The Compound and Friends - Pricing In Cuts

Episode Date: December 15, 2023

On episode 122 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Bob Elliott to discuss: the eruption in the market, what to watch for in 2024, the outlook for regional banks, the stupidest piece of research, hedge fund strategy ETFs, and much more! Thanks to Kraneshares for sponsoring this episode. Learn more about the KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) at: https://kfafunds.com/kmlm/# Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

So Josh and I lived on the same street. Really? Growing up. And we overlapped for about maybe a year. But I was 8 and he was 15. We didn't hang out. Yeah. We weren't.

I don't—I hope for your sake you didn't hang out. We weren't hanging out. I was a pretty chill 8-year-old. Alright. Is Sean in the shots? He's not. Actually, it's kind of funny. Duncan, I don't have my hat.

You have a hat on. I don't know if you know this. You look like one of the wet bandits. What's a wet bandit? That's the second time I came up to that. Home Alone, bro. Yeah, you gotta- They're called the wet bandits. Joe Tesche. Yeah, they're the wet bandits.

You gotta pull that down, man. We got too much forehead going on. Wait. It's- Oh. Do you know why they're the- Oh my god. Wait, you've never seen a bald guy?

Bob. I'm dead. Oh my god. I'm dead. I'm dead. I'm dead. I'm dead. I'm dead. It's, oh. Do you know why they're the- Oh, my God. Wait, you've never seen a bald guy? Bob. Oh, my God. Harsh. What did you think was under there?

A full head of hair? We're not all genetically as blessed as you. Jeez. Okay, where's your hat? I don't know. Is it for your office? I'll look at it. Guys, headphone volume for me is extremely loud.

Oh, we had have enough for Jill. Okay. All right. So, did you guys see there's a new Beverly Hills Cop coming out? No. Kevin Bacon's in it. Not Eddie? No, Eddie Murphy is.

Eddie Murphy's in it. No, Sean, you weren't in the shot. What's Candy Cane Lane? Oh, it was on Amazon. I mean, I didn't watch it. No good? Was it awful? It's like Eddie Murphy doing like not like family.

It's like a family rom-com, right? They must pay him so much money because he keeps doing those, right? These flat brims, they just feel ridiculous. All right, I wanted to ask you before we get started. Did you see the trailer for Civil War? Are you like... It scared the shit out of me. I'm not sure how I feel about it.

It scared the shit out of me. Bob, did you see this? No, I didn't. No. So the guys at A24 who seem to have their finger on the pulse, maybe more so than most studios. The vibes are seeping into Hollywood. The negative vibes are seeping into Hollywood.

Don't play this. No, I'm not playing it. What do you mean? Don't have a Civil War? No, the trailer. I'm not playing the trailer. So they made a movie about like what would happen if we had a Civil War now. It's rough.

Tough watch. Like the movie art poster is snipers on the torch of Statue of Liberty. It's like Don't Look Up. Yeah. the, of statue of Liberty. It's like, uh, don't look up. Yeah. Uh, no, but not funny.

Jesse Plemons is in it. And so it's Kirsten Dunst. I think it's Kirsten Dunst is, is great. And, uh, I'll probably see it. Oh,

I will definitely see it. By the way, I was thinking about this. The question is, is it, is it, is it not, not cool.

They're going to put it out in April. Is it not cool to put a movie out like that in this environment? Almost like goading people or daring people. I feel like it's maybe too on the nose for the moment. That was my reaction. It's scary. You haven't seen the trailer. If you see the trailer, you'll be like,

this probably isn't a great thing to wish cast out into the world right that was my that was my impression at least so but of course I'll go see it

Bob's silent completely silent has not a single reaction hey Bob that's cool how do you feel like civil how do you feel about

civil wars good yeah generally against them alright let's let's change the topics um not a fan

not a fan? I was thinking this is going to be like a little more upbeat. No, no, no. We want to start with Civil War and then we get more upbeat. So the Fed is dumping money in the streets. Wait, I want to give you a couple of – Meb Faber did 75 facts from 2023 at the Idea Farm. We can't do 75 of them. But there's some,

there's some really good stuff out there out of nearly 10,300 mutual funds and ETFs in the United States. There are more than 5,900 where the listed portfolio managers own no shares in the fund they manage. Do you believe that? Yeah. You can believe that? Yeah, of course. Why can believe that? Yeah, of course.

Why don't we just close those, and then we go from 10,300 to 5,900? Like, why get hung up in your own investment management? It's like... Come on. Hung up is great. Don't get high on your own supply. That's how I was taught.

Actually, all those people are holding low-cost diversified ETF portfolios. Laughing at the shareholders of their funds. Laughing at the shareholders paying 150, 200 basis points. What else you got? How about this one? The Nikkei 225 was flat from July 1990 through November 13, 2023. So that's not all markets are meant to be bought and hold.

Stocks only go up, right? Not in Japan, only US stocks. Here's a good one. Blackstone hit a trillion dollars this year in assets under management. Did you think that would happen? Yeah, yes. There's economies of scale. They're just sucking up.

They'll take a dollar from anybody. You must have thoughts about private credit. I mean, the beautiful thing about private credit, I'm a bit of a snarky mood this afternoon, is that it's totally uncorrelated to any other asset class, right? Yes. Until you have to get some money out of it. Right. Until you want to get your money out of it and everyone defaults, right? I mean,'s – I think it's – the problem with private credit is that they are misleading people, people who genuinely – Well, I want to ask you about this, the distinction. Is the problem with the product or is the problem with the marketing of the product or both?

I mean the product is fine. The product is not that interesting, right? You can go buy an ETF at 50 basis points to get essentially the same economic exposure as price. Yeah, but that marks the market. Nobody wants that. Right. And people want to see the prices. That's the alpha. People want to be lied to. Well, but the real problem is the idea of saying that that's uncorrelated. Go read some of these marketing materials. That's a lie. Uncorrelated. Yeah, so that's the problem I have with it. And that is garbage.

Yeah. Right? Like how can you possibly say that a credit cycle is uncorrelated? Or like the credit cycle is the economic cycle, right? It's a different point in the economic cycle, but it is the economic cycle. And then, I mean, the other big issue is that there's no track record on these things. So they're like, well, I'm going to show you something from, you know, January 2010. It's never defaulted.

You know, we've had no defaults basically in this product. It's like, of course you've had no defaults. Yeah, zero interest rates since January 2010 also. And then if you talk to these folks, you say, why don't you just backfill it with, you know, say bank lending through time? Because all you're doing is just replacing bank lending. They're like, oh, no, no. We are so much better at picking than banks. Is that the alpha, the selecting who to make loans to and the likelihood that they'll pay?

Not at trillions of dollars of scale. No. There's no alpha trillions of dollars of scale. OK. Just like one bank or another bank might be better at lending to this sector or that sector. But at the banking, we're, there's been more private lending, private credit lending over the last 10 years than there has been coming out of banks.

Is that true? There's a bubble in my inbox. I'll just tell you that. Wait, is that true? There's more private credit loans than bank loans? Than bank loans over the last- In dollar terms or in transactions? Yeah, there's a good Wall Street Journal article about it.

Wall Street Journal did this article, to your point, where they showed like the bubbles of like all these companies like KKR. Right, right. It was just huge. I want to play this from Mr. Powell yesterday. Hi, Jones. Financial Times. What a voice. I'd say the mood among economists at the moment seems to be one of cautious optimism, which is somewhat corroborated by your forecast, by this sense that we are going to have a soft landing.

Yeah, when we hear from the general public, there's a lot of discord about economic conditions. What do you think explains this disconnect, and does it matter for policymakers? It may be. It may be. A common theme is that while inflation is coming down, and that's very good news, the price level is not coming down. Prices of some goods and services are coming down, but overall, in the aggregate, the price level is not good. So people are still living with high prices,

and that is something that people don't like. And what will happen with that is wages are now – real wages are now positive, so that wages are now moving up more than inflation as inflation comes down. And so that might help improve the mood of people. But we do see those public opinion surveys. All right, enough of this. The thing that we can – Bob, do you think that the gap between how the economy is doing and how people feel the economy is doing is going to shrink in 2024? I think so.

And the reason why that is is that the economy is pretty – doing pretty well. We've gotten an injection here basically a bunch of stimulation, right, from stock prices back up through highs, interest rates coming down, all that. That's all good. And that should keep things tight, which should keep wage growth pretty good at a time when we're getting a bit of a moment of moderation of inflation, right? So I mean, what do people really care about in terms of the vibes? It's not that complicated. It's prices.

Do they have a job? Rent. Are they earning income? Healthcare prices. And what's the price at the pump? That's what matters, right? You think price at the pump trumps healthcare premiums or? It's just, it's a way to be able to see what's going on in the day-to-day you know people complain about right now auto insurance

more than any more first of all gasoline prices are down like 90 days straight or something right nobody's complaining about that everyone right now is complaining about audio out of nowhere that's like the topic i bought a bag of dog food yesterday. It was $85. And I'm pretty sure it used to be $55 or $60. Well, you love your dog, right? I don't care that it's not going to be $86 next month. And I'm speaking for America here. I'm a voice of the people. I care that it's $85.

Like all of that, that 30% increase, that happened. That's not going away. That's not going away. And the question is, are people going to feel like they're catching up? Because the problem is not – I mean the problem obviously is that big gap and then also feeling like they're falling further behind. And so the question is, can we get a switch here where real wages start to rise, right? Where people feel like things are getting a little easier for them, right, in 24? And I think that's where we're going to see – it's going to feel a little easier for them, right, in 24. And I think that's where we're going to see it's going to feel a little easier.

You're just going to nag, pick up the tomato and be like, it's $3. What the heck, right? But if their job's still there and oil prices are coming down and they can start to feel a little bit of relief, they'll feel a little bit better. But, you know, the level is still pretty out of whack, right? So the vibes are still weak but getting a bit better. Getting a bit better is what we're all about. Let's get this shit started. In the words of the great Ronnie Mung. What show, John, what show is it? 122. What's up? 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 Redholz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Redholz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is brought to you by Craneshares. Let's talk about the KFA Mount Lucas Managed Futures Index Strategy ETF. The ticker there is KMLM. This is sub-advised by Mount Lucas Management, who in 1988 established the first passive index to measure returns to risk bearing in futures markets. This has the potential hedge on equity, bonds, and commodity risk. It consists of 22 liquid futures contracts traded on US and foreign exchanges, such as copper,

corn, sugar, gasoline, soybean. Duncan, how are you feeling about soybeans? Are you bullish or bearish? I'm bullish. Well, they're long, so that's consistent. That jives. All right. To learn more, visit kfafunds.com slash KMLM. Guys, we have returning champion with us today. Bob Elliott is the co-founder, CEO, and CIO of Unlimited Funds, an asset manager providing easier access to hedge fund strategies. Bob was previously the head of Ray Dalio's research team at Bridgewater. Anything going on with Ray Dalio lately? Nothing.

Nothing? Did you get a Christmas card from the Dalio family this year? Yes? No? I think I lost it. We don't have to go there. It's enough about Ray Dalio. Let this man end his year in peace.

We're starting with a very simple question. Yesterday, there was an absolute eruption on Wall Street, and that followed arguably five of the best weeks I've ever seen in the stock market. But it was almost like a crescendo of the war is over.

We won. We won with veritably no casualties. Mission accomplished, baby. Like literally the Fed itself was like, we're probably going to have to the economy up to get inflation down. Like they were telling us that. And the economy said, oh yeah, watch this. And the economy LOL'd. We added 200,000 jobs last month. We're adding an average of, I think, 300,000 jobs over the last 12 months. Inflation over the last 17 months has come down from an eight handle to a three handle about to cross into a two handle. And core inflation, too.

Both are coming down rapidly. And did we do it? Like is it that simple? We did it. Oh, I don't know about that. I mean like if you think – We did it. Cheers for the Fed.

Everyone wants to choose, right? No, we wanted the plane to spite them. I don't think they get – I don't want to give them the credit. Well, first of all, the Fed needed to tighten. Monetary policy was way too easy. But a big part of what you see is that this is all – this is a lot of it's the resolution of the supply chain issues, right? And so, yeah, when used autos were surging and now they're falling. That's not the Fed.

The Fed has nothing to do with – The Fed doesn't print semiconductors? Right, or semiconductors or oil, right? We got that part. But also, rents have fallen, and a big part of that is the availability of capital and money feeds into wages, rent. Those things are now moderating too. That's some of – There's a lot of supply side stuff too, right?

The amount of creation of units basically in tertiary areas is about as extreme as it's been. Secondary cities, sunbelt cities, areas that had been, seen a lot of migration, there just weren't enough apartments. There still aren't.

There still aren't enough apartments. Well, the median asking rent posted the biggest decline in over three years. So rents are still dropping. That's true. They're still 22% higher than they were in November 2019. But they're 4% below the highs. And if this continues to moderate and even deflate, this certainly should help the vibes. It should.

I mean, how much do you pay in rent? How much do you pay at the gas pump? Those are the in rent? How much do you pay at the gas pump? Those are the basic things. How much do you pay in the grocery store? But we're sort of at the maximum here. That's the thing I would say. The maximum what? The maximum disinflationary impulse.

Like gas prices are not going to keep falling every day forever. Yeah. Right? OK. Rents. That's a good point. You're not going to have, you know, millions of units of rental apartments coming onto the market. The deceleration is going to decelerate. That's right. Well, then I like to call it the negative impulse. Right. The

disinflationary impulse is going to is going to moderate. Right. Used cars went up and then came down. They're not going to go to zero. New cars aren't going to go to zero. Right. Right. And so the issue is, if you look at how inflation is right now, which is, say, three to four percent, it's not that great, not that low, considering the fact we basically have max disinflationary impulses in the economy. Oh, I see. Right. But it's going to lap higher prices throughout the course of 2024. And it will, at least in comparison with year ago, monthly numbers continue to look better and better. It'll look better. But the question from the Fed's perspective is durability, right? Everyone

in the market is looking at here and saying, well, we're going to print 2% in these reports, measured inflation, and everything's set. But the question is, does it stay at 2%? these reports, measured inflation, and everything's set. But the question is, does it stay at 2%? It's not a question of, does it print at 2%? Do you think the risk is that the bond market, credit markets get too easy, stock market runs up too much, and all of a sudden we're right back to seeing inflation in wages? Well, look at what we've seen in the last eight weeks with oil prices falling in the stock market going to new highs. Those two could – Those two points have translated directly into

increased retail sales during the holiday season. So we saw a big print in retail sales today, which is indicative of the fact the consumer is in great shape. And if anything, it's feeling better. If the consumer is feeling better, they're spending more and keeping growth elevated. And so Chairman Powell gets on the press yesterday and says, well, we've had a moderation of growth. Yeah, it went from five, which was very elevated in the third quarter and not – it wasn't really five. It was measured at five to the most recent Atlanta Fed GDP now at two and a half, right? Two and a half in an economy that has productivity growth of about one and labor force growth of about one. Two and a half is above potential growth. It should be two.

Right. It should be two or one and a half. So it does not require stimulus. Right. It's certainly not a place where you're like, you know what we should do? Cut a hundred and seventy. Well, here's a hilarious dichotomy. Like that is not – this is not the economy. It's certainly not a place where you're like, you know what we should do? Cut $100 million. Well, here's a hilarious dichotomy. Like that is not – this is not the economy.

It's not an emergency. It's not an emergency to cut as if we're in the middle of a recession. Yesterday, Powell said, our actions have moved our policy rate well into restrictive territory. Later on during the day, I saw a tweet from Lisa Bromowitz. U.S. financial conditions are the most accommodative they've been since the Fed started hiking rates last year, according to Bloomberg US financial conditions. That's obviously through no fault of their own. But what if we find ourselves in an environment in 2024 where the economy starts to overheat,

where the S&P is up 20%, home prices are up another 10%, and they have to say, holy shit, we got to tighten again. Is that possible that we see those conditions ease too quickly? The thing that's actually interesting is if you look at the market pricing on the short-rate market, you're actually seeing a lot of people piling into expectations of them easing. But what you're seeing is actually the probability of hikes next year starting to rise in that short rate market.

And so people are – I think a lot of folks, the smart money is looking at this set of conditions and saying the odds that there's a hike next year are not zero. They're getting higher because of the way that they're behaving. Bob, everyone was like very good about pointing out the lag effect of hikes and why aren't we seeing it show up and why aren't spreads blowing out and why isn't this and why isn't that? Why wouldn't it work in the same way? So the Fed now indicating that its next move isn't easing.

Michael's point, like what if the stock market runs up, blah, blah, blah. Shouldn't there be lag effects to cuts? We have no evidence that the stock market runs up, blah, blah, blah. Shouldn't there be lag effects to cuts? We have no evidence that the stock market running up will bring back about inflation. We have the opposite experience. If you think about 2012, 2013, stocks were ripping higher, like 50% and 60% rally, and we didn't get any inflation. Yeah, because remember, that was the jobless recovery. Right. It was the asset man's recovery, the asset owner's recovery. Yeah, because remember, that was the jobless recovery. Right. It was the asset man's recovery, the asset owner's recovery. That's right.

But it was the jobless recovery. But we have the opposite right now. We have a – unemployment is at 3.7 percent. Yeah. Right? We're adding – essentially we're – I mean the reason why – But my point is the stock market wouldn't be the thing that causes it. It's the employment market.

Absolutely. Okay. My point is the stock market wouldn't be the thing that causes it. It's the employment market. Absolutely, which is that the nominal income today, like income growth for high-spending cohorts like under $150,000 is growing between 5% and 6% a year. That's up 2% to 3% relative to where we were in 2019. So just think about that. Like that's the structural gap in the economy, right? Is that we're not seeing, we're seeing income growth that continues to meaningfully outpace what's appropriate for the Fed to be. So you do, you do a bunch of CNBC now, you do a great job by the way, but you hear people say like, oh, the Fed doesn't want to see the market do this. It's like, are you kidding me? Like in 2022, we had a NASDAQ crash.

That didn't affect prices in the real economy. It didn't affect really labor in the aggregate. So why do we think the Fed's biggest concern is that the stock market has a party? I don't think they care that much about the stock market. I don't either. Okay, I don't either.

But the problem is not the stock market. The problem is the bond market for them. Okay. That's what's going to test their credibility because right now – So that gets too easy. They said three cuts, right, in 2024, which wouldn't be what my choice would be. But it is reasonable. It's kind of like the tweaky cuts of mid-'90s policy.

But then you go look at the market. I was coming up here on the subway and 170 basis points priced in to cuts in 2024. What's going to happen is the Fed is either going to lose credibility by massively easing and meeting the market, or they're going to piss off the bond market by doing nothing close to the 170 basis points priced into the cuts. So the two-year yield had a one-day change that was greater yesterday than anything outside of the March SVB saga. How many basis points did the two-year fall yesterday? 30? Where is this? Yeah, it was 34, I think. Major. Yeah, it was a lot. So look, that's the last 10 years. Outside of March, it was the largest decline. And I think a lot of this is due to positioning. Urien Timmer, this was December 5th. So nine days ago, he tweeted, what will the

Fed do next? No one knows for sure, but the higher for longer trade has been a crowded one, per the commitment of traders data below, which could explain the 72 basis point reversal the two years. So people were massively short the two year expecting higher rates. And so that trade has obviously been unwound. Do you think that it's been overdone? Well, it looks actually a lot like what happened in the SVB time, right? Where particularly levered money hedge funds in SVB were massively positioned higher for longer. There was essentially a negative inflation shock there, which created a sharp reversal and all those funds had to cut their risk pretty fast and that created – but remember, what happened there was that expectations of December 23 cuts or rates went to almost

350 basis points. In March. In March. Right? And where are we today? We are not at 350 basis points. We're a whole heck of a lot away from 350 basis points, right? And we're seeing basically the same dynamic play out. The hedge funds were positioned

higher for longer. They got caught on the wrong side of this. They're being forced to, they're all being told to cut their risk. Is that what's bringing about what we saw in the two-year yesterday? It's hedge funds unwinding a trade that they no longer believe it worked. The macro funds are, that was the position that they were holding. Higher for longer. That they were holding a position higher for longer. And the reason why they're holding a position higher for longer is not random. No, the Fed said that.

The Fed said that. Many times. Unemployment's at secular lows. Income growth's still high. Economy's strong. The economy's strong. Like if you just took the normal look at what's going on, you'd say, you know, is policy restrictive? Policy is not that restrictive like relative to conditions.

It doesn't seem particularly restrictive. So what do you think about this theory that I have baking in the oven? That mortgage rates are now down to 6.5%. So a combination of the housing market being reopened, maybe the IPO window opens up. Maybe people feel a lot richer because their portfolios are higher. And consumer spending goes berserk and they have to tighten it again.

Well, I mean, look, relative to 170 basis points priced in of using over the next year, like the Fed could do nothing and it would be a huge surprise. Isn't the offset- Even the three cuts they said that they were going to do would be a huge surprise. Isn't the offset – Even the three cuts they said that they were going to do would be a huge surprise given the way the market's priced. Isn't the offset how much debt has to be repriced this year?

Wouldn't that maybe help keep things in check? I mean you can – Or is it just not enough to matter? It's not enough to matter. Like the terming out of the debt – I mean this is the challenge is that normal – if you go back whatever cycles decades ago, the short-term financing conditions really matter. But now you look at things and everyone will show you a nice curve of, oh, there's – The wall.

The wall. But look at the wall. The wall is so far away that it doesn't matter. OK. The wall is not – it doesn't matter for the Fed. It doesn't matter for trading markets today. It doesn't matter. So that won't keep the economy – if the economy is ready to run now or if the stock market is ready to anticipate that the economy is about to run and if the consumer is ready to start running. The wall has nothing to do – that's why the problem – The wall is not going to offset that. The thing to slow down the economy is getting falling asset prices. That's the only

way that this works because the falling asset prices slow the consumer, which hurts the earnings. But so the Fed tried to do that and they couldn't. Well, they did it for like eight months. Yeah. I mean, they couldn't. I don't think that's right. They certainly couldn't. 10 months. They could have portrayed a certain stance in policy yesterday that would have been consistent with trying to push back against the significant financial conditions. The Fed tried to slow the economy and they really couldn't. Yeah. I mean it shows that they were not – the tools that they used were not particularly effective. We're still at secularly low unemployment and at potential growth, right, or better.

They were able to slow transactions in the housing market. We have the evidence for that. They did that. I don't know if that – I don't know if – what is the transmission mechanism from that into the real economy? Well, loan offices got laid off. Yeah, it sucks for realtors.

Yeah, even if you look at the real estate sector, like the employment in the real estate sector hasn't really moved all that much. Construction hasn't really moved that – usually the things that are sensitive to that slowing hasn't really moved that much, partially because we've had the multifamily boom and all that stuff that's been in the cycle. It just takes a long time. This is the whole thing is that like our expectations of how these macro cycles, they like whip around. How many times have we been through this? We were – if I came in here last year, it would have been like aren't we on the face of a depression? Yes.

And I was like – This time last year, consensus was recession. The world is coming to an end, right? Yes. And it was like what has ended up happening is like unemployment today is the same as it was 12 months ago. Like nothing. Nothing has happened. What's your biggest takeaway from how crazy the reality turned out to be relative to consensus a year ago? Is the takeaway that people just have no idea what's going to happen no matter what?

Or is the takeaway that there's something really extraordinary about the current labor force that made this time truly different from all other times the Fed has been this aggressive? Well, I think I'd say there's two things. One, the big picture story of the economy is it all just moves so much slower than like people who are sitting around on Twitter every day. Yeah. Right.

Every day it's like, you know, we're in a depression. We're in a boom. We're in a depression. We're in a boom. Right. Because they look at the Dow and it's a mood ring. It's a mood ring. And the expectations are shifting all around, right?

We've gone from hikes to cuts to hikes to cuts to hikes over the course of the last year. So what's happening is the macroeconomy – like no macroeconomist on Twitter is going to tell you this, but it's really boring, right? Nothing changes in the macroeconomy. It's a battleship. It turns slowly. I mean, but – It doesn't react to daily data. So slowly.

That's right. Years. So do you think that we're – Years and years. But on Twitter, the narrative changes every six hours. Right. And so the economy is slowing very gradually. It's almost as if spending a lot of

time on Twitter is not a really productive way to get good at investing. I'm just, is that possible? I mean, unless you're reading my stuff. Well, so you tweeted this. Can we go here, Mike? Do you mind? Go ahead. If the Fed is going to more structurally go soft on their inflation mandate, it's a time to sell long bonds, not buy them. The Fed's own dots show no intention to bring core PCE down to at or below 2% until 2026, even under strong economic conditions. Okay. In English, please. What does that mean? In English, why, why did this, the Fed's current dot plot and their lack of intention to slow their preferred measure of inflation,

core PCE, why would that affect the decision to buy or sell long bonds right now? For the audience. I already understand all this very well. For the audience. I'm sure. And for Michael. Could you explain this to –

Look, make eye contact with him. Michael? Okay. Let's talk about the dots. I'm going to grab a drink of water. You just explain it to him and then we'll catch him up. The thing that's interesting about the dots is not what their projections are because those are actually useless because they have no idea what they're going to do. That's right. Okay, aside.

What are the dots? Oh, the dots. Every quarter, the Fed, the various Fed governors predict what they think is going to happen to growth and inflation and monetary policy over the next couple of years. It's literally like a roulette table where they put their chip. That's right. And it's literally dots on a piece of paper. Yes. That's why it's called the dots.

The thing that's not – is interesting about it is not their predictions because they have no predictive power. If anything, they're probably – Completely wrong. Completely. More likely completely wrong than right. But what you can see is how they are weighing things in terms of where they put their dots. And so as an example, when you look at the dot plot this time, they showed that they think unemployment is going to stay very low. And they think inflation is going to – remember their mandate. Their target is 2 percent on PCE and actually a little bit below that because they don't want to go meaningfully above 2 percent in terms of the targeting regime.

And PCE is generally a little bit lower overall. So they show on that and that set of dots that PCE is going to be at – core PCE is at 2.5 and 2.3 and 2.2 out to 2026. Perfect glide path. Right? Perfect glide path. But their mandate is 2%. Yeah. And so these folks at the Federal Reserve are saying, we are not going to fulfill our mandate.

Our mandate is 2%. But is the 2% right this minute? Or is their mandate to eventually get there? It's not above 2% for five years yeah uh 2026 what's it's almost 2024 it could be a two percent five years from the beginning they could be a two percent next month they can take fed funds to ten percent they'll be at two percent i mean you know what i mean like but directionally they like the direction things are heading sure but the question is are they meeting their mandate? Not yet.

The answer is like, no. And it would be – if this was just a wiggle up or a wiggle down, who cares? Right. The big issue is whether these inflation expectations get entrenched. And they've been behind the curve for years now. It's not – we're not arguing over 0.3, 0.4, 0.5. We're arguing over are they comfortable with inflation being above their mandate for five years, right? And five years is not a wiggle.

It's not barely. Five years is unacceptable. Might as well not have a mandate. Right, unacceptable relative to their mandate. And so that's – I think there's a genuine question here of like is the Fed actually not pursuing the 2% mandate? And that would have a lot of meaningful implications because if you thought that their real view was- Three is okay. Three is okay.

Right. Hence the Barron's cover this weekend. Right. Then that just changes, that changes what you expect the long-term price of money to be. That's the anchoring part. That's the part where people just start getting comfortable with the idea that inflation is going to run faster and hotter just structurally. And then you start seeing that show up in the way people renegotiate contracts and the way people ask for compensation. Exactly. So that's problematic if that's taking place already and the Fed has lost control. Yeah, and I think the issue is that they have not – they have control. They could make a decision, and this is why the dots are so interesting, is they could make a decision to have inflation be more swiftly moving to their mandate.

And the way that they make that decision is by keeping interest rates higher than expected. But when you look at the dots, this is where the monetary policy part intersects with it, is that they're showing that they're going to cut interest rates. So they're going to proactively ease policy during a period when they're comfortable with the fact that they haven't met their inflation mandate and they have no problem with growth. So what's the implication for long bonds that you're making, that they're more at risk of higher than expected inflation? Well, I mean, if you look at the bond market, basically like everyone has hard-coded 2% as a long-term inflation expectation into the bond market

and into yields and things like that. What if it's three? What if the, and it's not just, is it three? But as you start to ease off the mandate, that 3% mandate, there's more volatility in it. And if there's more volatility, then you need a higher risk premium to hold those bonds. So it's not just three. It's three plus the risk premium. So 325, 350, right?

That's the effective compensation you need for inflation because inflation, if it's a three, it's going to move to four or five and then down to two, et cetera. And so that's the basic question. Like that's a, that's a totally different pricing of long-term interest rates. Whereas right now, if you look at long out the curve, it's basically like, you know, people are pricing in 2% inflation forever, but till the end of time. Right. So let me ask you this. You mentioned that the economy moves really slowly, really, really slowly. I've been saying that we landed the plane, it's over. Not to say that we can't have a recession, but we did it. The hiking cycle is behind us. We swallowed all of the rate hikes. We did it. Are you saying that we could be easing at the same time, potentially, that we do finally feel the impacts of those 5% interest rates? Like, if we get a recession in 2024, do you think it's more likely to be as

a result of the lag interest rate impacts, or is it going to be something exogenous? And of course, you can't know. I'm just asking. But what do you worry more about? Which of those two things? I mean, I'm much more worried about the plane taking back off. Okay. Right? Than I am about a recession. Where is the recession? Are you really? Like, where is the recession? Like, tell me. So the economy is at greater risk of overheating the number of a recession.

Absolutely. Do you think most people think that right now? Is that where the mentality is now shifting to worry about a re-lift off of inflation? No. I mean, I think the Fed in particular and many asset holders are enamored with a soft landing because soft landing is great for them. Yeah. Right? Who doesn't like that?

But who doesn't like it? But the problem with the soft landing is it's priced in. 170 basis points of cuts is priced in. Stocks are back through the highs. Okay, so you think the risk is all of a sudden it becomes apparent that that 175 basis points worth of cuts this year is not going to materialize because the data starts to run hot again. Yeah, and it doesn't even have to run that hot again, right? Where would we see it first?

Like auto prices all of a sudden shocking to the upside? I think the main thing – Retail sales. You got to look at the consumer, right? Yeah, I agree. Airlines. So airline tickets. Consumer buying.

Airlines have come down. Airline prices have come down a lot. So I'll give you. All right. So if I gave you one metric to follow this year to see if that, the likelihood of that was about to play out, what would be the thing you would follow? Wages? I mean, yeah. I think the wages.

The wages are the key thing. the wages are the key thing. Wages are the key thing. So if that starts surprising to the upside two months in a row, we got a problem. Yeah, because that's going to – I mean if you can only look at one thing, it's like against my constitution as a macro guy looking at a whole bunch of things. I know, but the alternative is, here's the toughest part. I don't know anything about macro. Here's the toughest part from the outside looking in about macro.

If you talk to 30 people who claim to either be macro strategists or run money on macro, each of those 30 people follows 30 indicators. They will talk about the one that occurs to them in the moment. If you're on the outside looking in and you don't know anything about this, like me, it's like, well, what really matters?

I mean, this guy's got 80 different data points. Well, which one? Like, what really matters? And I'm sure that there is a hierarchy of importance, but the media doesn't know what the hierarchy is. The media will report on whatever just came out as though it's of equal importance. But at some level, it's relatively straightforward, which is it's inflation and unemployment.

And the reason why those- But the inputs to those things- So ISM is that important? Like what's overrated? No, ISM is a terrible- ISM is bullshit. I've always told you this. I've always-

ISM is- Throw it out. What else? ISM services- What else goes in the garbage? Zero correlated to actual activity. Throw five more things out. What else? ISM services? What else goes in the garbage? Zero correlated to actual activity. Throw five more things out.

We'll never talk about it on the show again. The S&P 500. What else? Garbage. Moving averages, no good? I don't know.

By the way, speaking of the S&P, so we had an incredible run in the stock market. Dan Greenhouse tweeted that the 32-day change was whatever.

So I ran it as of the end of the day yesterday. So why 32 days? That's when the October bottom was. So over the last 32 days, the S&P is up 14%, which is over the last decade, about as good a five-week period as we've ever had. Yeah. I guess out of COVID. We saw that at the bottom of COVID. But considering that we're not coming out of the lows really, I mean, we were in a 10% correction in October. We had a hell of a run. Holy shit. Yeah. I mean, I think the thing that's interesting about it is it's all about the bonds actually, right?

So I think the stock investors are staring at stock market. They think, oh, everyone thinks these companies are great. think, well, everyone thinks these companies are great. But what's actually happening is bonds, long-term bonds, risk-matched bonds have gone up more than stocks over that time frame. Depends which stocks. So it's all, I mean, whatever, the S&P 500. But to your point about it's all about- It's all about the bonds.

It's all about bonds. And it's all about, and the reason why bonds are moving is because of the easing. That's the reason why stocks are moving. If you actually look at the Qs, look at the S&P 500. Sean was giving me notes on this before. Over the last month, they're up like 6%, 7%. It's not that impressive. What's really impressive are the worst sectors of the year.

Small cap value just- Russell's killing it. Up 20% or something. Utilities, home builders. Can we talk regional banks? Regional banks. S&P we talk regional banks? Regional banks. S&P REITs, regional banks, utilities. This is where the sex is happening.

SL Green yesterday sexed 12% higher on the day. Wow. Yeah. 12% Boston properties. Like everything that got destroyed because of higher interest rates flew yesterday. But that makes your point where you say it's all about the bonds.

It's all about the bonds. None of that would be going on if not for the absolute plunge in rates. Right. And both directly because of the discounting effect on the stocks, but also because it reflects just a meaningfully easier monetary policy. Well, also because what was the problem for small cap value? It's a lot of financials and industrials. And frankly, they need to roll debt faster than the S&P does. And so the implication of falling yields and a

Fed willing to make the turn is you can now stop pricing in roll risk for these businesses. That's right. 90% of the S&P 500 debt is long-term fixed with the Russell 2000 because it's 50%. Right. So I'm much more sensitive to higher rates. Right, and then those small banks and small financials and stuff like that, they're still holding some long-term debt. They're still holding the bonds. Obviously, bonds rallying is a direct benefit. I think the interesting thing there is that KRE is still well below its…

I think so. I don't like that trade from a secular perspective. I get the cyclical part. They were pricing these things as though they're zeros. They're not zeros if rates are going to moderate. Five on some of those stocks, right? So you have that benefit, that snapback. Structurally, it's not going to be fun to be a regional bank going forward. If your primary advantage or edge in that business is your geography, nobody cares anymore. So I'm

not jumping in on that trade just because if it goes the wrong way, I don't want to be stuck with those stocks. Yeah, but some of those are, as I said, P's of five when you're looking at Bank of America, which is a garbage business, zero growth, wealth management, zero growth loans, right? Yeah. It's a 10 P. Yeah. Right? So what do you want?

You want the – and they've got a – Yeah, that's a good point. Bank of America has got a way worse CRE book than – the problem with the regional banks is you've got to roll up your sleeves. You've got to get into the nitty-gritty of the loan books and the NIMS. It's not like buying the XLF. Yeah, it's not like buying the XLF. I won't derail us to a nitty-gritty conversation about the regional banks. But the rally also broadened out.

Yeah, the Dow hit a new all-time high. RSP. Sorry, let me interrupt. This show brought to you by Bank of America. I forgot to mention to you. Not a fan. If we look just over there, right? We could throw our stones.

If you look at like a ratio of the S&P equal weight to the S&P, like it ripped higher. The rally is broadening out. Yeah, and I think – look, when there's a massive easing, which is what we've had, it's a market-based easing, but a massive easing, it should help those, you know, the water's going back out, right? The people who got caught are feeling a little bit better now, right? They're floating a little bit better these days.

Speaking of Bank of America, like one of the big reasons to be bearish as recently as two months ago was their mortgage book. And higher for longer would have not been fun. If it's not going to be higher for longer, it makes it a little bit more palatable to be invested in the equity of Bank of America. And there's a lot of that, I guess, in many other sectors, not just in the banks. Yeah, in one form or another, they're exposed to either the financing or the bonds themselves. Boy, I hope it doesn't reverse. I hope we're not looking at spiking bond yields next week

or the week after. I want to just skip a few topics and say this bank thing. Bob, you tweeted the great deposit flight risk of 2023 didn't materialize despite high rates. This is a legitimate concern for some people, at least earlier in the year. Deposits have been pretty stable up for months now.

And before I hear, quote, but large-time deposits are surging, recognize that the $400 billion increase since SVB is just 2% of the deposit base. So what are the charts that we're looking at and what did not materialize? Well, this is a chart of the deposits. The blue one is the small bank deposits and the red line is large bank deposits. This is wild. Wait, why are the large bank deposits falling? Is that money markets? Yeah, I mean, that's basically people

moving money. That's cash sorting. Exactly. And the issue is that the large banks, the big banks, they're still offering you zero. So your motivation to move, right? Is higher.

Is higher actually at the large banks than at the small banks. Most people would have said at least six months goes the opposite. Because they would have said the credit risk existed in the small banks. But the small banks have gotten through. And their NIMS have been hit a little bit. Their net interest margins. Why aren't people leaving regional banks? Because there is no risk anymore.

Because there's no risk. No, but how come money is coming out of large banks and going to money markets? Because they're paying one basis point interest. And regional banks are paying more. And regional banks are two things. One, they're paying a bit more on average, right? But, you know, like the NIM of Comerica is actually higher than the NIM of Bank of America. So it's not a radically different story. And the other thing is,

we sort of talk about the benefit of transaction deposits in small and regional banks, because most of the banking that's happening there are people who are doing actual business, right? And if you're running a business, you're not carefully managing exactly how much money market flow you have. It's not an investment asset. It's a business asset. If you're, I don't know, building houses in Topeka, right? The money comes in, the money comes out. You're not thinking about it. You're not thinking about the credit risk of your bank. And so it's not that surprising that the capital's all that, it's that sticky. One of the things that I'm going to be paying close attention to in 2024 are money market funds, $6 trillion now. A lot of that came in over the last

couple of years. It was at four and a half before the recent rate hike, and now it's at six. So just an incredible run. Balchunis had a set that we mentioned last week, something like 20 of the top 23 gathering mutual funds were money market. It's just something crazy. In your opinion, how quickly does the money leave? Because my hypothesis here is that it was relatively slow to go in. I think it's going to be relatively slow to come out. Do you disagree with that? Yeah, I think because people think of cash,

people are often, they're not, they might shift between one cash-like asset and another cash-like asset. This is not going into the stock market. But the idea that they're going to, someone's looking at that and then boom, flooding cash into the stock market. But the idea that someone's looking at that and then, boom, flooding cash into the stock market, it's just not how – people think about cash and assets pretty differently. But if the money came out of stocks in the first place, that's different. But it didn't.

But it didn't. It came from checking accounts. Right. It's mostly people who had their – Does it go back into checking accounts? Yes. Oh, no. No. It's going to stay there. So it'll stay. It's mostly people who had their, you know, their. Does it go back into checking accounts? Yes. Oh, no. No.

It's going to stay there. So it'll stay. It'll stay. So there'll be disappointment, though, when five turns into three by the end of the year, let's say. 175 base points in Fed funds rate cuts. Let's say 5% money market turns into 3.25. It'll stay.

There's going to be some disappointment, but I guess that's not enough disappointment. I mean, here's the question. It's like take your transactional checking account. Have you carefully figured out how to shift the money into your money market fund and then out? And then how sensitive are you to the rates? And this is like a classic behavior. I'm the wrong person to ask that question. I don't even know where my bank is.

I have nothing to do with that. But it's a classic sort of behavioral finance thing. It's like there's a whole bunch of people running around saying, you know, I'm going to, on my Apple app, shift my deposits or whatever. Like I think I can get 5% on my Apple app, but then I have to set it up and then link my bank account. People don't move money. And I just, you know, like what a pain. Yeah, it's annoying. So here's something that I think we could see on a few TikTok accounts next year when the Fed starts to cut.

People will be mad because their easy money is gone when interest – when their high-yield savings goes from five down to three and a quarter. Oh, the Fed is stealing my income. The Fed is stealing my money. That's so funny. So the Fed is going to be easing. I didn't even think about that. And people will think that the free money is gone when it's actually returning. Oh, I can't wait for those takes. That's so funny. So the Fed is going to be easing. I didn't even think about that. And people will think that the free money is gone. When it's actually returning.

I can't wait for those takes. That's coming. A kid on TikTok with like $400 in his account. It's a scam. Where the hell is my money? It's a scam. The Fed is taking it. Where's my income?

Where's my side hustle income? Hey, can I ask you about the stupidest piece of research I've ever seen in my life? You're better off going all in on stocks than bonds. New research finds. That's remarkable. Are they saying stocks produce a higher return than bonds? Have you heard that anywhere before? It took 125 pages actually to say that.

This is serious? Did you read it, Bob? I tried to read all of it. Who published this research? Hamburger University? It was brutal. What is the gist of this? That if you're a long-term investor, you should buy stocks instead of bonds?

Is that seriously what they're saying? That's what they're saying. But is one more volatile than the other? That is not something that they would consider. I almost can't. Okay. I did that research too. That's funny.

I reached the same conclusion. The biggest thing that they say is the key thing to hold stocks for the long term is that when they go down 60 percent. Yeah, don't panic. Just don't do anything. It's not that complicated, folks. When your stocks are down 60%, everyone just act rationally. Maybe even buy more. That's another thing that you could do. And it'll be okay.

And if you're on the verge of retirement, it's going to be okay. Just don't think about the fact that your retirement savings has evaporated. Did you and Ben talk about that? Yeah, it's a joke. What was Ben's take? It's nonsense. It's not even worth discussing. We should put that research out. Can we talk

about ETFs? How's business? Tell us about unlimited funds. Good, good. For the audience that's not familiar, tell us what you guys do. Yeah, I mean, my co-founder Bruce and I have been in the hedge fund business for a long time. And when we left, we thought

I bet we could build technology that can look over the shoulder of those managers and try and figure out what they're doing in real time. And then we could package that into an ETF, make it available for everyone. So that's what we've been doing. So the technology, you have ring cameras in every hedge fund's building.

That's right, yeah. What is the technology? I have a keypad logger on every computer. You're trying to approximate what the return would be for different hedge fund strategies. Exactly. And then give it to people in a way that they're not paying 2 and 20. They're not locked up. Right, because we're using technology.

We can charge a lot less. What's the easiest hedge fund strategy to replicate? Not easy in the sense that you're guaranteed to make money. I don't want you to answer it that way. Easy in the sense that, hey, it turns out this wasn't that hard of a strategy to reverse engineer. Equity long short. Okay, why? I mean, the reality is if you're trading equities, there's a thousand stock pickers out there who

will tell you all the nuances of the stock versus that stock. There's only so many types of risks you'd take. You'd take countries, geographies, factors, sectors, size. You know, it's like 20 things. And you can boil it down that way. It's pretty straightforward. And you can, you know, put together something that basically does what they're doing at an index level.

But so you can put together something that does what they're doing on the whole. At the index level, yeah. Right. Because then within that category, I don't know how many hedge funds there are doing equity long short, a thousand? Yeah, a thousand. Okay. So 50 in any given year are really good at it. Yep. I'm making that up, but like approximately. Yep. So you can't replicate that. You can replicate what the strategy at an index level is returning and how it's behaving.

That's right. That's right. But the thing to keep in mind is that there's no manager outperformance persistence in hedge funds. Well, we know that, but that's not popular. People don't want to hear that. They don't want to hear that. But you can't engineer a lone pine and give people, here, now you own a lone pine clone.

But sometimes it's good. Sometimes it's bad. Well, I agree. Right? Right. And if there's no outperformance persistence, then what you want is – that means you can't pick, right? Yes. Well, there's no benefit in picking. Because there's no benefit in picking.

Prospectively. No prospective benefit in picking. And so you'd much rather get the benefit of diversification in the views than trying to pick. Well, if you're a big family office, you probably allocate to seven or eight different hedge funds anyway. So you're not picking one in that case. You might be concentrating. The reason why we started this, actually,

I worked with Future Fund for Australia for a while, which is a big client at Bridgewater that's publicly known. And what they do in their hedge fund portfolio is they invest in dozens of different funds. So they're getting the category returns anyway. They're essentially getting the category returns. But the thing that they do that's so neat is they go to each one of those funds and they say, hey, I got billions of dollars. Like forget this 2 and 20 stuff.

Like we're bringing the fees way down. So what do they do? They basically build their own low-cost diversified index fund. By virtue of their size to their advantage. That's exactly right. So why not make it liquid? So Corey Hofstein tweeted, any hedge fund beta that can be turned into an ETF

will be turned into an ETF, at which point institutions have to ask, why am I paying hedge fund fees for this? Why do I want something that's less liquid? I'm betting this trend accelerates. I was about to ask you- Well, then what do you talk about at parties? Well, yeah, true.

I was about to- Your venture investments. I was about to ask you- Well, then what do you talk about at parties? Well, yeah, true. I was about to- Your venture investments. I was about to ask you, who wants hedge fund beta? Because is hedge fund beta something that is actually a good thing? But I guess you're saying, but a lot of these people are already getting the beta because they're diversified across all the 10 funds anyway. Why not cut the cost by 80%? Exactly, exactly.

And beta, I think, is not quite right. Like alpha, like hedge funds generate alpha, right? Returns before the fees. But is hedge fund beta actually alpha? Yeah, I call it diversified alpha, right? That's what's happening, right? Is index, you know, it's just a diversified set of alpha strategies. All sorts of different kinds, all sorts of different managers.

What's the hardest hedge fund strategy to replicate? Probably the global macro folks. Okay, why? Well, because they're typically a little- They tweet a lot. What's that? I have noticed. No, because there's a lot of guessing with hedge fund macro.

There's a lot of different- What's the category of hedge fund manager that is most prone to tweet, right? Global macro? Global macro. I don't- I mean, I guess prone to tweet, right? Global macro? Global macro. I don't – I mean I guess as a global macro guy who's prone to tweet. Why is it so hard? Why is it so hard to replicate that particular type of investing? Well, there's a lot of different assets, right?

Because a big global macro fund might invest in 70 different assets, right? And so it's just a more complicated portfolio than you'd see an equity long short fund, which may look like— The universe is bigger. Right. The universe is about four or five times bigger. When I said guessing, what I really meant was—obviously, I was joking. But I feel like global macro is more—there's a lot more art than science. Not to say there aren't rules-based strategies, but there's so many inputs. There's a lot more art than science, not to say there aren't rules-based strategies, but there's so many inputs.

How much of that is quantitative that then you have the qualitative filter where the manager will digest all the data and then say, okay, here's my interpretation of the data? Yeah, I mean I think a lot – I think there's naturally a range of different managers, but qualitative understanding is certainly a big part of what's going on with a lot of different managers. But qualitative understanding is certainly a big part of what's going on with a lot of macro managers. Now, what we're trying to do is infer their positions rather than their decision-making rules, which should – How do you do that? Which allows us to pick up if they're using discretionary views. We look at the returns. You look at the returns at any point in time, and then you know what they trade. You look at the returns. And I'm sure you guys look at this. Like whenever you see a manager, you're like, well, that guy got 5% this month, and stocks did this, and this sector did this.

You sort of say with your gut, like, ah, I think they're probably underweight tech, which is basically all equity long short managers this year. And so all we're doing is we're just doing that process just in a more computationally rigorous way to back out what they're doing. And there's some reasons why, like as you get to a diversified index, the noise goes down relative to essentially the signal, right? That in terms of the exposures and – you can get better understanding by looking at sort of the path of returns. Because these managers, they shift their positions, but it's not instantaneous. So the portfolios that generated the returns last month or three months ago are related to the portfolios that they hold today.

So there's no more index funds coming to market. It's enough already, right? We don't need any more. We get it. Baochun has tweeted the percentage of new ETF launches that are actively managed has reached a record 80%, which is wild. 80% of the launches of ETFs were active

ETFs? He said, and he also said active. I'm not surprised by that. No, active ETFs are also taking a quarter of the flows. I guess are factors considered active? I guess probably for this, probably. Yeah, they are. But fine, but my point is, we don't need any more index funds. We have a million.

We got all the pieces. That's the beautiful thing, right? The pieces are now free. I wouldn't want to be the guy who's creating a business around selling the pieces, right? Because that's a terrible business. That's literally commodities. That's a business that's going to fall to zero, essentially. Right.

Your IP is worth nothing. It's just whose index you can license and what's going to fall to zero essentially. Right. Your IP is worth nothing. It's just whose index you can license and what's the lowest amount. And even these factors, right? These factors are basically free at this point or so close to free that it's not worth it. And so the question is – I think a lot of active managers are looking at the ETF wrapper and they're saying with the regulatory changes in 2021, giving a lot more flexibility to be able to run long, short, et cetera, it's actually a pretty good wrapper to run a product. Yeah, they're getting permission to not reveal their holdings right away.

They're getting like a lot of reasons to, if not build a new one, at least replicate an existing fund in this wrapper. That's right. And that directionally probably continues. I think so. And I mean, the thing that often probably doesn't get talked about is operationally with all these white label providers, it's actually operationally pretty efficient to

run an ETF. So whereas, you know, if you go to a big LP fund, like 50, 70% of the people are like people who are doing nothing related to running the money, right? So you could be paying 100 basis points of your fund structure for people who are back office and operations. You launch an ETF, use one of these white label platforms. You can do that for 15 basis points. So this is the last bastion of the mutual fund is retirement. And they just haven't perfected fractional ETF purchasing in 401ks and getting everyone in that ecosystem comfortable with the mechanics of that. 100% it's going to happen. I can't believe it's taken this long. When that

does happen and a very mainstream 401k provider just says, okay, this is now part of the mainstream platform. ETF 401k is how we're doing it going forward. That's going to be a dominoes falling moment, I think. I think it's going to be tough for a lot of those businesses that are running the 401ks because they're charging. Yeah, they're charging a lot of money for a lot of shit that nobody needs them to do anymore. Well, that's what's held it up. That's what's entrenching the mutual fund structure. I was looking at target date funds. And if you take Vanguard out, the AUM weighted target date fund cost is like 40 basis points, 50 basis. Way too high. the AUM weighted target day fund cost is like 40 basis points, 50 basis points. Way too high. Yeah.

Are you kidding me? In this day and age, way too high. I mean way too high. That's just theft. Yeah. Right? For a product that is – it's an index product. Yeah, and essentially the robos are unbundled versions of a lifecycle fund.

Right. That's exactly right. You're putting in the date that you expect to retire. And they're saying here's the – They're giving you the ETF components of what those lifecycle funds are buying. So I think there was a stat about mutual fund outflows from the Morningstar report recently.

I think it was 64 straight months or something. So it's a melting ice cube. If that ever happens, it will be a flame, a torch to the ice cube. Yeah, we just don't know when, if it's gonna, I think it's a when. I don't think it's an if. But I don't know when. You got a lot of ent it's a when. I don't think it's an if.

But I don't know when. You got a lot of entrenched interest. I mean you think – like take it from the David in the ETF and the Active40 product world. Like the Goliaths are out there. They're big and they're angry about this and they are – they will do whatever it takes. Well, one thing is though that they are increasingly willing now to dip a toe in both. And like we saw Dimensional was one of the last holdouts to do ETFs. Now it's their hottest business. They're going to keep going.

So at a certain point, there won't be any incumbents left who haven't embraced this for at least their top managers. So like every mutual fund company has its quote unquote flagship. Right. Or it's like best managers. At some point, the manager is going to say to them, dude, I'm crushing it. Why am I in outflow? Why am I in redemption?

Like, give me a better structure. All I want to do is manage money. I don't want to watch money leave. Like they're going to have to. It just, it takes so long long like a lot of other things. Yeah, it takes so long. But I mean it is true that what huge market size this is, 10 trillion in actively managed mutual funds, right? Right.

And in actively managed ETFs, it's like 500 billion. And that includes stuff that I would say is index adjacent. Right. Mutual funds are index adjacent too. But so you're part of this new wave of etfs like you came along the last couple of years and like investors advisors everybody is interested in actively managed etfs it took 25 years yeah right like honestly i think i mean say what you want kathy would kick the door down You might not like her investing strategy.

You might not love her marketing, but she is the reason that active ETFs have exploded in popularity in the post-pandemic period. And it's staying that way. She's been absolutely a torchbearer for the active ETF community. active ETF community. I also think from a product creator standpoint, the regulatory changes created a lot more flexibility to do a lot more interesting stuff without having to get approval from the SEC and stuff like that. And you basically brought down – I talked to people who started startup ETF businesses 10 years ago, and it was millions of dollars to start and get the exemption and the legal papers and setting up the trusts and all that stuff. ETF businesses 10 years ago, and it was, you know, millions of dollars to start, right? And get the exemption and the legal papers and setting up the trusts and all that stuff.

And now today, if you have an idea, I mean, you could literally in like, you know, 75 days. I think what's new is done for a few hundred thousand bucks. I was going to say there are platform providers who have figured out it's a pretty good business to help somebody that has a great idea get their product trading like uh architect alpha architect west gray like those guys helped a few friends of ours and they realized hey this is that we have a lot of know-how here we can help these people that have great ideas it's actually a good business so that's that's what's new those guys are are

i mean they're they're great businesses and they're helping a lot of folks. Totally agree. Can I play one more thing for everybody? Is it going to be as boring as that Fed thing? No. I have much more discerning taste than Michael. Can we listen to it on 2X speed? By the way, you have tenured professors.

Let me say something. There are about, I guess, 20 million Jews in the world. Think of all the accomplishments of the Jews in science, in the arts. Go right down the list. It's incredible when you think of only 20 million and all they've done and all they've truly gifted people. Thank you. That may sound like I'm biased, but I am biased because, thank God, most of my doctors are Jewish.

And I can tell you right now, they take care of me like a baby. And I'm 88 and I'm still going. So at least the point I'm making is they've done so much for civilization. That should be the best reason of all. He doesn't even know the point he's making. I think he wanted to shout out his Jew doctors. Was that Joe Biden? That's Ken Langone.

That's my guy right now. I was feeling that. He was on Squawk. I guess he probably does it like twice a year or something. He had some stuff to say. But Ken Langone, big fan of the Jews. Fan of the Jews. Speaking of the Jews, February 4th.

Don't speak of the Jews. February 4th, new Curb Your Enthusiasm. Is it? Allegedly the last one, but I'll believe that when I see it. I can't wait. Very cool. I wanted to just throw this out about Netflix for the first time ever revealed what people are actually

watching. Did you listen to Sarandos? Not yet, but this is a... There is a lot of information in here. It's meaty. What were the biggest takeaways? Like, we've never seen data from Netflix like this. Not like this. What were your biggest takeaways? So, Ben Thompson wrote about this, and this is not at all surprising,

but the power law structure that exists in Netflix, that exists everywhere else in the world. If you just plot this out, hours viewed, it is— It looks— There's nothing, and then there's everything in the world. If you just plot this out, ours view, it is, it looks there's nothing and then there's everything at the top. So that was takeaway number one. But how did the night agent

get to be the top? Well, there's a lot of garbage. It was just okay. It was like something that you have on in the background when you're answering a few emails at night. But that's what it is. That's what it is. Nobody watches it. It's in the background. Certain things come along at a time when they're not competing with a lot of other things, and it benefits them. But I also think Netflix has the power to make something a top ten hit.

Yeah, well, that was my guess. My guess is it just came on. Well, if they spend enough money on something where they decide we're going to get behind – I watched them do this with like, they decided that one week bird box was going to be the thing. And they manifested that by virtue of where they placed it on everyone's screen. It's objectively terrible.

It's Sandra Bullock with a scarf around her eyes. And it was a cultural phenomenon and it was awful. It was awful. It was awful. But they have that power, maybe not forever,

but right now, that's different. There's no cable system that has ever been able to do that for programming. That's right. So that's what was really fascinating to me.

I don't know. Anything else on this? I think 30% of the list was outside of, was non-English. It's just a lot of garbage. I mean, I'm a happy Netflix shareholder,

but there is just a lot of junk on this list. I can't believe twice as many people watching Emily in Paris as Squid Games. You're surprised? I'm a happy Netflix shareholder, but there is just a lot of junk on this list. I can't believe twice as many people watching Emily in Paris as Squid Games. You're surprised? I'm not. My wife just watched. I mean, you've got to be kidding me.

It's more accessible, though, for most people. You've got to be kidding me. My wife just watched Squid Game. It looks like The Challenge. The Challenge, yeah. That's what it looks like. I don't watch The Challenge, but. What is it?

It's like a reality show? Yeah, I mean, it's like a. It's a game show? No, it's take the Squid Games. You know, they don't murder the people, but they. Oh, so then that's a. It's a little lower stakes but you know you get you get 80 of the five my favorite recurring show on netflix my wife watches it mostly but i pop in love is blind great it's great what is that about love is blind it's a great it's a great premise

you have it's basically blind dating it's oh it's a game show. It's two people who are in a room together, and they're separated by a wall, so they can't see each other. And they date, and they propose to each other all in like a week period. It's reminiscent of Dating in the Dark, which I'm sure you saw back in the day. That's Mad People for My Time,

but it's a wonderful train wreck. I love it. I love it. All right. Did you have fun on the show today? It was awesome. Did we make all of your podcasting dreams come true for Christmas? Of course.

Are you doing a lot of podcasts these days? Yeah. You're out and about right now. Out and about, you know. I love seeing you. Everywhere I see you, I turn the volume up. I always learn from you. What's your favorite podcast in finance right now?

Compound and Friends. Look how smart this guy is. So quick, too. All right. We're going to do favorites, and then we're going to let everybody get out of here. You've been on the show before. I see you brought us something. What's your favorite of the week?

What should people know about? Oh, Hidden Forces. Okay. Which is not a finance podcast. Dimitri Kofinas. Dimitri Kofinas. Yeah, I know. Very interesting.

I listen to, you know, I do enough of this on my day-to-day, like sort of podcasts that explore a lot of different stuff. This one was about UFOs. I'm like a space – I'm space interested. You're curious. I'm space curious. Are you UFO curious or just space curious? I'm space and UFO curious. curious and this was like this was like a smart thoughtful person basically asking you know the questions that would come to your mind to someone who spent a long time uh actually an academic who

came out of religious studies and actually came to it based upon seeing similar uh recounting of experiences let's say in the religious history, you know, in religious documents back thousands of years. Duncan was once abducted by aliens. And then, you know, now is studying it today. It was very interesting. Did you ever read Where Is Everyone? No. You would like this book. You know, you're familiar with Fermi's Paradox? Yeah. Okay. So the book gives maybe 24 different chapters, 24 different answers to Fermi's paradox, which is, I guess, what's the easiest way to frame it? If the universe is this big, like where is everyone? Why haven't we – and these theories range from, oh, they're here.

We just don't know. Right. To actually we're an intergalactic zoo and we're being studied and or petted. and were being studied and or petted. And I thought it was a really interesting way to answer that question with like 20 different answers of like what could be plausible answers. Have you guys seen A Fire in the Sky?

Movie from the 90s? Yeah. That scared the shit out of me as a child. Why? Because this guy got abducted. It was real. There was probing. There was probing. There was probing.

Did you read the Jamie Dimon article at New York Magazine? I did. You read it? Do you know what we're referring to? No. Okay. There's a guy. His name is Gary Cernovitz.

And he's not a writer. What does he work? He's not a writer. He's like a hedge fund guy. But he wrote this. And he's a client of J.P. Morgan's. So like with a little trepidation, he's like, you know, should I even be writing this? You know, like, I do business with them.

But it's not mean-spirited at all. It's Lime Rock Partners is the name of his firm. And I was chatting – not to brag. I was chatting with him a little bit on LinkedIn. But the gist of the article is this is now a $4 trillion bank. It is pulled away from Bank of America and anyone else that was considered its peer. It's like a one of a kind operation at this point. What makes it tick? Like what is, what is Jamie Dimon really doing? Fraud. Yeah. I thought it was a really well done article and

it was published in an interesting place, New York Magazine. You wouldn't expect to read such a deep dive. It's like thousands of words. You would appreciate this as well. So the article is called Jamie Dimon's $4 trillion machine by Gary Cernovitz. And that's at New York Mag. Michael, you got something for us? Last night I was watching headliners. Probed.

Stop it. Headliners. Probed. Stop it. Headliners only. Kevin Hart and Chris Rock go on tour. And it's the history of their friendship and coming up through the ranks. And it's,

if you're a fan of comedy. Oh, I didn't even know that existed. Gotta watch. I think it just came out. Where is it? Where do you think? Netflix?

Netflix. They're the best. Yeah. All right. Right under the night agent. We'll check that out. All right. Hey, everybody.

If you enjoyed. Hey, everybody. If you enjoyed learning from Bob. Duncan's got something. Oh, you have some for us? Yeah, yeah. I was about to wrap up. Spotify wrapped. I just wanted to share a couple of things. So we've had people sharing that we're in their top podcast. So please keep doing that. If you're listening on Spotify, share that with us.

We love seeing it. Trying to find the person who's listening the most. So if you think you might be that person, share that. We got David Walsh with us in number one spot. We've got Bernard with us in their top spot. We've got Adam in the top spot. There we go, Bernard. We love you guys. Interestingly, Paolo from Poland.

I can't read it, but it says 4,921 minutes of listening. They're in the top 2%. Thank you. Pretty cool. That's awesome. Love that. Very top 2%. Thank you. Pretty cool. That's awesome. Love that. Thank you guys for listening to us on Spotify. We appreciate it.

Hey, everybody. If you enjoyed learning from Bob as we did, here's how you can follow him. Your Twitter account is at Bob E Unlimited. The E for Elliot. Okay. At Bob E Unlimited. And you're pretty active. You put up E for Elliot. Okay. At Bob E, unlimited. And you're pretty active.

You put up charts and stuff. Okay. A few times a day. All right. And on LinkedIn, what are you doing on LinkedIn? Like roughly the same thing? More industry commentary. I find myself like doing almost the same thing I used to do on Twitter on LinkedIn.

Because Twitter is more macro stuff. Okay. LinkedIn is more industry commentary. Oh, that's interesting that you break it up that way. Yeah, I break it up that way. People are more interested when they go to LinkedIn about the industry. Well, because they're there as their professional self,

not as like a trader per se. That's right. So you got to keep people interested. And I also have a YouTube. Tell us about the YouTube channel. I mean, you guys are masters of this stuff. We just tried to throw some videos up to see whether it's... What's the... How do

people find the YouTube channel? I don't know. Bob Elliot YouTube. There's some SEO on it that I haven't figured out. I'll get some tips from you. We'll find it. We'll link to it. We'll excerpt it. We'll play audio from it. We'll do all the things. All right. Bob Elliot, ladies and gentlemen, thank you so much for coming. Really appreciate it. We'll link to it. We'll excerpt it. We'll play audio from it. We'll do all the things. All right. Bob Elliott, ladies and gentlemen,

thank you so much for coming. Really appreciate it. Thank you. Great time talking to you. Awesome, man. So this is the intermission. We're going to have you stick around. We're going to do another hour when we get back. Awesome. Sounds good? Keep doing it. All right. Compounding Friends is out. Ratings,

reviews, do the things. We'll see you next week. ratings, reviews, do the things we'll see you next week