Animal Spirits Podcast - Where Were You at the Bottom (EP.72)

Episode Date: March 13, 2019

On today's episode we discuss Bill Gross, the hardest thing to do in the markets, the biggest mistake savers are making, how many workers max out their 401k, how much credit card debt is out there, what would you be willing to give up to get out of debt, how to cut your mortgage payments, why people move 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

Today's Animal Spirits is brought to you by Why Charts. White Charts is where Ben and I get all of our data from, everything from price charts to economic data to fundamental data and much more. If you are a new subscriber, visit Ycharts.com. Mention Animal Spirits and you'll get 20% off a new subscription. Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing. Hosted by Michael Bannick and Ben Carlson, two guys who studied 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 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. All right, Ben, I'm here to tell you that I'm a bit of a hypocrite.

Okay, get me with it. So my mother used to say you can notice a fly on someone else but not an elephant on yourself. And I don't think that she was talking to me. Like there wasn't an accusation because I do notice an elephant on myself. Okay. This weekend, Robin and I were going to go to breakfast. We're going to go to the diner. But we had a built-in babysitter.

So you said, you know what? Let's do something a little bit, one step above the diner. So we went to a place that has a brunch menu. Trader. And we ordered off the brunch menu, but is it brunch if you eat at 8.45 in the morning? Oh, no. I think you saved yourself there. I say brunches any time after 10, 10, 30. Okay. Well, I definitely ordered brunchy food. I ordered chicken and waffles. Well, here's the real question. Did you take a picture of your food and put it on Instagram?

I took a picture, but I didn't Instagram it. Okay, you're saving your own meals for which is weird. I don't know why I did it then. You know what? I took a picture. I said, eh, not going to do it. Okay. Good. I've been cutting down on my Instagram food photos. All right, but anyway, so I ordered a brunchy item. It was chicken and waffles with fried eggs on top. But it was at 8.45 a.m.

Okay. All right, I think you saved yourself then. All right, and then, if that's not bad enough, on Sunday, we had Kobe's second birthday party, and it was a rainy, windy day, and I was going to party city to get balloons for the birthday party. So I had no choice. The back end. The weather forced my hand. I backed into the parking spot.

Well, if you have been reading anything or. listeners have been sending us, then obviously you were thinking of safety at that time. It felt much safer. I will say this. But also, no, logistically, I had to open it because there was a roof on top and it was shaded from the wind anyway. I just want to throw that out there. All right. On to business. So this week was the 10-year anniversary of the bottom in the SP 500, and I believe the Dow probably bottomed the same week. So, Ben, where were you and what lessons, what takeaways? What's your relation to the bottom 10 years ago? I was buying handover fifth. I put all my money in on March 6th or 9th. No, I don't know. So I did a little

quick look at this. The S&P is up through Monday afternoon, 407.5% since the bottom. Wild. Not bad. I was, I guess I was still relatively early in my career at that point. I guess I'd been in the business for five or six years. How old were you in 2000? I don't know. I do the math 10 years, 28, I guess, late 20s. Okay. It was an interesting time because I was still so, I started a new job in July of 2007, basically right when stuff started going haywire with financial firms. And so the entire time I was at that job, it was basically volatility and crappy markets.

And so it's kind of like all I knew at that point. But wait, stocks peaked before the market did it. what, you're telling me you didn't notice that negative divergence. Right. Sad. I know. I think it was actually a good thing being relatively young at that point because I was almost too, like, naive to understand how crazy the times were.

And so it didn't really have as big of an impact on me, I think, as it is looking back. But, I mean, I was an investment person within an organization that didn't have a lot of investment people. There's three of us that were investment people in an organization of like 400 people. And I remember every single day, people talking about the stock market. and they were talking about the Dow and looking at it. And that was like the biggest thing to me is that, oh, people who are not in the investment field are actually paying attention to this stuff every single day.

And they were really scared about what was going on. It was pretty crazy. But were you investing at the time? Yeah, of course. I mean, I didn't have a ton of money at that time. But for me, my whole thought was I'm probably never going to see prices as low again. And I remember I had colleagues who were putting their 401K contributions into money market and cash and stable value funds.

And I'm thinking, you know, this is my retirement money that is not going to be touched for decades and decades. And so I'm not trying to pat myself in the back, but I knew like there's no, what else are you going to do except just continue to put money in? And I remember it hurt a little bit, but I was increasing my savings rate all through 2008 because I knew like this is going to be the best buying opportunity. Those, those investments will by far be the best returns that I see ever. And do you still, like, were you investing in a taxable account as well? I mean, that was the point in my career where I started trying to be a stock picker, which probably had mixed results. But I mean, I bought Apple in 2008 and held it on for a couple

years and it was like an insane investment. But I also bought some. Wait, did you sell Apple? I probably did a few years ago. I don't own any individual stocks anymore. I just, I just don't care to have it hanging over me. But I would never pat myself in the back for that. It was just kind of like, what else are you supposed to do at that point? Everyone else was just paralyzed, and I thought, well, if the whole system goes under, then everyone's screwed anyway. So what's, you know, what's the worst that could happen? So my story is a little bit different. I was 24 years old at the bottom. And I had just graduated college, I guess a few months earlier. And if you do the math, yes, my college was an extended visit. And I got a job at the insurance company. And I sort of

of wish that I can go back in time because I only have like vague memories of what was going on around me because it feels like so long ago. But I remember the first time that I really found out about what was going on was actually before that when I was when I was a waiter while I was in college. And I just remember and it was like a nice Italian restaurant and I remember the traffic just sort of fell off a cliff. You heard a lot of stories about that for like my parents were at a country club and the country club almost went under because so many people got rid of their memberships. The other big impact that it had on me was my mother actually, and I think I told the story before, but she actually bought Seljean in 1995 or 1996 at my uncle's advice and held it

basically forever. And so it was one of those weird stories that we always joke about where if you put $10,000 in, now you have a million dollars. It was like that actually happened to her. And it was just pure luck, you know, no, obviously no insider knowledge of any sort for that matter. But I remember it becoming a big talk in my house because my mother was sick and she probably knew that she wasn't going to live forever and that this was going to be money that was going to be left from me, my brother, my sister. And so the stock got cut in half like basically everything else did.

And I remember, I think it was like around 2010. So she didn't panic sell. but I think she sold it sometime in 2010 after it had rebounded, say, 20 or 30%. So that was like a big topic of conversation in my family. And then after, you know, during the recovery, I remember that I, when I started trading, I was still of the bearish mentality because of what just happened. And the first that I started trading was FAAZ, which is the three-time bear bank stocks. Oh, my God.

basically. I mean, just lighter fluid, right? Pure lighter fluid. Well, and that was, that was like, when, like, during the recovery, and I was getting destroyed. I was like, wait, what I thought, I thought this was bad. I thought these were bad. But what, do you remember where you were in 2010 and 11, like, mentally in terms of, did you think that it was a dead cat bounds, or did you, like, not even, did you not have those thoughts? I don't think anyone believed it, because we had that period in 2010 where I think the S&P fell 16% or so. And it was kind of like, okay, here we go. And there was double-dip recession talk. And then 2011 again, we had all the Greek stuff. And I remember specifically every manager meeting we had, the topic would be, well, how many holdings do you have in Greece? And it was

always like, well, 0.1% of the portfolio or something. And Greece is always when they came up. And then we had that European flare up. Do you remember the Michael Lewis book came out about his? Boomerang? Yeah, about Europe. And I remember, I mean, people were freaked out. Really about Iceland. Yes. And so we had. that big period in 2011 where stocks fell almost 20%. And that was the point where everyone's like, okay, this is going to happen again. So I don't think there weren't too many people in 2010 and 11 who were thinking, yeah, we're going to see 400% returns going forward. Excuse me. Stocks did fall 20%. Actually, 21% piqued the trough intraday. In case Barry's listening,

he will correct you. Did the market start on in March of 2009? March 28th, 2013. Honestly, I don't really care. Neither do I. Whatever. No, in my opinion, that's when the bear market ended. I mean, who cares? Yes, but no, it was in the institutional world. I was in the foundations and endowments world and everyone for the next three years or so was looking for Black Swan funds. Of course, fighting the last war after the fact, they loaded up on hedge funds and everyone was worried about downside volatility. There was a lot of structured products where your downside was capped, but your upside was capped even more. So there was a lot of that stuff going on where people were just freaked out about what had just happened. One thing,

that nobody was talking about or arguing about in 2009 was fees on index funds and now 10 years later it seems to be the only thing that that I guess big money is worrying about so yesterday it was announced that J.P. Morgan is slashing just came out with an ETF that's that's two basis points one one basis point cheaper than the closest competitor and so Ben Johnson over at Morningstar tweeted, at 0.02%, JPUS will be 0.01% cheaper than the closest comps. All else equal, the fee savings on a $10,000 investment amount to $1 per year. Next stop, someone counters with a 0.015% or lower. The fee wars has become a PR war. Meanwhile, the real costs are creeping into the dark. And if you're interested in learning

more about this, Nate Garasi, what a really good blog post, sort of recapping everything that's going on in the timeline of it. But, Ben, we've spoken about this before. That, I mean, is it over or has it only just begun? Well, I mean, these big shops, it's kind of crazy that a place like JP Morgan is involved now in Goldman Sachs. And so it's just the scale that these places has is enormous. And I continue to think that they're going to pay us eventually to own their funds. A lot of these firms are Vanguard or BlackRock. Someone's going to do it. They're going to give credits. I think the best thing would be, honestly, like, let's say you buy into this fund and you put it. in a hundred bucks a month, we'll put five bucks in, or something, you know, two bucks in, a dollar. Whatever it is, if you invest in these funds to help you save more, it seems like that's kind of the next.

That would be very cool. For every $1,000 you invest, we match it a dollar or whatever it is. The problem is when people try to make changes to their funds base, like if you're paying five or 10 basis points and you're trying to save one or two basis points here or there, you're probably going to lose that edge by trading because of the spreads that you're getting on your trade or mistiming or whatever. Taxes. I mean, it's certainly not worth changing your allocation because of one basis point. There was another story attached to this that I think half of the flow is going to these

J.P. Morgan products are from J.P. Morgan advisors. And I guess the knee-jerk reaction is that that's a conflict of interest. But if these are like pretty much beta products and they're just going to the cheapest one, is that so bad? I don't see a problem with that just because of the fact that it's much better than the alternative. And if they're using their own funds and they can maybe have some trading advantages there and it's helping their clients, I don't really see the problem. Obviously, the problem comes if they are then using other funds that they're upselling for and they're using these as just like the placeholder. But compared to what people were in the past invested in at big banks, this is a huge step forward. Yeah, I think so too.

So Bill Gross sat down to talk with Robin Wigglesworth in a very candid interview. This is like the other side of that. It was interesting because he talked a little bit about how he's had some struggles at the Janus Fund and he just retired recently. He said that he admits he ignored the lessons of a lifetime and took excessive risks with his new fund. It's kind of interesting that you can be one of the greatest investors for, call it, I don't know, 40 years in the bond market. And, I mean, this gets to your point of your whole book you wrote, that these really intelligent people can, it wasn't at the Drucker Miller quote where he said, what did you learn? And he said, it's kind of, it kind of reminded me of this because Gross said, you know, I was basically shooting from the hit because I wanted to prove the people at Pimco that pushed me out that I still had it. Right. And obviously he, he kind of didn't and probably should have walked off into the sunset. Do you think that Bill Gross is on the Mount Rushmore of finance? Unfortunately, he's almost centered like the car. Carmelo Anthony territory, where because the end of his career was so rocky, people kind of maybe are forgetting the fact that he was such a huge presence. And maybe that's not even the apt comparison because he's probably better than here. Yeah, he's far better than Carmelo. But that's kind of the idea that he had such, I mean, he basically invented the active bond fund. Before then, pensions and insurance companies, they would buy a bond and hold it to maturity and hope to get their interest where gross decided, no, we're going to trade and we're going to go for total return over just whatever the yield is. All right. So let's just actually pull on the thread for a second. If Bill Gross is on the Mount Rushmore, I think that probably Bogle and Buffett deserve a spot. Do you agree or disagree with those two?

One of those two is a clouded indexer. And the other is Jack Bogle? Hey, oh, yeah. And who do you think, well, do you agree with those two? Yeah, of course. And then who would be the fourth? Although it's kind of a different, it depends what Mount Rushmore we're talking about here, because Bogle is almost not like a, The Mount Mushmore North Dakota. Okay. Is that where it is? Wait, what do you... Who do you think?

I'm just saying, Bogle, you could call them the Mount Mushmore. Are we talking greatest investors? Are we talking like most influential people in the industry? I'm saying the Mount Rushmore finance. Okay. Yeah. That probably makes sense.

Well, who's the fourth? Charles Ponzi. I don't know. I got nothing. What do you think? That's a tough... I'd have to think about this. You can't just put me on the spot.

like this. You're on the spot. You're on the hot seat. Okay, I want to pivot here to something gross said in this. He was very candid in this interview and I was shocked that he actually admitted to this, but he got a divorce and it was in the tabloids that one of their houses, he filled it with fart spray. His ex-wife said this, which sounded pretty off-kilter when you heard it in the tabloids and you thought maybe she's just trying to drop some more money in the divorce. But he actually admitted it was true and he says, but he claimed it was only responding to what his ex had done to another house that he was taking over, and he said, and I quote, so I went to a drugstore and found some smelly shit, end quote, to spray in the house. He talked a lot about in here about how

he, he was almost more, he was almost more inclined to be famous than he was to be rich and powerful. And I think maybe that's something that happens after you are already rich and powerful. When you have a few billion dollars, that fame is probably the next thing that can sort of stoke the flames, I guess, in a lot of ways. But I was surprised at how candid he did. He even said, I wouldn't be sitting down for this interview if I wasn't wanting to be famous. Two things stood out to me. One was that at one point in the interview, he said something like, I'm happy, I'm happy, and it almost sounded like he was trying to convince himself that he was happy.

And he also, I think, said something along the lines of one of the reasons why he wanted to be loved was because he didn't receive enough of it as a child. And it's so crazy how much our life is shaped by who we had as parents. Yes, a lot of, yeah, the environment you grew up in, and obviously it's a lot of the nature versus nurture stuff, but that obviously is the stuff that sticks with you. So sticking with a fund theme, Bloomberg had a...

Hold on, by the way, last thing. My vote is either Peter Lynch or Stan Drucken Miller for the fourth spot. Okay. And my fourth spot would go to ramp capital. But I... Can't argue. Can you really say that Drucker Miller should be there above Soros,

since Soros was kind of his... Yes, you can. His mentor, and he was Drucker Miller was a protege? You can and I did. Okay. all right we're going to put this one to a survey who's on the mount rush more of well you well we're putting buffin instead of ben graham yes but you're putting ramp capital instead of me you are ramp capital now i'm not so one of the even if we're talking about these legendary investors one of the

hardest things for any of them to do and none of them have done it is have persistence in performance so have just consistently good performance over time and so obviously if these people can't do hold on hold on hold on sorry what that's that's that's virtually, that's 99.999% true. Okay. Druck, I think Druck only had like one or two losing quarters or down months or something insane. Okay, but-

Had it's not much more. Yeah, well, there's a difference between having positive returns and having consistent returns that outperform. That doesn't mean he outperformed every time. Okay. He probably did if he got 30% a year, but still, if we're basing it. Does audit it? Yeah, I'm just saying, just saying.

Okay, so obviously if these people can't do it, then actively managed mutual funds can't. So there was a story in Bloomberg that said they looked at what happened, who outperformed through the three years in 2015. And for large cap U.S. stocks, it was like 25%. Small caps, it was similar. International was one of the higher ones. Even that was pretty pitiful. But they found these active funds that outperformed through three years through 2015 over the next three years, less than one percent of them were able to enjoy. the same XX returns. So even outperforming over three years doesn't guarantee you're going to outperform with the next, obviously, but it was such a small amount that did it. They basically said chance alone should have said 12.5% would have outperformed, which shows how hard it really is to sustain that. So would you agree that mean reversion is much stronger in manager performance than market performance? Yes. It's not nice reversion. It's mean reversion. But I'm just going to skip over that bad joke. But I think the bigger point is that if you are picking actively managed mutual funds,

you should not expect consistent outperformance because it doesn't exist. I think Vanguard did a study showing that of the funds that outperformed over a 10-year period, 72% of them underperformed for three years in a row. So the funds that really, you know, that are worth paying for are really hard to stick with, which probably is fairly intuitive. You know, there's nothing for nothing. But I guess that goes to the point of why the behavior gap could be so prominent in actively managed funds because the end investor, whether that's a financial advisor

or just a retail client, it's really, really hard to know that a three-year period of underperformance is going to reverse because most of the times, it doesn't. This is one of the reasons I always harp on the manager of managers approach for institutions. I don't think it's impossible and I think there are certainly organizations that can do it, but the ones who don't have the discipline or the understanding to stick with something like this, that that's why, because even if you have a manager that just outperformed, that should give you pause of what's going to happen over the next period. But instead, all the studies show that they go with those managers that just outperformed and they ditch the managers that

just underperformed. So it's like they're doubling down and the mean reversion hits them twice because they're selling the losing funds that are probably going to come back and they're buying the winning funds that are probably going to come back down. And so it's just, it's, it's so hard to do and to understand, well, am I being disciplined by sticking with this manager and rebalancing into the pain or am I just being stubborn in sticking with a manager that obviously has lost their way? And there's, who knows? We know this to be the case, but there's a study that shows that fired managers go on to outperform. But is that, have you ever seen that study? Or is it just something that floats around there? I feel like, I've seen it, but I'm not

positive. There's for sure a study in my book that shows that the managers that are hired go on to underperform big time. They way outperform before they're hired and then the next ensuing three to five years, they highly underperform. And yeah, it's, I'm not sure about the actual fired one, whether that's the case or not. But I know the hired one definitely underperforms. Ken Hebner has the best time weight of returns or one of the best time rate of returns in the industry and literally the worst dollar weight of returns because after his 80% year in, I guess, 99 maybe, he raised billions of dollars and then it all went to crap. Sounds about right. Okay. So moving on to one of the biggest points of that we've gotten in terms of

listener feedback. So Ryan Kruger wrote a piece called Solving a Bank Heist, Follow the Money. And he talked about the fact that the Fed funds rate continues to rise, it's at 2.5% now. And if you look at the chart that he provided, average bank savings account yield has actually dipped a little below where it was when these rates started rising. And he actually put a disclosure from a certain bank that said interest rates are established periodically and may seek to pay a rate as low as possible based on prevailing market and business conditions. And the problem with this is, we've talked about this in the past, there's over $9 trillion in these savings accounts. and we had Y charts, drawn up a few charts for us on this. Again, mentioned Animal Spirits to

them if you get a new subscription, get 20% off since our sponsor of the show. And they found that of the overall savings deposits at commercial banks versus the ratio to total U.S. savings deposits, they make up almost 86% of the total. So that $9 trillion that's basically earning nothing is almost 90% of savings that people have at banks. So I actually wrote about this last night. Kevin James, I was watching a stand-up special on Netflix. It was, I guess it was pretty old one from Comedy Central. Have you ever seen it? Do you know which one I'm referring to?

Yeah, I recommended that to you about two weeks ago. Did you? You were paying attention. Thank you. It was tremendous. Is that the one where he talks about you walk through the ropes to get to the tower? You're like, hang, I'm going to be there. Just wait, I'm getting there.

Sorry, off topic, but the jet ski part in that was killer, right? He's very funny. Writing a gray jet ski. He's very, very funny. So it used to be, you used to have to work to save money, right? You had to go to the bank, you had to fill out forms, you had to move money. It used to be a real effort. Now, it's, it's easy.

Like, you could literally do it in your sleep. You don't have to do anything. You just have to set it up. So I included a link in my blog post last night about just, we'll put in the show notes, but getting money, getting paid to save is very, very easy. And you could have it so that it's drawn automatically from your campaign. You don't have to do anything. There's no work involved. And I think one of the reasons why there's $9 trillion in just commercial banks earning nothing is obviously there's a lot of inertia, but it's not

as if somebody controls the $9 trillion pile of money. The Illuminati. And you're like, wait a minute, we're leaving $300, you know, we're leaving $30 billion on the table, whatever the number is. It's people that have $800 or $1,000 or $3,000. I'm like, yeah, I can be earned 2%. But what is that, $13? Who really cares? That's the problem is once you, there's a big leap going from zero to 2% or whatever you can get. And then when you get to that 2% or whatever threshold it is now, then changing around, that's kind of like the ETFs going from five basis points to four. It doesn't matter that much.

But the thing is, going from zero to two, at least does you something. So we've mentioned it enough on the show that we should probably get royalties from Golden Sacks Marcus Bank. So that's the online one we use. I believe it's now up to 2.25% you can get. And again, there's no fees. It's easy to transfer, but there's a million other places you can do it at, too. There's ally has one, Capital One has one, I believe. You could go to a credit union.

CDs, we've mentioned, is probably not the best option because they're not liquid. But even that, you can get respectable rates now, money markets, short-term bond ETFs, short-term muni ETFs. There's all these things. I did a post about this in December, which I'll link to that is maybe the yields are probably a little higher now, even. So let me ask you a question. When money goes from just savings account earning nothing or a checking account earned nothing, into a high-yield savings. Is that cash on the sidelines still on the sidelines? It's double

cash on the sidelines because it can go up to yield and then stocks. So I think what we're trying to say is that if all of our listeners just open a high-yield savings account, we will inject another $13,000 into this economy. And if we take a piece of that $9 trillion interest. So Whitecharts also sent us the U.S. expectations of higher interest rates on savings account. Take this for us worth. Is this a survey? Well, it's got to be a survey. But the funny thing is, since 2015, when rates started rising, this has risen a little bit, not much. It's only 37% of people now think that rates are going higher. And in 2015, when they actually were going to rise, it was 28% of people. And maybe the reason that these savers don't think rates are going to rise in their accounts, because the rates never do rise in their savings accounts. So because people just don't know, I guess. Maybe we take this for granted. Because again, we get a ton of emails about this from listeners who ask us, well, what am I supposed to do with this? Oh, yeah. This was a hot topic because we got like a dozen emails on what is Michael talking about with better rates and a liquid wrapper. Actually, to be honest, what I was talking about was like short-term bond funds. Why would you lock up your money in a five-year city for 2.2% when you can buy short-term bonds and get like 2.3%. That's what I was talking about. But obviously Marcus and other banks like this are another liquid alternative. So the chart that Ryan showed with Fed funds were creeping higher and what banks are paying you not moving at all. It's sort of like gasoline in reverse.

You could see crude oil go from 70 to 50 and prices at the gas pump just don't move or at least that's how it feels. Can I throw out a thought here? Is this a conspiracy theory? No, no, no. I feel like people that say crude, that's borderline charlatan. Right? It's like the people that say,

call S&P 500 Spos and... Wait, hold on, hold on. It's Spooze. It's Spooze. Is it really? Yes. Not Spose? It's not Spos. See, I'm not a...

a charlatan. I just proved it. I'm just saying crude is borderline. You're on the fence, moving along. Okay. So the other place that rising rates actually would help is in hedge funds. And you share this with me from J.P. Morgan. I believe it's their, they have an alternative book now for their guide. Yeah, before we get into that, a nice lead in as opposed to Ted Sides wrote for institutional investor. And he was posing the question how long, short funds are like a pariah now. how nobody wants to touch them. And he posed the question, what if instead of paying two and 20 or one and a half percent in 20, what if they paid you 5 percent to invest?

Like, how cheap does a hedge fund need to get in order for it to make sense to invest? And he said, quote, these answers are monumentally different than they would have been 10 or 15 years ago. Allocators woke up craving the next rising hedge fund star and couldn't invest enough at high and increasing management fees after the widespread success of long short funds in the weak equity markets of 2002. And one of the things that he talked about was that in higher interest rate environments, long short equity strategies make money on the short rebate just for showing up.

So when they were getting 5% interest rate in the 90s and 2000s, it's a lot different than getting zero today. So back to your point about the slide from J.P. Morgan, it shows the three-month U.S. Treasury yield on one axis and the average hedge fund return on the next. And what it's showing is that from every year, basically, since really 2010 to today, returns have been crap. And again, this is the HFRI, and I know it's weird to lump them all together, but whatever. Let's just go with it for a second. But I wonder, is the reason that they're having trouble because of Kiwi and Zerp? Or is that just sort of a coincidence? I mean, obviously, higher rates are a tailwind for long short funds, but what do you think? Like hedge funds

in general. I mean, that's part of it. But the fact that markets have been doing so well would kind of be the other side of that where that shouldn't, they shouldn't be doing so bad. And obviously, we lump in hedge funds together. Long short funds are much different than a lot of other hedge fund categories. But they've, they've had their struggles. The quote that came to mind when you talked about Ted's piece is, so it reminded me that Cliff Hasnes quote where he said, there's no investment product so good gross that there isn't a fee that could make it bad net. And so obviously people weren't paying whatever they could back then. But in a lot of ways, hedge funds took exactly what they could. And when he says, well, they could pay 5% to invest in

this, that's basically, if they make some money, that's basically what their fee is when you include performance if it is a 2 and 20. But in the past, in the 90s, you could earn that 5% or 6% on your cash that you'd get from your short rebate. But the problem is, was that inflating these returns then? Wouldn't you say that long short worked so well in 2002, which was like the golden age of these value hedge funds for obvious reasons? And right now we're in a period where growth is working, and value is not. And even without fees, there would be pretty massive underperformance. I think everyone would love to have that period again where there's this massive divergence. And I think people want to say that values underperformed over the past, call it five or six years,

and that we were back there again. And it's not even close to what we saw back then. There was such a wide divergence that it's, I mean, never say never, but that could never happen again where growth is so overpriced compared us into value. So those funds and get a good credit for timing it right, even though they probably had some years of underperformance leading into it. They went long, cheap, and short, expensive, and both of those trades worked and worked out really well. You think there are any funds that go long, expensive, short cheap? Probably a lot of funds right now. That would be hard to pitch to investors, but boy, would that have crushed over the last few years? Yeah, well, anyone who's chasing performance

has probably done exactly that over the past few years. And a lot of the value fund managers like David Einhorn and such that have done the opposite, have gotten crushed. One of the reasons why hedge funds have had such a hard time is because it has been pretty much a one-way market since the bottom in 2009. Now, I am off the opinion that there have been three separate bare markets in U.S. stocks and I guess global stocks, but they've been very shallow and the recoveries have been very quick. And one of the reasons why they have been so shallow is because there really hasn't been any recessions. And Morgan Howell, House also wrote a piece showing a really cool chart that I haven't seen before, and it clearly

shows that the time between recessions are getting longer and longer. Morgan said that one of his theories is that the Fed is better at managing the business cycle, or at least extending it, and another is that heavy industry is more prone to boom and bust overproduction than the service industries that dominated the last 50 years. What are your thoughts when you saw this chart? It is kind of crazy how we talked earlier about the double-dip recession possibilities that we heard in 2011 and 2010. and history since World War II or so would tell us that that's pretty rare.

It actually happened in the 80s where we had a four-year period where we had two recessions. So here's a stat for you. From the 1850s through the end of World War II, the average economic contraction in GDP was 22%. Since World War II... Wait, wait, hold on. Say that one more time? From 1850 through World War II, anytime the economy went to recession, GDP fell an average of 22%. Wow. But to put that in perspective, in 2007 and 2009, it was like 5%.

5.5%. That's wild. Since World War II, the average contraction has been 2.3%. And from those same time periods, there was a recession every two and a half years on average through World War II from the 1850s. Since World War II, we've seen a recession about every five and a half years on average. So obviously these periods are getting way longer, which makes it difficult, which is why every economist in the world says we see recession on the horizon in 18 to 24 months. And they just say that every single year until it happens, I guess. No, it's sort of interesting. The damage damage done to the economy has obviously been less than it was pre-plunge protection team. But the stock market has had similar experiences. Yeah, that's true. The stock market hasn't been much

different. And so I guess the reactions are always the same to these. Maybe people think that they're always going to be worse than they really are. But I guess there's two reasons where you could chalk this up to. One is the fact that back then we were more or less than emerging market. We talked about this last week, the U.S. in the early 1900 didn't make them near as much of the equity markets as it does now. And two, the Fed was created in 1913 to debase fiat currency, and they've done a great job with that since then. But they've also made things much more stable.

And I think the fact that we've got a more mature economy with, say what you want about them, they missed the last crash, but they've probably made a more stable economy for us as well by having a somewhat competent central bank. So you put a link in here about how many workers max out their 401K, and listeners, take a guess. I was surprised by this. Wrong. You're wrong. It's 9%.

It's not 3%. 9% of workers. This is according to a study done by Fidelity. So not a service. Yeah, so 13% of workers at Vanguard, who have a 401k max it out, 9% at Fidelity, which is actually up since 2013. These are higher than I thought. The caveat here, of course, is that I think only 50% of workers have access to a 401K,

and it could be even smaller if you include things like small businesses. So the retirement system is not perfect, but this is actually kind of encouraging, I think. Yeah, this is definitely encouraging. So Oswald Demoderin, who does amazing valuation work, wrote a piece on Lyft, which is going to be the first ride share company to come public. And I think this sentence really just nails it. He says, when valuing young companies, it is the story that drives your numbers and valuation, not historical data or current financials.

And I would actually take this a step further, not that I'm a valuation expert, far from it, but it's not just young companies. Obviously, companies like Colgate that have very, very steady, predictable cash flows are not driven by stories. They are driven by numbers, and maybe you can do discount, discounted cash flow analysis. But a lot of valuations are driven by stories. Right. It's all about the narrative.

And that's why I think he just does this. as kind of a fun little exercise, but is it even worth it to do a discounted cash flow analysis on these companies that are just IPOing right away, especially the tech firms? Who knows? No, probably not. And I don't think that he's investing off of this. But it is interesting that Lyft is going first. It's almost like Uber wanted them to go first so they had a benchmark where they could say it was kind of like the baseball players that Mani Machado signed a $300 million deal. And Bryce Harper wasn't going to sign to after him because he wanted to one up him and got $330 million or whatever. Like they have to have a benchmark.

it's just all relative, I guess. So Bloomberg had a piece this week saying U.S. credit card debt is the largest has ever been, 870 billion as of December 2018, according to data from the Fed. And they kind of break down by age group as well, which is kind of interesting because it is pretty well spread out. There isn't one age group that dominates.

The biggest one is 25% goes to people who are 50 to 59, and actually 18% of those 60 to 69. So it is kind of skewed a little older, I guess, which kind of dovetails nicely with our, talk a few weeks ago about older people with student loan debt. But this is another one of those denominated blindness things, I believe, because the last peak was in 2007. And so it's taken a long time to get back to the peak, even though we've had many other things that are at all-time highs in that time. Yeah, this number was still contracting in early 2014. So I was surprised, but you put

a survey in here that is equally surprising. So this is from Freedom Debtrelief.com, and they looked at 2,000 Americans and asked them what they would sacrifice to get out of credit card debt. one in five said they would give up vacationing for 10 years to get out of debt the same amount 22% said they would give up going out to eat 13% would give up their right to vote only 5% would give up their internet 6% would give up their phone and only 3% would give up their driver's license to clear the debt you know why surveys are dumb because sometimes people are dumb and if you have so it says 1 and 5 would say they would give up vacation for 10 years to get out of debt that should be 5 out of 5 if you are in debt you should not be vacationing yes that's a good

point. And also, especially for someone like you in New York, like, wouldn't you give up your driver's license if you had five figures in credit card debt like that? Yes. Yes. Yeah, the internet and phone one is kind of interesting. That kind of, we talked about giving up Google on a past show or giving up Facebook or something like that. I think it's funny that people would rather hold on to that. The right to vote, if I had a huge credit, if I had 50 grand in credit card debt, here, take my voter ID card. I don't care. Get rid of it. Yeah, that's a layup. So we got a lot of feedback about the principal repayment and the lowering of the monthly mortgage payment, we said you can't do it. Turns out you can do it. It's a little strategy known recasting

or re-amortization. Somebody sent us in New York Times article. And Ben, you're still not on board with recasting. Yeah, I know it's this article is called a little known strategy for cutting mortgage payments. It's funny because this article uses numbers from the 1990s, which shows you how how much higher rates were. So they said, let's say you had $230,000 left of principal on a 30-year fixed mortgage that you took out for $300,000 at 7.9% in 1995, which seems astronomically high now. That would be roughly a $2,200 a month payment. If you just put a flat $20,000 toward the principal and asked your lender to reamortize for the remaining 15 years on the loan, your payment would drop by $184 a month. Similarly, if you put $100,000 down, you'd save $945 a month.

month. My question is, why would you want to do this? What if you're bearish on U.S. stocks? Or if you're bearish on your own house, I guess. If you know, I think one of the best parts about getting a fixed rate mortgage is the fact that you know exactly what your monthly payment is going to be. And so I think if you already can handle that payment, I think trying to lower it if you have a, if you already, if you have a lump sum, what's the point? Just use that lump sum for the money you're going to save on your mortgage. Because this is like a time value of money thing. Why would you put that money? money into your mortgage. Obviously, you can lower your interest rate payments a little bit,

I guess, on the overall. But this just seems like something maybe is for people who have a hard time refinancing and maybe you have a terrible credit score after they bought a home or something. I don't know. You're making sense. You're making sense. So our friend Julian Hebron writes a blog at the basis point, and he shared a chart that shows the biggest reasons why people move. Ben, what were the biggest takeaways to you here? Or any surprises. Well, one of the lowest ones was actually moving for a job, which you'd think would be a higher one. And another low one was to reduce your commute. The highest ones were basically for a better home or a better neighborhood.

And so this kind of gets back to my point of why would you ever buy a starter home if you're just going to use it to trade up? Because you incurred so many costs and fees along the way that it's tough to constantly move up and trade up to your home. So a lot of people aren't really moving out of necessity. They're moving because they want to move. Well, don't you think that, and I agree with you on the numbers side of it, but don't you think that there is a sort of psychic income to buying your first home? Yeah, that's part of it. But I think the people who go into it saying this is going to be the biggest investment

of my life, I think they maybe misunderstand all the numbers involved and don't really think it through when they make that decision. But I agree. There's probably a lot of stuff beyond the spreadsheet that comes into play there. I was just surprised that some of the reasons here were so low. The interesting thing to me is that, so when we have, like, self-driving cars, it'll be interesting to see how that recasts where people live because that commute won't come into play as much anymore.

If you can just have a car drive you wherever you live, so maybe that's a bullish thing for the suburbs, possibly? So we're going to skip listening to questions because this is getting a little long. So recommendations, what do you got this week? Okay, so I went back to Audible again. had some driving time the last couple weeks, and I listened to Extreme Ownership by Jocko Willink and Leif Babin. Jocko kind of came on the scene, I think from Tim Ferriss.

He has his own podcast now. And I'm usually not a huge fan of like leadership books or motivational stuff like that, just because... He wakes up at 4.30 every day. He should be like your arch nemesis. No, not him. I would not mess with that guy. Former Navy SEAL.

See, I feel like my biggest problem with... But you would, you would sub-tweet him. That's possible. No, my biggest problem with most leadership and life coach gurus is that they really don't, they've just figured out how to become good salespeople. They're not, they don't really have anything to back it up by. These guys are former Navy SEALs and they actually worked with a guy. What was the Bradley Cooper movie where he played the sniper? American sniper? Yeah, they actually were in the same company as that guy in Iraq. And so, so I feel like if you hear leadership and motivational stuff coming from guys like this who've been through so much and actually can back it up, that resonates with me much more than just some. life coach who follows 100,000 people on Twitter. We also watched a Star is Born last week. I liked it. It was a little overhyped, I feel like.

My problem is I didn't see it early enough, and I heard all the hype, and it was trading at a 70PE by the time I went into it. Okay, that's fair. I think it's properly rated. I read the Cooper had an amazing hair. His voice was a little to Jeff Bridges. My hot take is,

if he would have toned down his voice 10%, he probably would have won the Oscar. He just decided I'm going to become a singer. Is that it? Like, how did that happen? And I also think it's possible. Lady Gaga is like, she was way better than I thought. And her voice is just amazing. Like, I don't know. Is it possible that the biggest pop star on Earth could have an underrated voice? Where she just, she's not singing these pop songs. She's just singing regular songs. It was, yeah, she kind of blew me away. So I liked it a little overhyped. There was a few too many cheesy moments for me, but I did like it. You're a tough critic. I thought it was properly rated. But fair enough. Well, if I saw it, you know, months later, I would probably feel the same. Okay. So I read, I'm currently reading, well, I read one novel and I'm starting another. And I usually don't give recommendations before I finish a book. But I'm ready to recommend this one. It's called Beneath the Scarlet Sky. It was recommended by my friend Charlie Bellello. Just buy it. And trust me. Fiction, nonfiction? What is it about? It's narrative nonfiction type of thing. Like, it reads like fiction is what I'm trying to say. but it's actually based on a true story. And I read Gary Steingard.

I read his book, Super Sad True Love Story, which was pretty heavy, and he is an interesting guy because there was a few moments where I'm reading that book and I'm like, how the hell did he write this? Like, what is his brain thinking when he does this? And I think that it's a really great book for a book club. I think that it is the type of book that warrants a lot of conversation. And there's a lot of threats to pull on from the perspective of a solo reader, I thought at times it got a little bit challenging because there's, you know, it's pretty deep. But he's a very, very talented writer.

He's got a unique mind. It is about the future. So it's a little out there. But it's hard to wrap your mind around parts of it. But yeah, it was good. Yeah. And then lastly, I watched John Mullaney, the comeback kid on Netflix. And I had never heard of him before, but apparently he's very well known.

And I thought that his jokes were like pretty solid. but his delivery was really impressive. You could tell that this guy spends hours and hours and hours with the wording of his jokes because his delivery was flawless. And one part that I thought was really funny, he said real estate agents have to deal with the dumbest people in the world making the biggest decisions of their lives. Perfect.

So he was on the season finale of crashing, which I watched last night. And that's one of those shows. It was in the third season, that's Pete Holmes. I think Pete, and it was funny because Malaney played a funny character. He played himself as a comedian, but he was like a giant. he was just a huge jerk but it's about Pete Holmes and his like it's a lot of backup to the

it's like a lot of background in stand-up comedy they actually spend a lot of the third season at the comic seller and it was really funny and Pete Holmes I think is actually better on the show than he is in stand-up like his stand-up I think is okay on the show he's hilarious and it's one of those shows that has gotten better for me actually so I really like that one. All right thank you for listening

feel free to reach us at Animal Spiritspot at gmail.com if you liked our podcast please leave us a review over at iTunes, and we will see you next week. Thanks for listening.