Animal Spirits Podcast - What Makes People Happier Than Money (EP.126)

Episode Date: February 19, 2020

On this week's show we discuss the wealth inequality problem, how to get more people invested in financial assets, who gets hit the hardest during the next market crash, overcrowding in the private markets, concentration in the U.S. stock market, intellectual index funds debates, the benefits of working out and more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by our friends at Y-Charts. One of the reasons that I like using Y-charts because they not only have access to their own data, they're an aggregator of other data. So Michael and I will be talking about wealth inequality today, hot topic, and they do a good job of I didn't even realize they had this data, but they have broken out the share of wealth inequality over different subsets of the population divided by different deciles of wealth. and I didn't even know they had this, typed it into there, found it.

Yeah, when we were talking off camera just before, I was really surprised to learn that you were such a big fan of wealth inequality. Yeah, thanks. Huge fan. Number one, I've even got an anonymous Twitter account. Anyway, we'd also like to say congrats to our friends at Y charts, financial planning magazine, an American banker named them the number one company in terms of best fintech firms to work for.

So congrats to-I have to ask. Yes. Was this a survey? Oh, that's a good question. Anyway, they were number one. If not on the survey, then in our hearts. So, anyway, go to YCharts, tell them Animal Spirits sent you and get 20% off of your initial sign-up subscription. 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 Holtz 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 Ritthold'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. There was an article in the Financial Times this week, how America's 1% came to dominate

equity ownership. And this chart is pretty striking. I think one of the things that stands out is, well, two things. One, the growth of the top 1% is really glaring, but two, the bottom 50%, I mean, it's such a small number that it's hard to even look at, but it looks like it hasn't budged one iota. And it's actually gone down. So this is just equity ownership. It's private as well as public. Okay.

So they own 90%. Here's the other stat that kind of boggle my mind. The wealthiest have bought a net $1.2 trillion in equity while the rest of the population is sold more than one trillion. So it's almost like the wealthy have done their own share buyback from the unwealthy, if you will. It's kind of wild. As the stock market rises, wealth inequality becomes exacerbated. And this is where the connection is between people blaming the Fed for wealth inequality. I don't know if they mean the stock market is, but I guess they blame the stock market for

the Fed as well. Yeah, I mean, there's so many variables at play. So I looked at the numbers, Y charts had all this number from the Federal Reserve, and they break it down by the top 1%, the 90th percentile, the 99. So that's basically the top 10% excluding the top one, 50 to 90th and then the bottom 50. The data goes back to 1989. And the biggest differences are the top one in everything. The only one that stayed the same is the 90 to 99.

So the top 1% has gone from 23% in 1989 to 32% in the end of 2019. The bottom 50 has gone from 3.6 to 1.6. And then the 50 to 90 range has gone from 36 to 29, whereas the 90 to 99 has basically stayed exactly the same. Do you think bottom 50 decreased so much? Do you think that pension ownership of equities was counted there? I guess it's hard to tell. That's a good question. I mean, that number was so small to begin with. That's tough. But the biggest one, of course, seems to be the 50 to 90th percentile, which I guess you could claim is sort of the middle class. And that one's dropped a lot. And then the top 1 percent has gained a ton. So I tried to look for,

I wrote a piece in fortune about this a week ago, two weeks ago maybe. What is the biggest reason for it? And one of the studies I found by Edward Wolfe was the amount of money that people have tied up in financial assets versus their primary residence. And so the top 1% has 75% or so of their money tied up in financial assets, stocks, bonds, whatever. And this is excluding cash. And they have maybe 10% tied up in their home. The bottom 80% has well over 60% in their primary residence and 10% in financial assets. So it's basically a mere image of one. other where the majority of your wealth, if you're in middle or lower class, is in your home. Whereas if you're in the top 1%, the majority of your wealth is in financial assets. Is there a silver lining here? Here's the one silver lining, maybe, but I think it's a brief silver lining. When we have another stock market crash, the rich are going to be the ones that get hit the hardest.

But I guess the thing is, they had that happen in 2000 to 2002 and in 2007 and 2009. And my point was that's the reason that the crisis was so hard on the lower middle classes because they had so much tied up into their home that when we had a real estate crisis, that just crushed that group. And so they haven't really been able to recover, whereas the wealthy class, all they had to do was wait out a bare market that lasted, what, 18 months. So I guess a lot of it depends on what the next recession looks like. Another potential silver lining, and I guess we're stretching here,

is Bezos just said that he's going to commit $10 billion. to fighting climate change. So he's calling it the Earth Fund. Don't you think they could have come up with a little better name than that? Ironically, it's all being invested in Tesla. It reminded me of the Human Fund from Seinfeld. I know you're not a Seinfeld watcher,

but anyone out there, that was the George Costanza made up charity that he gave people for Christmas. It's funny you mention that. I was thinking about this. Should I binge watch Seinfeld? Yes, definitely. It honestly still holds up today.

It's one of those shows that. I think it would definitely be worth it in the episodes are so short. It's like a 23-minute episodes. How many are there? What was it? Nine seasons, maybe? Ah, doable. Maybe. Yeah. I mean, I basically re-watched the show four times on TBS and TNT in college. But the inequality stuff, when the wealthy hold the financial assets, and that's where the gains have been for the majority of people.

Obviously, housing has gone up, and that's helped a lot. But it took until 2012 for housing to bottom, whereas stocks bottom three years earlier. And so I think any time you have something like that where you have a real estate crisis, that's going to hurt. everyone, but it's going to hurt the people at the lower and middle rungs the most. And that's what happened, unfortunately. What do you do to change this? Everyone says we need to tax the rich more and we need a wealth tax. I don't know that's the answer. The White House this week, they had a CNBC story, said that they're proposing tax cuts to help give people who make $200,000 or less the ability to invest like an extra 10 grand in the stock market on a tax-free basis. It sounds like it's still very early in the stages. I don't know why they actually called this an economic

stimulus scenario, because it's really just people saving. So it's actually the opposite of a stimulus, maybe long term, I guess. But I think something like this is actually a good idea. Like, don't you think instead of trying to fight this stuff and ban buybacks that we should be trying to encourage more people to invest in the stock market and own financial assets? I do. And I want to come back to this in a second. But this is a surprising chart. Share of national income. So it's not just wealth. It's also income goes going the wrong way. from 1990 today, share of national income for the bottom 50th percentile went from 17 percent to under 13 percent in the U.S.

And in Europe, it really hasn't budged. It's not going in the wrong direction. So I thought that was pretty interesting. But in terms of what we can do to solve this problem, I think the reason why there hasn't been any progress here is because any actual solutions are not going to be, there's not going to be any direct benefit from the politician proposing these law changes. because I think what really needs to happen is like giant reform, particularly in the bottom decile or bottom 50% or whatever. And it has to like start in the school system. And it's such a

structural societal issue that anything that we're talking about here are just band-aids. Yeah. This isn't the kind of thing that's going to be turned around. This is turning a battleship. Yeah. So I think proposed today is you're not going to see the effects of it until maybe a decade or more. So from politicians' perspective, how is that even going to happen? The income thing, that's one of the reasons, obviously, that a lot of young people on the bottom end of the scale aren't investing in financial assets is just because they don't have the money to do so, unfortunately. I mean, I just, you know, pie in the sky here, pipe dream for me, I would love to see some sort of match by the government that would help people, some sort of nationwide retirement system where the government would almost do a company match for people who make under a certain amount that when they put into a program. So I was doing some research on this. It's not just a retirement thing.

It's also a today thing. Yeah. Yeah, that's unfortunate. But investing in financial assets is not something that you're going to, that's not going to help something today. I guess that's the tax, the wealthy thing and give back to the poor. That's a today thing. That's why maybe that stuff gets more groundswell. Well, it's such a big thing because it's not just, we're freaking out about people,

like how are they going to fund retirement? So we have those people who have a median balance of $40,000. And then you have everybody else, not everybody else, but you have a ton of people in the bottom five percent. that don't have anything. Forget about retirement money. They can't even make ends meet. And unfortunately, I think there's always going to be some proportion of this population that's going to be in that cohort. I think the hardest hit group has just been the middle class is just kind of, we've kind of bifurcated where it's people are going way to the top or way to the bottom. The middle is kind of getting crowded out here. So there was an article called the Great Affordability Crisis Breaking America and the Atlantic.

And the author said, home prices are rising faster than wages in roughly 80% of American metro. regions. Wow. In 2018, housing affordability declined in every one of the 160 suburban areas. So maybe they should break up Bezos's new house. Yeah, but did you know it's only 0.13% of his net worth? That's a hot tweet to do these days. The percentage of Bezos's net worth that he's spending on things. That's a hot. The other hotness is that the house costs more than Amazon paid in taxes. No way. So this great affordability piece of the Atlantic. I have some quibbles, but they mentioned the fact that two and five American adults would struggle to come up with $400 in an emergency. That's never going to die.

I know it's never going to die, but when I read that piece, I immediately almost go, I don't know how much of this I can believe anymore. My eyes have been open to this survey data that this thing is bunk. Yeah. I feel like it's just a lazy argument. Well, all right. It's, no? Just one piece. Okay. Yes. But here's the thing about the housing affordability stuff. We complained during the crisis that all housing did was go down. And housing prices went down for years and people complained about that. Well, they didn't go down. They crashed. Right. And now housing prices are going up and people are saying you can't afford to own a home, even though interest rates continue to fall. What is the middle ground? There's never going to be this equilibrium, but it's like no matter what happens, someone is going to

complain. Housing is crashing or housing is going up. What do you want? While we're on the topic of housing and interest rates, so I heard back from the company that I'm refinancing with. And I was talking on Friday and I was like, all right, lock it in, lock it in. It's like, this sounds too good to be true. So I'm going from a 30 year at 4%. And when you talk about a 30 year mortgage, it's almost like a ridiculous number like 30 years from now. Am I going to be in the house 30 years from now? I don't know. Maybe. Probably not. But the point is it's such a large number that it's like so far into the future. So rates have fallen so low that I ended up being able to refinance fingers cross because the paperwork's not done, but at 15 years for two and seven-eighths, which is amazing.

Did you get a mortgage in 1984? Why are you quoting it in terms of a ratio, two and seven-eights? Are you from... That's how it was quoted to me. I'm just being apparent. But anyway, so the point is... Is that Brown giving you your mortgage? Where did you find this? Two and seven-eight's? Is someone ripping you off? No one quotes mortgage rates in fractions. Really? No, not since like 1993. That's what I've been quoting it the whole time.

My previous mortgage was it was four and five-eighths. Did they just like write out your mortgage on a piece of paper and pencil? What, two and seven-eighth? Here you go, sir. Here's your ticket. So listen, my monthly payment is going up quite a bit. However, over the course of the lifetime of the loan, if I were to stay there, I'm saving a ton of interest, a number so big that my wife was

talking about, she's like, she goes shopping at this store called Five Below. And she was talking about how she got something at Amazon, but then it was more expensive here. She's like, what's 78 minus 25? And I was like, it's a waste of time. That's what it is. Did you listen to how much money we just saved on interest? And she's like, you know, I'm talking about 78 cents minus 25 cents, right? I was like, yes, I know you're talking about cents. This is a complete waste of time. I hate to be spreadsheet guy here. So whatever you're paying in extra monthly payments, if you didn't put that towards your mortgage, is that something that you would save, say, in a retirement account of your stock market. So are you doing the opportunity cost of, yes,

I'm saving X amount and interest over time, but what if I were to save this money? Nope, not doing that. So, okay, fair point. Fair point. But I wouldn't be investing that money. This is for savings. Yeah, that's the problem with a lot of people is you could do the spreadsheet thing and say, well, if you invested it in stocks and made 5% over that time, you'd be way ahead doing that instead of paying down your 3% mortgage. Right, but I wouldn't. Yeah, I think that's the point that you've actually pushed me. me to look into the 15 year thing too, even though I think rates are so low. I almost think like young people, this sounds just really dumb in a lot of ways. But I think young people almost

should be taking on debt. If you're doing it smartly these days, the rates are so low. So the guy was saying to me is like, I probably wouldn't wait for them to go lower. And I was like, no, no, no, no, I don't want to look at gift torts in the mouth, lock it in. And is this psychic income, by the way? Is that what this is? I felt amazing. I was like, wait a minute. In 15 years, if I make one extra payment a year, or might or might not, my mortgage will be gone in 12 years, which is a thought that a year ago, two years ago, would have been so out there. I wouldn't even have even taken it seriously. This is why this decision is not something that you could put into a spreadsheet and say,

well, if you made 5% here versus paying off your 3% here, you would actually be this far ahead. It is a psychic income thing and it's an emotional thing where some people can look at it just in terms of the numbers. And some people really need to just say, you know what? I want this off my books, I don't want to deal with it. And so that's why this decision is such a personal thing for people. Because you're putting money into a liquid asset that you can't spend. But if you can have that weight lifted off of your shoulders, how do you quantify that? Cannot. That's the way I look at it. Okay.

So there was an article about private equity and it was, at first blush, I'm reading, I'm like, well, maybe instead of firing warning shots about how the industry is so wildly valued and how people's expectations are too high. Maybe this is just like a secular transition. Maybe that's just what's going on here. And then after like three paragraphs, my immediate thought got pushed to the side because this article was not one of those like hyperbolic warning signs at all. It did a look into the private equity space. And it asked a question, how big is the space? Because we hear about how there's, I don't know, $800 billion in dry powder, whatever the giant number is. And you're thinking like, wow, this is a lot of money and all that sort of stuff.

turn to expectations. So what they did was they looked at the total investable space. In other words, if everybody's piling, where's this money going to go? Because it's just not that big. So today, there are over $4.5 trillion in private capital assets across 10,000 managers. 20 years ago, there was barely $500 billion in just 1900 managers. So what this post shows you is that the size of private markets, they estimate to be like $2 to $3 trillion. And it's like, oh, well, That's why there's $800 billion in dry powder because there's nowhere for it to go. That's a crazy number like hedge funds almost going from 1900 managers to $10,000. That's huge.

And this is why valuations have gone up so much. And this is why ostensibly returns have to come down going forward. I've come to the realization that it's easy to predict that there's all this money rushing into private assets and it's going to end horribly because they're investing at higher valuations and levering up all these companies. Dan Rasmussen was on with Ted Cedies this week on Capital Alicators podcast. And he talked about what does this mean? mean if this happens. And Dan said there's so much money in here, even in the worst case scenarios, I think it's almost like there's just a muddle through and people don't even realize they're just being strung along. Because it's going to happen so slowly? Yeah, it's one of those things where

there is so much money now in infrastructure and money pouring in from endowments and foundations and sovereign wealth funds that the results are probably going to be nowhere near what they're expecting. But it takes so long for these things to play out that they're going to be able to have money to put into these zombie companies and keep them alive. And they're just not going to have many exits unless these private equity companies just start switching chairs with one another and trading and buying firms on another private equity company where you're not going to have this huge crash in private companies. There's just going to be strung along and the IRS are going to be way lower than they were in the past. And they'll just be able to keep putting more money in

and extending the periods for investing. And it's just going to go on where a lot of these foundations and endowments 20 years down the line are going to go, oh, wait, we didn't do very well these things, but no one even knew it for a long time. I think that's the way it's going to play out probably. How great would it be if Dan nails it and returns are way, way lower instead of whatever, let's just say that 3%, 4%, whatever it is? And then Dan raises a $10 billion private equity fund. Well, there's capacity issues for him because he's doing small microcaps, but I mean, don't you think it's time for everyone to agree that if there's going to be low returns in this one space, in this space, in this space, it's going to be across the board. But that's backwards.

That's been my argument is that people are going to private markets because they expect public market returns to be lower. It's like, but we're fishing in the same pond. That's the thing. If one of them is lower, they're all going to be probably lower. That's the thing people have to wrap their heads around. Valuations are high basically in everything except for international stocks. And everyone knows in 30 years, the U.S. is going to control 99.9% of the global stock market.

Well. That's the only way this plays out, right? Apple's an $18 trillion company. So not saying that there's too much money in the private equity space. but Blackstone's looking to put them into the target date funds? Mom and Pop millionaires are driving Blackstone's growth. Did I say Black Rock? I don't know.

I mean, I mean, same thing. Gun to my head, difference between Black Rock and Blackstone. Once a Rock, one's a stone. Yeah. So honestly, my first read of this when you told me this that they're thinking about talking to regulators at the SEC about allowing target date retirement funds with longer investment horizons and greater flexibility to invest in illiquid assets. My first thought in this was, this probably isn't the worst way to do it.

Go on. Go on. I would not want this personally. But if you're going to do a private equity fund somehow, let one of these BlackRock or Blackstone or Vanguard or whatever who's getting into private equity put it into your target date fund where it's one of many assets within a fund and you're not looking at this singular thing and they're handling it all for you and they're rebalancing and they're putting the cash flow is coming in and out. If you're going to do this, I think it's not the worst idea in the world. And now I think, listen, all these places getting into private equity, the returns are going to be crap. I really believe that. But if you're going to do something like this, this isn't the worst way to do it, I don't think. Thoughts? I've heard worse. People are going to say, oh, this is the top. Like they say about everything.

But I think that, yeah, if you're going to do it in a retirement account, again, long-dated assets, cap the amount you can put into it. I've heard worse ideas. There were a couple indexing pieces the last couple weeks on a podcast and a video. we don't need to name them, but we watched them on the same day. And I think you called me and you said, you know what? I watched this video talking about how the great unwinded index funds is going to crush everyone's retirement. And we were both like angry after listening and watching these things. I couldn't sleep. Because here's the thing. I think investment intellectuals, the people that know how to use big words and sound smart and invest in complex strategies, I think they have a

hard time wrapping their head around something as simple as index funds. And so Eric Belchunis put this this high profile hedge fund piece together of all these high profile hedge funds who are worried about index funds and passive investing and the bubble in index funds. And the only one who really says that they're not worried is Cliff Asness. And everyone else is just really worried about what's going on in these hedge. I think some of these people are so smart. They can't wrap their mind around the fact that something this simple could actually work. And it makes sense for most people to just invest their money prudently this way. And you said to me, okay, let's say they unwind. What does that mean? Stock markets always unwind when they crash. Did we need ETFs and indexing for the roaring

20s in the Great Depression of the go-go 60s and the nifty 50 in the 73, 74 bear market? Like, no, that stuff happened before any of this stuff existed. It's always going to happen. One of my favorite Vogel quotes was like, during the 73, 74 bare market, I think there was outflows for 22 consecutive quarters. Right. If people panic, they're going to panic no matter what they hold. You can look at all these, well, if you look at the granularity of volatility versus 10 years ago, index funds are blah, blah, it's like, of course market structures are going to change and the way people invest is going to change. But saying that all of a sudden, people are just going to leave all their index funds and ETFs at once, I mean, it just makes no sense. When markets crash, people sell

or people are selling because market, trying to blame it all in index funds just, to me, just reeks of someone who's trying to gain attention or gather assets or get people scared. It just, I don't know, trying to go that route to get attention just really bothers me. So I was watching this video late at night and I generally enjoy the bear case. I find it sort of stimulating. I enjoy it. Yeah, because like 5% of you is like a zero hedge person. 5%.

But when the bear case is literally that the indexes are rigged, I know. And the benchmarks are rigged. And yeah. I was thinking to myself, angry, my blood pressure was up. I couldn't sleep. And I'm thinking, like, what's wrong with me? Am I, maybe I'm just, I haven't been doing this long enough. I'm still immature that I can just not turn this off and just not think about it. I don't know why. It made me angry. I hope that I move past this. But so I guess specifically, like, what's going on with the index stuff? So there's some good charts floating around here that gives a ton of ammunition to people who say that the indexes are right. And I'm not saying that it's legitimate, but here are some of the data points. some really good charts floating around. So there's a record percentage of S&P 500 market cap held by just five stocks. So right now it's 19%, which is, believe it or not, higher than it was in the

dot-com bubble. That's high. That surprised me. John authors wrote, yikes, excluding the big five. So the, what was it called? Not the MAGA. Oh, not fan mag. All right. So it's just the M-A-A-A-G-A. Microsoft, Apple, Amazon, and Google. There's too many acronyms for me to remember. It's too much. So, excluding the Big Five and U.S. earnings were actually down 7.5% in the fourth quarter. So it's not just that they're controlling the market cap. They're also driving the earnings. So I thought that was pretty interesting.

Daniel Soderoff over at Morningstar said, for anyone that wants to gripe about the concentration of the U.S. market, here's some context. And he showed a table showing the percent of assets in the top 10 holdings. And U.S. was, so Japan is the lowest concentration with 19 percent. U.S. is 21. And then the UK jumps to 45%, China is 47, France is 49. So he's making the case, like, actually, it's not that bad compared to a lot of other countries. That was very...

Switzerland is 75, Italy is 76, like huge concentration. And you sent me this. I looked historically, and this is some data from our friends at O'Shaughnessy that... So back in 1965, 18T made up 8% of the index in General Motors was 7%. The top 10 were 34% of the S&P. And if you go back to the early 60s, the top 10 were 50%. 50% of the S&P 500. So it was just this huge amount back in the day where you had just these big blue chips. And it's actually gone down since that. It is ticking back up now. But in

1980, it was right where it is now, the top 10, 25% or so. And I guess people just get worried maybe because it's those names that they know at the top and they've gone up so much. And so there was this, I don't know, do you think this is a chart crime? This history of asset bubbles the past 40 years. And they show gold, Japan, Thailand, tech stocks in the late 90s, U.S. houses. now they're calling these disruptors, which I guess is probably the Fang. It's the NY Fang Index, whatever that is, that has gone up even more than these bubbles. The thing that troubles me about this chart, I actually like this chart aesthetically. A chart can be nice aesthetically, but does that make it not a chart crime? Your pie chart was aesthetically pleasing,

but a lot of people thought it was a crime. Here's what I'm going to say. And I guess you could make the case for all bubbles that this one is supported by fundamentals. I don't know. Is this a bubble in Amazon or Apple? I just, I don't know. I guess how can we know, right? Isn't that the thing? Like, we just, we don't know the future. The thing is history shows a lot of these companies just don't stay at the top.

And if they do, like IBM was in the top 10. I looked back again until the 60s. IBM in like General Electric were in the top 10 forever. And now both have dropped off. And General Electric has fallen, whatever, 50% since 2000. And guess what? The S&P didn't flinch when the biggest holding in the index got cut in half over 20 years. It's going to happen to one of these tech stocks.

Like, could they stay? Well, it did. Apple got cut in half. In 2013, I think Apple fell 45%. And the index kept making new all-time highs. And guess what, Apple was the biggest stock back then, too? So we did experience this. People just don't remember, I guess. In 2030, there's no way all five of those are still going to be the top.

I can almost safely assure you that. That's not going to happen. It's going to be a new stock or one of them's going to fall off based on competition. This is just the way markets work. I guess we can't disprove the fact that indexes are moving around the market. I guess the data that we can point to is what, percentage of overall trading is done by index funds? Less than 20 percent? No, it's like less than five percent of the underlying funds. Okay. It's still very small. So the people who are worried

out price discovery, the active managers are always going to be setting the prices. And we're always going to be free riding. Yes. I mean, did people back in the day say active managers are causing market disruptions, causing crazy, that's just the way things have always happened. And it's going to happen. I just, like, of course, it's changing the structure of the markets a little bit, but markets are constantly changing on their own as it is. It's like, it's always going to be this way. Here's a bare case that I love. So Mark Spitznagle, I guess he's known for like working with Talib. There was a profile of him in Vanity Fair. And he says, when the market crashes, I want to make a whole lot. And when the market doesn't crash, I want to lose a teeny, teeny

amount. I want that asymmetry. I want that convexity. And what it means is I provide insurance, crash insurance to my clients so they can put a sliver of their portfolio liquidity into it. And then because of the downside protection I provide, they are allowed to then take more systematic risk. So he was saying how like, he's like, I don't hope that the market crashes just because it'll be good for my strategy, although maybe he was just saying that. That's the type of thing that appeals to me. It's like, listen, could be wrong. Who knows. But to me, that's so much more appealing than index funds are rigging the market. It's a smart way to look at it, and I still think these crazy black swan hedge type programs

that'll go up a lot when markets go down a lot, I still think for most people they don't really understand that they're paying insurance all the time. Isn't the simplest form of hedging just holding more cash for most people? I still think that's an easier way to think about it. But the reason why I like what he said is because he literally frames it as insurance. I would guess that most of his clients understand what they're paying for. And again, the main point is he allows him to take more risk, whereas cash doesn't do that. I still think this is the kind of fund where it'll be up 20% in a day when the stock market gets hit hard, and then a ton of assets will pour into it.

So investors still don't understand how this thing works. Like they'll still be chasing. You don't think so? It's not like a mutual fund. I know. I'm not blaming it on him. I'm saying he'll have people lining about the door. That's what all these endowments and foundations were looking at Black Swan strategies in 2009 and 2010 after the fact.

That'll happen. But I did think this was kind of funny. The Vanity Fair headline for the story was no longer. tethered to fundamentals. I just, when have markets ever been tethered to fundamentals? Has there ever been a time when we've said like, oh, perfect. We're at a P of 15 and interest rates are 4% and things are good. No one has ever like thought we're at a good equilibrium. We're never tethered to fundamentals. William Cohen, whose book on Goldman Sachs I enjoyed, I think he's been beating the strump for a while now. Yes, he's kind of a bearish guy. I just think those kind

of headlines are kind of funny because we're never tethered to fundamentals. Right. Okay, ThinkAdvisor had a piece about Susie Orman and how she invests her own money. And crazy to me that she actually created a latte fund where she invests $5 a day when she doesn't drink a coffee. I'm just kidding. So some of the stuff in years kind of wild. They talk about her own finances and she throws around a lot of stuff here. She says the majority of her money is in municipal bonds, but she plays in the stock market because she's making more money now. And it said at the end of 2018, she was investing heavily in cannabis stocks.

and that's not true anymore. She named off all these companies. She says she got rid of Facebook because she was mad at them. She has a biotech position. She lends money to gold mines because she says small gold mines need money. Two years ago, I did a partnership with some people. We lend money to the gold mines and they pay back the loans at $400 an ounce in gold, but then we turn around and sell it for like $1,600 an ounce or whatever it is valued at. If you read the way that she invests, you would never think this is someone who preaches personal finance to the masses. And my first thought after reading this was, if you're a good salesperson, honestly, it doesn't matter how you invest, because the way that you sell will always trump whatever you're

telling people. And honestly, the other thing is, for someone who like that, she's talking about how she's sitting in $50 million in cash, and she owns an island in the Bahamas or whatever with her partner. And if you have that much money, it doesn't matter how you invest. You could light it on fire, but that's the problem is like people who take advice from people like this in terms of They see the headlines and how they invest, and then they want to invest like them, just like hedge fund managers. It doesn't matter how they invest. They're making so much money from their business that it really doesn't matter.

But for normal people, it does. Those are great points. And yeah, I mean, overall point is don't take specific investing advice from billionaires because they have nothing in common with you. Who cares how she invests? It could all go to her cannabis investments, her gold mines could go to zero. She is $50 million in cash. She'll be fine.

And it's not even to discredit what she says specifically, but just generally speaking. No, and I think the main point is she's had millions of people buy her books. I think at the end of the day, a lot of people don't need good advice. They need someone to motivate them. And she's probably more of a motivator than anything. But again, it just gets back to the fact that if you know how to sell to people and touch on pull the heartstrings and tug on people's emotions, you can really create a good business model, even if you aren't necessarily the best investor in the world.

And a lot of times, I've always said a good sales staff will trump a good investment staff in terms of raising money and awareness, nine times out of ten. That's just the way the world works. Yep. All right. So I like this article, talk about like quantum mental stuff, merging data with humans. On the last Sunday of April 2019, a sleek Gulfstream jet belonged to Occidental Petroleum Touchdown on Omaha Airport.

The only company had set the delegation to Nebraska for a secret meeting with Warren Buffett. Unfortunately, the meeting did not stay secret for long. An alternative data company called Kwondel that tracks the flight details of private jets I quickly alerted its clients, mostly hedge funds. Two days later, Occidental announced a $10 billion investment from the Oracle of Omaha. Don't you think that this is probably like table stakes at this point? Stuff like this is just everybody's doing this already. Right.

The first mover advantage of this stuff is probably gone like that. It's like the high frequency trading where the money that they were making just slowly goes down over time as competition comes in. So I don't know how you could say that this is your edge unless you're really the first one there every single time in terms of this data. Yeah, I think all these hedge funds, they're tracking the plain numbers, they're looking at the golf scores and handicaps, and they're checking, they have satellites on all the crop details. And yeah, if that's the way that you're looking for an edge, I think that's going to be arbitrary pretty quick. Survey. Okay. What makes people happier than

money? This is one of the biggest surveys I've seen. In a large survey of 1.2 million Americans, researchers from Yale in Oxford show that people who exercise are markedly happier than people who don't, even if they have less income. So they showed what? I was going to say, wait, but you just overrode my weight. I was going to think that like... Were you going to talk about Peloton again? If you have time to exercise, aren't you probably financially secure? Yeah. So they show a sedentary person would have to earn an additional $25,000 to be as happy as a person who exercises. And it's only, it's not like more exercise makes you happy. They say the cutoff, it's kind of like that making $75,000 and up. You don't get that much happier. So they say exercising three times a week for 30 to 60 minutes

has the most potent effect on happiness. I totally biased. I don't know if you could tell that I'm a little got a little pep in my step today. I wrote the Palaton yesterday. Ah, you did it. Can you see I'm glowing? Yes. You do seem happier. And I actually, I think for me, I would never be someone who would meditate. I just, I wouldn't want to get stuck on my own head. And I feel like that's something billionaires do because they're so stressed out about things. But I think exercise is like a form of meditation. And so I think it is a way to think through things and get happier. And I totally, if I go a few days without, I'm not happy. So I agree with this. All right. Listener questions. What drives ETF prices? Is it the underlying assets, the demand for set ETF or a combination of both?

For example, what happens at Vanguard went through a stretch of bad PR. Where their ETFs take a hit? If people stop buying VOO and switch to SPY, we would see a significant decline in VOO. No, we wouldn't because there is a market structure in place to make sure that this doesn't have. happen. There are these things called authorized participants, which are basically just like the big giant banks that have very sophisticated and complex algorithms in place to arb any of this away immediately. If it diverted from the NAV, the underlying net asset value, someone would see that and say, well, the fund is trading less than the underlying assets are worth. I'm going to step in and buy that in arbitrators away that difference. Do you think that these are what the index rigged people

think is going to happen? Yes. I think they think it's going to completely, and we've seen, when we've had these mini flash crashes the last few years, and we haven't had one in a while, but I wouldn't be shocked if we had one again at some point. They're over within a couple hours. It happens relatively quickly. You wrote about this, the flash crash in the early 60s that lasted a few days, I think, to reconcile all the prices. Yeah, because they were trading with pieces of paper, like you trade your mortgage these days. But, yeah, especially in a fund like that, like SPY or VOO, like an SP500, I would never be worried about seeing a divergence from the NAB in that. Maybe in something like high yield or corporate bonds.

maybe for a day or something, but if you're not a short-term in-and-out trader worrying about something that's happening in a couple hours, I don't think this is something you need to worry that much about. I think it's the kind of thing that will impact you in the very short-term, not in the long-term. Okay, next. I am sure you have both heard of the Reddit thread, Wall Street bets. Do you believe a community of that size has the ability to affect the market? For example, if the group decides to buy calls of a specific company on a specific date, do you think they have the ability to drive the price? I think we just explained earlier that the 1% of the 1% controls basically all the stock. However, if a group of people is buying options

and putting a relatively large amount of money to work in a otherwise relatively illiquid microcap stock, absolutely they can do something like that. And how many people in the 1% of the 1% are on a Reddit thread trading? Isn't this mostly young people with probably not a lot of money? But I'm saying it probably doesn't take a ton of money to move these illiquid stocks. So theoretically, I think they can do it. That's possible. They're not going to move IBM, obviously, but a $20 million biotech stock that trades 4,000 shares

a day. But don't you think the SEC would love to slap the wrist of some young punk traders on Reddit that come together and... By the way, we have to say this is not advice. Right. Don't go try to move on options on microcap stocks. Okay. If the boomer generation is juicing the market to make up for their losses from the

great financial crisis, what is the best way to position ourselves? assuming they're pulling in future growth right now in returns. I've never heard this theory, actually, before, that the boomers are juicing the market to make up for losses? Well, because all the money is going into bond funds lately. Well, didn't we say last week the boomers control the Fed? That is true. I mean, the best way to position yourself, I don't know, lower your expectations for the

future because things have been going so well. I think if a generation really had the ability to juice return somehow, don't you think they would have done it prior 10 years when markets went nowhere? Yeah. So, all right, I think I understand the mentality of this question, but we don't subscribe to this idea. Returns have been higher for the past 10 years, no doubt. Over the past 20 years, when the boomers have really been investing, not just the last 10 years, returns have been below average. So I reject this idea. I understand where it's coming from. But if you're a young person and you've got 30 years, I wouldn't even worry about it. And yet, and if you're a young person, you should hope the next 10 years the market's going nowhere. Right. That would be, for us, one of us is fast approaching their 40s.

One of us is approaching their mid-30s. And yet, only one of us has hair. How about that? Professionally, markets going nowhere for 10 or 15 years would not be great for us. Professionally, personally, as we're saving markets going nowhere for 15 years and a lot of volatility in the meantime, would be great for us. And then as we hit our 50s, if then markets took off again, that's like the perfect scenario because you're hitting... Maybe you're middle to peak earning years and you're saving a lot and then markets go off. That would be the perfect scenario.

Now, you don't want to see markets go nowhere if you're retiring, but that's also why you diversify and you've had this last 10 years. So I think you have to take into account the last 10 years being great and then adjust your expectations from there because if the last 10 years weren't so great, guess what your balance wouldn't be as high as it already is. So that's why you have to, it's all about just expectations and understanding how these things work. So all right.

Recommendations. What do you got? I read Dark Tower. by David Enric. He is the author of the Spider Network, The Scandal on Libor. And this book, so there's been a ton, obviously, a ton of Deutsche News, Deutsche Bank News. I read this book, too. David sent us an early copy. I'm halfway through it. I think this book was the first time that taught me how to say the name, not Deutsche Bank, but Deutsche. Well, also, on last week's, we did a podcast on margin call. You kept calling it Lehman.

Not Lehman? It's Lehman. Lehman? Yeah. All right. Sorry. You don't want to say Bezos, so. You're an out-of-touch Midwesterner. It's Bezos. So Dark Towers was a very good story. So what I was saying is that Deutsche's been in the news a ton. I've kind of ignored it. I haven't really read any of the articles. Have you? No. A lot of this was news to me. How screwed up they are. So just top to bottom, just a toxic, toxic culture. What's really amazing is that usually when you read books like this, it's after the fact when they're no longer in existence. I guess an exception is bad blood about Uber. Like they're still going.

but Deutsche Back is still operating. If they didn't go under, they're never going under. Right. That's one of the things is like how often they were so close to the edge of going under back in the day. And they've been around for a long long long. Like the stuff about them basically funding the Nazis during World War II was, holy, yeah. Yeah, not good. Okay.

So did I speak about this last week? I'm sowering a little bit on the older movies. I tried to watch Unforgiven. That's not really that old. But do you ever see Unforgiven, Clint Eastwood, Morgan Freeman? Long time ago. All right. I was just bored.

I gave up after an hour. Don't you feel like it would be hard to make a good Western anymore? No. 310 to Yuma was great. It was okay. I really liked it. Okay. Stripes with Bill Murray?

You're out on Stripes? Okay. I watched 45 minutes. I didn't get it. I know you love John Candy, but... The last half of the movie was unnecessary when they went to war, but the beginning... Oh, really? Because the first half I thought was unwatchable.

Okay. I like Stripes. It's been a while. I'm a big Bill Murray 1980s movies fan, so... All right. I got to rewatch Cadyshack. I haven't seen that since I was a child, but I don't know. Tough going.

Okay. You've been really searching hard for your movies lately, I guess. Trying. Is that it? That's it. Okay. I had a bare market in books for a while where I was reading two or three chapters and putting them down and not reading much, so I finally got some good ones.

We are thinking of doing a little side project on parenting for the podcast here, TBD. So I reread Home Game by Michael Lewis. I actually read it. I read it when I was before I even had kids. It's kind of preparing. It's been a while. It's not Michael Lewis's best book. but it's probably my favorite of his.

I loved it. Kind of like how Uncle Buck is not the best movie in the world, but it's probably one of my favorites. It's kind of in that same sort of realm. But the way that he just describes the ridiculousness of some of the stuff you deal with when you're dealing with a toddler and the way that they react, it's just laugh out loud funny at parts.

He just nails the whole thing of parenting when the kids are young and how crazy it is. And he has a lot of good one-liners. And so he talks about how if you have a gift for frightening new parents, your fortune in this world is secure. New parents are not rational. They worry about all sorts of things. that makes no sense in the world to worry about.

And this one was perfect. There's no such thing as equilibrium in a room full of toddler. Something bad is always about to happen, which is very true. I love that book in terms of parenting and how parenting really goes. Robin and I, hold on. Robin and I read that book. I read it out loud when Kobe was born. Like I guess while we were like feeding him or whatever, it was very enjoyable.

Someone recommended the great influenza by John Barry, which is about the 1980 outbreak in influenza kind of because of the coronavirus stuff going on. Some of the stats from this book are just, the book is probably a little too long because it goes to the history of medicine and how doctors became more prevalent and the education improved, which is kind of interesting. Does it boggle the mind? Shut up. Okay, here's some stats. Before the worldwide pandemic faded away in 20, it would kill more people than any outbreak of disease in human history. It killed more people in a year than the black death.

The Middle Ages killed in a century and it killed more people in 24 weeks than AIDS killed in 24 years. it likely caused 50 to 100 million deaths depending on how you want to look at it. Wait, what was this? It being short Tesla? Yeah. So normally like the regular flu kills elderly and infants, but at the 1918 pandemic, half of those who died were young men and women in the prime of their lives in their 20s and 30s. And the upper estimate is 8 to 10% of all young adults living then may have been killed by the virus,

which is crazy. And people were dying in like a span of 24 weeks, so it's not like it took very long. My thing is that 30-year period of World War I to the influenza thing in 1918 to the Great Depression to World War II, that 30-year period, can you imagine of some of the things like that were happening today with the onslaught of social media and the information age we have? No, God forbid. I don't think people could handle it. That 30-year period to me has to be just one of the craziest times in modern history. And I just don't know how those generations survived it. maybe it's because a lot of them didn't know the extent of how bad things were, but this book was, yeah, mind-blowing to say the least.

And finally, I tried the McDonald's fraud documentary on HBO, the one about the monopoly thing. I can't even remember what it's called. I'm the audience for this thing, and I've read a little bit about it before, so I knew the story, but I watched one episode and it was way too slow. It probably didn't need to be six episodes. They could have done it in a 90-minute to 120-minute single-back instead of making six episodes and string it out. So I was out on that one. I'm with you. Unnecessary. You know what? Sowering on me?

A lot of filler. The outsider. I mean, this is a sunk cost because... We have to stick with it now. It is, I agree. It's three or four of the episodes are unnecessary. It's not great. I still like it and I'm with it.

I'm going to need the ending to pull me back in, but this should have been a six. If the Brits would have done it, it would have been a six episode show, not 10. Would have nailed it. BBC. Where are you? I know. Okay. Animal Spiritspod at gmail.

And if you missed our show from Monday, we went through. and rewatched margin call for a random watchdown Wall Street. We think it's probably one of the better movies ever made about the financial crisis. What are we doing next? Check it out. I think the next one we're going to do is the founder about the Ray Kroc McDonald's story. We're doing the founder. We're going to do the founder.

So if you want to watch along with us, find that. That's the Michael Keaton movie. Send us an email. Follow us on Instagram. Subscribe, rate, review. Talk to you next week. Thank you.