The Compound and Friends - Greed Is Good

Starting point is 00:00:00 There's a tequila crisis going on. Oh shit. Do you know about this? No. Yeah. Wait, so how much did Jimmy pay for our bottles? No, it's not a price crisis. It's a supply crisis. What's the difference?

Starting point is 00:00:14 The reaction to the supply crisis is the problematic part. So tequila became like the thing. And that happens. Like vodka was the thing in the 90s. I think single malt scotch in the 2000s like there's always a thing. So they can't, the good brands can't make it at quantity sufficient to supply it all over the world from this one little province in Mexico. So some of them are cheating. They are adding more sugar to speed up the fermentation process so they can get more out the door.

Starting point is 00:00:51 So I guess technically you could say that it's being aged the same length of time, but it's really not. And... Does that affect the labeling of the tequila bottles? Because every different country has a pretty tight sort of standards process that affects labeling. I don't know if they're faking. I don't know how they're getting away with it

Starting point is 00:01:11 or what they're doing, but it's noticeable. Like my favorite brands of tequila, they taste, at this point it's like maple syrup. So I asked somebody who sells high-end tequilas on Long Island, like a guy with multiple liquor stores Who's like plugged in with all the top suppliers? He's like this ain't the shit you would drink it three years ago I'll tell you right now like this is Sweetened because why would they screw up the taste because they're trying to make more and more and more and so the more sugar

Starting point is 00:01:41 You add the faster they can make it or something like that So this is why we need to buy Greenland as fast as possible I have been saying this Most most great tequilas come from Greenland As you are well aware And Dosa Arts is the biggest basket case. My favorite brand, Tequila. They can't ship anything. Like the one that's in a ceramic bottle,

Starting point is 00:02:10 it's kind of square, like a rectangular ceramic bottle. I've never heard of that. Yeah, you have. You've had it before, I think, at my house maybe. They can't ship anything. They're like sold out of the Anejo everywhere. So it's problematic times, guys. I remember, what was it, the Avion tequila guys.

Starting point is 00:02:33 From Entourage? The Entourage guys, yeah. Mark Cuban. Yeah, I forgot. They like sold NetJets, they sold a private jet company. They never really took off Avion. I don't think it got as big as it as they wanted of course but they are still in bars. I wonder if that was like... Here's what happened

Starting point is 00:02:50 to Avion. It had a moment in like 07. It was too early. It was like the pets.com. It was like too early. Right but then what happened was Randy Gerber who owned the Whiskey Blue like the big bar in Manhattan teamed up with George Clooney and they did Casamigos. Casamigos just totally stole their thunder. And that became like the mass market premium tequila brand for a while. And now there are, I don't know, a hundred of them. So bring this up. The more you know.

Starting point is 00:03:20 We were delivered two bottles of Claus A Azul today as a gift. Are those still good? Quite good. Tasty. Not quite $86 a glass good. And not a Naho. The white and blue bottle that you see everywhere is actually a Reposado. And the Reposado is better than the Naho in Class A Azul. It's cheaper and better. I usually prefer Reposado. Me too. It's like the 15 year old Scotch is too much for me.

Starting point is 00:03:48 Sure. Especially the 18. No thanks. Not for me. You know. So what else is going on? You a tequila guy? I'm a lot of things but like the main thing I'm not is Scotch. I'm a lot of things. But I'm mostly bourbon but also tequila. It's like if I'm sipping it's bourbon or tequila and then

Starting point is 00:04:07 What's your what's your bourbon? I? Like Eagle rare, but lately I've been drinking. This is just totally random lately. I've been drinking benchmark Which is basically well whiskey, but it's the cheapest It's basically the cheapest shittiest whiskey that the Buffalo Trace distillery makes. And Buffalo Trace is the one that produces Pappy Van Winkle and Blanton's and all these really hot. Yeah, they all come out of, that's right, they all come out of the same thing.

Starting point is 00:04:34 Is Knob Creek in that family? Knob Creek is separate, is a different family. By the way, Knob Creek has an amazing firing range. If you're ever in Kentucky and you're looking to shoot. I could see how those two things would go together. Like bourbon and guns. I totally get that. Breckenridge, underrated bourbon.

Starting point is 00:04:55 I think it's originally a whiskey distillery in Colorado. Breckenridge is off the chain. Four Roses? Yep, Four Roses. Four Roses, good. Yeah. Okay. Is Blanton's like a top for you or? I like Blanton's but like, you know, it just shows up in too many,

Starting point is 00:05:12 so many movies that it's like impossible to get for like, you know, the manufacturer's price. It's like, I don't know, you're supposed to be able to buy it for like 30 or 40 bucks, but anytime you go to a liquor store, they're selling for like 180. Pappy? I've never had Pappy. Okay. But I would imagine it's kind of like this thing where like the more it's aged and the more it's refined,

Starting point is 00:05:33 I'm just not going to be able to pick up on, you know, what I'm supposed to be picking up on. Budweiser. Budweiser. Love Budweiser. Andrew gives a thumbs up to Bud. Bud Heavy. Full on Bud Heavy.

Starting point is 00:05:42 None of this Bud Light crap. We did a show, we did an episode of The Compound of Friends with Meb Faber, and he's a huge craft beer guy. So I brought like 12 different craft beers in, and we drank them head to head, like this one versus that one. I was stumbling out of the room. I was stumbling out of the room.

Starting point is 00:06:02 I think Meb wanted to see a Broadway show with his family after. Yeah, and Meb's wife showed up to pick him up from here. And the table was just strewn with beer cans. It's not what it looks like. That's tough. Dan Ariely, the behavioral economist, did a great study at MIT.

Starting point is 00:06:17 He took Budweiser, and he took then Budweiser Nextwood and added a little bit of vinegar to it. And they called it MIT craft beer. Okay. And they did taste tests. Yeah. And people loved it. Yeah.

Starting point is 00:06:28 And they were like, oh my god, it's so great. It's like small batches, et cetera, et cetera. And then he told them about it. This is one of the great behavioral studies. And then what happened was actually people were so anchored to liking it. And they were so insistent on consistency that the bartender at the MIT

Starting point is 00:06:45 bar had to have a thing of vinegar behind it because people would say no no I want MIT craft brew which meant buying a Budweiser and then putting vinegar in it. What if it's actually good? It might be. Yeah. I mean you think about like you know martinis with brine and all that crap. Yeah people like that. and all that crap. And people like that taste.

Starting point is 00:07:07 You know, I did a taste test myself for wine. Not like a big wine guy. And I bought a $40 bottle and a $10 bottle. The problem was there were two different types of wine. One was white and one was red. Exactly. Oh, you wanted to see if you could tell the difference between the good one and the bad one?

Starting point is 00:07:21 And one was like a Pinot and one was a Cabernet or something. One was champagne, the other was champagne and beers. Exactly. Oh my god! Zero percent chance. Oh my god. Zero percent chance. Zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, zero, Today's show is brought to you by our sponsors at Betterment Advisor Solutions. Imagining a better future is the first step. Investing in that future with Betterment Advisor Solutions is the next.

Starting point is 00:07:49 Whether you are launching your own practice, looking to streamline client onboarding, or just searching for efficient ways to scale your firm, Betterment is here to help. They automate to make tax optimization simpler. They provide support to make administrative tasks easier. At Betterment, they are building innovative technology all for anyone who's ever said, I think I can do better. So grow your RIA your way with Betterment Advisor Solutions. Learn more at betterment.com slash advisors.

Starting point is 00:08:15 Investing involves risk. Performance not guaranteed. 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.

Starting point is 00:08:49 Ladies and gentlemen, welcome to literally the best investing podcast in America. America. Dare I say the world, right? There we go. There's a galaxy. Do you think there are other good investing podcasts in Europe that I don't know about? I'm sure.

Starting point is 00:09:08 Not this good? Not this good. How many of them Sam Rowe? Not even this close. Come on. Ladies and gentlemen, the compound and friends, or episode, what is it? 184.

Starting point is 00:09:18 184, you guys, we're in for a treat. We have a returning champion and a first time guest, and I can't tell you how excited I am given all that's going on in the markets to tell you who's with me today and get into the show. First things first, please welcome Andrew Beer. Andrew is a managing member at DBI, a pioneer in hedge fund replication. Prior to DBI, Andrew started in the hedge fund industry in 1994

Starting point is 00:09:46 when he joined the Balpost group as one of six generalist portfolio managers working for Seth Klarman. That's a big name. If I ask him if he knows you, will he say yes? Absolutely not. During 1999 to 2004, he was the founding partner of three hedge fund firms in areas ranging from derivatives arbitrage to fundamental commodity investing to cross border trading in Asia. That's where Josh started. Andrew Beer.

Starting point is 00:10:16 Cross border trading in Asia. We have a very similar background. Also with us today, Sam Rowe. Sam is a bourbon drinker. He's the founder and author of Ticker, an award-winning newsletter covering news, data, and insights informing long-term themes for investors and the economy.

Starting point is 00:10:36 And as I mentioned, he is also a fan favorite here at The Compound of Friends. Thank you for joining us. Thanks for having me. All right, good to see you guys. All right, so anything going on these days or not really? Quiet. It's pretty quiet out there? Yeah, pretty quiet. Okay. We're gonna start with this America's greed is good moment. Where did this idea come from? Whose idea is this? Oliver Stone. Okay,

Starting point is 00:10:59 it's your idea. So I went through this and I wanted to agree with like 90% of your notes and I'll tell you where the 10% is. Okay. But tell us what's happening right now. So I think I call this America's Greed is Good moment because in 1987 when the movie Wall Street came out and Michael Douglas gave that great speech about the job of the company is to make money. It was very controversial.

Starting point is 00:11:28 Remember in the 1970s, corporate America had gotten very fat and lazy. You had Japanese cars coming in in the 1980s. You had sleepy corporate boards. People would build factories just because they like to build factories. You had conglomerates that specialized in mediocrity. I mean, it was a end. Around that time, though, the LBO business was starting. And the M&A business was starting. And what was happening is people were looking at these companies

Starting point is 00:11:53 and saying, we can do better. But they were vilified for it. The idea of providing stock options to management teams who had not started a company was very, very controversial. It was going to exacerbate inequality, which it did. But what it also did was it actually aligned the incentives of the management, which was basically it's much easier to run a business.

Starting point is 00:12:14 If your one goal is to make money, you can focus on it. And it got people thinking about things like restructuring and all sorts of other things. So would it, you know, and remember at the time that Cognoscenti were arguing that the problem with the US business community was we should be more like Japan and Germany, literally. What were they focused on if not making money? Craft beer. Craft beer, you know, what do our customers think?

Starting point is 00:12:40 What are we doing for our community? It was a much more, how do we think about our employees? It was much more just diffuse. I think Japan was like lifetime employment, the shame of getting a demotion or being laid off, the prestige of being elevated within the company. The company was your life. The company was your life. It wasn't about economic success. It wasn't about economic reward. And so, to me, just the point was that greeted greed is good was so shocking at the time and the there was a great speech there was a an LBO guy named sir

Starting point is 00:13:15 James Murdoch who was giving a talk that I saw around 1988 or 1989 and everyone was talking about kind of the role of the company and he said look your job is to make money yeah let your shareholders give it away. Yeah, make more money hire more better people. Let everybody make money They can give it away. They can decide what to do with it Is that who the British guy and Wall Street was based on? Oh, yeah. Okay. Yeah, I'll buy you. So Larry, so Lawrence So Lawrence Wildman something like that. I can buy you buy you ten times over. Yeah. Yeah. Okay, and So just the point is that you know, LBO started out as the barbarians of the gate But they've evolved into private equity. Yeah, you know private credit was asset-based lending. It was hard money loans

Starting point is 00:13:55 It's become private again. They've stepped in to fill the role of the banks haven't provided So just my point is that things that are very very controversial at the time Actually ended up that I believe ended up driving a lot of the American exceptionalism that we've seen in corporate America over the past however many years. For instance, I don't think you could get the people that you get into the tech industry if you didn't have stock options. If you basically said, come here and be like what IBM was, you're going to get what IBM was.

Starting point is 00:14:22 These are the smartest people in the country. You're not going to put them in a room and have them work 20 hours a day if they're not earning equity. Right. And back then, the whole point back then was and the whole kind of undertone of Wall Street was you're taking this best and the brightest and they're doing this unproductive thing on Wall Street and they're buying beamers and they're turning up the colors in their shirts. But it was really profound what happened. To your point, not only was it shocking, it was unintentional, Oliver Stone's a communist.

Starting point is 00:14:51 Completely. He did not mean greed is good. Completely. To take flight within the hearts and minds of 20 million young men who would then eventually go on to found companies or come to Wall Street. Like, he didn't mean it as a rallying cry. Liars poker was the same thing. It turned out that way.

Starting point is 00:15:09 Yeah, yeah, yeah. Cautionary tells. They thought it was supposed to be like this big indictment in this community, but then it actually drew people in. Liars poker, like that's why everyone- Wolf of Wall Street did the same thing. Same thing. Yeah, that's why Josh cut it. It's very funny because in the movie Boiler Room in 1999,

Starting point is 00:15:27 there's a scene where the brokers are reenacting, not the greatest good speech, but another Michael Douglas scene from that movie. And Gecko is the archetype that they are striving to be. In 1999, if they're all 25, that means in 1987, they're 13 years old. And that's a formative moment for them is seeing Gordon Gekko on screen.

Starting point is 00:15:50 And that was your lunch for one. And I've written about this. I felt that the Wolf of Wall Street, I don't think Scorsese meant it to like glamorize ripping people off in the stock market. But I have to tell you, that movie, I think, gives birth to the types of traders who first came into the market in 2020 and 2021. And I think that that's their

Starting point is 00:16:12 cultural touchstone that they grew up with. I can't wait to grow up and be just like Leo. So, yeah, I never thought of that. But you can definitely see the parallels. Absolutely. Okay, so go on. So my point is today, right? I mean, we have a there's been a very, very strange transformation, whatever you think of Trump, either way, and whatever you think of the. I'm a, I'm Mago like through and through. I'll, I'll, I'll leave mine on, uh, you know, outside, but what Trump and the administration represent is unfettered, unapologetic capitalism.

Starting point is 00:16:45 Yeah, we're going to disagree on this unfettered part, but keep going. Okay, so basically that, you know, in a sense, if you free capitalism from regulatory constraints and all sorts of other things, that you can do what Elon Musk did with SpaceX. You can take a government that needs 3 million people today or 5 million, whatever the number is today, and you can do it with one seventh of that. I think a lot of it is unrealistic at the end of the day in terms of what's actually achievable. It's not not achievable, but it's a philosophical thing

Starting point is 00:17:16 that feels very shocking today. That's where I draw the analogy without opining on whether they're going to be successful or doing it or not. It's just there is a sense of even, you know, what I, is the, almost a sense of like, well, it's now if we're going to, you know, the old model of serving the government was I work on Wall Street, I work my way up through Goldman Sachs or something, I become secretary of the treasury and I'm going to bring my experience, but it's going to be, it's all

Starting point is 00:17:44 incremental. The Robert Rubin. the Robert Rubin the Robert Rubin Method exactly right and that's and there's a long history and it's almost no bless oblige. Yeah, right and These guys don't care Right. There is no they definitely don't care. There is no sir. Elon Musk in the future, right? There's no they don't they're they're impervious to public criticism. They are willing to have open failure. They're willing to have things break. It's a huge philosophical change relative

Starting point is 00:18:11 to anything we've ever seen. And so my point is just that what it's doing is it's stretching out the range of possibilities right now. Three months ago it was, this is animal spirits. It's gonna be great for the economy. It's gonna lift all boats. It's wonderful Now people like oh my god things actually might break or you know, they're kind of going back and forth Yeah, the Overton window has been kicked completely out of the frame. We're no longer shattered. We're no longer talking about

Starting point is 00:18:36 Opening the aperture wider now the realm of possibilities of how far these policies can go What the second- order effects may be, like everything and anything's on the table. I think that's a really good take, I agree with that. What point that entry made do you disagree with? The unfettered capital, this is not unfettered capitalism. This is literally the president saying, write a check for my inauguration

Starting point is 00:18:58 and I'll let you do your next merger. Make your platform more amenable to my most hardcore supporters in the, let's call it, alternative media and I will find ways to include you in the next, you know, government contract. Like that's not unfettered capitalism. I understand that people want- It's cronyism. It's cronyism.

Starting point is 00:19:24 It's venal, right? It's ven's cronyism. And by the way, the Clintons did it too. So what I'm saying is not coming from a partisan standpoint. The Clintons had this bullshit called the Clinton Global Initiative, which was effectively a patronage network, not unlike what we've seen in New York City in the 1800s with Tammany Hall. Okay, everybody does this. They do it in Chicago, the Democrats, Trump's doing it in DC and all over the world. But let's not call it unfettered capitalism. It's the same picking winners and losers that the other party does, only this time the people

Starting point is 00:20:01 that are being picked and favored are in many cases the enemy of the media So the media is much more angry about this than they ever got about whatever the hell Hillary Clinton was up to I think it was a how it actually for the the the the venality in plain sight is something new well They're hiding more brazen. They're not hiding it right right and and that's why and I think there are people who are going to the administration It's more brazen. They're not hiding it. Right, right. And that's why, and I think there are people who are going to the administration who think, hey, I'm worth a billion

Starting point is 00:20:27 dollars. Yeah. I'm willing to drop my day job, come in, and save the government. And I think in their mindset, which is exactly the greed is good mindset, hey, if I can privatize Yellowstone National Park, I deserve a cut. Yeah.

Starting point is 00:20:43 I mean, it's- Well, Lutnick was talking about this with Friedberg and Schmott, national park, I deserve a cut. Yeah. Right? I mean, it's- Well, Lutnick was talking about this with Friedberg and Schmoth, talking about the strategic reserve. Exactly. Not Bitcoin, whatever, the wealth creation thing that we're going to do.

Starting point is 00:20:55 That if we're going to do a deal with Pfizer, we should have warrants. He said that out loud. And that's philosophical. And that's what I mean about the stock options, right? But a lot of people would say- But stock options were viewed in the same way in 1987, in 1988. It was, they didn't earn that.

Starting point is 00:21:11 What do I mean if the stock price goes up? Look, I'm not taking position either way. Yeah, me either. But I just, it's, having been there, because I'm probably the oldest guy in the room, and having seen it, it was, you know, there was a guy named Mike Jensen at Harvard Business School who wrote- I don't know. He was telling me about the courtship of Eddie's father the other day. I don't know if you're the oldest guy in the room.

Starting point is 00:21:34 Hey can I ask you a question? You agree with this? I want to hear what you think also. There are 40 million Americans who would answer back and say I assume they're all stealing both parties every level of government at all times. I really don't care as long as they get the Venezuelan gangs out of here and I get to say the R word. People honestly, most people really don't care about these things. The media is up in arms.

Starting point is 00:22:01 Maybe there are some really highly principled people on Wall Street that are somewhat offended by it, but honestly, people just want their stocks to go up, their house to be liquid, the price of groceries to go down, and you guys go steal whatever you have to. Look, we have the senior administration communicating on signal. Yeah. That's totally normal. I love it.

Starting point is 00:22:22 That's totally shocking too, like beyond shocking. And the same people who were on signal were demanding people get thrown in jail for communicating for not being, I mean, it's, but there's maybe, I mean, it's the unapologetic part of it that I find fascinating. That the standards are very different than the way they were.

Starting point is 00:22:41 In terms of what you're saying, look, I think most people are concerned about their day-to-day existence. Yeah, that's what I think. I think that the, and I think what you have on the media side is the 11,000th moment of shock again and again, where, oh my God, there's, somebody is saying something that is dishonest.

Starting point is 00:23:00 I don't think that that's shocking to those 40 million people. That ship is sailed. The Sovereign Wealth Fund, I think people would love that idea. Like, wait, again, going back to Pfizer, if we're going to buy all their vaccines, yeah, we should get upside on that. I think that the average American would say like,

Starting point is 00:23:14 isn't that how it should work? Okay, but that's not unfettered capitalism. I think there's this greater theme of, regardless of the state of the economy or the stock market or whatever, you have record high stock prices, you have unemployment at 60 year lows and all this kind of stuff.

Starting point is 00:23:32 For better or for worse, I think the American people or consumer, whatever you wanna call it, are just never satisfied with the state of things. They always want things to be better. They always see everything going wrong in their life, even though there's a lot of things going right. And so I think it kind of ties into this whole sort

Starting point is 00:23:50 of greed is good messaging in that because you're never satisfied with how good things are, you'd rather just destroy the state of things because you think that something might be better on the other side of it. It's sort of like a collective grass is greener moment. Well, people also take it for granted, right? Oh, for sure.

Starting point is 00:24:11 We have generations of people who've grown up without going to war, right? Without being confronted with it. I mean, that's why during the first Trump administration, I was less concerned about, you know, a breakdown of democracy than most people I know because I believe in the robustness. Again, as you mentioned, second and third order effects. Something happens. Two years ago, Trump was sitting in a dusty courtroom a couple of miles from here.

Starting point is 00:24:35 That's not autocracy the way that we think about it. Autocracy is your political opponents get arrested in the middle of the night and thrown out windows. People do revolutions when they don't have food, when their lives are at risk. I mean, you know, my partner's in Paris and we do a lot of business in well, like political fighting here is still child's play relative to Europe. So I, anyway, I'm less concerned about the left fat tail being somehow the collapse of democracy, because I think a lot of the people that Trump has surrounded himself with which is in a

Starting point is 00:25:07 sense I think a huge head fake on his original constituents who got behind him are I think they're great optimists yeah I mean if you if you do an exercise two years ago if you'd said you know what there's a candidate where Elon Musk you know arguably the greatest single businessman of the past hundred years was willing to drop things. Arguably. Arguably okay was or was willing to go spend a meaningful amount of his time to try to save trillions of dollars and the outcome of that was he was gonna make another hundred billion dollars and that the other ways had again I think most of those 40 million people were like I don't

Starting point is 00:25:44 care. Yeah I agree with that and that's why it's gone on as long as it has, but I wanted to ask, I wanted to ask you guys, one of the things that's creeping in and it's still at the edges, and I don't think the average person is waking up and thinking about it, we tell ourselves this story where the reason for the hegemony of just global capitalism the reason why it's centered around these these Anglo, you know countries like England and the United States is is because of the strong rule of law It creates an environment where you can do business. You know what the rules are. You don't have like some bureaucracy that can step in and cancel deals.

Starting point is 00:26:29 You also don't have people getting away with things. And I wouldn't argue that that's totally broken down. But the threat of it breaking down, there's a consequence to the multiples that we're willing to pay for stocks. There's a consequence to who we're willing to buy bonds from. Again, I don't think it's a front burner issue right now, but what I would say to your point is Trump has surrounded himself with people who have the most to lose if there were to be a loss of trust in our markets and in the business rule of law.

Starting point is 00:27:01 Like they are the wealthiest people with the most assets. There's no way they're rooting for that. That's what's interesting about this because I think early on there was sort of like this discussion about stock market vigilantes, right? Like if the market reacts negatively enough or the fact that he is surrounded by people who have so much exposure to, I mean, it's literally the CEOs of the MEG7, you know, are in the front row of the inauguration. Zuckerberg was there, Bezos was there, they're all there.

Starting point is 00:27:27 Yeah, and so it's so confusing to see like all these announcements about tariffs that are almost universally agreed on as a negative to, you know, especially publicly traded companies that do a lot of global commerce. Or maybe it's the case that they're all in on the same game. But yeah, it's, it's, there's a lot of conflict there because I would have assumed that, you know, you wouldn't have this kind of rhetoric that's so unfriendly to the market that breaks down the confidence that's behind the market, right? Like the idea that, you know, rule of law at contracts held and that, you know,

Starting point is 00:28:04 you don't have to worry about your American trading partners or whatever. But that's where we are right now. I think the market is looking past this for now and it is confusing for the average person who's either, even if you're in the middle or you're somewhat moderate, I don't know if that exists anymore, you have people that are like freaking out like how is the market holding up? It's gonna collapse, he's gonna break something and then you have other people saying, well, yeah, maybe it'll be rocking.

Starting point is 00:28:27 Then things are going to be so much better than the other side. We've got AI and productivity. But if you look at just the analysts, and these are not partisan people, you have this chart three, John, please. There's a chart from Factset, S&P 500 buy ratings. It's at the highest level it's been in a couple of years, which is pretty remarkable

Starting point is 00:28:47 We've got consensus expected earnings estimates still at all-time highs next chart John like this The you sure we had a mini Vic spike and the market wobbled but but wobbled We were up 20% back-to-back years and out of 10% drawdown. That's it One well one thing about the... Well, one thing... Well, the first slide, you know, let's not forget that, you know, all these analysts giving these ratings have a lot of career risk and all kinds of different interests in mind. Like, you know, as you can see, there's always...

Starting point is 00:29:19 Most stocks are always, you know, have a buy rating or most analysts, you know, give a buy rating. So, you know, it tends to pick up when prices are going down, right? Which is exactly how it's playing out now Yeah, cuz you're markets falling for better for worse You know, they're gonna be anchored into whatever their fundamental analysis saying in terms of price targets So when the price comes down the buy ratings are gonna go up. I mean, that's that's exactly what happened in, you know 2022 right? I guess I guess the buy rings actually came

Starting point is 00:29:46 down because John chart five but but even still you've got bottom us EPS actuals and and of course estimates they're not incentivized to do this but like they're still watching it I just come down for full year 25 from 12 correct me if I'm wrong from 12% to 7 and falling fast. Strategists are getting bearish. No, no, no, no, no, no. These are bottom-side earnings estimates. 12 to five is a lot. 12 to seven's a lot, you agree? That's very rapid. And I think that would certainly explain

Starting point is 00:30:16 the pullback in the stock market. I think it perfectly explains it. Yeah, so you have sort of two competing narratives, right? So the expectations are definitely getting a little bit more cautious. But what this is telling you is it's not outright disastrous in terms of the expectations. All they're saying is that we went from pretty bullish

Starting point is 00:30:34 to a little bit less bullish because we're still expecting earnings growth in 2020. So that's my point. But look, I would say, I mean, all to talk about tariffs is scaring the daylights out of people, right? I mean, in that I don is scaring the daylights out of people, right? I mean, I mean like the in that I Don't think there's anybody else. We cannot separate the signal from the noise on it, right? I mean, it's I'm gonna tell you a Very very funny story about my one encounter with New York real estate, which is where I think but it describes us

Starting point is 00:30:59 So I looked at doing a deal about 20 years ago. It's a complicated deal I didn't know anything about real estate and I got introduced by a top New York real estate lawyer to one of the developers in New York. And I went in and presented the deal. And they trashed me for 20 minutes. To the point where I got up and walked out. I'm like, this is crazy. I called the lawyer back.

Starting point is 00:31:17 Trashed you in why? What are you, some little Harvard Business School guy? What are you gonna pull out? You're HP12C and tell us how to... I mean, it was like, it was personally insulting, it was professionally insulting. And I walked out and I called the lawyer. And I said, Larry, excuse my French, but what the F was that?

Starting point is 00:31:33 And he said, well, tell me what happened. And I told him, he said, wait, those three guys were in the room for 20 minutes, they're dying to do the deal. And I said, Larry, look, it was an idea, I'm not going to do it. I said, just tell them thank you. I want to be polite.

Starting point is 00:31:45 Tell them thank you. Walk away. I got a call back from three days later. They loved your response. It's like, he's our kind of guy. Now we know he's serious. All right. So it was a test.

Starting point is 00:31:54 And I'm like, literally, no, I'm not negotiating here. I'm not going to do the deal with him. Two weeks later, this went back and forth. Two weeks later, I got a shark in my office. They were calling me the shark because they thought my simply not wanting to do the deal. They couldn't imagine that I got a shark in my office. They were calling me the shark, because they thought my simply not wanting to, they couldn't imagine that I was walking away from the deal. Everything was a negotiation.

Starting point is 00:32:11 And then he started telling me stories about like people in New York real estate who will invite somebody to lunch and then put their lieutenant two tables away and not show up and see how long the guy stays there. It's the amount of head games that goes into that world in particular. So the lens through which I look at Trump is it is truly impossible

Starting point is 00:32:29 to signal, to try to figure out what's the policy signal underneath it. Yeah. Versus what is, I mean the answer could be you'll include the Melania coin in your strategic, in your sovereign wealth fund. It could be anything. is the answer to solving the fentanyl crisis. I mean, it's like, they're all unrelated. Your book, someone's wedding at the hotel or at the golf course. I think this also speaks to a lot of the analyst estimates too. Like one of the more popular phrases from the Q4 earnings calls and earnings announcements that wrapped up a couple weeks ago was,

Starting point is 00:33:05 we have not factored tariffs into our earnings guidance. Oh, well, good luck. So, I mean, yeah, so what do you do about it, right? So like, you know, the current guidance is basically assuming some sort of status quo because, you know, you're supposed to take him, you know, seriously, not literally. But if stuff actually gets enacted

Starting point is 00:33:24 and it starts to affect business, or even if if stuff actually gets enacted and it starts to affect business or even if it doesn't get enacted and it starts to affect business, then you're going to start to see it come up in earnings guidance. Here's a note from from Ren Mac to that point. Neil and Steve consider the tariff threat is more of a dial than an on-off switch. We expect Trump and the administration to fiddle with that dial well beyond April 2nd. So basically it's like an ongoing negotiation that never ends. And this week it's 25% and hey, we had a great phone call,

Starting point is 00:33:54 now it's 10. If you're a sell-side analyst trying to come up with estimates for Stellantis, I don't know how you do that. But don't you think the market, or don't you think that Trump blinked as a result of the market's reaction? Last week he said, eh, 10 hours, we'll see.

Starting point is 00:34:08 I think that's part of the reality show though, is the twists. Right. I think it's part of the show. So there is so much uncertainty, like literally nobody knows. Well, and this is where you get into business planning. Who's going to hire, who's going to do anything now?

Starting point is 00:34:21 Who's going to make long-term investments now when you literally cannot, I mean, it's, I describe it to a friend as it's like, you know, you get on a plane coming out of a storm and everyone's like rattled, kind of stumbling off the train because you've been bouncing, I mean, planes because you've been bouncing up and down. It's like, it's nerve wracking to try to think about anything beyond an incredibly near-term horizon because three months ago, we could not be talking tariffs at all, as you say it and so I think right now the market is assuming that this is noise and that and that you

Starting point is 00:34:51 really do like we're we're in a 10 we're in a 10% correction right now nothing the market is market thinks it's noise it could be it's also it's not just noise but there's also the possibility that any terrorists that get enacted are very short-lived, right? Well, that's that's been my base case this whole time is that if you zoom out I don't know. If you zoom out and say is the market super concerned about Trump's policies and you zoomed out you'd say no It's a blip. I'm not saying that it can get there, but right now it's looking past it Well, that's and so it's the bond market. And back to the second or third order facts, right? So, okay, so we we throw tariffs on everybody They're gonna throw tariffs back on us. Well, that's already, yeah. And back to the second and third order facts, right? So, okay, so we throw tariffs on everybody.

Starting point is 00:35:25 They're going to throw tariffs back on us. And he's going to triple them. And they're going to triple them. Like, it's, I mean, it's an insane downward spiral that nobody's thinking about, back to your point. Nobody's saying, like, well, that's likely. So here's how stupid this is. We do tariffs against Europe.

Starting point is 00:35:41 You know, what we sell in Europe is software and services and financial shit, and it's like a 50% profit margin. The stuff Europe sells to us is a 5% profit margin. They sell us Volkswagens. They're breaking even. They sell us Porsches. They're not making any money on any of this. A lot of people along the way are making money.

Starting point is 00:36:02 That's not the same as selling software at a 50% margin. Why on earth would we want to upset an apple cart where the stuff we sell around the world, services, are so profitable and the stuff being sold here is razor thin profit margins? It just doesn't seem like, even if we got the outcome Trump seems to want, it doesn't seem like we win. Oh great, we get to manufacture more things that have a 7% profit margin and the rest of the world stops buying our software. Who wins in that?

Starting point is 00:36:33 It doesn't seem like we win anything. That's what I'm saying. I don't think any of the people around him, I think this is one of those issues that has some sort of political driver behind it. I mean, he has surrounded himself with some people who from what I understand are are believers and tariffs But I don't think the Elon Musk's of the world the you think that sense of believer in tariffs I think he has to twist his mind into a pretzel to become a believer I think I think he and Lutnick and what?

Starting point is 00:37:02 Like I'm not sure but I think I think they all look I think what the Trump administration is doing now Which they didn't do the first time is they've unified messaging. Mm-hmm. Yeah, really good at it, right? I mean, it's normal to use signal. No, it's not Right, but but but it's it's the it's the adoption of of Trump's Roy Cohn approach to everything Which is you don't concede anything and you punch back as hard as you can This is Ricardo Hausman writing at Project Syndicate. He's an international trade expert at Harvard. US based companies like Apple, Google, Microsoft, Facebook, Nvidia, Johnson & Johnson,

Starting point is 00:37:33 and Tesla leverage their innovation based market power to extract rents from consumers and businesses around the world. If these firms were hit with the equivalent of a tariff, they would not be able to pass the cost on to their customers abroad. After all, they could have raised prices without losing profits, they already would have done so. If we multiply American companies' foreign earnings by 26, which is the average P-E ratio of the S&P 500, the value of US investments abroad can be estimated at $16.4 trillion. By contrast, foreign companies operating in the US earned just $347 billion in 2024. So we've built this value on foreign earnings of if you use a PE ratio, like $16 trillion,

Starting point is 00:38:22 Europe is making a few hundred billion. How are we losing in that, in the status quo? That's what I said. It seems like we're not. But I think the market is saying the basic scenario is nothing's gonna happen. There's gonna be, there's gonna be noise, it's gonna always be on the front page of the news.

Starting point is 00:38:39 But ultimately, because of what we've seen about, you're not gonna see a Mark Zuckerberg or somebody else stand up and say, I think this is insane, stop it. It's going to have to be in a way where they, you know, they shift the narrative, they talk about something else and they claim victory. Yeah.

Starting point is 00:38:54 There's no, and I think that's the problem with the media and the way they approach this is that it's like a, you know, it's like a 1980s like high school flick where like the bully at the end of the day is like, you know, I'm sorry I shouldn't have been mean to you. It's not going to happen, right? There is no concession. There's no moment of concession. There's no acknowledgement.

Starting point is 00:39:14 Okay. If the media stops talking about tariffs though, Wall Street analysts won't. So it's more than just immediate. I get what you're saying. You're saying if everyone just calms down over it, he'll get bored of it. No, no, no, I don't think he's gonna, he's gonna go on his normal path and he's going to look. And we don't, the second order effects may be good for all we know at this point. Like I said, I'm not, I mean, it's like what's happened

Starting point is 00:39:39 with Europe with defense spending. Yeah. It's hard to argue that that's a bad thing that's happening. I think it's great. Economically's a bad thing that's happening economically, et cetera, et cetera. So we just don't know what the combination, we don't know the motivation of the first order effects. We don't know how the second and third order effects will play out.

Starting point is 00:39:54 We don't know how it'll be resolved. And I think this is one of those things where there's the known unknowns and the unknown unknowns. I think the market is saying it seems so destructive to take this to its logical conclusion that's not going to happen. I agree. So I'm going to just say, I think the typical person who is not a Wall Street finance person trading shares of GM

Starting point is 00:40:15 is perfectly fine with what's happening unless it's directly affecting them, which is not a huge number yet that have really felt the effects of this. And in the meanwhile, the number one thing that you have to admit about Trump, whether you love him or hate him, he's doing exactly what he said he would do. Today, they arrested the number three guy in MS-13. They ripped him out of a house in Virginia. They put it on TV immediately.

Starting point is 00:40:41 They're getting rid of a lot of the regulations that annoyed people, started with plastic straws and we all laughed. But in the meantime, every day there's more news about different departments in government where they're cutting regulation. I know everyone doesn't love that, but I think the people that voted for Trump, they love it and they're getting it. He's really doing it. I think, and I think, look, I think from the Democrats perspective, right?

Starting point is 00:41:03 Are there any left? Well, I mean, like for the Democrats perspective,. Are there any left? Well I mean like for the Democrats perspective like you know pick your battles right. I mean I mean your battle is not the government was functioning perfectly the way it was before that no one thinks that but on the other hand you know focus on the essential things that we want to preserve to make sure there's not a bad impact in people's lives. Focus on the fact that this vilification of every government worker,

Starting point is 00:41:27 because they made a choice to go work for the government, is very, very damaging to the social fabric of this country. There are people dealing with government the whole career, there are people who are wonderful, who work for the government, it's just the career path that they chose, and there are people who are very, very difficult. And it's, but in a sense it's the same way that the arrogance of the you know kind

Starting point is 00:41:50 of sort of Washington geopolitical establishment about free trade and ignored the consequences that it would have to the families the multi-generational families in an industrial city. That's the part that Trump is right about it never was free trade. We called it free trade. In reality, US goods were being tariffed everywhere. So that's the part that he's right about. And I think, again, to bring it back to investing,

Starting point is 00:42:17 though, I think the chaos might be part of the point because of all the attention it gets. But the market is looking past it. I don't know. I think each week. We're losing a little bit more ground and one week It's gonna be a really big move you might be right but in times of like hiding in the city I'd refer to the market. I think the market knows more than any of us collectively I mean obviously it doesn't mean it's always right and this could age very poorly but for now the market is looking past it So Morgan Stanley's Andrew Sheets was quoted in the FT this week.

Starting point is 00:42:46 And he said, We're mindful of the temptation for equity investors to take comfort from the credit market's resilience. Yet, remember, two of the big issues that have faced stocks were not really credit stories. So then later in the article they quote Greg Obenshine from Verdata Capital. And Josh has been talking about this. That maybe it's not showing up in credit spreads because really we should be looking to the private credit markets.

Starting point is 00:43:08 But even then they say, while the private credit markets has experienced rapid growth in the past 10 years, the high yield market is the same size as it was in 2014. Pretty interesting. Furthermore, over the same period, the share of double Bs, which are the highest rate of push of the index, has climbed from 41% to 51% of the high yield index given credence to what Josh has been saying. It's like if you're looking there, it's more highly rated than it used to be otherwise.

Starting point is 00:43:31 However, even the junkiest of junk, so forget about the double B's, even the junkiest of junk we're looking at triple C and lower remain sanguine over recession risk. So there was a little bit of a spike but to call it a spike is a hyperbo, because it's still below where it was for almost all of 23 and all of 24. So unless this starts to pick up, I have a hard time being too worried. Sam, this doesn't look like starts to pick up. That's exactly what it looks like to me. Yeah, I mean, it's like, you know, on one hand... But it was on the floor.

Starting point is 00:44:01 On one hand, you have the whole, like, you know, it happens slowly, and then it happens suddenly kind of thing too. But you know, don't forget, we also spent the last couple of years talking about how much credit quality has improved in a lot of these companies we're talking about. Right, so all of a sudden it's different because of the threat of tariffs? Yeah, no, I mean like, I think the threat of tariffs or like, you know, higher costs or lower revenue and all this stuff, you know, might, stuff, might be a problem when it comes to earnings growth,

Starting point is 00:44:27 going from earnings growth to slower growth, or maybe you have some earnings declines. But I'm not sure anyone's saying, well, we're in a situation right now where we're having actual financial distress. Nobody yet. Nobody, yeah, nobody. Because again, credit quality, cash balances,

Starting point is 00:44:43 all this stuff is very high. Profit margins are near-market profit margins Our credit quality get better or yes, or was there just so much money available that nobody could actually default I mean, what's the what's the difference? Mm-hmm. The companies themselves probably aren't better but but the Treasury and Fed printed four trillion dollars and Margins are at all-time highs across the board of almost every company. Not every company, but across the board. Even when you look at issuers in the junk indices? I don't know about that. Those are never highly profitable companies.

Starting point is 00:45:13 But my point is, I'm not dismissing risk. I'm just saying that for now, the market seems to be not super duper concerned. And again, maybe it's wrong. Yeah, I mean, if this stuff persists, then yeah, it could probably turn into a problem. Because, I mean, that's another thing that's sort of like, you know, you balance, is this a good or bad thing? That, you know, so many of these companies have shifted toward long-term fixed debt,

Starting point is 00:45:35 as opposed to a lot of short-term floating rate debt. So it's like, this might not affect companies for the next couple of years, but if rates stay where they are or they creep up more, then, you know, maybe you do have a problem, especially if growth goes sideways. Do you worry about the wall of maturities or the amount of private credit expansion and how much more important those types of lenders have become relative to the traditional banking sector?

Starting point is 00:46:00 Is that on your radar? Is something to worry about or not yet? I would say we're there for a second. So first of all, I think in any area where you throw tons and tons of money people and you give them an incentive to put the money to work, you're going to have people are going to take more risk at lower yields. I mean, a great case study would be to talk to a typical buyer. What was your experience doing alone today versus five years ago and 10 years ago?

Starting point is 00:46:23 So on the other hand, there's not the contagion risk. I mean, private credit funds can lose money, but they're not leveraged. Nobody's calling, I mean, yes, maybe some of them have a little bit of leverage built into them, but you don't have that, I mean, in a sense, you've actually decentralized a lot of the money. They're not tied to deposits, like at a bank.

Starting point is 00:46:43 Short-term deposits, there are money runs, there's no Silicon Valley issue here. So I really don't know the answers. I agree. I'd rather Apollo take the risk than Bank of America. And those guys are, again, Apollo, Blackstone, Aries, Sixth Street. These are some of the greatest investors, allocators, like businessmen. And the top six issuers are responsible for 75% of all loans in private markets. So, you're already seeing the payment of kind stuff pick up, but you're right,

Starting point is 00:47:13 like, Blackstone can probably take these companies through. There is almost infinite money. Now, I know this figure, when it turns, it gets dry very quickly, but for now, I would rather be in their hands than syndicate it all over the place. Well, because I would have said before in the 2010s when you were looking at normal issued bonds, my argument about it was, okay, so you're going to negotiate those bonds and you find out that Apollo owns your bonds. I mean, that's the worst day of your career. Why? Because they are so tough.

Starting point is 00:47:46 OK. Apollo, Aries, or whatever, it used to be, if you're negotiating with a bank, that banks have ongoing business they're worried about, that whatever. These are such hardball negotiators. They always leave the room more than anybody else. This is that creditor on creditor violence we hear so much about.

Starting point is 00:48:06 Right. And that's when they're inflicting it on each other. Imagine if you're a normal corporation or a normal corporate boy. Anyway, look, I think they're responsible stewards of capital. And I think they're aware of the historical precedence of taking on too much leverage. I don't see it. I'm not an expert in the overall industry landscape, but I doubt that's going to be a flashpoint.

Starting point is 00:48:30 But the question is, if there's really so much, Michael might be right when he says that the markets are looking through a tariff-driven recession, because if there really were as much concern as people say they think there is, why is copper making a record high right now? Why is the 10-year at 4.3?

Starting point is 00:48:51 Why is the 10-year at 4.3? Why do we not see spreads blowing out really anywhere? Because there isn't any distress yet. So it might just be it hasn't gone on for long enough. Might be the right answer to that question. Or we haven't been surprised by you know second, third, or effects, the unintended consequences and all that kind of stuff. Everything you know, because you know like you were saying that a lot of the stuff that's happening is stuff that Trump has been promising for a really long time. And so you know as much as there's volatility in the markets you know a lot of companies will tell you that they've already been you know

Starting point is 00:49:24 setting aside a plan B for all these different things that could possibly happen. But none of that stuff will ever capture, well, let's say Europe decides that they just hate America now. And all the consumers there decide that they're not going to buy American branded products anymore. Like, OK, then maybe you have bigger problems. Not that I'm not saying that's going to happen, but you know, it's really disturbing when

Starting point is 00:49:50 you watch like a Canadian hockey game and like people are booing. Yeah, it's not great. It's not great. But also, I'm going to Montreal next week. See you later. The hard data is not softening yet. I mean, it's not as strong as it was last year, but initial jobless kids, people have been waiting for that to spike.

Starting point is 00:50:05 Maybe it will, it hasn't yet. But I mean, Trump has an extraordinary nose for power. And he recognizes that the US is still, and however you think about it, the most powerful nation in the world. You don't want to counterpunch on a trade war. You want to concede what you can concede and slither out of the room as fast as you can

Starting point is 00:50:27 to avoid getting into a major escalation. But you said this, he's going to declare victory before it happens. Well, he already won the trade war, it doesn't matter. But Apple and Nvidia are two pressure points that the Chinese, if they wanted to, could really push on. Apple is hugely reliant on China both as a place to sell phones, but also as a place to manufacture. You could see it hasn't happened yet and it may not happen.

Starting point is 00:50:56 I hope it doesn't happen because it's the second largest market cap in the United States of America. But the Chinese are very well aware if the iPhone disappeared tomorrow, there are plenty of Chinese phone makers who would fill that void. And if they really wanted to put the screws to our stock market, pushing on that Apple pressure point is pretty easy thing to do. You don't even have to do it. You can just talk about it. That's one. Two, now they're going, now they're sort of waffling on the Nvidia relationship with China.

Starting point is 00:51:28 They're saying that all this AI stuff happening with Nvidia's chips is not great for the environment. These are hints that they're dropping. Nvidia and Apple are massive pressure points for the entire global economy and very acutely the United States stock market. And that hasn't really been tested yet. Do we want to know what the NASDAQ does in that scenario? Do we want to guess at what the S&P looks like

Starting point is 00:51:51 if that becomes the new theater of the trade war? But I think that's why the market's ignoring it. Or largely looking past it, because they see this. I mean, usually when the market freaks out, it's either something big happens overnight that nobody was expecting. Deep seek. But, or it's three things that converge at once. You know, so last July it was, you know, the bizarre political stuff happening

Starting point is 00:52:20 here at this, cause again, it was like, everyone thought Trump was going to win and he was going to face Biden. Then overnight Kamala Harris was put in which everyone thought would be worse than Biden all of a sudden she's doing really well in the polls. Stock market didn't love that. Animal spirits, stock market didn't love that. At the same time that you know the Powell comes out and talks about weakness and you get a number of data points on weakness in the economy.

Starting point is 00:52:41 At the same time the Bank of Japan comes in and decides to blow up the macro world. And so it's usually it's usually convergence of things like that. So there's shock or it's an in threes thing where the market sits up and says, wait a minute, all of this sounds bad. Right. And it kind of builds on it. And so to me, it would be, you know, it's less likely that there's going to be a, like a, like visible escalation on the terror front that results in kind of mutually assured destruction on, on the economic side, it's more likely that while that's going on, there's a bond market tantrum in the UK that causes

Starting point is 00:53:18 something bad to happen there. And that same week, you know, some bank that nobody's heard about goes under at the same time, or like, it's going to be, it's usually, and then there's a new virus. I mean, like this could be, it's always something weird where you're, where people don't know how to price it initially. How about a 40, how about a $40 billion IPO

Starting point is 00:53:37 that nobody wants to buy? Just Cori. That would do it. Would that do the trick? That would do it. Cause that's what I think happens tomorrow. I don't know. By the time people are listening to this, I will look like an idiot or I will look like

Starting point is 00:53:48 George Soros. So for right now, it's still a political story, right? It's more of a political story than a market story. If you look on who's on the talk shows, the political shows, it's not market people yet. That's when you know we're in some shit. When Jim Cramer's on Bill Maher, then it's a market story. For now, it's a political story. They're not calling me yet from like CNN.

Starting point is 00:54:07 Yeah, okay. And that is a thing. There were a couple of days close to whatever the bottom was when we entered that 10% correction that there was a couple of folks on there. Yeah, we might get there. Josh might get the call. Yeah, yeah, don't worry. Well, stand by. Stand back and stand by.

Starting point is 00:54:20 What I always say is... Well, that's another thing too, right? It's like, as much as we're going to say that it doesn't look like the market's taking this very seriously, well, these corrections can happen for over a very long time. Totally. Totally. But there's one... Hold on.

Starting point is 00:54:34 What I always say is about that, you never do the first markets and turmoil. So I usually... When there's going to be a markets and turmoil special, so this is at seven o'clock at night on CNBC, when they would normally run like Shark Tank. If the Dow is down 1300 points or something, they'll call for a markets and turmoil. And with good reason. That's when people like actually are paying attention. You got to have something there for them.

Starting point is 00:54:59 But you never want to do the first one. You always tell the producer, I'm not free tonight. I'll do the if you need me tomorrow night. Because that first day of markets and turmoil could be reversed so fast. And then it's like I just spent an hour last night like doom-scrolling with with people. So you always want to wait till the second or third edition. If you need a crash tomorrow I'd be more than happy to put a Twitter post up saying I'm not worried about that I just went all in we're bye bye bye all right where we go we're going next um Andrew you've got some opinions on the ETF market

Starting point is 00:55:38 specifically that's talked about with alts go ahead well so Mike is yours well thank you so so I need to find liquid alt for the audience that's not sure what that term means? Sure. So, liquid alt was a term, it's a terrible term that came into existence in the early 2010s after the GFC. Oh, I hate it so much. Yeah. And basically, the idea was there are alternatives, which means generally it meant things that

Starting point is 00:56:00 hedge funds do. So, you go, you don't just buy stocks, you also short stocks, you make macro calls. You might go long and short different fixed income instruments. So kind of the bread and butter of what hedge funds do inside hedge funds. And hedge funds are vehicles that a typical investor cannot get access to unless you meet certain networks or accreditation

Starting point is 00:56:19 requirements, and they're kind of a pain in the ass, and tax inefficient, all sorts of things. So generally, it's the realm of institutions and time that was investors. So people came up with this idea after the GFC where a number of these hedge funds did well, and they said, well, these would be great. Let's take them out to the retail world,

Starting point is 00:56:35 to the everyman investor, and we'll take the same kinds of strategies. They had great three year numbers because the 60-40 portfolio in 08 looked horrible. And so if you were doing something that deviated from that, you looked better in comparison. And on Wall Street, the number one rule is you sell what people want to buy. Yeah. And you look at a thousand funds and you find the 50 that have done the best.

Starting point is 00:56:57 And then that's your benchmark. That's your track record. And so they package them in mutual funds to make them more accessible to people. It's generally been a catastrophe for investors. So since they launched, they've done about 2% per annum during one of the great bull markets ever. And that's after about 200 basis points and fees. So I'm in a kind of a sort of know, I'm in sort of an unusual position. I think that

Starting point is 00:57:26 there are some things that hedge funds do that can be very valuable for the typical investor, but I am a hugely critical of the vast majority of stuff that's been created where I don't think there's any real value that they've offered to investors, but they have made a lot of other people rich. Is the problem the mutual fund wrapper itself or is the problem that once a strategy is done really well, whether it's a liquid alt or a hedge fund, the strategy is going to become so crowded that the alpha is not going to be enough to go around? Which is the bigger issue with liquid alts?

Starting point is 00:58:00 Well I would say one, I would say honestly both, but the mutual fund wrapper has been a very big problem. And in 2013, I wrote a paper with a professor at Columbia basically saying people are radically underestimating how hard it is to take what hedge funds do and make it work with daily liquidity, all sorts of other constraints. I mean, you couldn't kind of go on this list of things you have to do to make it work.

Starting point is 00:58:21 And I described it as taking a great mixed martial artist and asking him to use his feet, basically. It's just not gonna work as well. And we were right, it didn't stop the business from growing to hundreds of billions of dollars because the typical firm in this space has what Ben Johnson at Morningstar calls a spaghetti cannon.

Starting point is 00:58:38 They shoot a bunch of crap at the wall and they hope some of it sticks. And whatever sticks, whatever's doing well, they unleash their army on you. And that's the only one you'll hear about. You won't hear about the ones that did badly. And so it's very much of a, it has historically been an area where products are sold.

Starting point is 00:58:56 Because again, going back to your boiler room analogy, you got a 200 basis point product, you can pay your salespeople a lot more than going out and selling at 25 basis points. Not only are you paying the brokers more who are selling this to middle America, but also it's giving the brokers an aura of sophistication. Just being able to talk about it versus having the conversation like, well, what do you do

Starting point is 00:59:21 that's different than Vanguard? What do I do? How about private credit, mother f**ker?'s different than Vanguard? What do I do? How about private credit motherfucker? Can I show you can I can I show you and then of course they'll pull out whatever the best track record is and they'll sell You know and they'll sell that I mean, I mean, you know the average advisor has I think two major Strategic issues this at this time one is you're competing with Vanguard. Yeah, it's Absolutely bizarre that one of the two largest firms in this industry is a nonprofit.

Starting point is 00:59:49 I mean, imagine if Steve Jobs set up Apple as a nonprofit. What that would have done to the tech industry and how weird. Your iPhones would be $7. The other is that 6040 stopped working. A lot of the asset management business was built on a peculiar statistical relationship between stocks and bonds in the 2000s and 2010s that has not been working. Wait, what do you mean it hasn't been working?

Starting point is 01:00:13 I mean, it didn't work for one year. It didn't work in 2022. It didn't work in 2020. 2023 and 2024. How didn't it work? Okay, so the... When you say worked, what do you mean exactly? Providing meaningful diversification benefits relative to equities. Okay, so I start from the assumption that if you want... Those are bull market years. It

Starting point is 01:00:32 shouldn't work. Meaning like, bonds are a drag on stocks in 23 and 24 and rightfully so, because stocks did 20% plus in both years. Well, okay, I would frame it the other way. I would say in the 2000 to 2010s, you literally didn't need anything other than bonds. That's true. Okay. Bonds did 350 basis points more than cash, Sharpe ratio 0.9, volatility of three, right? It was a straight line to the upper right. Negative correlation equities never went down more than 4%. Yeah. Great decade for bonds. if that was a hedge fund and whatever, all you should have done is in 2000, you should have leveraged up bonds and forgot about everything else. Right.

Starting point is 01:01:10 Which is why I did that. And that's why you own this building. That's right. Um, the, since then, right. Vols have doubled. The max drawdown has quintupled. And on a real basis, forget about it. Right.

Starting point is 01:01:22 And, and, and it's underperforming cash, negative Sharpe ratio, and it now has a correlation to equities. So you're looking specifically at the fixed income piece, whereas like Michael and I are always biased toward the equity piece. Right. I mean- Because that's the way we think. You start with 100% equities. Yeah. And then you say, how much do I want to peel off? That's right.

Starting point is 01:01:43 To sleep at night. 10, 20, 30. Buffett would say, give me 95% equities, give me 95% S&P 500. I've got 500 people going back to this options discussion. We're going to go to the office every day, try to make me more money. But I'll keep 5% in cash. So I can buy more equities sometimes. Right? But the industry was built around a particular mathematical relationship where they said,

Starting point is 01:02:07 well, and look, and model portfolios are a phenomenal social good for the average investor because they combat two of our worst weaknesses, which is one is we tend to panic and sell at the bottom, and we focus obsessively on insignificantly small line items and how they did last month. So getting people to look at their overall portfolio and map out where what the horizon is going to look like in 10 or 20 years is hugely beneficial to

Starting point is 01:02:32 tens of millions of individual investors. But underpinning it is also is a belief that you can't time the markets, you want to remain invested through good times and bad and since you can't accurately pick whether stocks and bonds are going to do better this year, just keep it at 60-40. And my point is that 60-40 was the right answer for 20 years. It has not been the right answer for this decade. It would be a lot more equities.

Starting point is 01:02:58 Because in a sense, if you think about that 40%, right? The 10-year treasury was yielding 50 basis points in the middle of 2020 70 basis points by the end of that year yeah okay so you were basically going to your clients at a what no one argued was not the world's craziest bubble over the past 20 years you're going to your clients and saying we're gonna put 40% of your assets into something that is sort of the equivalent of March 2000 with equities. A treasury bubble in 2020. I was saying actually the dot com bubble in 2000.

Starting point is 01:03:33 But you're equating like allocating to bonds at 50 basis points in yield. Now a lot of advisors shortened up their duration and their fixed income allocation is not always the same as a fixed income allocation. So I think a lot of people said I'm getting paid the same for cash. Then I'll just I'll go to cash. I'll go to money markets. And that was a great move for getting rid of duration. Yeah, great trade going to private credit was a great trade. Okay. You know, Cliffwater, Steve Nesbitt, billionaires. Basically, he's become a billionaire under the argument that the public bond market is not giving you what it should be giving you.

Starting point is 01:04:10 Anyway, my point is when you look at the statistics, if you were to build a portfolio today, it wouldn't be 60-40. And so the problem is, going back to this connects to the disaster and liquid alts, and that's what's driving private credit ETFs and and and everything else people are saying we've got ten trillion dollars of ETF assets of which the entire like legitimate hedge fund ETF category is probably ten fifteen billion if that if that what like a liquid off that trades in an ETF wrapper yeah we can't even think of more than three of them wait what is yours

Starting point is 01:04:43 would you consider managed futures in that category? Yeah. Right? Yeah. So managed futures is one of the categories. Equity long short is another category. They've gotten certain long short factor stuff, like quant trading and other things.

Starting point is 01:04:55 But it's not going to be the only solution. But the gold rush that you're seeing is, wait a second, that could be a, if even 3%. Right. They always do that. And that's the way it looks. So we manage an do that. You know, if, and that's why I looked, so we banish an ETF that's about a billion two, right? Which you can look at it statistically

Starting point is 01:05:10 and measure its benefits relative to a 60-40 portfolio. It's not a hard statistical argument to make. But we as an ETF are one basis point of the ETF world. It's crazy. So... It's a rounding error. Exactly, so it's not, the argument is not get rid of equities, get rid of bonds, et cetera. It's just 40% is not the right number.

Starting point is 01:05:31 40% for fixed income. 40% in something that looks like the Bloomberg. Listen, everyone seems to agree on this. So the only, the only other than on the Bogle head forum, everyone in our industry seems to agree, it's not 60-40, it's 60-20, 55-55, or it's 60-20, 10-10. And then the argument is,

Starting point is 01:05:53 well, what are those extra pieces gonna be? And is that tactical in a certain interest rate regime? Do you say it's this? And then you, I mean, gold is over 3000, so you're starting to hear a lot of people back to the gold sleeve gold Bitcoin commodities You know things like tactical things like manner teachers, which we do Certain other kinds of hedge money people will private credit Mlps they MLPs right so people will fill I mean I think 60 2020 is probably where most people gonna end up and

Starting point is 01:06:24 What's the other 20? Private credit, private equity? All of your smorgasbord of things that you would consider to be non-stocks and bonds. The active ETF industry just hit over a trillion dollars or so, about two inches of tweeting. So people like you and Simplify and Corey and like, people are allocating dollars to you guys.

Starting point is 01:06:40 Yeah, you guys have broken through. But the, okay, so the active ETF story's an interesting one because active ETFs were a failure at first. Ironically, Cathie Wood was part of the catalyst of putting active ETFs back on the map, but because stock pickers didn't want to do active ETFs because they didn't want to disclose their positions, so they went down this non-transparent ETF route,

Starting point is 01:07:04 which nobody bought. She loved disclosing her positions. Loved disclosing this non-transparent ETF route, which nobody bought. She loved disclosing her positions. Loves disclosing her positions. Yeah. And now everybody, but you're right, everyone realized, oh, all right, yeah, here's my positions, who cares? But the vast, there's a trillion dollars.

Starting point is 01:07:16 We got Doss in here. Belchunas just noted that there's now a trillion dollars of what are called active ETFs. A lot of those would have been called passive ten years ago. It's a... They're active in name only? They're really quant formulas? Yeah, it's a DFA value versus something, screening mechanism. We call those passive, but I could understand why they would be sold as active. Well, because when they were sold as passive, people would say, then why are you more expensive than Vanguard?

Starting point is 01:07:42 Yeah, exactly. And so now what happened is active ETFs has become a thing, and it allows them to price the active ETFs at 40 basis points and not get pushback. And now what's happening is across the industry, most of the ETF models originally were passive models, because a wealth management platform that had mutual fund models, they never really liked ETFs

Starting point is 01:08:03 because you can't make any money on them. So they kind of relegate them and say, well, we can give you, I guess we have to give you an ETF model, but it's going to be passive or to be, I think BlackRock's models are mostly like 12 basis points or something. So like the dirt cheap, super passive, super simple stuff to preserve the moat around the higher margin active stuff. But now you're seeing a convergence, right? So people are going to the same guys with the models and saying you need to mix it up a little bit. Can we do this liquid alts trainwrap chart?

Starting point is 01:08:28 Walk us through what's going on here. So this is data from February 2002 to December 2024, and what you see on the lower right, real estate, adventure event, long short equity, macro trading, multi strategy, those are the Morningstar category returns. Yikes. They're almost fully correlated to the S&P 500. So the horizontal line is correlation to the S&P 500

Starting point is 01:08:56 and they cluster around 0.8. Not good. So what's the point? And then the vertical is alpha, negative alpha. Horrible. Don't buy them. How long? Wait. Sam, write this down. The vertical is alpha, negative alpha. Horrible. Don't buy them. How long?

Starting point is 01:09:05 Wait. Sam, write this down. Wait, for how long? 22 years. But wait, not to defend that, but in a bull market, these things are going to suck. They suck. Yeah.

Starting point is 01:09:16 Since 2002. It might work exactly as you want, but nobody wants the worst. Would you pay 200 basis points for that? Right? It's not just, they're expensive, they're complicated. They're hard to explain because anyway I would pay 200 basis points for that if they take me golfing at winged foot and they do right, right So then yes, right and that's and that but that's a different part of it. I know I know I know

Starting point is 01:09:38 You maybe should be so reformed. So CTA replication and CTA hedge funds Okay, so very distant from those at the other end. Why so CTA is so CTA hedge funds, very distant from those at the other end, why? So CTA is a strategy where basically- So commodity trading advisor. Commodity trading advisors, it's a regulatory term. What it basically means is people build these models that are effectively next generation charting. Okay, they're looking for breakouts,

Starting point is 01:10:01 they're looking for the things that fundamental investors generally consider to be lowbrow, they just work well. And they've worked for 50 years. Now what they do with those is sometimes they're long, sometimes they're short. So over a market cycle, if you look at that, they have no correlation. It's one of the few asset classes you can plug in and say, this really has no correlation to stocks. And by the way, it has no correlation to bonds either.

Starting point is 01:10:24 And the horizontal axis is the amount of alpha generates so there's a 340 billion dollar business of CTA hedge funds that do this that are staples 340 billion. Did you know it was that big? That sounds like that's a lot more than I thought it was. Yeah so the mutual fund side is only 20 billion okay in part because these guys walk in and they try to convince you to put your clients and saying and they basically are describing a leveraged long-short order base black box and they think your clients gonna be happy with it But the point is that even after high hedge fund fees what that dot shows you It's one of the few categories you can point to is it generates a lot of alpha and alpha look alpha matters when you're putting together

Starting point is 01:10:57 Portfolio, no one is gonna give a crap about you know The alpha generation of a particular investment in a typical retail portfolio But it is a way of looking at it, saying whether it should be. So when I look at CTA replication, the dot above it, what I basically said is, well, if they can do that after all these hedge fund fees, after all these crazy, what if we could find a way to copy that cheaply,

Starting point is 01:11:19 preserve that's where we are in that vertical axis, and just bump it up? And if I can do that in a simple way, I can put it into an ETF and then I can be the anti liquid alt by actually giving you diversification benefits in a client friendly route. And what's the reception to that idea when you sit with wealth management firms? If they are wanting, if they want to add things to their portfolios that will bring diversification benefits, if they want to add things to their portfolios That that will bring diversification benefits if they're in that mode, then it's very good I mean we like this this is a breakthrough ETF

Starting point is 01:11:51 So you don't so you don't position that against the S&P 500 you say look I already know you're not I already know you're doing that but you're positioning that against the shitty liquid alts that they've been trying and failing with for 20 I'm say that 20% bucket that you need to fill. Got it. I'm going to, this is, I hope I don't get excoriated for this, but it wasn't my quote. He said, you're by far the tallest midget in that room.

Starting point is 01:12:14 Yeah, we would excoriate you, but we don't know what that means. Would you like to be? All right, no, I love that concept. Let's put this demand for diversifiers chart up. I think this is good too. Oh, so by the way, that love that concept. Let's put this demand for diversifiers chart up. I think this is good, too Also, so by the way, that's the growth. So we got into the mannered futures this was a non-existent space basically before we got into it into in 2019 and

Starting point is 01:12:39 Again managed futures ETF managed futures ETFs. Yeah, you're the biggest by far not to brag so so I think I'm not supposed to talk about specific tickers, but whatever the So you might get excoriated, bro But so what I wanted to basically do is I wanted to take this which is valuable to advisors and figure out how to Translate it to advisors like the value proposition here is Not some shiny object. You can go to your clients and tell you about how cool this is. It's rather how does this? Incrementally help your portfolio is it complement what you're already doing already doing? And so the space has gone from zero to three billion. Now what's happened now is that people are realizing that out of that 20%, this is likely to be 3% of that 20%.

Starting point is 01:13:14 3% of the 20% that's not bonds and stocks? That's not bonds and stocks, maybe up to 5%. So what's that, Tam? Is that $500 billion? I think this could be $100 billion. $100 billion. $100 billion space. Okay. Now what's happened is since on the basis of our proving that this was could expand

Starting point is 01:13:31 beyond its original areas, it's about $3 billion right now. So three basis points of the ETF world. BlackRock just launched one. Yeah. Invesco just launched one and Fidelity has one in registration. And what they're going to have to go out and do is now every time you fire up Aladdin into your asset allocation, guess what? Guess what's going to pop up? And it's not going to be BlackRock's track record in it. It's going to be the dot that you just saw about the overall space and its diversification benefits in the same way that after they did iBit, all of a sudden, oh, maybe we should have Bitcoin as an asset allocation

Starting point is 01:14:06 thing. So the point is that my goal is not to compete with that $340 billion of hedge funds. It's rather to try to find a way to make this useful and valuable to advisors who are trying to find a way to help their clients grow their assets and sleep at night, basically. But message it in a way, because I describe this as the kale of asset allocation. You know what's good for you, right? And it could save you at some later date if you were going to have some nasty cancer come along. It's just not that pleasant at the time.

Starting point is 01:14:41 You know, it's not... Yeah, you're not going to... Right. That strategy... It's not your tequila. That strategy in 2024 is not, is not going to be the thing that your clients are thrilled that they owned. Right. Low correlation, low fees are great when the S&Ps and the 10% correction.

Starting point is 01:14:56 Or even flat. And a 15 year bond market. It's tough. Yeah, I mean, the overall space is up 20% in 2022. All right, guys, are private credit ETFs a bad idea? What do we think? PRIV got out somehow. Did it get out or it's out?

Starting point is 01:15:14 It's in the world. All right, I get the idea, why should only rich people have access to private credit, blah, blah, blah, they say this about everything. There's truth to that. I think regular people want to have the opportunity to invest in something that, I don't know, what is it compounding at?

Starting point is 01:15:30 12% CAGR for the last five, 10 years? It's been a great investment. It's been a great investment. Okay, so I like the concept behind it. The execution is you have companies that are willing to stand and buy any any and all redemptions so if somebody wants to sell the ETF they can even though the assets are illiquid there is a buyer who is under contract to take that asset to

Starting point is 01:15:57 provide that liquidity is that how that works I don't think that's I don't think so how does it work so there so a couple things one is you can get access to private credit you can get access through a mutual fund, that's 100 basis point mutual fund that Cliffwater has. It's 25 billion. Thing is a straight line. Straight line meaning it's gone up and up and up? Up and up, it never goes down.

Starting point is 01:16:15 Yeah, probably because they get to say what it's worth, but okay, it's gone. One of the great appeals of private credit is the returns are fake. It's like your house. I love it. So It's like your house. I love it. So it's like private equity. It's like and people aren't pulling the wool over people's eyes.

Starting point is 01:16:30 I mean, it's like you know if you don't really mark something to market. But so there are ways to get the question. The issue is in an ETF. So why in an ETF? In an ETF, because there's 10 trillion dollars of money that's sitting in ETFs. That will only buy an ETF. Will only buy ETFs. And that that's gonna go to 20 billion or Something or 20 trillion or something. So so what they're trying to do is is is

Starting point is 01:16:50 jam Illiquid assets now now pure IV is controversial not just because the SEC kind of said don't do it But it's also controversial because it's State Street plus Apollo except Apollo's not the PM Apollo's job is to source private loans basically, and sell them to State Street, who's the PM of this ETF. Okay. And why is that bad? Well, because somebody has to do it. Usually if your name is on the fund, you have a fiduciary duty to the investors. Again, the way I read it... Oh, Apollo can sell its bags to State Street's ETF buyers. That's the way I read it. Again, I'm not...

Starting point is 01:17:33 Okay, that's the controversy. But it's also... But in order to get... There are strict limitations on how many illiquid assets... Hang on, hang on. This show brought to you by Apollo... I'm sorry. I meant to do that earlier. So, in order to bump the amount that they can have in private assets, it's only up to 35% of this. Right, the whole fund is not actually in illiquid assets. Right, and originally I think they were going to call it the private credit and then the SSE said you had to put public in there. But what Apollo has said is, look, we'll make markets in these loans that we originated. That's what I was trying to explain.

Starting point is 01:18:11 And in theory, that's fine on a normal Tuesday if you had to sell it and they were going to make a market for it. The problem is not that it's March 20th, 2020. Everybody wants out. Everybody wants out everybody wants out and there's one firm that knows how to price all these things and they are the greatest distressed investors in the history of mankind yeah and so I've used the analogy it's like it's so weird some of the structural decisions they made it's like basically saying don't worry don't worry I know all our money is tied up in this

Starting point is 01:18:40 house but our local vulture investors promised to buy it in the middle of a hurricane. Yeah. Like it doesn't, it's so weird. But also, if I sell the triple Q's on it, in a panic, right? Picture this, market's panicking, Sam's my client, Sam calls says, get me out of their triple Q's, whatever. If I sell them, I roughly know what I'm selling it at what price. Like I could look at Apple, Nvidia, Microsoft,. I know the stocks that are big in there. I know the price I'm selling it at. All right? We all agree? With this, get me out of P.R.I.V.

Starting point is 01:19:11 A, you don't know what you're selling. B, you definitely don't have a way to look up what the price should be. And that's the, I guess that's like, that's the part of the asset class. You'll sell at a discount to NAV. That's not even a horrible thing to me. Of course. You want liquidity, that's the part of the asset class. You'll sell it at discount NAV That's not even a horrible thing to me. You want liquidity, that's the price. You have closed end funds That that I mean actually a mutual fund is at greater risk of having this illiquidity unwind Because you go to the mutual fund and say I need cash tomorrow, right? With an ETF you're selling it into the market So the great example on this is you know people use I've always looked at ETFs with private assets Assuming that the ETF has to sell the assets

Starting point is 01:19:47 to meet redemptions. It's not the way they work, they just trade in the market. The case study on it was the Greek ETFs in 2011. The Greek market actually shut down in the middle of the Euro crisis. Remember this? It was GRU 10. It was my first year at businesses.

Starting point is 01:20:01 I remember you writing about the European debt crisis. There was nothing else to write about. That's all we did. Yeah. OK, so what happened? The ETF kept trading at a traded discount to the stale NAV. GREK? I don't know.

Starting point is 01:20:14 Yeah. It was? You remember it? Yep. How old were you? 16. Say that. Yeah.

Starting point is 01:20:19 But it's not disastrous. You sell it at below NAV. It's the weird ways in which they've tried to jerry-rig this in a way that states read has tried to jerry-rig. To me, they look like the Patsy. So people like you that get market to market every day hate private credit. Hate. You just said the returns are fake.

Starting point is 01:20:41 Let me play devil's advocate. If you are making a loan to a company that is private and you're going to loan them money, they're going to pay you interest, they're going to pay you back, why does that need to be marked every day? It doesn't. No, no, no, I should clarify. The volatility is fake.

Starting point is 01:20:55 The lack of volatility is a mirage. But that's the point. Okay. But that's what investors are paying for. Exactly. But now you have an ETF that trades every day? Yeah. Where the NAV doesn't move,

Starting point is 01:21:08 but your price moves every day? Yeah. Oh, I get why Cliff is pissed off. I totally get it. I'm just saying from the investors point of view, good, why to me? I don't care. I don't want to see the market.

Starting point is 01:21:17 I used to get called by journalists about private, in 2022, private equity firms didn't mark down their portfolios very much, relative to what happens to the markets. Because generally they're leverage long equities, So in 2022, private equity firms didn't mark down their portfolios very much, relative to what happens to the markets. Because generally, they're leverage long equities, so equity markets go down 2025, they should be down 30 or 40, something like that. But they market down 10.

Starting point is 01:21:35 And journals were up in arms. And they called me and they're like, they're deceiving their investors. So I called some guys who run PE firms and I said, guys, how do you feel about this? And they said, honestly, we don't really care, right? It doesn't really matter to us whether we're marketing down 10 or not. He said, but nobody's pulling the wool over our client's eyes.

Starting point is 01:21:52 If we market down, if we're co-invested with Apollo, with KKR, or somebody else, and we market down more than they do, and our clients invest with us and not with them, they'll call us and yell at us. And if we don't market up in the same way they do, they'll call us and yell at us. And if we don't mark it up in the same way they do, they'll call us and yell at us. We're all in on it. We're all in on it.

Starting point is 01:22:08 I said the only people who care about this are journalists. Right, right, by the way, and in 23 and 24, the PE funds did not like have banner years. So yes, they may be undermarked down in 22. It's not that they were up 20. They didn't match the S&P in 23 and 24. Right. And all these journals, by the way,

Starting point is 01:22:24 got their starts during the financial crisis, where everything- The FT hates them. Yeah, all the controversy. All the controversy. About CDS. Yeah, CDS. And it's literally,

Starting point is 01:22:37 market to market was a huge issue back then. And accounting standards were constantly changing. And it turns out that, like, arguably changes to accounting standards helped stabilize changing. And it turns out that like, arguably changes to accounting standards helped stabilize the market back then. But Andrew, you're 100% right. Investors don't want to see the marks. That's why they're in the asset class.

Starting point is 01:22:54 Only if the marks are going up. But if you're a, all right. But if you run a mutual fund company, you're in the asset gathering business. The thing that makes it easy to gather assets is when you look good relative to either your peers or the market gathering business. The thing that makes it easy to gather assets is when you look good relative to either your peers or the market or both. The thing that makes it hard to gather assets

Starting point is 01:23:10 is when you look much worse. So there you are going about your business, market has a great quarter, you look really good, market has a terrible quarter, maybe you look a little bit better or a little bit worse. And that's the life that you have signed on for in that business. And then you see these other guys in 2022,

Starting point is 01:23:30 NASDAQ falls 30%, S&P falls 20, Treasury's down 16, 17, and these guys are down 5%. Yeah, it feels unfair. Well, they're going to raise a lot of money. Now, a quarter later on a lag, they may mark that down But it doesn't matter money's already been raised and so I think they look at it

Starting point is 01:23:50 Cliff Astin's calls it volatility laundering I call it regulatory arbitrage, which is what I think it actually is but either way it's got to piss you off It feels unfair. It feels like it's bullshit. It's not fair. I get marked every day and they're lying. I get it I'd be pissed too. Right. I have a ticker. Yeah, and they don't yeah, It's not fair. I get marked every day and they're f***ing lying. I get it. I'd be pissed too. I have a ticker and they don't. Yeah, it's not fair. It's not fair. Investor...

Starting point is 01:24:13 I'm not saying... You're saying they're not lying about the marks. It's just a different business. That Cliffwater fund that I told you about, it's done 13% a year for the past... since it launched or something. That's real money. Everybody's happy. Everybody's happy. Except for Cliff. Except for Cliff. Except for Cliff.

Starting point is 01:24:27 But I think that, again, I think there's a difference between, I think what's weird about this ETF in particular is the ways in which they've bent over backwards to kind of position them in a segment of the market that's clearly very, very hot. But just as an investor looking at it, it seems weird. It's weird. It's a built-in conflict is the easiest way to understand it.

Starting point is 01:24:50 Yeah, I called it like a moral hazard tied up with a bow. How much money has this thing taken in so far? It's $55 million. It just launched. All right. So it's funny. Is it going to have bad returns or is there a blowup risk? What do you see as the potential downside?

Starting point is 01:25:06 I mean, well, first of all, it's mostly going to be normal bonds. I think just the question is, do people? I'm sure they'll do well. Like, State Street as an organization. Asset-wise. Asset-wise. They're going to throw a lot of weight behind it.

Starting point is 01:25:17 I'm sure they control model portfolios. The first, look, give them credit for being first. Wait, will it get to a billion in a year? I don't think so. I don't know. I don't know. I don't know. Again, it's a bold call, Andrew. Well, look, the ETF space, like I've come out and said

Starting point is 01:25:32 and called certain things out there niche products, and people view it as an insult. Jeppy from JP Morgan is a niche product at $40 billion. Gep Q is a niche product with another $17 billion. If you talk to somebody working in JP Morgan is a niche product at $40 billion. GEPQ is a niche product with another $17 billion. If you talk to somebody working in JP Morgan asset management, they will tell you GEPI is a huge home run. It's the largest asset ETF in the world. It's 35 basis points.

Starting point is 01:25:55 So chew on that for a second. They started with this thing being 35 basis points. But I'm saying it's not going to supplant the S&P 500. Actually, people are viewing it as it maybe feels a little more like that bond portfolio, the traditional bond portfolio that isn't working in the same way. I mean, I am all in favor of financial innovation.

Starting point is 01:26:12 I am all in favor of bringing, and there's a lot going out there, particularly ETF world, some of which is like Wild West stuff that we're going to look back on in five years and think, why the hell did people do that stuff? You know, the ex-leveraged ETFs and single stock ETFs and stuff like that. Well, we know why they did it.

Starting point is 01:26:29 That's the spaghetti cannon. You don't know which of those is going to work. Those are here to stay. Those are not going to work. But people buy them, right? It's meeting some strange investor need out there. No, gambler need, gambler need. Fine.

Starting point is 01:26:42 But that's a need, right? I mean, you know, putting the sugar in the tequila. It's like, I mean, if you need it, so. You know what, those products have no marketing budget because Schwab and Vanguard don't make them. Shit sells itself. The shit sells itself. There are people using it and they have their own reasons

Starting point is 01:27:01 and it's none of our business. It's bottled lightning, right, and you got five of them. And I mean, it's none of our business. It's bottled lightning, right? And you got five of them. Yeah. And I mean, it's sort of a funny story. Like I had, I took Matt Tuttle to lunch about a year ago. And it was before he hit the inflection point. And I was like, you know, let me pay, whatever.

Starting point is 01:27:17 You know, I'll pay for lunch, be magnanimous, whatever. Two months later, I was like, he has four billion? Yeah. I mean, it's, look, he's, he's an aggressive entrepreneur who has a great nose for sensing out the demands of a particular segment of the market and he's going to build stuff for them. I don't think there's anything inherently wrong in that. Do, would I buy the products myself? No. Do I look at a lot of products out there that when you kind of get underneath the hood, do I think they're economically irrational?

Starting point is 01:27:45 Yes. And, but I can make those decisions. But again, going back to the private credit thing, again, I don't think it's pulling the wool over people's eyes. It's what you want to see. The weirdness is going to be that the first private, like I would be more comfortable. There's actually a, the FT had an article this morning about a 33 act fund that's going to get, try to have 80% of it in, in private assets from, from a bond box.

Starting point is 01:28:13 And they basically say upfront, and by the way, we may stop redemptions, right? You know, or you may not be able to get your money out because we, but again, that's like a private reef. That's like all these other things. So in a sense, you're taking these things and just making them tradable in a different way. So anyway, it's f*** it. Yeah. Try it. Try it.

Starting point is 01:28:28 You know. I'm just not looking forward to the moment where my friend from college is going to text me and say, hey, this private credit thing that I've been reading about in the journal. Yeah. I heard I can buy it now. Yeah. Should I? Yeah, yeah, yeah. Should I?

Starting point is 01:28:41 So I think like, you know. Start of this episode. Yeah, I mean, exactly. That's what I've been doing this entire, you know, this episode. Yeah, I mean, exactly. That's what you must. You must be torn. I wanted to ask you this. You must be somewhat torn though, because some of the best market research is now coming from private equity and private credit firms.

Starting point is 01:28:57 I know you're a big Torsten Slott guy. He's writing at Apollo. Have you noticed a lot of the other strategists that you frequently read in quote? They're all going to private equity now. Yeah. I mean, you know, so I used to work at Yahoo Finance, which is Apollo owned or operated. Yeah, that's right. And so every day a newsletter, somewhat somebody's newsletter or something goes out where there's

Starting point is 01:29:18 an ad for Apollo on it. Someone sends me a screen grab and says, hey, look at this. They're advertising. Yeah. I mean, they're doing it. They're doing it. It is not slowing down. Yeah I mean you know I think Torsten Stlock is really good. He's got really interesting charts and stuff and then every once in a while he'll put out the private you know credit tag.

Starting point is 01:29:34 And you're like wait hold on a second what's going on here. Well that's kind of the job. No matter where you work. Exactly that's all of our jobs. Alright guys did you have fun on the show today? The best! I could do this for hours. I don't know if our listeners can though, so we're going to leave it there. We always end the show these days by asking people what they are most looking forward

Starting point is 01:29:55 to. And you could tell me professionally, personally, sexually. I almost don't even care at this point. I'll let Sam go first. Sam, what are you most looking forward to, my man? I'm going on vacation tomorrow. I knew you were gonna pick option three. Say more.

Starting point is 01:30:12 Yeah, I'm flying out to Aruba. Aruba's sick. Yeah, meeting up with some old college friends is great. That's great. How many nights are you going away for? Four nights. Dude, you could do your thing mostly from there, too Yeah, technically yeah, yeah, I've already sort of pre written nice my stuff

Starting point is 01:30:37 Man happy for you. What do you got for us? What are you looking forward to? It's embarrassing Legos. Okay I got a three and a half year old, my second marriage, two daughters, they're one and thirty years old. Wait, are you my age? I'm 58, or 57. Holy shit, you're 10 years older than me. Wait a minute, and you have a three year old?

Starting point is 01:30:53 I have three and a half year old. So what's it like when you're like in the dugout at T-ball and the other dad coaches are hanging around? I haven't gotten there yet, I've been away yet. It's, you know, like, it's an everyday reminder of the joys and wonder and amaze life Oh, yeah, and and and it's also render of them. I'm older. You know, it's um, but anyway He loves Legos and when I'm in the city, I I get to raid the leg. You go to the Lego store and rock 30 rock where is it? Yes, right over there. It's right on Fifth Avenue. That store is magnificent. It's magnificent

Starting point is 01:31:23 Okay, does he have a specific genre of thing? He likes to build a young entirely automotive and preferably construction automotive and construct Yeah, that's so cool. Congratulations, dude When I was young I love I love when I was doing I mean when I was young I did Legos But they're all just blocks right and there and you you know, you'd make stuff with it There's so the sets are so cool today, and the instructions are really cool. It's also one of the only things that you do without a screen. Yeah.

Starting point is 01:31:48 Like there's no screen. I like the zoning out part. I love it. Also where like you have a mission, it's on paper. It's great. It's like a folded thing, and like two hours could go by,

Starting point is 01:31:57 for me four hours, because I'm not good at it. But like I love that, like turning your brain off and just completing a side quest. I think that's like mentally healthy. You can see the progress, you can stop. We're raising this boy in the 19th century.

Starting point is 01:32:12 So this is about as exciting as his life gets. Dude, that's amazing. Congratulations. Michael, what are you looking forward to? You're, we're celebrating your birthday for a fourth or fifth time tonight. It's pretty cool. I'm excited to go to dinner.

Starting point is 01:32:25 Alright. We're going to Emmy Squared. Uh, there's a new one in Hell's Kitchen apparently. Oh yeah. We love that place. Pizza place. And burgers. Pizza and burgers.

Starting point is 01:32:31 We're big fans. So I have a nutritionist now and I gotta give her the heads up when I'm gonna go do something like that. So Josh's been talking about his air quote nutritionist for the last, hang on, for the last like two months. Apparently it's a real person. I thought he was f***ing around. No. Yeah. We gotta make things up. I did. I thought he was f***ing around. No. Yeah. We didn't make things up.

Starting point is 01:32:46 I did. I thought you made it up. This person exists. So I start showing her the Instagram for Emmy Squared and she's like, oh my God, now I want to go. So it's Detroit style pizza and I'm a New York style pizza partisan. It's so goddamn good. So we're going to Glen Gary Glen Ross tonight. And right across the street from the theater on Broadway is

Starting point is 01:33:12 Emmy Square at Hell's Kitchen. So I was like, yeah, we have to do that. Do you watch Daredevil? No. Should I? I thought you would. I like it. Good show. I watch a lot of shows. Is there a new Daredevil show? One again. Very good. Okay. So the last one is like... Oh yeah, the last one's like...

Starting point is 01:33:27 They brought everybody back from the Netflix series. Wait, you watch it? Oh yeah. Dude, it's awesome. It's not as good as the first one, but it's eight years old. The movie... It's awesome. It is, I like it.

Starting point is 01:33:38 No, the first one was better. I like the first one better, though. That was 2017, it's a long time ago. Yeah. I struggle to keep track of it. I had Daredevil 100... I had Daredevil 1 through 186. Okay.

Starting point is 01:33:47 I have a lot of those, but I don't have the whole lot. And look, I was born in New York, had glasses and I had red hair, so it's like I had to like Matt Murdock. What was your store? You go to Midtown? I went to the one on, was it 51st, all the way on the east side.

Starting point is 01:34:00 On Lexington? No, there was one that was almost like between first and second. Sutton Place. Something, it was, I forget almost like between first and second. Sutton Place. Something, it was, I forget, it was far over there. But the, and then the first movie came out, Ben Affleck, I was like, you ruined the value of my collection.

Starting point is 01:34:13 It was the worst. It was the worst. I've never seen it. It's not bad, they took the Netflix actors and moved them over with only slight changes to the- Josh is right, it's not as good, but it's awesome for me. I'm enjoying, I have a good time. Yeah, no, I think it's fine.

Starting point is 01:34:25 I think it's fine. And actually, if the first version never existed, you would love this. True. There are some MCU threads that I'm a big fan of and some that I just can't keep up with. But I remember, I don't know if you saw Hawkeye. Yeah. It was like a Christmas special.

Starting point is 01:34:39 It was a Christmas thing. And then at the very end, like the epilogue after the credits had Kingpin walking in in the background. So I like when stuff like that happens, but then they didn't do anything with it. Yeah. Maybe this is, is this it? Oh, dude, how about this? They had John Bernthal playing the Punisher and somehow didn't make a movie out of it.

Starting point is 01:34:59 But John Bernthal's in the account, an accountant too, by the way. So that's why you have to catch up on that. Big Bernthal guy. All right, an accountant too by the way, so that's why you have to catch up on that. Thank Bernthal guy. Alright guys, this has been amazing. I want to say thanks to the crew. Duncan, John, McCall, Rob, Graham, Keith, Travis, Daniel. How'd I do? Sean, CharKid, Matt. Pretty good. It's crazy. You guys killed it this week. Views are through the roof.

Starting point is 01:35:23 Until this episode, we'll say. No, I'm just kidding. All right, guys, we love you so much. I want to tell people how they could follow you, how they could find your stuff. Sam, let's tell everybody how they could find the ticker. Yeah. And they should be subscribed immediately, in my opinion.

Starting point is 01:35:38 Yeah, it's ticker.co, T-K-E-R.co. Very easy to find. Very easy to find. Sign up for a free subscription. Shoot me a note, say you listen to the compound. I'll send you some free notes. How many notes are you publishing each week? Yeah, somewhere between two and four.

Starting point is 01:35:48 Every Sunday a free one goes out. Josh is at Maga Josh on Truth Social. Yeah, find me on Truth Social. The real Maga Josh. Josh the Tarot Fan. That's right. Mr. Beer, tell us where we can learn more and follow your thoughts. Well, our company website is called Maga Josh.

Starting point is 01:36:00 We're a brand that's been around for a while. We're a brand that's been around for a while. Real, real Maggie Josh. Josh the Tariff Man. That's right. Mr. Beer, tell us where we can learn more and follow your thoughts. Well, our company website, if you're interested in what we do, is www.dbi.co. Take care of DBMF. I could say it, you can't. I cannot say it.

Starting point is 01:36:16 DBI.co. CO, oh, just like him. Yep. That's the future, man. And if you, the commentary they do, I am on a sabbatical from Twitter. Good for you. For my sanity.

Starting point is 01:36:27 So I put I am on LinkedIn. Me too. You know it'll be five years for me in May? Okay, God bless you. Yeah, I deleted the app from my phone five years ago. Did they give you a little medallion points? I sent four tweets this year. I couldn't take it anymore. So anyway, I'm on LinkedIn.

Starting point is 01:36:42 If you look me up, please reach out. I respond to everybody. And anybody who reaches out here responds. Yeah. LinkedIn is where non-sociopaths spend their time and it has its own problems. You know what happened with me on Twitter was that for some reason on my feed, I started to see industrial accidents. Yeah.

Starting point is 01:36:59 And it was just, it was just macabre. And I just like, I was like, it was nauseating. They keep showing it to you because you keep watching it All right We're gonna wrap up special thanks to our listeners and viewers. We love you. See you next time. Thank you you

The Compound and Friends - Greed Is Good

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