The Compound and Friends - Private Markets Look Like The Dumb Money Now: What Are Your Thoughts? (with Josh and Michael)

Episode Date: October 23, 2019

Welcome to the latest edition of What Are Your Thoughts - Michael Batnick and Downtown Josh Brown break down the biggest topics of the moment. On this episode:  * Private markets used to be thought of as "the smart money" while public markets were for retail shleps - but this time around, it's the public investors who are calling bullsh*t on the VCs, private equity firms and insiders.  * It's not just value investing that's out of favor - value commentary from the likes of Howard Marks seems to be on the wane as well.  * Is the breakout for international stocks finally going to happen?  * The big brokers' announcements about commission-free trading seems to left out the mutual fund wrapper in the cold. Is this just another nail in the coffin?  * Has inflation finally bottomed? A big anecdotal sign has come our way... 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Downtown Josh Brown. I'm here with Michael Batnick as always. We're here to play our favorite game. What are your thoughts? I'm going to ask Michael about some stuff and he doesn't know what I'm coming at him with. Michael's got questions for me. I have no idea what he's going to ask. We have a lot of fun playing this game. We'd love for you to play in the comments below. Let's get into it. All right, Michael, the first thing I wanted to ask you, I'm old enough to remember when private markets were the smart money and public markets were, let's just say, pedestrian. Private markets are pretty dumb right now. And the WeWork thing is just one big glaring example. market investors all of a sudden are so much more competent and skeptical and reasonable than,

quote unquote, the insiders, the smart money, whether it's Silicon Valley or just any private equity companies looking to get an exit? Well, let me ask you a question. Do you think that this WeWork thing is a canary in the coal mine or is this isolated to itself? And if it isn't isolated, will it be isolated to just private markets or will it spill over to the public markets? What I've said is that I think Uber was the canary in the coal mine and WeWork is basically like a fucking meteor that slammed into the NASDAQ. And immediately in the public markets, not only did recent IPOs start dropping, but almost the entire software as a service cloud computing space, these stocks took 15 and 20 percent haircuts in the wake of it. I think that SoftBank was the main culprit here, because if you are a VC and you have money from investors, you have to allocate money. from investors, you have to allocate money. And SoftBank came in and changed the game and put just one up themselves with every other round that they did. So I don't know if this was like

dumb money. It was more just like- Okay. So finish your thought though. That's a $100 billion fund. If they're not the smart money, the Vision Fund is $100 billion. My point is, what were people in the space supposed to do? Just take their ball and go home? They had to allocate money. So I see this as just like a human behavior type of thing. Okay. What do you then consider the underwriters at Goldman, JP Morgan, et cetera, in these

specific cases, not overall, where they've got pitch decks purporting to see a valuation for WeWork, for example, as high as 80 something billion. They're doing their job. That's their job. Yes. But they've got clients that are on the receiving end of this incredibly inflated stock. So they're doing their job for one half and not the other.

I mean. I think the illusion that bankers and or venture capitalists are always smarter than regular investors is wearing off. I don't think it's as obvious. Perhaps. I don't know that it was that egregious where they were like, we're going to take this to the public at $80 billion. No, they believed. I agree.

They believed also. Hence my point. Right. They're not that right. It is sort of funny that the public markets, the dumb money called bullshit on all this nonsense. I mean, I love it. It's one of my favorite things to have happened during the course of this decade.

All right. Is the world breaking out? We have the DAX not too far from all-time highs. The CAC 40 in France at multi-year highs, highest since 2008. You have the Euro stocks 50 looking at a potential big breakout. Yep. Brazilian stocks, all-year highs, high since 2008, you have the Euro stocks 50, looking at a potential big breakout. Yep. Brazilian stocks, all-time highs.

Yep. My question is this. Things don't seem that great around the world. Just forget about headlines, but just economically, things aren't exactly booming. So I guess the question would be like, well, what's the catalyst to get these things moving again? So the question for you is, do things necessarily need a catalyst to move? The guy, what's the guy, Grant, that writes the Interest Rate Observer?

Jim Grant. I saw him at a conference once and he said something that I thought sounded really smart. And I doubt it's a universal truth, but he was actually pitching Russian stocks. universal truth. But he was actually pitching Russian stocks. And this may have been 2013 or 14 when oil prices or 14 or 15 when oil prices had already been killed. And somebody said, what's the catalyst? And he said, I don't need one. Good things tend to happen to cheap assets, just maybe not on command. So this is the opposite, though. I'm saying like, do things need a catalyst to break out to all time highs? But it's not the opposite, because a lot of the markets that you're citing,

forget about the Russell 2000, which is expensive. The S and P 500, which is expensive. A lot of the other markets you're citing are selling a 10, 11, 12 times earnings. So do they, do they need a catalyst or they, do they just need people to say, I think the risks are discounted and I don't have anything else to invest in. Well, to that point, the French stocks peaked in September 2000. Right. Yeah. So 20 years.

So is 20 years enough to discount all of the negatives about the French economy versus the S&P? It's nice that the global Dow looks like it's on the verge of a breakout. I would just say we've seen two versions of this in the last two years and they failed right around these levels. So like I will not be the one that's like with a fistful of confetti, but a lot of technicians that I follow just in the last couple of days, we saw JC Peretz, we saw Ari Wald put out notes about global stocks and actually no one else in the fundamental or the macroeconomic world really seems to have anything positive to say. To me, the positive comments

from the people that look at fundamentals come after a 20% rally. Always. So I feel like you got a side with the technicians and if they break through, I think they get the benefit of the doubt just because of how pent up some of these places in the world are. I want to ask you about, you said something

interesting yesterday that Howard Marks put out a memo and nobody said a word about it. And just like a quick bit of background, Howard Marks is in my top 10. I think like investment writers that I've learned things from and I've read almost all this stuff. But yeah, you were right. I've noticed like a conspicuous absence of people even referencing his new memo when they used to like spread like wildfire. So I wanted to ask you, do you think the popularity of the Marx memo is correlated with the popularity of value investing? is correlated with the popularity of value investing? Yes.

I think that he has been beating the same drum for years now. What? That it's time to be cautious because of valuations? Move forward with caution. Is that what he's been saying? Like eight years. So I think maybe there's just fatigue. And I don't think that he's any less insightful. Like if you read this eight years ago, I think it would have boomed.

You read it last night and it's about negative interest rates? Yeah. And I think he's just, I don't know if people are just tired of his sort of message, which is just like, we don't know. I mean, that's basically his thing is, I won't say when, I won't say how, I won't say why, but here's why I'm cautious. And I think that people have just gotten maybe a little bit sick of it or tired of it. I don't want to say sick of it.

That's disrespectful. So you think it people have just gotten maybe a little bit sick of it or tired of it. I don't want to say sick of it. That's disrespectful, but. So you think it's the message and not the style? I think it's a little bit of both. Yeah. Like in other words, let's just say that, let's say that we turn and- Turn negative. Yeah, let's say that the economy drops,

the market declines. I think that people will flood back to what he's saying. They'll say, see, Howard Marks has been saying, be cautious. Yeah, but I guess also part of me is like, it's rational to tell people to be invested and simultaneously cautious. Like when would it be rational for somebody to say, okay, now is the time to throw caution out. Go nuts. Right. So I feel like he shouldn't change his message just because it's in favor,

out of favor. All right. what do you got uh okay so yesterday i received something in the mail robin did and i opened it because i saw you're welcome it was from her retirement plan um i don't get what you just said but a few months ago there was a column i think by bloomberg inflation is dead was that bloomberg so yesterday we get a pamphlet from the teacher's retirement system in the city of New York. Dear Robin, as you may be aware, the inflation protection fund will be discontinued effective April 1st, 2020. This is a fund in her retirement account? Yeah.

That's like tips? Or what is it doing? Yeah, yeah, yeah. So I don't know that. I mean, this isn't managed by like Bridgewater. You know what I mean? Like it's a public plan. So if this isn't a contrarian indicator. But wait, did they give a reason for why they're not going to offer it anymore? Is the fund closing or are they just kicking it out? No, there's no fundamental research involved, at least that I know of. So they're just like, nobody's using this thing. Let's get rid of it.

It might just be that simple, which I mean, that might not berarian indicator it's just i just thought it was kind of funny well the 10 year did bottom in reverse two weeks ago so some things are lining up um i was thinking about uh i was i was thinking about um all of the announcements about commission free trading and they basically apply to u.s stocks ands. So Schwab, Fidelity, TD. I think I saw Raymond James and Bank of America, Merrill Lynch yesterday. Like everyone is now doing some version of the commission-free platform for stocks and ETFs.

And I was thinking like- But you still have to pay to read a Bloomberg article. Right. Well, also I was thinking about like mutual funds are just so screwed. Like for the left, I'll tell you my thinking. You tell me what you think. For the last 10 years, every major trend in investing has gone against mutual funds from fiduciaries thinking about tax. And obviously the tax ramifications are in an ETF or de minimis in mutual funds. It's a pain in the ass every year to people wanting more flexibility.

It's like so many trends. And now this is like one more nail in the coffin because the mutual fund trades are still gonna cost advisors and retail investors money. Fees have come down. Transaction fees and expense ratios. I'm just talking about net flows.

Why would there be ever a bounce in the flows to mutual funds? There's not going to be, but there's so much money there that they're going to be dying for the rest of our career. There's $15 trillion. But it's shrinking every year. So what? It's terrible. Well, it's bad for the industry. It's sad.

There's a ton of layoffs. I'll give you another one. The SEC just started approving actively managed strategies inside of ETFs where the manager gets to delay reporting their holdings. That's another advantage mutual fund managers claim to have like, oh, we don't have to file a 13F and reveal our holdings. That's our edge. Now they're launching liquid ETFs. So I think that they're in secular decline, but it's going to decline. It's going to be a drip for the rest of our careers. Okay.

In five years, will any financial advisor be predominantly allocating to mutual funds or will it just be 401ks? Will any? Oh, here's another thing. Wait a minute. So now Schwab is allowing for fractional purchases of stocks, of individual stocks, and I assume ETFs. One of the benefits of mutual funds

was you could say, I want to put $1,000 a month into this account, put a round number and it'll buy the funds. With that fee schedule and technology, you don't need mutual funds to do dollar purchases. You could do dollar purchases now into stocks and ETFs. That's yet another advantage that mutual funds have. Yeah. Yeah. Yeah. Okay. All right. I was listening to Chuck Klosterman on Bill Simmons a few weeks ago, and he said something that I had said previously to you, which was this. People's real personalities are who they are on Twitter because there's no shackles, especially for anonymous accounts. You wrong. Hold on.

That's the real them. Who they are in real life is like the hidden version of them. No. Because they reveal themselves when there's no rules. No. Yes. Nope. Don't agree. Tell me why.

I think there are aspects of people's true personalities that cannot be hidden on Twitter. They will find an outlet for themselves. I think that's true. But I think I'm a more guarded version of myself on the internet in general. I do. I mean, you know me for eight years. You know I'm not lying.

I'm a little bit looser with things that I'll say in person than on Twitter. And for good reason. You don't know. You have to assume that everyone that's following you is not going to like some of your most extreme opinions on things like cilantro. I got ratioed to death talking about guac with no cilantro. Imagine I was like out there, like really saying things. All right. So I don't even show. And by the way, we met Ramp Capital and Ramp Capital is one of the most hilarious people on Twitter.

Definitely the funniest person in finance Twitter. That dude's not that funny in real life. He's like serious. No, I like him, but he's not like Jerry Seinfeld comes to lunch. I think people's real personality is on Twitter. I really do. Obviously there can be exceptions. I'm not saying every single case.

But I think that people that have anonymous accounts especially are saying exactly what they think. Okay. What about people without anonymous accounts? Like you. Are you Clark Kent in real life and Superman on Twitter? No. No, no, no. I guess I'm thinking more of anonymous accounts.

Oh. So maybe that's a different conversation then. Somebody that's got nothing to lose because no one knows who they are? Yeah, like when there's no consequences, you see what they really think. Is that what Klausterman is saying? I don't remember, but that's what I'm saying. Oh, I would agree with that. I think there are a lot of people who can't be themselves in real life

for relationship reasons, political reasons, career reasons. And if they're anonymous on Twitter, it's like the real, I think that's true. All right, so we agree on this one. All right, what do you guys think? Are people more themselves in an online persona or not?

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