of meetings for any company in the SP 500 except for Invision Healthcare. I think that's probably a good thing. How often do they need to meet? Right. Yeah, I don't see the point of that either. I think three times this seems plenty to me. I don't know why, especially for a company that is really

supposed to be focused on a long term. The last said that, sorry, Ben, this is all mine. Take it. The board members get just 900 per meeting with the median annual S&P 500 compensation for a board remember is $285,000. I thought that was really stunning. I had no idea it was that much. I didn't need it. That's pretty ridiculous, especially when you consider the fact that the board is kind of just overseeing things and they're not doing the day-to-day stuff. That's pretty shocking. I mean, the amount of time that they probably actually put into that is so small. And board members that are there for the long term that aren't there for the financial reasons. To me, isn't that a good thing? Shouldn't more companies be doing that? Yeah.

I think more companies should operate like Berkshire than Berkshire operating like other companies. I'll tell you what, this is quite a hot take to say that Bill Gates needs to get paid more. That was the stance I haven't seen much. The one interesting tidbit here I found that I didn't really see before was, I guess at the last year's annual meeting, Buffett said that if he died the next day, the stock would go up because it would fuel speculation about a breakup of the company, which I thought was interesting. And I'm sure he's going to do everything you can to make sure that doesn't happen. Yeah, and then some of the suggestions that I did that I thought were good.

To give more details in the investment portfolio, particularly what Todd and Tedder doing, name Greg Abel as your probable successor. He's the CEO of Berkshire Energy. I think that might, that's probably not a bad idea to just name a successor. And then have more people help with the letters. His last one that I read, I kept scrolling. I was like, wait, that's it. I think it was like five pages or something.

It was much shorter than usual. I think that Buffett has probably said, I mean, obviously I enjoy reading it, but I think at this point he's said as much as he needs to, right? I feel like there's a little more we can learn from him at this point. It would be nice to hear some other voices. So I thought that was a good idea. And you wonder if those letters will eventually go away to or not be as big of a spectacle as they are, obviously, with Buffett gone. So the other one that came out this week that is maybe in recent years has kind of been pretty similar to Buffett for a lot of investors as Howard Mark's new quarterly letter.

And this was his Get Off My Lawn letter, I guess you could say. It was interesting. So Mark's has written probably one of my favorite investment books called The Most Important Thing. And it's kind of a compilation of his old quarterly investor letters with some updates. And I think that was released in 2010 or 2011. He's actually got a new book coming out, I think, this year as well. But this one dealt with indexing, ETFs, passive investing, and quantitative investing. And so I won't bury the lead here, but Marx was not impressed by these things.

Yeah, I want to preface what I'm about to say by saying that I've learned a lot from him. And with that being said, there were some things in here. I mean, I just, I didn't agree with a lot of this. as a for instance. He said, the irony is that it's active investors so derided by the passive investing crowd who set the prices that index investors pay for stocks and bonds, and thus who establish the market capitalization that determines the index weightings of securities that index funds emulate. If active investors are so devoid of insight, does it really make sense for passive investors to follow their dictates? And I think that he has, at least from my

point of view, I think this is precisely backwards. I think that the reason why active managers fail to beat the market, and there's a lot of reasons. It's just the level of competition is so intense, and they're all so smart that it's like LeBron playing LeBron or LeBron playing a team full of LeBron's every night. Sometimes he's going to win, sometimes the other LeBron's going to win. These men and women are so smart that to consistently beat one another, the advantages have just become microscopic. The edges have really, really, really diminished. Yeah, one of the reasons that it's getting so hard is because most of the retail investors is the one who's going to annexing. And so there are fewer suckers at the poker table for them to take advantage of.

And so I think people always say, like, active investors are so bad. You could just have a monkey throwing darts at a newspaper and that would beat them. And I think that's kind of the wrong idea here. The fact is that, yeah, they're not getting any worse over time. It's just markets are getting harder. And there's so many hedge funds out there now in mutual funds and ETFs that it's just, and there's so many highly educated people that you're competing against. It's really difficult to do. And so I think, yeah, I agree. He has this, I think he has kind of the wrong way. One thing that he said that I thought was interesting was he said the second question is, what are the implications of passive investing for active investing? Well, and the idea

here that all of a sudden active investors are going to go away is kind of a straw man, I think, because if you look at the stats, 95% of trading is still done by active investors. Index funds don't trade that often. So active investors are still setting the prices. And even if indexing continues to grow, I'm kind of of the argument made by Charlie Ellis that the incentives are way too high for active investors to ever leave. They just get paid too much. If you look at the fee spread, it's still enormous. The revenue that some active managers bring in versus someone like Vanguard or I shares, even though they have way more money, is still much larger because they charge more. And so the incentive is still there for active investors. So I don't think all of a sudden you're going to

see active investors and mass just leave the market and give up. Yeah. And the whole like what happens when everyone indexes? I mean, come on. Like let's, you know, what happens when everybody eats McDonald's? I mean, it's just, it's not going to happen. It's not, not a good argument. I think you mean what happens when everyone doesn't eat McDonald's. All right, whatever. He said, the vast growth of ETFs in their popularity has coincided with the market rally that began roughly nine years ago. Thus, we haven't had a meaningful chance to see how they function on the downside. This is not true at all. First of all, SPY came around in 1993. These things survived the Great Financial Recession. They survived the flash crash in 2010 or maybe caused it, whatever.

I mean, obviously there will be problems. There will be hiccups. August 2015, they survived. So they have been tested. And there was a bear market in 2011, in my opinion, in 2015. These things have been tested. So the idea that they are going to break the market when there was pressure, I just, I don't really buy that one either. So I think, and Marks also does, he takes a whole section of this letter to go against smart beta and quantitative investing in AI. And he does preface it by saying, you know, I don't know much about these things and I'm going to, you know, I've been doing some research on them. So I think I'll give him a pass on a lot of these thoughts because if you think about it, he has been in the private distressed markets his whole life.

So my old endowment fund invested in two of Oak Mark's, Oak Tree's funds. And they were, private equity-like strategies and that invested in distressed assets. So Marks honestly doesn't have a lot of experience dealing with retail investors in ETFs and index funds and public markets. He's dealing in private markets and he's dealing with a lot of large, very large institutional investors who make very large investments in his funds. And so I think in a lot of ways, he probably just hasn't had the experience dealing with this space before. And so I think that's one of the reasons why there maybe is this disconnect between the way that we view the world and the way he kind of used this world. And then lastly, and not to be too harsh, but this

was probably the part of the memo that I thought was like the least good. It was a little cringeworthy. Yeah, he said computers can do an unmatched job dealing with all the things that can be counted, things that are quantitative and objective. But many other things, qualitative, subjective things, count for a great deal, and I doubt computers can do what the very best investors do. Four bullet points. Can they sit down with the CEO and figure out whether he's the next Steve Jobs? Can they listen to a bunch of venture capital pitches and know which is the next Amazon? Can they look at several new buildings and tell which one will attract the most tenants? Can they predict the outcomes of a bankruptcy reorganization where the parties may have motivations

other than the economic maximization? And as I'm reading this, of course, I'm thinking what human can reliably do these things? Right. Yes. You just look no further than the Elizabeth Holmes cover on Forbes a few years ago saying, is she the next Steve Jobs? Obviously, if everyone could do that, then they would. And I think that's one of the reasons venture capitalists invest in 20 to 30 different investments because they don't know what the next Amazon is going to be. If they did, they would have one investment per fund. And so, yeah, I get what he's saying. And I think the problem, the big problem here is the fact that he's one of the best investors of all time. His track record backs that up.

And I think he is maybe trying to say that people should be able to, a lot of people should be able to do what he does, which is just not realistic. Yeah. And also it's like we've, you know, people have been having these arguments for the last three or four years now. So I guess I was just expecting a little bit more when I sat down to read this. Right. I think in the idea that index funds and ETFs are going to cause the next crash, market

crashes have existed long before index funds and ETFs were around. and they would happen regardless. I'll do you one better. Passive flows are propping up the market, and then they're also going to simultaneously cause the crash when everybody heads for the exits. All right. That's fair.

Time stamp. All right. So one of the questions we receive all the time from clients, prospects, listeners, readers, is what do we think about all the debt in the system? And that's government debt. Washington Post last week had a story that was sent to me by a few people, and it said, beware the mother of all credit bubbles. And the author goes through and looks at the fact that corporate borrowing is as high it's

ever been. And the conclusion here, it's hard to say what will cause this giant credit bubble to finally pop. A Turkish Lira crisis. Oil prices topping $100 a barrel. A default on a large triple B bond. A rush to the exits by panicked ETF to investors, which seems to be a recurring theme here. And finally, trying to figure out which is a fool's errand pretending it won't is folly. And so basically this guy was making the case that.

and he actually talked about ETFs in here as well saying that the growth of ETFs has actually made it much more unstable in the corporate bond world because it's created more bond issuance from investors demanding these shares. I really don't like debt as a boogeyman. I think it's so easy to scream this message and it, you know, it rings true with people that are financially illiterate. I think the hardest part is, and I was not always so well-versed on this stuff. I think there's been a lot of people who have really, I think, probably the best myth buster on this over the past few years is Colin Roche at Pragmatic Capitalism. And I think people look at the government and they see $20 trillion of debt

and they want to look at it like it's a household, which that comparison never holds water because first of all, you're not looking at the asset side of the equation, which anytime the government issues debt, they're also issuing a financial asset to someone else. So if you're holding a bond fund in your retirement accounts, guess what, that's an asset that the government has created for you to pay interest, which is a good thing for you. Also, The comparison doesn't work comparing a government to a household because guess what? They can print their own currency. They collect taxes.

And it's not like an individual's balance sheet. So there's just a lot more nuance here than just trying to compare the stated debt levels. And I think obviously... Here's another one that I really didn't like a staff in this article. A decade ago in 2008, there was $2.8 trillion in outstanding bonds from U.S. corporations. Today, it's $5.3 trillion. Yes, in the great financial crisis, corporations could not borrow money. horse debt has doubled since then. And of course, that doesn't match up the asset side of the equation

too, which is, you know, net worth set an all-time high and per capita GDP is an all-time high. And so I wanted to look at the other side of this. And so Scott Grannis actually had a good blog post about this last week, too. And he looked at the U.S. household leverage. And it's actually fallen 35% from the 2009 high. And it's actually returned to level. Hold on. I have to call you on that. Okay. Hold on. Is it, Are you saying the drop in U.S. household leverage, household liabilities is a percent of total assets? Are you saying that falling from 20 percent down to 14 percent is a 35 percent drop?

Sorry, I was reading. Hey, don't shoot the messenger here. I was just reading from the blog post. Shooting the messenger. It's down from 20 percent to 14 percent. Let's go with that. Okay, fair. That would still be a 37 percent drop, 35 percent drop, would it not?

I don't like the percentage of the percent. Okay. That's fair. Fair. But point taken. Point taken. All right. I just got hit with a misdemeanor in a chart crime. So anyway, so these are some charts we'll share. He also shows that real household net worth is the highest has ever been. So obviously, I do agree with the fact that the fact that the debt has risen so much. If interest rates all of a sudden rise overnight, a huge amount, that's going to be painful and it's going to be hard for them to make the government to make

choices about where to spend that money. But I don't think just because the debt level is there that you should be, you should be worried. And so the other good myth busting from the last few weeks was by Urban Carmel, who writes at the Fat Pitch Blog Spot, and he went through and showed all the times throughout history that people have worried about this. And he actually showed a Time magazine cover from 1972, and it said, is the U.S. going broke? So it's amazing how long that this has gone on for, both people worried about the debt levels of the country. Well, this will never go away. Right. And so he said on a per capita basis, household debt is at the same levels it was 14 years ago. And relative to the net worth, it's at the same level as it was in 1985. So again,

you can't just look at one side of the equation and just look at the liabilities. You also have to look at the assets and sort of the balanced part of the equation. There was a chart that I saw from the Daily Shot that Wall Street Journal does where they do like a daily blast of like 90 charts. It's pretty good. I recommend subscribing. And they showed a chart from Fred, all federal reserve banks, the total assets. And they're down 4.5 percent since the peak in late 2014 as at least our Fed unwinds the balance sheet. So total assets are down about $200 billion. And I think this is one of the things that what happens when the Fed normalizes rates, that was probably the last bearish catalyst, right? Yes. Once QE's over, that's going to be done

propping up the market and then we'll see a crash. Yeah. And maybe we will. Obviously, we don't know what the future holds, but so far that has not come to pass. Hold on. Sticking with the debt one more second. There was an article in the journal. Here, I'll just use this quote. bought Time Warner Inc. and Comcast hopes to purchase most of 21st Century Fox, the companies would carry a combined $350 billion of bonds and loans, according to data from whatever. So that would make them the world's most indebted companies, I think was the title of the post. That is, I guess, to the bear's case. That's a big number. Yes, in the grand scheme of things. It is kind of amazing, though, that like a company like Netflix

is kind of forcing these huge media companies to get together, to try to fend off and come up with the better entertainment strategy. I guess cutting the cord is part of that too. But it is kind of amazing that these enormous companies that have been around for a long time are now forced to to come together. I was with Josh yesterday and we passed a billboard that said it was for a movie or a show. It said AT&T presents. And I was like, holy shit, look at that. Yeah. Everyone needs more content. So sticking with the debt theme real quick. So there was a blog post this week that looked at the fact that the largest tech companies, Apple, Microsoft, Google, Facebook, Cisco, and Oracle. Their debt levels have risen substantially since 2013, and a lot of people are saying

the reason they're doing this is they're borrowing money to buy back their own shares, which is kind of an arbitrage on the capital structure. And actually, what this author was saying is that in 2018, it dropped off substantially. So actually the debt for these big tech companies is falling, even though they continue to buy back more of their stocks. And this is kind of another chart we can put in the show notes for you. Wait, was there a reason? Why did debt go down so much in 2018? They paid it off. So it's kind of like, this is like the other equation of the shareholder yield, which Meb Faber and the guys that Oshanasi have talked about a lot. So if you think about what companies can do with their cash, they can buy back shares, they can issue a

dividend, or they can pay it on their debt. And so this is kind of something that's a positive for investors, the fact that they actually just paid down their debt with cash on hand. I'm looking for a tinfoil hat argument in here, but I didn't read the article. So I'm sure there's one. It's possible that there's some manipulation going on here, but it's looks good to me. So let's stick it with the tech thing. So there was a chart, someone sent this article to me last week and talked about the great migration from Silicon Valley to the Midwest. And it was kind of showing this chart that if you were to leave Silicon Valley where it's one of the most expensive places on earth to live and instead go to the Midwest, Chicago, Cleveland,

Columbus, Detroit, Indianapolis, Madison, Minneapolis, any of these places, it would be much, much cheaper to live. So they were saying on average living in the Midwest and they kind of adjusted for the standard of living. It would be 73% cheaper in terms of housing. Utilities would be 20% cheaper and so would groceries. Why are groceries so much more expensive? I guess just because grocery stores could charge more. It just must be demand. It's kind of like, I think it's kind of like why our gas price is so much higher in big cities. It's because they can, I guess. Maybe taxes are part of it. So the point of the article was maybe a lot of these tech people should move to the Midwest. And I think in some ways it makes sense, like, why are we

creating all this great technology if you all have to live in the same city? Like, shouldn't you be able to use some of that technology for good? And I'm sure there are people who are doing this arbitrage and working as programmers in other cities. And a lot of people push back on me when I posted this on Twitter saying, well, would I ever leave California? It's beautiful. This is, you know, and I think the one thing people miss when they look at this stuff is the fact that, you know, where you were born or where you went to school or, you know, your friends and family really determine a lot of where you live. I mean, would I be in West Michigan if I wasn't born here? Would you be in New York if you weren't born there? I think that's a part of the

equation that a lot of people miss when they try to look at this on a spreadsheet basis. Yeah, I mean, for goodness sakes, it was snowing last week in Grand Rapids. Probably, yes. So I think it's hard to get people to uproot and say, well, you could save a lot of money by moving somewhere else, even though you've lived there your whole life or that's where your job is. And there's obviously some networking opportunities elsewhere as well. But I think that decision is much harder than people give it credit for. Agreed. One of the things many people in the financial blogging and advisor world do is talk about

the behavior gap, which I believe Morningstar was the first one to really provide the data on this. And all the behavior gap shows is the fact that most investors on aggregate tend to underperform their own fund performance. So investors, you know, forget about outperforming the market. They have a hard enough time outperforming themselves or just perform. forming in line with themselves. So I think the average behavior gap is probably in the 1 to 2 2% range when they show their data. So someone, we've probably talked about this before.

So someone actually sent us a listener of the show, sent us this research from some London School of Business. It's actually from 2012 and I'd never seen it before. But these academics make the case that the behavior gap is not due to market timing ills, which is what a lot of people point to. It's actually due to the hindsight bias and the fact that many investors just look at what's been recently happening. So it's not the fact that they're bad market timers. It's just that they see what just happened in the market. And then their flows go to whatever's done the best. So it's more performance chasing than bad market timing. What's the difference? To which I say, yes. I was looking for like a big aha moment in this paper. And it didn't really

hit me. So I think, you know, I don't think the mistake matters. It's the fact that there is a mistake in the first place. And so whether. I don't think that anybody disputes the fact that the behavior gap exists. I think that people have a hard time buying and holding. So there will be a gap. But I think that what some people take issue with is that it could be misleading. So the path of returns has a lot to do with how this thing is measured. So there could be a positive behavior gap where people outperform the investments just based on the path of the underlying investment. So some people say that Dabar is aggressive with their with their assumptions. And I think that what rubs some people the wrong way, particularly people that working in active management

is how advisors might potentially misuse this and use this as a tool to convince their clients that they're incapable or they're dumb or whatever and they can't do it themselves. I think that, I mean, that's not a great way to use this tool. I agree. And I think one of the big things here is the fact that if you're dollar cost averaging into the market, you could use that information to say you're mistiming the market because you're making purchase. is when things are going up. And so I think, yeah, it's kind of, it's really hard to look through and do an x-ray on these numbers and figure out where exactly the mistakes were made and where exactly someone was just doing, you know, dutifully contributing to their accounts. So I think

that's the part of it that makes it difficult, as you can't know for sure what the motivation is. Well, one area of the market where the behavior gap will never go away is the best performing active funds. So Ken Heemner is a great example. I think he had, the best performance numbers of the decade, but he had the worst dollar weight of returns of the decade because billions poured in after he gained 80% in a year. And then in the next year or two, he got crushed and all of the money went out. And it was basically all lit on fire. So I think that index fund, the behavior gap is very susceptible to the path in which it follows. But I think that the best performing active funds, the gap will always exist because people just

misuse them. And maybe I guess that's what this research is telling us, the fact that people will always chase performance, which makes sense to me. Yeah, so I think we knew that already. But, okay. So a few weeks ago, we spoke about WeWork issuing bonds on a community-adjusted EBITA, which was pretty interesting, but apparently SoftBank is coming in with a big amount of money that's going to potentially raise the valuation of WeWork to $35 to $40 billion, which is pretty wild when you think about the fact that the biggest REIT in the United States is

Simon Property, which is around $50 billion. and the biggest office reed is $22 billion, and for New York listeners, Vornado here in the city is worth $13 billion. So the fact that WeWork is going to be worth potentially $40 billion is a wow. And so it says they're going to be the second largest startup behind Uber now, which is amazing that we have these startups that are in the $40 to $50 billion range. Like this would just be unheard of in the past. Yeah, pretty amazing. So I don't, you know, I can't comment on the valuation. I don't know anything about this company's financial.

I just think it's pretty cool. By the way, I think the founder of WeWork, there's a picture of him on the Wall Street Journal article. I think he's kind of a doppelganger for Orlando Bloom. Okay. In case we're wondering. All right, let's move on to the survey part of the podcast. What do we got? By the way, people keep commenting to us the fact that we're an anti-survey podcast, but we keep

following them. But, I mean, I think we're just doing God's work here. We have to, right? They're there. We have to comment on them. So this week's survey comes from TD Meritrade, and they, surveyed millennials. And I think the funniest part of this is, so we just talked a couple weeks ago about the fact that everyone got all up into tizzy because it showed that you should

have double your income saved by age 35. And this says that millennials expect to start saving for retirement at age 36. So I don't know if that was just fate or what, but I thought that was pretty funny. But they also said, millennials expect on average to retire at age 56, and half of millennials, more than half, expect to be a millionaire at some stage in their lives or are already millionaires. So we have a little bit of a disconnect there. They want to retire early. They want to start saving late. And they all want to be millionaires, basically. And 30, well, 32% of millennials right there investing knowledge is very knowledgeable. So they should be fine. All right. Well, that settles it then. Which I think we've touched on this in the past. What is it? One out of 20 people

in the country are millionaires. And they're looking for more out of a 10 out of 20. out of their cohort. So, hey, maybe they'll figure out how to mine the asteroids or something. I don't know. Okay. So there are millionaires grew their assets by 10% in 2017, eclipsing $70 trillion for the first time. Wait, is that right? Did I make that up?

$70 trillion. Is that possible? Hold on. Fact-checking myself. While I fact-checked myself, let me say that. It does say so in the headline. The wealth of millionaires surges to top $70 trillion for the first time. Poof, this one went unwell.

You've seen this movie before? That's a big number. Okay. There are now 18.1 million millionaires, and that is investable assets of a million dollars, excluding primary residence, collectibles, consumables, and consumer durables. Why would you feel the need to exclude consumer durables? You mean my dishwasher does not count to my net worth? By the way, do you think like GLD counts as a collectible? Do you know that GLD is taxed as a collectible?

Is it really? So it's got really awful tax rates, so it's very good that I took a 2% loss because who needs that? Good thing it was in your Roth IRA. You don't receive like a K1 on that or something. Oh, good point. Good point. Yeah. I, well, that's, I'm not a financial planner, so I don't think about taxes. So there was an article this week saying that the rise in Bitcoin last year was more or less manipulated and not by the Fed this time because there is no Fed in the cryptocurrency world. Wait, was this, was this a survey? No, this is actually a study by two researchers. at the University of Texas, and they looked at blockchain purchases and discovered that tether, which is this other cryptocurrency, they used major tether purchases to follow market downturns and help stabilize Bitcoin's floor, which to me, I don't know how they can call that manipulation.

How is that manipulation? Yeah. Yes, that's what I, they were trying to say that this other currency, there are people who were trading back and forth between and to manipulate the price of Bitcoin and stop its fall, which honestly, I don't know if you call that manipulation or just a really, immature market that is still trying to figure itself out and it's so small that large investors can push it around. Hey, listen, if it's on the internet, who are we to argue? Yeah, so this one was flying around. And honestly, it's not that surprising. I think if it's true. And I don't know if you can really call it manipulation. But I mean, if you want to see manipulation, look at the fang

stocks. That's all I got to say. So somebody tweeted to John McAfee. Please advise on the next best ICA to invest, dollar, dollar, dollar sign, Mr. Cryptobonds, dollar, dollar sign. And John McAfee responded, due to SEC threats, I am no longer working with ICOs, nor am I recommending them. And those doing ICOs can all look forward to arrest. It is unjust, but it is reality. I am writing an article, and by the way, this is my John McAfee impression. I am writing an article on an equivalence alternative to ICOs which the SEC cannot touch. Please have patience and to capitalize patients. I'm not sure quite why. I guess this surprised no one, right? I think we figured out where you're going to put your Roth IRA funds, right?

Mr. McAfee's new triple leveraged ICOs. Yeah, let's move on. Okay. So there was a piece in the Columbia School of Business and they were looking at the World Cup. So we're trying to stay on topic here and talk about what's going on in the sports world. And it was the idea from Michael Mobison, who wrote probably one of the best books on skills. and luck called the success equation, and he wanted to see how different skill and luck matter between different professional sports. So he looked at Premier League soccer teams, the NBA, and the National Hockey League. And he found that luck contributed to roughly one-third of soccer teams performance because

the goal differential is so small that luck can have a large amount to do with it. And actually is just 12% of the NBA teams because I think a lot of that is because there's just so few players, I think NBA has the least amount of luck. Yeah, usually the best team, the best team usually wins in basketball. Yes, with the best players. And then a whopping 53% of national hockey league team's performance was due to luck. So I don't know if that's because of puck bounces or what, but this was kind of interesting to see the difference between the skill and luck continuum.

And in his book, he actually shows that investing would be closer to the NHL than the NBA. Good stuff. So news on athletes this week, J.J. Hickson was arrested in charge with Omrobbery in Georgia on Friday. and this is obviously a sad story for everybody involved. He played eight years in the NBA and was a decent player, so it's obviously many, many things went wrong for him to land here, which is pretty sad. Unfortunately, we see this way too often with athletes.

But there was a good story recently. Draymond Green spoke to ESPN about sacrificing for Durant to come here. And of course, the sacrifice to normal people, it's like you're making $70 million, you took $6 million less. like nobody's crying for you. But good for him. He was speaking about how he, how he was reading the contract and what's expecting to make it up in other places. And I just thought this was a really good story. Well, so Kyrie Irving was on the Bill Simmons podcast this week. And he talked about how all these younger players are coming in more prepared because they've been dealing with it for

much longer being in the AAU and being under the spotlight and social media and all these things. And it was interesting how they all view themselves as more of a brand these days and they're not really attaching themselves to a team and how they all want to play together. And so I so I think these players these days are definitely, at least the bigger, more popular ones, are thinking more like businessmen than anything than they had in the past, which is kind of interesting to see. I suspect that athletes of this generation will be much more financially successful than prior generations because I think they're less likely to take somebody's word for it, particularly an advisor. I could be wrong, but I think that they're more inclined to be a little bit skeptical.

Well, plus I think a lot of the owners these days are much smarter and much better business people and they're giving them advice and they're saying come join our team, especially for someone like Golden State who's in Silicon Valley and they're saying we'll open you up to this network of people that we know can help you with your investing on the investing side of things. So I think that that helps too the fact that just all around people are more cognizant of this stuff. It also might be sport by sport. I think that NFL careers are so short and I think they might get into more drug problems because of all the pain. killers that they take and the, you know. So I don't know if it'll get better in the NFL, but I think the NBA there's hope. This is true. Okay, let's get to, we have one listener question this week. Hold on, hold on. Before we get to that, so there was a story last night about Elon Musk accusing an employee of carrying out extensive and damaging sabotage on the carmaker. And there's a tweet that I'm going to share in the show notes from Klendathu Capitalist. So he writes, Tesla, let me get the straight. lever to the hilt will burn through its cash by 2019, can't make cars, can't sell cars, CEO going

off on Twitter under SEC investigation, whistleblowers leaking evidence, is the most valuable U.S. Auto OEM trading less than 5% from its all-time highs. I guess what you put it that way, it's kind of funny. And then he has a GIF adding Elon Musk, seriously, bro, and it's the Ron Burgundy, and you ate the whole wheel of cheese? How do you do that? Heck, I'm not even mad. That's amazing. Honestly, like anyone involved with this stock these days, I feel like unless you're just completely putting it in your account now looking at it, whether you're long or short, I feel like it's totally ego-driven. And I don't see how you could be involved in this and think you know what's going to happen one way or another, whether Elon Musk or the investors on the other side of things. It's just amazing how crazy this story's gotten. And he's, I mean, he's responding to trolls on Twitter about who are shorting his stock.

Yeah, I think this, yeah, it's like it's hard to look away. Like, there's some amazing stuff going on here. This is going to be a great book one way or the other. I mean, can you imagine maybe this is an unfair comparison, but Thomas Edison back in the day, like responding to people on Twitter about his electric company, it's just, it's sort of mind-boggling the stuff that happens in social media these days, but it is kind of funny to watch. Well, let me give a little teaser. Speaking of Edison tweeting back in the day, for our Animal Spirits Live podcast, which I'm sorry

we're not going to be broadcasting, so maybe this is not nice, but we're going to be. taking a stroll down memory lane and we're going to be looking at market history through the lens of tweets. Yeah. So if you would like to view that, we were going to replay it here, but it's going to be a lot of visuals. So come to Dana Point, California. There's still tickets available if you want to come see us. Okay. Now we'll get to a listener question. And hopefully, I think we're hoping to take the animal spirits live on the road if this is successful. So stay tuned for that. We may be doing this again. All right. So let's say, so someone asked us they want to know it's five years long enough in the equity markets to be considered long-term,

which is something we've talked about. So this was a sort of convoluted question. They said, I agree that five years is too short, but what if you have a 10-year horizon and then the first five years go, okay, what do you do for the next five years type of thing? Right. Yeah. And they say, what if a five years passed? Is it time to sell your investments?

What do you do? And so the idea is, is five years enough to be considered long-term in the stock market? And what happens if you have a liquidity event, but the five years don't go so well? And the simple answer here is the fact that this is why you diversify your investments because the stock market can never be counted on even over a five or 10 year period to give you the returns you would like. So are we sticking with? And five years is arbitrary.

Listen, if it's four years or six years, the bottom line, in my opinion, is that if you have a liability coming due at a future point in time, that's less than 10 years even, and even that's not, there's no guarantees, I would not risk money in the market if I know I have something to pay for. Exactly. Yes. This is where you, this is where cash is okay because if even though you're going to be losing to inflation over the long term, if it means missing out on a payment that you really need to make for college payment or a mortgage down payment, whatever it is, it's not worth it to take that risk. Let's move on to some recommendations for the week. What do you got for us?

I read Geometry of Wealth by Brian Portnoy and I just thought this is great. It's really the type of book that you give to your kids or somebody that you really care about. The message behind this book is how do you underwrite a successful life and how to use money as a tool to just be happy? This is not a how-to book. It was just really refreshing. I very much enjoyed it. Brian is a really beautiful writer and a clear thinker. So I enjoyed it. I just started this one and I feel like it is the kind of book where there's probably not enough written about this subject, like how to think about money and wealth and what a rich life means to you. So I think it's it's yeah it's an underrated topic all right so on saturday night robin and i went out to long island

and we had we had somebody who could watch kobe so i said let's go to dinner in a movie and she's like what do you want to say so i said hereditary we like these like psychological thrillers it's like a horror movie a thriller yeah yeah not like gore but so she's like eh i don't really know so i said no we have to see it the last horror movie that i saw on the theaters was it. And it was such an amazing experience being in a packed theater with people screaming and whatever. Like, it was so much fun. So I said, we got to do it. It's going to be, it's going to be a lot of fun. And we haven't done this in years. So she begrudgingly said yes. And we got to the theater. Movie started at 720. We get there at 710 and there's nobody there.

Oh, that's not a good sign. Not a single person. She's like, I'm so impasse. I'm like, don't worry about it. People will come. And so anyway, just one other couple came. it was us there was four people in the theater was it in so was it anything good or not yeah the ending was a little bit funky i think will annoy some people but it was it did what i think a good hard movie should do is that it makes the viewing experience pretty uncomfortable okay i can see that okay is that it's it okay i got a few couple book recommendations two of them i was reading one was rereading one was a new one so i was rereading the great depression a diary by benjamin roth this is for our i was reading this for our presentation we're doing it's a

a diary he wrote throughout the Depression, leading up to the Depression and all the way through, I think through the 1940s, although at the end it's kind of sparingly. And it's amazing to listen to a first-person account of the Depression and what happened then. It's just hard to wrap your head around how crazy the time it was in the country. And he went back and added some notes because he gave predictions along the way, and obviously a lot of them were probably not right. But it's an amazing book, probably one of the best books in the Great Depression I've read. Adam Smith, I think in the Money Game, says something, like statistics tell a bloodless tale, something to that effect. And this is, this is just proof of

that. You know, you can look at the chart and you see the 90% decline or whatever, but that does not do it justice at all. So I second that recommendation. It was so good. I love those type of history. And so the other one that I just finished reading was called the Lords of Creation, the History of America's 1%. And this was by a guy named Frederick Lewis Allen. And he wrote it back in, I think the 50s. And it's about the Rockefellers, the Fords, and the Morgans and the Vanderbilt's. so some of the richest people of all time in the early 1900s and how they basically took over the economy and what it meant for rich people going forward and how they really really control a lot of things in terms of the economy and banking and lines of production. It's really good

and it's a really good history lesson. A couple movies from this week, we tried to watch Blade Runner 2049, which is the sequel to the Harrison Ford original from the 80s. Did you watch this one? No. I don't know. It was like three hours long, a little too slow. It's kind of an interesting story, but way too long. And I didn't ever watch the original. So maybe that would have made it more, would have made more sense to me. But I wasn't, this is one of the Ryan Gossling. It was, eh, it didn't really do it for me. Way too long. I like science fiction, but I haven't seen Blade Winner since I was a kid. I had never seen it. Honestly, I like science fiction, too. The one thing that kind of reminded me of, are any sci-fi novels or books or movies ever not about

a dystopian future? Is it ever like a good thing that happens in the future? It's, always like things that have gone horribly wrong. It's never, here's how technology is going to make things amazing. It's always dystopian, in my view. Is that fair? Yeah, I think so. Things are always terrible. Maybe that's because it makes for a better story. The other one I like this week, we watched I Tanya, which was the Tanya Harding story. And it, I liked this one better than I thought it would. It's kind of, they made it the story of the Tanya Harding, Nancy Kerrigan thing from the mid-90s Olympics. They made it something of a dark comedy. And I don't don't think Nancy Kerrigan would necessarily be too happy with it because the movie was actually

made from interviews with the people who took did the hit on her knee. So Tanya Harding and her ex-husband and his friend. And it's kind of amazing how, just how, like, dumb they were and how they went through this whole thing. And of course, because they used interviews from them, the story totally contradicted itself. And I think that was kind of one of the points. This isn't the real story, but it's kind of their version of it. And it was kind of a dark comedy. So I, it actually played better than I thought it would. So I'll recommend that one. All right.

That's all I got. If you're going to be out in California next week, we leave Saturday and Sunday, I believe. We'll be there for three or four days. Come say hi at the EBI West in Dana Point. Otherwise, we will be back in action. I believe we will be filming, taping our next podcast in the confines of the Monarch Beach Resort together, correct? Yeah, so we'll still have a regular episode out next week. Yep.

All right. Send us an email, Animal Spiritspod at gmail.com. Thanks for listening. Thank you.