The Compound and Friends - A bad omen, why Bitcoin moves with Nick and Jessica, Starbucks new CEO

Episode Date: August 20, 2024

On this TCAF Tuesday, Josh Brown is joined by Nick Colas and Jessica Rabe of Datatrek, to discuss: what happened with the Japan carry trade, what to do with an elevated Vix, bitcoin vs gold, and much more! Then, at 39:14, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! This episode is sponsored by Public. Visit https://public.com/ to learn more about how you can earn 5.1% APY with a high-yield cash account. Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Public Disclosure: Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. See https://public.com/#disclosures-main for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Okay. We had Nick Colas and Jessica Rabe of Datatrek on the show that's coming up in just a moment. Nick and Jessica take a look at the volatility of August and a lot of really fun stuff. I always learn a lot talking with them. I know that you guys always learn a lot listening, so please enjoy. And then following that, it's an all new edition of What Are Your Thoughts with me and Michael Batnick. We talk a little bit about signs of the top and some things we don't want to see as the

S&P challenges the old highs. We get into some stuff on how much cash people are currently holding. The new Starbucks CEO is getting 85 million bucks in compensation plus a whole lot of other perks and all kinds of things that happened over the course of the week. So please stick around, enjoy the show. Thank you so much for listening. Welcome to the compound and friends, all opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Hello, hello, hello, ladies and gentlemen. Welcome to live from the compound. One of my favorite things I get to do each month is check in with Nick Colas and Jessica Rabe of Datatrek for a little something we like to call what did we learn? We look at market activity, economic data over the last week or two and we try to figure out what's going on here. Are we up to speed? Does it make sense? How does this affect my portfolio and how I'm investing? Nick and Jessica

are the co-founders of Datatrek Research, the authors of Datatrek's morning briefing newsletter, which goes out daily to over 1,000 institutional and retail client subscribers. They're also two of the smartest people I know. Nick and Jessica have their own YouTube channel, which you can find a link to in the description below. How's everybody's summer going so far? How are we? Very good. You're well?

Great, thank you. Nick, is that a tan? Did you get some color this week? No. No. All right. I wish. All right, all right.

Fair enough. So what did we really learn from this extreme but extremely short burst of market volatility? This is a really good question. What actually happened this month in August? Because it seems like we had this really huge, sudden burst of volatility, but then it went away almost as quickly as it arrived. So talk to me, what have we just gone through? Is it over? So I think Jessica's got the lead off data from that. So I'll turn it over to her.

Okay. Oh, sure. I mean, honestly, it all fits exactly what we've been talking about in these videos. August is almost twice as likely to see the VIX peak for the year as other months. So barring an unexpected shock. We could check that box for this year. Yeah, yeah, yeah. We do think 38 spots six earlier this month. Yeah, it should be the

top four of the year. The VIX has plummeted since, closed at 14 spot eight on Friday. That's the lowest print since mid-July. So in terms of what's next, volatility does tend to cluster, but again, we think the worst has passed. October, of course, does tend to be volatile as well, but the four out of five times

that the VIX has peaked for the year in October since 1990 was in the 90s when mutual funds were a lot more prevalent. So the their October year end date would pressure stocks because of tax loss selling. That's no longer, you know, as big as that's no longer. They're not as important as big of an issue. Actively managed mutual funds closed out their fiscal year in October, which meant that any end of year things they were contemplating or actually doing would take place in that month and not December, which is part of the reason why October earned this reputation for being of a more volatile than usual month. And you're making the argument that relative to the overall markets and since the growing

popularity of wealth management, ETFs, things that are not doing this type of thing in October, it's not as big of a factor. Yeah, exactly. And ultimately, I know we sound sort of like a broken record, but the stats are staggering in that the S&P has peaked for the year 70% of the time in Q4 back to 1980. And more specifically, the S&P's peaked for the year in December half the time over the last few decades, again in December. So it's only done so once or 2% of the time in July. So it'd be super unusual if July marked the peak for the year.

And again, remember that volatility and returns are inversely correlated. So as markets calm down in November and December, stocks tend to melt up. So we're still bullish through year end. We think stocks will melt up through December. Nick, how do you see it? Yeah, I think we've got a table to show which shows returns for, there you go. So this is something that we showed our clients last week. We do a quarter, mid-quarter update for clients and kind of give them the lay of the land as far as how things have been performing. And the columns to focus on are kind of in the middle of this table. It's July, then the first half of August, then Q3 to date, which was through last Thursday.

July, we all know, is a rip in month, right? I mean, non-US stocks were working, non-US stocks were beating US stocks. So ACWX was up 2.2%. the S&P was up 1.1, the small caps were amazing. You know, the- Huge rally for mid and small. Yep. 10% rally in July for the Russell, 11 for the S&P six.

And then the first half of August looks like an entirely different world, right? All of a sudden everything fell apart, you know, and it seemed like that was the end of this cyclical rally that we had had in July. But if you look at the next to last column, the Q3 2024 to date, you'll see that the underlying trend is still positive.

Small caps are still beating large caps. So Russell's up 4.3, S&P's up 1.5. You've got the NASDAQ actually in the red for the quarter still as of As of last Thursday, so tech is still getting rotated out of and stuff is going into money is going into small caps the International stuff is a bit of a canard though because the dollars weakened a lot the euros off 2.4 percent quarter to date the British pounds up 1.6, so the Euro is stronger, the Pound's stronger, EM currencies are stronger. So you're getting some return in non-US investments, but it's currency, it's not underlying stock. So the message from that table and the message for today

is don't be fooled by the volatility of the last couple of weeks. This rally is still in place, cyclical rally is still in place. Financials are working, industrials are working, small caps are working. And as volatility comes down, as Jessica mentioned, those trends will, I think, again, prevail. So the rest of the quarter will look more like July than it did the first half of August. So I want to go back to the VIX for a second. I want to show you something that J.C. Perrette's brought to the Compound and Friends, not this past week, the week prior, just illustrating how extreme that VIX spike was.

For viewers who are not familiar, the VIX is a volatility measurement tool. It doesn't have predictive power per se. It just tells you how much options activity is involved in buying protection against the market falling. This is a really extreme number, this 65, but it was an artificial and it had to do with the illiquidity of some of the contracts that are in the calculation of the VIX index. And so the bottom chart, which is the actual VIX futures that trade on the CBOE, JC's point was that's what the actual VIX was if we're looking at the tradable version of it. And so it's still extreme and it's still a really fast move. It's

just not really 65. What do you guys think of make of that distinction? Is that interesting to you, the difference between an index, which artificially captures something versus the tradable product itself, which represents people actually betting live money? Any thoughts on that? It's a fair point. We did think about that two weeks ago when all this was happening. Look, the tradable product is always the one people should watch and really pay attention to.

So even if you're trading during the day, if you're an active day trader, you should be watching the futures all day long, not the cash print. Because the futures are the things that are trading through the day. And that's where the liquidity is. And that's what's actually happening. So you might get a wonky print because something goes off on a bad trade, a big stock, but you watch the futures. And it's the same with the VIX. Another thing I'd say is that,

it's a distinction without a difference, those two charts, because ultimately the average on the VIX is 20, standard deviation's eight. The minute you're getting to 30 plus levels, you're close to two standard deviations. It doesn't matter if it's 35, 40 or 42, it's just big. And that tells you that something bad has happened. Yeah.

36 is a two standard deviation or 37 is a two standard deviation move or the print of 38 spot six that we saw. That's still very rare. And we think also that goes to show that that probably was the high for the year. So look, I always say after moments like that, it's not, you know, whether you bought or you sold, the important thing is that you panicked. I always like to remind people I want to roll through some of the returns since that VIX spike So I went on TV that day and I basically said look I can't tell you shit about the Japanese yen carry trade

All I can tell you is a 65 VIX, you're a buyer, not a seller. If you know absolutely nothing else but one thing, that should be the one thing that you should know. I didn't realize how quickly that would look as prescient as it does now, but it always ends up that way. The triple Qs are up. This is as of this morning.

Triple Qs are up 8.5% since that VIX spike. The Russell 1000 growth is up 8.38%. S&P up a little bit more than 6.5%. Dow up almost 5%. Russell 1000 up 4.5%. So you got this like, I don't want to call it a meltup, it's the wrong term, but you just got this instant knee jerk by the moment we were no longer worried about whatever we

were worried about two weeks ago. And it's just to me, it's remarkable how quickly a lot of these charts repaired themselves. And maybe it's not so remarkable. Maybe this is what it normally looks like. I want to give you some sector level data too. Let's put that chart up. The XLK, which is tech sector, is up almost 11% since that VIX spike. The XLY, 6.6%. XLF, which is financials, up 5.87%. The three worst sectors since then, it should be pointed out, real estate, basic materials and utilities. They're up a couple of percent, but they're all up.

There is no sector that's still down from the highest level of volatility two Mondays ago. Should I be, Chardof, should I be surprised by that? Or is this kind of a standard comeback whenever you see a spike of that magnitude? It is a hyper speed comeback, that's for sure because look, there's a reason we did, you know, there's a reason for that open two weeks ago. And the reason was you had tremendous volatility in the end, tremendous volatility in the Nikkei.

And if you remember long-term capital, you get hedge fund blowups, you get financial system blowups when a currency melts up or melts down or a local market melts up or melts down. People aren't prepared. And so there was a rational fear. It wasn't a 65 VIX fear, but there's a rational fear like, okay, something's going to break and we got to wait for that to happen. Then you wait 72 hours and wait for things to clear and nothing broke. And then we got that good data on Thursday and things have been off to the races since.

So even if you're not trading a market, it's always important to understand why we have these, you know, air pockets and just to reassure yourself that to know what to watch for. And that's what we told clients two weeks ago is like, if we don't get anything breaking in the financial system, we're gonna be fine. So let's wait a couple of days.

And if we don't, then we're fine. And we were. So funny, Greg Zuckerman, who's a great author of books, but also a journalist for the Wall Street Journal, is currently working on a book about George Soros. He mentioned, I guess, I don't know, is this 40 years ago, 35 years ago, George Soros blew up because of a yen carry trade going wrong at some point in the early 90s. This is not a new phenomenon.

It's just something that doesn't happen every day. So I guess we were basically in a situation where you had a lot of hedge funds that were borrowing in Japanese yen terms, buying assets in the United States or elsewhere. And there's this differential between the borrowing rate that makes for a high octane the borrowing rate that makes for a high octane kind of trade situation until it unwinds or temporarily unwinds. And there's leverage involved. So what it ends up looking like is a margin call, but it's not in the millions of dollars or in the tens of thousands of dollars if you think about a margin call, let's say in

your Robinhood account. This is on a much bigger scale and very often if there's a successful trend or trade that's working, everyone's doing the same trade. So you have that phenomenon too. JP Morgan estimated at the end of last week that we've probably seen three quarters of what they estimate the Japanese yen carry trade needs to, or people that need to unwind that trade, we've probably seen 75% of it.

Does that sound like it's feasible to you? Is it something that you think about or you don't really care so much about the size of it? Yeah, I think we care less about the size and more about the fact that nothing broke. That 65 VIX was something's gonna break and nothing broke. And that's sort of a testament to, I think, the regulations that have gone in the past 20 years, all the focus that prime brokers now have on making sure they don't have another archaic in our books. So I think it's all healthy.

It shows like the system actually stood up okay. What would have broken historically a bank, like an investment bank that's a prime brokerage somebody that's got Somebody that's extending credit to traders Well, it would have been it would have been a multi-strat hedge fund that had several prime brokers with whom they didn't share 100% transparency on what their positions were And when you get a big inversion in a currency trade or your cost of capital suddenly spikes, every individual prime broker thinks, oh, okay, we're fine. We're the only guys and they're covered.

And then they find out they're not and then they have a problem. Were you guys surprised to see some of the moves in the Japanese stock market or not really? They basically had a mini 1987 in price terms and that's not a small market. It's one of the largest stock markets in the world. Were you surprised by the severity of how their equity market reacted? Stunned. Stunned.

Okay. And stunned and then you see these pre-open VIX prints and you're like, yeah, I get it. I understand why that's a 60 handle. That's probably where it should be and let's see where we go from here. Not for you to comment on any individual company, but any idea in mind about why so much of the volatility was concentrated in MUFG,

which is Mitsubishi's financial group, that seemed to be the epicenter of the panic. Is that just because it's one of the largest companies and systemically important? Or is there some other reason why that stock would have been down 25%? One thing I learned over the years is don't way overthink periods of crisis. Just wacky things happen and they usually resolve. Okay. One of the interesting things about

the Japanese stock market sell off is that from a price perspective, it basically got back to where it was in 1989. It took a really long time to get back to that price. And then as soon as it got back to that price, we had this Japanese yen carry trade unwind. Coincidence or like what could explain the almost perfect symmetry between the Nikkei hitting that price twice and collapsing in both cases?

I think this is one of those examples of people looking for a pattern to explain the world where the pattern's actually random. Oh, so you think it just randomly happened and it has nothing to do with that specific level? I don't think there's any muscle memory left in the market from 89. Like I was in B school in 89 and every professor was writing papers about why the Nikkei should be where it was, because of all the cross current, all the cross holdings and the industrial growth and the Japanese miracle and that all proved wrong. So that was one case where nobody knew

and I don't think there's any connection. Okay, I wanna ask you guys about the consumer slowdown. Jessica, you're looking at companies' earnings reports and the commentary coming out of the transcripts from those reports. What do you say? Yeah, so one thing we do is we look at Google Trends as a crowdsourced real-time indicator of demand since consumers tend to search for a product or service before making a purchase.

So we have some examples here that we looked at after those earnings calls that were indicating here that we looked at after those earnings calls that were indicating, you know, slowdown in the consumer. So the first one we have that we sent you guys perfect. This shows us Google search volumes for Home Depot and loads over the past 20 years. And what it shows is that searches for these home improvement stores grew steadily through the 2000s and 2010s, but spiked after lockdowns with the 20 year peak in the spring of 2020, since pandemic lockdowns led to a massive home upgrade cycle because of course people were

spending more time at home. That clearly pulled forward demand and search interest is now back down to pre-pandemic levels. So this matches what Home Depot CFO was saying on the call. He blamed high inflation, some economic uncertainty with unemployment ticking up, and then of course high rates since homeowners tend to finance home improvement projects. So the next chart we have on inflation, and this shows US Google search volumes for inflation and interest rates over the last 20 years. And we think this is a super interesting chart shows that no one really cared about these topics prior to the pandemic.

Since inflation and rates were low, searches for inflation peaked in August 2022, two months after the annual inflation peaked. And then searches for interest rate peaked in March 2023, when 10-year yields fell sharply before climbing to its high then of course of October of last year. And searches have come down somewhat, but the important stat here for this chart is that search volumes for inflation and interest rate are still double pre-pandemic levels. It's really interesting because I think one of the things that's keeping those searches high is the prevalence of inflation commentary from both

political parties. Each party will accuse the other of being the reason for inflation or they're going to cause more inflation or they're to blame. And so that's kind of like something that will keep it in the headlines. And I imagine the longer something's in the headlines or the more something's in the headlines, the more people will search that topic because everyone's talking about it. So it's probably like, there's probably some give and take between what the media is talking about and what people are searching for. Yeah, it also does reflect some of what companies are talking about on their earnings call, like

I just described with Home Depot's CFO. We have another chart, US Google searches for buy car and buy house over the last 20 years. This is just another example. It shows searches for both terms grew in the 2010s as the US economy expanded, But it took a step function higher after the pandemic because Americans wanted more space given pandemic restrictions. So they moved from, you know, we had that max exodus from cities to suburbs. So they bought houses and then also they needed cars to get around. But searches for buyouts and buy car hit hit their 20 year highs in Q1 of 2022. And interest in both are now back to the upper band of their pre-pandemic interest. So we're starting to see a pattern here. And our last two charts, I can just briefly discuss quickly, they show the same thing.

This is US Google search volumes for Airbnb over the last five years. They peaked in June of last year, but they were down 10% from those levels in June of this year. So Americans are reducing discretionary travel as households pull back on spending. And then the last one, that's US Google search volumes for restaurant over the last 20 years. It shows that searches for restaurant spiked in 2021 and peaked in July 2022 amid all that pent up demand. But interest was down 6% in July of 2023 and down even more down 14% year over year last month. So just like discretionary travel, Americans are dining out

less. So our overall takeaway from these five charts is high inflation and interest rates are still top of mind for Americans and it is weighing on their propensity to spend on everything from eating out to discretionary travel to big ticket items. However, as we saw with all these charts, search interest is really just falling back in line with pre-pandemic levels as opposed to falling off a cliff. So we think this speaks to the US economy normalizing as opposed to signaling and impending recession. Yeah, it's not that nobody is searching for Airbnbs. It's that they're not acting like it's 2021 anymore and they need to go away every three

months or they'll spontaneously combust. I mentioned CEO commentary earnings transcripts because when I looked at your charts, I said, I'm just curious if anecdotally executives on this last earnings call are confirming the things that these Google searches are reflecting. And it turns out that they are. So a friend of ours writes the transcript, which is this really great email product where basically they're just pulling out the highlights from every earnings conference call that is somewhat representative of an area of the economy.

So in the restaurant example where your Google searches show that that number is now in steady decline, the CEO of Arc restaurants, Michael Weinstein, just said, quote, it's telling where the customer's pocketbook is right now. They're sort of being stingy. And so that period of time in which they will continue to be stingy, we will not see the sales that we were used to prior to that. All right. I don't know what Ark restaurants are.

Is that this Kathy Wood chef? I don't know. What's Ark? I don't, I'm not 100% but we're seeing the same. We're seeing similar things. I wanted to share one more with you. This is Bank of America CEO Brian Moynihan. He said quote, well, in our customer base of 60 million customers spending every week,

what you're seeing is they're spending at a rate of growth of this year over last year for July and August so far about 3%. That is half the rate it was last year at this time. So the consumer has slowed down. They have money in their accounts, but they're depleting a little bit. They're employed, they're earning money, but if you look at it, they've really slowed down. So the Fed is in position where they have to be. So searches for things like travel and restaurants, you, that's exactly what you would expect to have corroborated by one of the largest credit card issuers,

one of the largest banks in the country. And in fact, that's what's going on. They're saying slowing down. They're not saying off a cliff or disappearing. And I think that's a really important distinction as we cycle into year three, maybe year four of the current bull market. Yeah, absolutely. I agree. And I think that's what's so helpful about these charts. They show just how unbelievably robust demand was for everything from eating out to home improvement projects,

to discretionary travel, because we have to remember pre immediately pre pandemic 2018, 2019 was the end of the last economic expansion. The economy is really strong. So yeah, we just completely surpassed, um, uh, those levels. So right now demand is slowing, but we're just simply returning to levels at the end of the last economic expansion. Yeah. If you come to something other than the immediate post pandemic, it looks more normal than anything else when you're looking at the rate that people are searching for these terms. Nick, you want to do some Bitcoin stuff? Sure. Okay. You like to point out that you were the first strategist on Wall Street to seriously write about Bitcoin. And I know that's true because I was there. Why is that

still so important to you as a because you're not a wild-eyed Bitcoin advocate per se, but you have been taking it seriously far longer than most people have. Why is that so important for you to remind people of? Because I think you're right. This is when I ask that the people fall in love with and think it's either the best thing in the world or the worst thing in the world. And the way we look at everything is stuff is just what it is. You know, you can't fall in love with anything. That's the first step to losing a lot of money in anything.

So if you look at it objectively and in particular Bitcoin, it's it's had a relatively short history, but the history is very volatile and, you know, full of different events. And so having some historical perspective is helpful. Like the thing I hear most or the question I get most is which is better, Bitcoin or gold? And the answer I always give is, look, they're just very different assets.

Gold is a physical asset. In half of all gold demand in the world is for jewelry. There's no Bitcoin jewelry, right? So physical demand for gold has a steady underpinning in jewelry demand. Non-US central banks buy 20 to 25% of all the gold supply every year. So between those two things,

you have a fairly stable source of demand. The rest of gold demand is technology 7% and then investment demand is like 18 to 23%. So investment demand is just about a quarter of gold demand in any given year. For Bitcoin is essentially all of it, which explains why gold is much less volatile than Bitcoin. Gold has a stable source of demand,

several stable sources of demand. Bitcoin doesn't have that yet. Maybe at some point in the future, central banks will buy Bitcoin the way they buy gold. Maybe, if it's not happening yet, it could happen, I suppose. But the underlying message is they're very different assets. You're buying different things.

For gold, if you're long gold, you're hoping that nine US central banks continue to buy it, like we've discussed on prior calls. If you're long Bitcoin, you just hoping that nine US central banks continue to buy it like we've discussed on prior calls If you're long bitcoin, you just hope that there is more financialization more people use it as a diversifier in financial assets Um, which kind of leads me to my can we pause and double click on that? I think that's such an important point We are now 15 years into this experiment And you no longer hear people seriously talking about use cases for Bitcoin, other than investment, speculation, maybe store of value.

You don't hear the critics say, I can't use Bitcoin to buy Starbucks, because nobody cares anymore whether or not you can use it to buy Starbucks. No one is saying this is good for small dollar transactions. So you're not hearing the bears or the bulls debate whether or not there's a use case. Since the advent of the ETFs, the only debate is whether or not investment demand will outpace the rate at which new bitcoins are mined. There is no other conversation. That conversation seems to be fairly one way, which is that, look, this is now productized by the largest investment firms in the world.

There will be some level of demand. We don't know how much it'll be. And it won't be as steady as how many tons of gold jewelry manufacturers need to buy. But we know it's at least coming in. It may be a trickle. It may be a lot at any given point in time. So now the question is, is it going to outpace how fast they can make new Bitcoin or not? And now that we've arrived there, I think you're absolutely right. That's the main difference with gold.

Yes, it's a store of value, but you also still know that people will want to buy gold jewelry, people, central banks will want to hold physical gold. These things will never ever change. And so you have that feather in your cap. Bitcoin's a very different conversation. It is actually there's a new academic paper that was just out this month that I pulled a couple of charts from that I wanted to show you. Please. We've got them here. What the first one we've got is. Okay. This is from the paper and I think you're going to put

the link to the paper in the show notes so people will be able to check it out. It's a very, very good paper. It looks at Bitcoin returns back to 2019 to the present. And in this chart, it decomposes the sources of the moves in Bitcoin. What explains the variation in Bitcoin prices? So the top line is Bitcoin, the black line. The next level down is demand, which is what we've been talking about, demand for Bitcoin.

Then the kind of purplish line is basically interest rates, monetary policy. And then the bottom line, the blue line, is conventional risk, call that the VIX. And so what this chart does is show you that at various points over the past five years, the price of Bitcoin has been affected by some of these factors more than others.

So for example, in 2020, we highlight the March 2020 pandemic crisis, where conventional risk very high and everything went down, you know, in a crisis correlations go to one for everything, including Bitcoin, you can see that the black line dips right there over there above 2020. Then in 2021, we had this huge demand surge for Bitcoin. And you can see that Bitcoin prices track that demand surge very, very well. So that demand surge caused by excess savings and people wanting to gamble on financial assets that work there.

Then the rate hikes in 22 were the monetary policy shock. And that really, you can see how it kind of had an effect on the Bitcoin returns. They didn't, it felt like- Negative effect. Negative effect, yeah. So a shock to rates, a shock of higher rates, pulled down Bitcoin prices.

So you can see that they all matter at various points, but the one that looks the matter the most is the demand side, that purple fuchsia line in the middle. So the next graph we have is a bar chart. Also from the paper. I'm sorry, can we go back to this very quickly? Sure. Do the purple, pink, and blue lines add up to the black line?

It's a variation analysis, so no. Mathematically, it would not. Okay. So, but those are contributors to what the black line does. Yeah, it's important to show this is a disaggregation of the Bitcoin return data to give you a sense of when does a factor really overwhelm the other factors. So the pandemic crisis in 2020 had a temporary but very damaging effect on prices, but they came right back as the VIX came down and stocks began to go up. Then that rate shock in 22 had an effect

on prices. But that Bitcoin demand line, the second one from the top. It looks the closest to the actual. Right. OK. And the bar chart will show you, confirm what your eyes are telling you. This decomposes what affects the prices of two-year treasuries, the S&P 500, and Bitcoin in those three sets of bars.

The first one shows that conventional risk, the VIX, stock market volatility, and monetary policy, explain about half of the move in two year bonds over this period. For the S&P, it's also about the same. When you get to the Bitcoin chart, you'll see that crypto demand, demand for the product, explains 80% of variation in price. And the more conventional things, monetary policy and conventional risk, explain less than 10%. So when you're owning Bitcoin, when you own Bitcoin, you're owning crypto demand, you're owning a call on crypto demand,

you're not really hedging any kind of other risk aside from perhaps very big shocks to rates or very big shocks to capital markets, but in general, you're owning crypto demand. Mike, so guys, tell me what you think of this. My takeaway from that explanation is people who are spending time in search of some sort of Fed related or monetary policy related answer to,

should Bitcoin go up or down in X environment, those people are spending their time focused on the wrong thing. The question that actually matters is, will there be more or less demand for Bitcoin? And I'm not suggesting I have a way to answer that question. But like that is the that's the right question. Will more people want to own it versus less people is more important than what will the two year Treasury do?

What will the Fed do? What will monetary policy be? Would you agree with that? Is that too general of a statement or would you say directionally that's the right? No, the data is overwhelmingly in support of that view. I mean, there's no other way to read that data. You can argue that the shock and rates in 22 was a rate move and therefore influenced Bitcoin prices. But I think it was the surprise of the move. It was the surprise of how aggressive the Fed got that hurt stocks and hurt bonds because it pushed us into thinking we're going to have a recession. Absent those kind of shock moves, either in risk or in rates, the move in Bitcoin going forward is going to be about demand for the product, which makes sense. It makes so much sense to me.

It's a technology. It's also got a commodity element to it, supply demand. And because there are no cash flows, why would interest rates matter to it? We're not, we're not trying to discount cash flow analysis, this thing, because it doesn't produce any. So the discount rate or the risk-free rate shouldn't really even enter into the conversation when we're talking about an asset like this. Would you go that far or not quite?

I wouldn't because if you look at a historical correlation of gold prices to real interest rates, real ex-inflation interest rates, there is a decent relationship. You know, when real rates are zero, it's kind of free to own anything because you're not paying any money. You're not paying for capital. When real rates are high, you know, it's a little bit harder. But, you know, it's it's a weaker link than you would think would, you know, would be the case.

So I think there is some there's some argument for rates, but the data on Bitcoin is so overwhelmingly clear. This is a man's story. Yeah. If if please, if your viewers do want to one way to track is so overwhelmingly clear. This is a man's story. Yeah. Please. If your viewers do want one way to track real-time interest, again, use global Google Trends search volumes for Bitcoin, but again, do worldwide. And you'll see that outside size interest correlates with extreme moves in Bitcoin. So for example, certain peaks in the price of Bitcoin, you'll see that the search interest chart on Google Trends is very similar.

And that works both ways, of course, when the price swoon. Yeah, I feel like if we could get real time data of Coinbase logins without looking at a price chart of Bitcoin, we could infer it's either up or down 20% from last week when we see a huge spike in people checking their account. They're either checking it because they're terrified or they're excited. And this and this is and this is where yes it's different than stocks but in some way it's not very different from stocks because we're all human beings. It might have a different ticker symbol, different asset class but in the end it's us and we

are what we are. Yeah, a chart's a chart. I agree. Guys, I had so much fun checking in with you. I want to remind people how they can watch you on YouTube. Guys, you can go to youtube.com slash at Nick Colas and Jessica Rabe. And of course, you can always go to datatrackresearch.com and subscribe. Thank you so much for joining me today.

Really appreciate it to the viewers, listeners. Thank you. We'll talk to you soon All right, all right, I know some of you I know some of you are disappointed. It's not Callie. I know she smashed it last week. I am. Well, you're disappointed.

I get it. I understand that. You're going to talk a little bit less this week than last week. Hey everybody. Welcome to The Compound and Friends. My name is Downtown Josh Brown here with my compadre as always You know him best as a war boy from Furiosa Michael Batnick Michael say what's up to the folks? Hello. Hello. All right. Did you watch your yosey? Yeah, by the way

Did you watch it twice? Or in it I thought in the theater. I thought I started a theater and then I watched it again on max I gave you the heads up. It was on max this weekend. I you I started a theater and then I watched it again on Max. I gave you the heads up it was on Max this weekend. You gave me the heads up I already had the heads up it was already queued up. Way too long. It's a goddamn masterpiece. Yes it really is and hey there's a New Yorker interview with George Miller who made the first film in like 1979. It turns out his wife does all the editing and they broke a record with this movie. It's the most individual scenes like cuts, like the amount of shots in that film. It's like a thousands of shots and she cuts the whole thing and it's not

really a movie until it gets edited and cut. It's like it's a script and then they film you know a thousand hours of stuff but it's not really a movie until it gets edited and cut. It's like, it's a script and then they film, you know, a thousand hours of stuff, but it's not really a movie until it gets edited. And he talks about how critical editing is, and it's a really fascinating read. I don't know how we got here. We have a sponsor tonight, but before we do that, let me just say a quick couple of hellos,

cause I was off last week, and when I'm not here, I miss you guys. Chris is in the house, John Carlo, Cliff, Magnus, Georgie is here, Jack's here, Jeff, Drew, you guys are the best. Thank you so much for joining us on the live soren, I see you. Who else is here? Everybody's here. We love you guys.

Okay, Public is the sponsor tonight. Michael, tell us about public. Public is a place where you can transact multiple things. You want cash, you want bonds, stocks, crypto. Right now, you can still get 5.1% APY in your cash. So I'm still doing it. It's not going to be there for long. I understand. September, we got a hike coming.

Got to start planning, the cash back to work. But for now, for now, we're still getting that 5.1%. The best part about using public for the 5.1% APY yield is the fact that there's no fees on that. So like what good is earning high yield if you end up paying a bunch of it back in fees? Is it liquid? It's just straight up 5.1% liquid is water, no balance requirements put in as much or as little into your account as you feel the need to and public provides up to $5 million

in FDIC insurance, which is 20 times the standard coverage. Let me read this disclaimer. This is a paid endorsement for public investing 5.1% APY as of June 17th, 2024 and is subject to change. Full disclosures in the podcast description. All right, Mike, I have to open up the show tonight with a little item of housekeeping. So bear with me. Is that okay? You're on. All right. I don't know how much you know about this, but I have been battling with account impersonators on various social media platforms, but most specifically lately on Metta and Instagram. And basically I want to make sure the audience understands this. So nobody falls prey to this. There are people who are buying Facebook ads, pretending to be me, and inviting my fans

into WhatsApp chat rooms where they are engaging in what's known as a pig butchering scam. So, yeah. So they're fattening people up with short-term wins in stocks and then getting them put in more money and more money. and then they're doing like these rug polls and pump and dumps and they're not just doing it with me. They're doing it with Bill Ackman, Elon Musk. I heard there was a Jamie Dimon one. There's a Tom Lee ads all over the place. Guys, listen to me. Look into my crystal clear beautiful blue eyes. It's always fake. I don't buy ads. I will never DM you.

I will never ask you to move over a conversation into a WhatsApp chat. I do not engage in online chats or trading rooms. It's never me. And I really want you to, when you see these things, report them. Metta won't do anything about it most likely, but so what? The more people who report them, hopefully the sooner Metta will shut them down. We are actively directing people to

the FBI tip page to report these things at this point. There are some lawsuits that are going to go forward against Metta on behalf of some pretty prominent people. And Metta is taking money in exchange for allowing this activity. Yikes. It's really, it's really outweigh. You know what this is, it's the equivalent of if somebody put you, Michael, on a billboard

and put a 1-800 number, and then people call the 800 number and we're scammed. Like, how pissed off would you be about that? Now imagine nobody does anything about it. It's like it's insane but they have the platforms they're getting paid for this. They're monetizing this activity so they're not stopping it and I feel powerless and it's really pissing me off. So I want to make sure that people that watch this show Understand that it's fake and they should report it and they should never trust an ad purporting to be a well-known person on Wall Street

Who's looking to like chat stocks with them? It's always guys whether it's me or anyone else. I promise you it's fake Don't do it. Tell your family and friends. All right, is that sufficient? Do you think we covered it? Yes. Okay, when the Michael Batnick impersonation start, I'm gonna be every bit as heated. So this is not just about me.

This is bigger than me, okay? All right, the first thing we wanna get to is- I won't rest until I get impersonators. Believe that. I mean, it will happen at some point. Your profile is steadily rising and any day now I expect to see them. I'll probably believe that they're real. Hi, Mike Bannack here. Can we talk crypto on WhatsApp? All right, signs of a top. So I thought this was interesting. It's a discussion about what you should watch for as markets rally back toward the old highs,

the all-time highs, like the quality of the market rally. Is that the right way to phrase it, Michael? You tell me. What are we looking at? What should I be looking for, Josh? Well, let's put up the S&P 500 ETF SPY. This is one of the fastest snapbacks ever. It wasn't quite a 10% correction, but close enough.

On the NASDAQ it was. Yeah, NASDAQ it was. I mean, look, this is like breathtaking, the speed at which this thing came back. Let's do the NASDAQ. Here's the cues. I mean, this is just really breathtaking. And here's the Dow, which is now only 0.8% off the all-time highs. Special thanks to Sean on the charts this week, by the way.

So I have two charts from one of my favorite technicians, Ari Wald at Oppenheimer. And Ari illustrates the stuff that you don't want to see when stocks are challenging new highs. And I thought this was really interesting. Let's put this up. So, this is three charts in one. So, what he's saying, I'm going to read his words, our market bottom checklist in 2022 keyed on downside extremes in our indicators. Our market top checklist is based on negative divergences rather than upside extremes.

That's interesting in and of itself. For instance, a new S&P high undermined by one, fewer than 60% of NYSE stocks above their 200-day would warn that internal breath is narrowing and to a failure for the high beta versus low volatility ratio to reclaim its 200 day average would caution that market leadership is turning defensive. We found that these are characteristics of a market top. So he's giving you the playbook in that second pain, Mike. That's the percentage of New York Stock percentage of New York Stock Exchange stocks above the

200 day, which is not troublesome yet and could confirm higher, but you really don't want to see that breakdown. If you are a wide charts user, this is really easy to punch up any day you want to. Then this high beta versus low vol thing, which might be a little bit harder. It's a ratio chart, but what he's basically showing is you don't want beta to, uh, uh, you don't want to see the high beta names underperforming the low volatility names as we reclaim an old market high. Well, I mean, I'm, I'm giving you from, I'm giving you from Ari. Well, I would push, I would push back on that a little bit.

I get what he's saying that high beta are the stocks that move more than the index for better and for worse. Generally, they're the growthier names of the market, except when they're not. So for example, I'm looking at the whole thing. He's in SPHB, the high beta. And phase energy is in here. Like, yeah, it's a high beta stock.

Is that like a leading stock? Is it a growth stock? No, it's, well, it had been getting killed. Yeah, stocks doesn't look great. What I think a better metric for confirming this is like, I'd rather look at a momentum ETF, whether it's the iShares, MTUM, or Vanguard's, VFMO. They're both saying a similar thing.

They're, I don't know, I'm just high bogging it. They're a percent or two off from all-time highs. So that looks a lot healthier than this particular ratio chart. I think that's a fair point. I think he's just trying to capture the idea that the stocks that move more than the market, you don't want to see them selling off while, let's say, the utilities and staples are printing fresh highs because historically, that's not been a great confirmation of the overall index making new highs. You know what I like better? I would look at,

and Callie and I did this last week, this was a bit worrisome, the consumer discretionary divided by consumer staples. Like that, you want to see trending higher, whether it's the equal weight or the cap weight because the XLY is like it's all Amazon and Tesla or half of it anyway. That's also not looking so great. So there are some things you want to say. Here's the next chart from Ari. We can throw that up, John. This is Ari's words.

It's not surprising that high yield credit spreads widened during the correlated risk off rollover in early August. However, it would be surprising and a concern if credit spreads remained wide during the S&P's next attempt at a new high. Also higher VIX lows would likewise indicate underlying market conditions are turning risk averse. Conversely, a new VIX low would reaffirm the bull cycle.

So the first chart I showed you stocks and some stock based measures at a return to the highs. Here I'm showing you something else. I'm showing you credit spreads in the middle pane. And again, you don't want to see this rolling over as stocks make a new high. And then in the bottom pane, the VIX, it would be really juicy to see 11, 12 VIX. It would not be great to see the VIX rising with rising stock prices. So I think that those are two reasonable concepts. It's not that they'll necessarily help you call the top, but it should definitely make

you more cautious if you're seeing those divergences while stocks are rallying to highs because it would indicate that it's a lower quality rally. Yes. We think that's a fair way to sum it up. Yes. I would also point out that high yield bonds hit an all time high today, like all time. And if you look like credit spreads are, they came out, they came up, I mean, not a lot.

And now they're falling. So yes, I think that there are lot, and now they're falling. So yes, I think that there are things that you want to pay attention to, but to me, these are at best, at best yellow. They're not even close to red. Roger Rutherford is asking, what is hot to go? And Michael asked this before the show, and I really want to make sure that we are level setting this podcast as a youthful, a relatively youthful financial show.

Chappelle Rowan is like the biggest pop star in America this summer. And I think hot to go is the song of the summer. And maybe that's not the case for people, my age group or older, but I feel like there should be some awareness in the chat. Dude, shut up and listen to Steely Dan. I will not go gently into my second adolescence, which is what I'm referring to the period

of time I'm headed toward. So all right, you're up. Okay. You're welcome, Roger. It's kind of wild how much cash investors hold, at all times. Vanguard shared a chart on overall the aggregate industry asset allocation. They're looking at equities, bonds, and money market funds. And they're using mutual funds, using ETFs, using money market funds. And the money market funds are in yellow.

And it's 18.6% as of the end of June 2024. But the median for the last, this goes back to 1993, the median is basically a quarter. People just are under invested or over invested in cash all the time. What's in the green, Mike? Is that mutual funds that own bonds? It's bonds, yeah. Could that also be ETFs that own short-term treasuries? Would that be in that bucket?

Yeah. Yep. I think there is some substitution of traditional money market funds with ETFs that are short-term bond oriented. And I guess I don't view that as being like a permanent holding. I feel that some people use that and then they rotate out of it to go do something else while other people buy it. And it's probably not the same accounts holding the same amount of cash all this time.

You got what I'm saying there? I do. I do. But people are just- It's like a revolving door. But people are over-investing in cash. Here's maybe perhaps a better chart also from Vanguard to illustrate the point that I'm trying to make.

So there's a new report that they say, to assess just how sticky cash is in IRAs, we looked at a sample of rollover and direct contributions made by investors into Vanguard IRA accounts in 2022. Even after 12 months, they're showing that 28% of investors in the sample who conducted rollovers, so 401k to IRA, 28% who conducted rollovers still had their assets in cash or crash equivalents. This is even worse. 55%- You said crash equivalents. I like it.

That's a 14%. 55% of investors in the sample who made direct contributions still had their assets in cash or cash equivalents. The chart is showing the age and year since rollover and the proportion of investors that are staying in cash. For whatever reason, behavioral or otherwise, just not getting around to it, who knows? People just are over invested in cash.

Well, why do you think they're doing this? What do you think this is about? Do you think this is functional, like keeping a certain amount of cash for a reason, or do you think it's mostly psychological? No, I think it's mostly psychological. I think most of the time the market goes up, people don't invest right away. The market is up 10% since the last time they locked. They're like, oh, shit, I can't invest now. And it just goes and goes and

goes. In your mind, is it a positive signal if all of a sudden we start seeing less and less cash in that graph? Is that necessarily a good thing or do we kind of like it this way because that's the wall of worry that the market climbs as people gradually come out of their cash? Yeah, it's a fair question. It's an impossible question to answer. Do I think people should have less money invested in cash generally? Is 20% excessive? Yeah, it's excessive. To your point, if all

of a sudden that number went from 20 to eight, would I be like, yes, this is great news? Probably not. I'd probably be like, okay, this is probably a little bit frothy given history. You know what's interesting about this also? I remember a long time ago, I had a conversation with a real estate investor and his observation was real estate investors are never in cash. Everything they do is leveraged. Yeah, they have no cash. And they're always invested. And one of the reasons they're always invested is the 1031 exchange. So you sell a building, you have a certain amount of time to put it into a new building or you pay the capital

gains tax. Who the hell would do that? The nature of the asset class makes it so that transactions are fairly rare. And if somebody says I'm a real estate investor, they're not also in the next breath going to say I'm 50% in cash right now. They don't tend to look for bottoms the way stock market people do. So it's a different mentality. And I think if stock market investors were able to adopt a real estate mindset with their equity assets, it'd probably be a better result over a decade to decades, as opposed to this idea that just because it is liquid, it doesn't mean you should behave as though it's liquid. And I don't know. I think that that's a really interesting dichotomy.

And some of it is tax related and some of it is just the ease with which you can move in and out of things. If somebody sells a stock today, they know they could buy it back in an hour. They could buy it now, they might not. But I think that's why investment portfolios in the liquid markets tend to lend themselves more to larger cash positions than portfolios that are real asset or real estate. So all right, I want to tell you the new Starbucks CEO. I was blown away by this development last week and I screwed up because I knew Starbucks was a buy and I never ended up pulling the trigger on it.

And I never say stuff like that, but this was just one of those things where I was genuinely mad at myself for not being in it. The stock ripped from like 68 to where is it now? 90 something? I don't know, I made the case, just saying. No, I know, you crushed it. So that's why I wanna ask you about it.

Were you like, when that news came out, were you like super excited or were you shocked? What was your, we'll talk about what the news was in a second, but what was your initial reaction? Holy shit, that's a big gap. Okay. We're actually on the stock price. Yeah, that was my-

Were you excited about the development itself? Yeah. I mean, listen, the stock had its biggest one-day return ever. I think we have a chart of that. And so there we go, up 24% in a day. So of course, I'm like sort of struggling. Do I sell the stock? It just went up 25% in a day.

On the other hand, this stock has gotten the shit beat out of it, rightfully so. The business has performed not well. And this new guy, he hasn't even started until September. So he's getting a lot of the benefit of the doubt and we'll see what he could do. Well, so let's talk about this. The new guy's name is Brian Nicol and they're going to pay him $85 million basically to be the new CEO of Starbucks. And let me read this. Well, first, the question is to me, why would he, he came from Chipotle. So the reason why he's getting a pay package like this, and the reason why the stock added billions in market cap is because he has

done an incredible job at Yum Brands first, and then Chipotle where he took the reins in 2018. And people take it for granted. Oh, it's Chipotle. Of course, he was successful there. No, Oh, it's Chipotle. Of course he was successful there. No. When he came in, the company was still trying to get over the food safety issues and it really hadn't ramped itself back up until Brian Nicol came in. But so I guess my first question is, why leave Chipotle, which is firing on all cylinders and clearly has more room for growth? Why leave there and come into this basket case situation where basically Howard Schultz made a mess, then he hand pointed a successor, Kevin something or other,

who somehow found a way to make it worse. And then you have the current CEO who was just defenestrated who really presided over a disaster. Like, why would you leave running Chipotle, arguably the best managed quick service restaurant in the world to step into this shit? Well, I think he said, my work here is done. He did it. So he came in in 2018 during the diarrhea scandal, the stock was doing awfully. The stock, we have a chart here, he crushed the S&P and he created one of the greatest fast casual food machines that the world's ever seen and he's done. He did it.

He did it. He did the thing. So you think it was like mission accomplished and I'm looking for a new challenge? And whatever the reason why he's getting paid, he got a $10 million signing bonus, $75 million equity grant to replace whatever stock he was leaving back at Chipotle. Right. Because walking away from Chipotle, he's forfeiting, I guess, stock options. So they made him hold the air.

So Starbucks made him hold. And dude, Starbucks is an iconic. But the difference is he got shares in Starbucks, not in Chipotle. So I don't know. They made them whole in dollar terms, but it's not quite the same. The opportunity to run an iconic company has probably got to be really appealing. Okay. And to be the face of the turnaround, like the guy's got an ego. Nickel's salary was set at 1.6 million.

This is in addition to the 10 million and the 75 million, 1.6 million annual salary eligible for an annual cash bonus of up to 7.2 million. That's a year. And he will receive an annual stock award valued at 23 million starting next fiscal year. And he gets so much money. He gets work. This is LeBron James money. It's a lot.

It's a lot. You kind of have to do it. No matter how bad Starbucks is, you have to give it a shot. But you can imagine he probably has been observing what's been going on with Starbucks. It's not really a competitor, but it's a company that takes consumer dollars. So maybe it is a competitor. They don't serve the same cuisine, but he's a company that takes consumer dollars. So maybe it is a competitor.

They don't serve the same cuisine, but he's probably been watching this from afar and saying, you know what I would do? Right. And then it's like somebody gave him the chance to actually do it. So there's probably some element of that too. He probably has a playbook in the back of his head, just watching this. He said, I already did it here. Now I'm going to do it there.

Dude, you go to a, you go to an airport Starbucks, it could be 22 minutes to get an iced coffee. Like just plain, traditional iced coffee. Literally coffee on ice. It could be 20 minutes easily. Yeah. Because the menu is like out of control. There's 9,000 things.

So what else do I want to tell you about this? Uh, oh, he's a super commuter. Do you know what that is? I do. So I didn't know what that term was. Part of his deal is he negotiated for himself. He gets to stay in Newport Beach and commute up to Starbucks in Washington three days a week. And they're giving them a private jet and they're setting them up with a Newport office with an assistant. And here's something interesting. Chipotle moved its headquarters from Denver to Newport three months after he became the CEO there. So part of Brian Nichols whole deal is like the company comes to me, which I feel like is pretty gangster. I don't hate it. Dude, this guy created the Dorito

taco show. He moves headquarters. Oh, at Taco Bell? Yeah. All right. Starbucks ran up 22% by the close. Chipotle sold off 7% neither are surprising I guess The move to the upside in Starbucks is a little bit surprising Starbucks added 18.7 billion in market cap and Chipotle lost 5.2 billion in market cap that day. Let's put this chart up So here it is and that is market cap directly flowing out of Chipotle and into Starbucks to some extent. I could imagine there being people who sold one and bought the other.

Is that far-fetched or what do you think? No, I don't think it's far-fetched. Here are some of the performance numbers. Nickel was CEO at Chipotle since March of 2018. The stock had a 725% total return in that time. That is 38.65% annualized from March of 2018 through August 13th of this year. Chipotle over that period of time added $62 billion

in market cap. It went from a $9 billion business to a $71 billion business. So yeah, he took a $9 billion company and made it $70 billion. And I don't think anyone should be surprised at the pay package in light of those numbers. Not that he could definitely do it again, but my God, let's put this career chart. do it again, but my God. Let's put this career chart. So on the top is, well, this is versus the S&P. Do we have one more? Yeah, I wanted to show this one. This is revenue on top, quarterly revenue. So they're doing $3 billion a quarter at this point. And that's up from, it looks like a little over 1 billion per quarter when he took over and earnings per share looks like I don't know, is that a triple?

Yeah. All right. And then put the other one up guys. No. What do you look for? Chipotle versus the S&P. We just did that. 765% versus 135%, which is pretty outrageous. What are we doing with these Starbucks charts?

These worth getting into? Yes. So Starbucks has been languishing as we know. This is free cash flow. It's gone sideways for the last three years. Next chart, this shows what we already discussed. The monster move on his announcement. Skip the next chart, John.

So look how many Starbucks stores have opened over the last couple of years. Look at this. Last year, they opened 2,876 stores. What planets are they opening these stores on? Like where do you even, where do you even put these things at this point? Oh, actually, did we get a new one last year? The Belmore store on Sunrise Highway

was at last year or the year before? Yeah, yeah, what they're yesterday. We're in that 2,876 stores from last year. And so if you can keep finding. If you look at sales per location, it dipped fairly significantly. Yeah, but this is solid, dude. It's good. No, it's good. But they've but so they've got work to do. And Brian Nichols, the guy to write the show. Sales per location is a

little bit troubling of as a metric because a lot of this is just raising prices. It's not more foot traffic. It's not more transactions. I mean, it's not that Starbucks is not doing well, but like you can get away with a lot with price increases and they clearly did. Part of the problem here is they're not getting away with it anymore. From Wall Street, let's take a look at some analyst coverage. Piper Sandler, TD Cowan, and Baird all upgraded Starbucks stock right after those leadership changes. And you can see though, you still have 15 analysts at a hold. So there's still some skepticism whether or not this thing can turn around. All right, let's keep

moving. All right, earnings season is just about over. So 93% of us. Thank god. 93% of companies reported. 79% have reported a positive EPS surprise, and 60% reported a positive revenue surprise. So on the earnings growth side, 10.9%. So if that holds, that will be the highest year over year earnings growth reported by the index

since the fourth quarter of 2021. So not bad. Looking in terms of revenue. Really? Yeah, really. Wait, almost 11% earnings growth. So earnings growth is accelerating, which is like, how many people thought that we would see that?

However, right. However, 60% of S&P companies reported revenue above estimates, which is below the five-year average of 69%. Nice. Very nice. But, all right, so companies are reporting revenues that are 0.5% above estimates, which is below the five-year average of 2%. And if 0.5% is the final number, it would be the lowest revenue surprise

since the fourth quarter of 2019. So margins have done a lot of work, but the revenue surprises are not great. So this isn't surprising. This tracks with GDP growth decelerating from last year. I don't think anybody should be shocked that revenue growth is not as robust as it was a year ago. It was a stat from the Bank of America call that growth is like 3% a month in consumer spending, which sounds amazing,

but this time last year it was 6%. So I'm not blown away by that. But this story where, what is the number? The number of 79% of S&P companies have reported a positive earnings per share surprise. So they are still finding change in the couch cushions, like metaphorically. They are still finding ways, regardless of slower revenue growth, to surprise on the bottom line. It's got to be more than just layoffs. It's got to be costs coming down and a whole mix of things in order for that to keep going, right? You would think so. This is noteworthy. So companies that are beating are the stock price is doing like, it's up on average like what it's been the last five years, but they're beating the crap out of

companies that are missing. So companies that have reported negative earnings surprises for Q2 have seen an average price decrease of 3.8% two days before the earnings released through two days after, which is significantly lower than the five-year average of negative 2.3%. So if you've performed well and you're missing, you're in deep doo-doo. You know what? That also attracts, you're at a 21 market multiple. There's no room. There's no room for oopsies. At this valuation, people want solid results and if they don't get it, they sell. You're already taking risk buying higher valuations than what we've seen over the last couple of years.

So now you wanna have a higher valuation stock and you wanna come in and miss by two cents? I don't think so. So a few interesting charts I wanna run through. The number of S&P 500 companies citing recession is Dramatically dramatically off its highs obviously which is what was the high it was 234 It was the second quarter of 2022

So half of all S&P 500 companies were talking about recessions on their earnings call which actually sounds kind of low I would have thought it was like three quarters, to be honest. That's wild. I don't remember it being that bad. And then they show, they break it down by industry. So perhaps not surprising at all actually, financials are the most number of companies talking about or using the word recession was in financials. No consumer staples or no consumer discretionary companies

are talking about it, only one staples. Thought that was fairly noteworthy. And then the number of companies with increase or decrease in net profit margins, a lot of green here. Percentage. A lot of green here. Wait, let me freeze on this. So the companies, the sector of the S&P with the most companies reporting an increase in

net profits are utilities followed by energy. That's really interesting to me. This is also interesting and not surprising consumer discretion, which we mentioned earlier as having a lot of pressure on the stock prices. Well, guess what? The businesses as well. They've had 56% of companies with deteriorating margins, which is the worst for any sector.

Very interesting. What's this next one? Okay. This is just the index versus the forward 12-month earnings per share. And this is what moves markets. And the earnings per share estimates continue to go up and to the right, right on all- time high and so Shocking shocking not shocking that the market is less than one percent of them as well. The light blue is the s&p um Is is the s&p's price? And the dark blue is the earnings per share outlook for the next 12 months

That is correct And i've got a segue into your next topic before we get there We had the lowest beat rate for tech since the first quarter of 2020, which also bleeds into some of the punishment that we've seen for the stock price that we mentioned earlier. And lastly, they said information technology is reporting the highest year-over-year revenue growth

of all 11 sectors at 10.5%. Obviously, Nvidia is a huge part of that. If you take Nvidia out, it falls from 10.5% down to 6.8%, which is a dramatic, dramatic change. And of course, we'll get an Nvidia report next Wednesday after the close, and I'm sure on what are your thoughts tonight before we'll preview that. I wanna talk about MegaCaps.

It is a good segue. I thought this was a really good piece. It came out in July, but still very relevant. And it's called Bad Omen for MegaCaps. And let me set this up. In 2015, the cloud computing era began. Would you agree with that statement? That was the start of the fangs and the mega cap dominance of the stock market. And it happened when Amazon reported a surprise profit that blew everybody away. And it was all AWS? And it was AWS. And it just kicked the whole thing into gear. And it coincided with cloud adoption from corporate customers of Microsoft. And okay,

the cloud computing era started in 2015, and that's nine years ago. First we had the Fang stocks, and then they became the Magnificent 7. But it really transformed the stock market. Just when it looked as though the era was over in late 2022, AI came along and it was like doubling down on the cloud hyperscalers. We call them hyperscalers now. So AI reinvigorated these stocks once again. They should have died.

If chat GPT hadn't come along, the growth rates for all of these hyperscalers would have been way lower and those stock price recoveries in 2023 would not have happened. Microsoft would be two trillion instead of three. That's right. Okay. But that's not how it played out, which is why investing is hard and calling tops is hard. So the market cap weight at S&P 500 has been trouncing the equal weight S&P 500 over this

nine-year cloud computing slash AI era. That is the story of our generation of investors. Let's put this chart up. This is the purple, is the S&P 500 total return, very simple, up 219% from January 2015 through now. And the orange is the RSP, which we frequently reference, that is the equal weight S&P index, basically negates the size of Apple, Microsoft, Google, Amazon, by reducing them all to the same weighting as Hershey and Exxon and everything else. Um, next chart.

This is the same chart, but in the growth of $10,000, $10,000 in the S and P market cap, which gives much more weighting to the MAG7, you would have turned that into $32,000, only $25,000 in the equal weight total return. So pretty big differential and pretty big ramifications for everyone working on Wall Street. We're in year nine of this mega cap growth outperformance era. It still continues this year. If and when it turns, there's a high probability

that the market cap weight starts to trail the equal weight. And the reason I say that so emphatically, this is literally always what happens. And a lot of us, myself included, fall prey to the recency bias. Just because the market has been dominated by large cap growth over the last nine years, it feels like it can never stop. And it's just always going to be this way from now on.

But literally, it's not going to be this way forever. So this is from Lyrical Asset Management. We have looked at the best periods on record of the S&P 500 outperforming the S&P equal weight and then looked at subsequent returns. History shows after the S&P 500 outperforms by a lot, it goes on to underperform by even more over the next three and five years with no exception so far. This is important. The underperformance becomes even worse than the outperformance.

The best three-month periods of the S&P 500 performance relative to the equal weight is what we're looking at here. Let's put this chart up. So there are 412 rolling three-month periods documented here. At the top of the list is the three-month period that ended May of 2023. In those three months, the MAG-7 and the AI trade began. So what lyrical asset management is showing here, you see all that red, Mike, in the right three columns? I do.

That's the subsequent relative performance of the market cap weighted S&P versus the equal weight. I have never seen this broken out this way and I'm completely shocked by the revelation here. The next five year relative return after the 30 best three month periods for the S&P 500 had been negative 42%. Okay, but there's a huge but here, dude. These are all like over, a lot of them are overlapping. There's like 14 tech bugs. They're rolling periods. We completely agree.

We completely agree. Of course, we don't have a thousand years of history, which is why you need to use rolling. Let me skip to their conclusion. So this is a table of 30 instances of this. And to your point, some of these do overlap. The moments of these three month best periods for the S&P, AI, tech bubble, COVID, Gulf War, great financial crisis.

This is what Lyrical says. In addition to the best three month periods, the table shows the performance of the S&P 500 relative to the equal weight in the following one, three, and five years. Notice all the negative relative returns in red in these columns. When we originally constructed this table, we started with the 10 best three-month periods. Every single one showed significant relative performance over the next three and five years. Then we expanded it to 15 periods, then 20, 25, finally 30. It turns out this has always been a bad omen for the future. We don't have data for all 30. Some of these periods haven't ended,

but the record is unanimous. I don't know. I feel like there's a lot of signal in this. When people get too carried away with the market cap weighted index, there's no signal to look elsewhere. There's no signal. It's information that we've been talking about this. We've been talking about this literally since they named them Fang in 2015. Okay. So every time though, every time that this shifts, it's a time to be elsewhere and not market cap wave.

Golf war, tech bubble, COVID. I mean, there's just like four periods in here. Right. Because these are extremes. Yeah. How many should there be? This is it again, these are historic periods of market cap dominance over equal weight. So I don't disagree that this can't and won't last forever.

However, we've literally been having this conversation for the better part of the last five years at least. Pre-COVID, we were yelling about this. The last thing I'll say on this, after every single one of these periods, the S&P 500 underperformed in the following three and five years. Further, the underperformance has been severe. On average, the next three years resulted in over 20 percentage points of underperformance and the next five produced over 40.

Listen, I hope this comes true. Maybe it doesn't turn out that way this time. I hope the market broadens out. It's enough of the Mag-7. I think we're all sick and tired of it. Right. So this is the message that I'm not saying get out of the Mag 7. What my point is, if this is what your portfolio looks like and you're all Mag 7 because you're

driving in the rear view mirror and it looks like that's the only way to make money, you're going to be shocked if history holds. We're fully aligned there. What's that? We're fully aligned there. Yeah. All right. Well, that was a short correction, obviously.

Carl Kintenia tweeted, 93% of the S&P 500 is up over the last eight days. Only 36 stocks are lower. Only four stocks are down more than 3%. Just wild. I met a chart kid, look at the percentage of stocks that are up over the past 10 days, which is how far we are removed from- This is an extreme. Yeah. This is about as good as it gets. So 92% of all stocks are up over the last 10 days. And I guess you've seen that happen a lot of times. It just doesn't last. Yeah, it's happened.

Today we had a pullback. We had, we had eight consecutive updates for the S and P, which is kind of hilarious if somebody told you two Mondays ago, Hey, don't worry. The next eight days will be positive. Um, I wouldn't have, I wouldn't have bet on that kind of hilarious. And, uh, should I put my chart in here? So I had, I had Matt make a chart of the NASDAQ 100. And it showed once you were in correction territory. So once the NASDAQ fell 10% from

its highs, how quickly did it then rally 10%? And I understand that down 10% and up 10% is not getting you back to even, but the average was 32 trading days. This happened in eight days. It's by far the quickest 10% advance off of 10% decline that we've ever seen, going back to the inception of the index. One of the funniest charts that I saw or stats that I saw was the double long Nvidia ETF NVDL, it had no ultimately assets. It went from 5.7 billion to 3.7 or 3.4, whatever it did. What the hell is this? Is this a bet on the earnings next week? Put that back up.

Why did $2 billion just come into the 2X NVIDIA ETF? Is this, this is how people want to be long ahead of the report next week? Well, guess what, dude? We can laugh. These people just made a lot of money. No, I'm not laughing that they did it. I'm laughing that it happened. You know, it's hilarious. I'm not laughing that somebody's... Guys, I buried it. I buried an image below Michael's Make the Case. Can we jump down and throw it up really quickly?

All right. I like this one. I don't know this guy. Matt Brill is the head of US investment grade credit at Invesco and the t-shirt is, I survived the yen carry unwind of 2024. I don't know what the image is at the bottom. I didn't zoom in on it.

So I told him, rip one of the sleeves off and splatter it with red paint and I'll buy one of those shirts. Anyway, look, thank God we didn't do a whole hour long show about the yen carry trade because that'll go down as one of the more hilarious reasons to sell on your famous chart. Yeah, it's a price that we didn't hear about like more funds blowing up.

How about no funds blowing up? Has that hit you? Zero, none, not even one. Nobody, not a bank, not a credit card company, not a hedge fund. Well, people are trading their butts off. I'm going to make the case for Intercontinental Exchange, Ticker is ICE, parent company of the New York Stock Exchange. This is really more of a technical than anything.

I can tell you what the business does, but barely and I don't really care to be honest. So the stock is at an all-time high. I bought a starter position last week. It's really hard to go. I mean, this will pull back. It's extremely extended. So I put on a third of what I want my position to be. Can I get RSI on this? Let's just say it's 69.

Strong to quite strong. 69. 69. So next chart, 16% CAGR on their earnings per share since 2006. They're also very shareholder friendly. They're buying back a lot of stock. Company's firing on all cylinders, record revenue, record profits. And this is the parent of the New York Stock Exchange. Yeah. Okay. Cause you know I'm long NASDAQ, right? I know you're long. Same idea. Same idea. Capital markets, baby. They should both work. Let's go. So the revenue mix,

half of the revenue of some exchanges, the other quarter is from fixed income and data services, and finally they bought Black Knight or no, Black Ice, Black Knight. I don't know. Who cares? They bought a mortgage company, mortgage technology is the other quarter of their business. And, uh, you know, what else do I need to say? They're doing well. What's the next catalyst? Who cares? More trading. Well, is it earnings or is there something like what, what do I need to own this right now? Should I wait for the pullback that you just prophesied? Uh, I don't know. Trends, trend markets, markets tend to trend. I might not get that pullback. This looks pretty good. I would go with you on this if I didn't own NDAQ, but I can go both work. I also bought SPGI, S&P Global, similar-ish.

Yeah. I think the capital market story for the second half is intact. Something that I've been talking about here for, I don't know, months. And I think all these stocks can work. It's been a really long time since we've seen these companies really be able to feast on a more sustained bull market, not that 2021 shit, which was a sugar high, but like a real cycle. So they're huge in energy trading. I don't know how much of Brent trades on their exchanges. I don't know if it's all of it or what. Obviously, I'm not super familiar with this business. Again, I don't care. Stock's going up. I'm long. So in the chat, they're talking about CBOE is way better, CME Group. You know what, guys? They're all going to work. If one of them is going to work, they're all going to work. We haven't seen a cycle where all of the exchanges haven't found

a way to capitalize on a bull market. So zero days to expiration. Who do you think is profiting off all these options and all these derivatives trading? It's all these companies. Yeah, we're the house. All right. I have a mystery chart for you, Mike.

And this is not going to be one of my easier ones, but I do think you are uniquely positioned to guess it. I appreciate that. Okay. Let's put this up, John. Oh, okay. So I asked specifically for the prices to be removed because I thought that would give it away.

And so obviously there's no ticker here. But what you'll notice is that this was a pandemic darling. I know what this is. Which is one of my clues. I know what this is. And you want to keep going. Keep going. Keep more. You want to solve the puzzle? Keep going. No, I don't need to keep going. Is it PayPal? You son of a bitch. Drum roll. Look at you. I got applause. I didn't get a drum roll. You know the worst. Well, first of all, can I just congratulate you? Thank you. That wasn't easy, dude. Well, how did you know? Because I said pandemic. I was looking at pandemic stocks today. I was looking at Teladoc, which is the worst. Yeah, don't look at that. I was looking at zoom. I was looking at PayPal. But go on.

I bought PayPal today. I bought it in the pre market when I saw the news, they signed a major deal with Adyen for Fastlane. Fastlane is their hottest product right now at PayPal. And basically, they are gaining background on the shopping cart business, the branded checkout button on third-party websites. Stock looks good. The stock looks really good to me. It's a 16 multiple and the new CEO is improving the fundamentals of the company slowly and

now they're starting to cut deals with some really important companies. The second, so Dan Dolev is my guy on these fintech stocks and he upgraded it a little while back. And the next thing that happened, which he wrote about over the weekend, was Apple just preemptively, probably because they're being sued by the EU and everybody else, has agreed to open up its NFC chip, that's near field communications so that you could take your phone and you can tap it and pay with Venmo and other providers, not just Apple Pay. So the susceptibility of PayPal to Apple's dominance on NFC chip has, I feel like it's really cut their dick off.

And if they now are gonna regain access to Tap to Pay, and they're gonna, they have 427 million live accounts, PayPal, obviously Venmo is a really big part of that. So if you could pay with Venmo at the tap of your phone, I feel like that's a really important development. I don't know what the earnings will be from that in the next quarter. But I'm just saying like, it changes the narrative on how F'd PayPal seem to be.

So there was a couple of quarters ago, actually, last year, this time last year, the stock got down from 70 down to 65 closing the lows. Looks like tomorrow, the stock got down from 70 down to 65 closing the lows. Looks like tomorrow or the next few days, it's going to close that gap. As gaps do, they get filled. Credit to you for being on the gap-filled train. I tried to buy the stock earlier in the year and I sold it. I wasn't patient enough.

Credit to you. We have more charts on this. John, what are we holding? Keep it in the talk. Oh, so here's the XLF divided by PayPal. So I guess, I guess like you'd want to invert this. You should show it the other way. Whatever.

Should show it the other way, but it doesn't matter. And then I think we have one more. So this is the one year chart and Michael, this is a 52 week high. This stock popped up on Sean Russo's best stocks in the market list that he and I keep together. And if there's a low volume pullback here to that breakaway, which is, you know, of course possible. That's 67, 68.

Yeah, maybe that's an opportunity. So shout out to Sean Russo on our research team and great, great guests. You got it with no clues. Pretty impressive. Pretty impressive. All right. Hey everybody. Did you know tomorrow is Wednesday, which means an all new edition of my favorite podcast, Animal Spirits. We went crazy today. Did you? We did. Okay. I can't wait to listen. Michael and Ben Carlson. I'd also like to mention Ben Carlson will be appearing with us on the Compound and Friends

this week along with a brand new special guest. If you subscribe to the Compound Insider, you can find out who the guest is in advance. So if you're a really big fan of the show, make sure you subscribe. It's free. I don't know if we have a link probably somewhere below. This is what the page looks like. Put your email in there and we'll tell you everything happening behind the scenes at the compound.

We love our subscribers. Jill on money this weekend and I want to wish everybody a happy and healthy end of August. We're coming into the home stretch this summer. Sad but true. Please stay safe. Please keep watching. We'll talk to you soon. the right financial plan to speak with a certified financial planner today, visit riddholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM.

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