The Compound and Friends - The ETF Graveyard: What Are Your Thoughts? (with Josh and Michael)

Episode Date: December 4, 2019

On this edition of What Are Your Thoughts, Michael Batnick and Josh Brown of Ritholtz Wealth Management discuss: -1,000 zombie ETFs have been put of their misery this year -How many minutes early for a meeting is too early? -Would you invest directly into a college student's future success? -Stocks are up over 20% this year, what's the simple reason? -The 60/40 delivered its best annual performance since 1998 -Private equity firms have three quarters of a trillion in cash to deploy 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/   Check out our video channel, "The Compound," over on YouTube: https://www.youtube.com/thecompoundrwm 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

Okay, hi, this is downtown Josh Brown. I'm here with Michael Batnick as usual. We're gonna play our favorite game What are your thoughts? I don't know what Mike's gonna ask me about and he doesn't know what I'm gonna ask him about Are you shouting? I'm so excited. Duncan hit the music. I Want to talk about this thing that Balchunas wrote So Eric Balchunas is the ETF reporter at Bloomberg and he did a thing about how this year, a thousand ETFs were killed or put out of their misery by the fund company that had launched them. And there are still four to five hundred zombie ETFs, you know, that are barely collecting assets around. Should that be like scary to investors if they buy an ETF and it gets shut down? Or should they just say, all right,

this one didn't work out, on to the next? Like, how should we feel about that many exchange-traded products dying in one year? Hmm. I don't really have strong feelings on this. Like, is it a, I mean, it's sort of a non-issue in my mind. What do you mean exactly? I don't know that it's a non-issue if you have a portfolio and you're holding these things. Nobody has a portfolio of zombie ETFs. Well, you probably don't have more than one, but everyone probably has a

few. And it's probably a very small piece of your portfolio anyhow. Right, because they're tiny. Because they're probably like these niche ETFs, like whatever, pick something stupid. So Eric is saying that this is actually an example of the market working and capitalism working in the ETF space. Like things that should die are put out of their misery, just like any other failing business enterprise or unpopular product. I'll wait for a billionaire to weigh in before I give my opinion. A billionaire to weigh in on ETF closures? On the capitalism in ETF land.

Do you know how many ETFs there are, period? 3,000. Is that the number? No, I don't know. I don't know the number either. We should look into that. All right. What do you got?

So I thought of this question and then I realized, was this in the Irishman? The question I'm about to ask you. So we had a meeting recently. We should just talk about the Irishman the entire day. We had a meeting recently where the people came 14 minutes early. And I was a little annoyed. Okay. So I feel like five minutes early is like respectful. That's not what, in the Irishman,

the guy was 15 minutes late. Right, you're right. Okay, anyhow. And he was supposed, and they were saying like 10 minutes is the max. Okay, so let's invert that. Let's talk about what's too early. If you're 15 minutes early, isn't that rude?

Well, where are you coming from? If you're coming from the airport, you can get there as early as you want. Where are you supposed to go? No, you can't. Go to a coffee shop. No, you can't. You can get there two hours early. Go sit at, what's that stupid coffee shop on our block?

Blue Ball. No, that's the stupidest. Le Pen Quotidian? Go sit in that hellhole for 20 minutes? What's the difference? What are you talking about? There's no limit to how early you can come if you're coming from the airport. I'm a real You scroll through Twitter. Why does it bother you? It's rude. Oh, I know why it bothers you. Because you have a glass door next to you and people can see that. No, no, whatever. I just think it's rude. All right. What do you got?

Student equity. So there's $1.5 trillion in student loans. They take the form of debt. I'm reading almost every day now a new article about what are called income share agreements or ISAs. Purdue University is at the forefront of this. Basically, they're putting up the ability for students to pay for their tuition in the form of equity from somebody investing in them like a shareholder and then getting a share of their income later after they graduate. And I want to know your opinion on this from both sides. The first, from the side of the student, is this superior than fixed rate debt?

And then from the side of the investor, is this an attractive thing to buy as an alternative to, let's say, a traditional bond or traditional venture investment even? I don't even know what you would compare this to, but what are your thoughts from both sides? Okay, so I will caveat this with, I don't really know much about this, so I'm making this up. So forgive me.

Okay. I think the professor or somebody from Purdue was on a podcast, Odd Lots maybe? It was on one of them. I thought it was like, oh, that's an interesting idea. So would I rather give up 2 percent of my income for 15 years or pay $190,000 for four years of tuition yeah probably rather give up my income yeah so this is this is like what's what's the worst case scenario that you become filthy rich and are giving like no it's not a good risk it wouldn't work that way why there, there's caps?

The schools that are doing this are putting a cap. One of the schools, it's two and a half times the total value of what you were lent is the most you could pay back. And then another school is saying that you have to be making a minimum of $50,000 a year before you're obligated to pay anything back. I love it. So they're not punitive. Right. So the employer has to wait until you have your pay anything back. I love it. So they're not punitive. Right.

So the employer has to wait until you have your feet underneath you. Not the employer. It's not really a lender. The investor in you. All right. So now from the investment side, let's say you want a family office and you have $500 million to allocate and you have $5 million for some random alternative shit. million dollars to allocate and you have five million dollars for some random alternative shit and you're able to go on a website and select students you can read about their gpa their

activities well don't you think it's going to be it'll be bundled you're not going to be able to select individuals not necessarily right now oh my god student picking is a new stock picking well right now you could say like this guy is going to major in something that I think has the ability to pay me back faster. I'll invest in him. English lit. You think this is going to be like an interesting category? Can you short? Can you short a student?

Well, all right. Again, without knowing anything, I would say it's intriguing. Need to learn more. Okay. Fair enough. Go. Let's talk about the stock market. Go. Let's talk about the stock market. Go. So notwithstanding this. Notwithstanding today's plunge. Yeah. Up 25% year to date.

Yeah. And I know one year returns, blah, blah, blah, whatever. 30 daily new highs or 25 new highs this year. So if you had to give a tidy narrative of what happened in 2019. Where did these returns come from? What would you say? MARK CORTAZZO, The stock market likes when interest rates are headed lower, not higher. I mean, that's just the reality. We can point to all these historical cases where that didn't matter.

Right now, it just it matters. We were in a 20% drawdown a year ago, pretty much next week. And nothing's changed with the economy. We're still growing between 1% and 2%. We still haven't sorted out the thing with China, and we're probably not going to. So what's changed? Well, what's changed is the Fed raised rates four times last year and cut three times this year. You think it's that simple?

Yeah. Why overcomplicate it? And some of it is fundamental, and some of it is psychological, but it's a potent cocktail. So fundamentally speaking, it takes some pressure off of companies and maybe makes it even easier for them to borrow than they already had it. And then psychologically, people say there's nowhere else to go, et cetera, et cetera. So I don't think we need to come up with this complex narrative. One thing that's interesting is that Europe didn't have a recession this year. And there were people last year saying it's a guarantee if this trade war with China goes on another year, Europe will be in recession.

It didn't happen. So I want to ask you in the same vein. Yes. So I want to ask you in the same vein. Yes. I think Goldman Sachs put out something saying the 60-40 portfolio just had its best year since 1998. Pretty good. I think it's up 20% plus. So that would be 60% S&P 500, 40% Barclays Aggregate Bond Index. So if you did nothing and just adopted the 60-40, you made a fifth more on your portfolio

than where we were. Which, by the way, nobody really owns the 60-40. Fine. But if you even looked anything close to that, you're happy this year. And most financial advisor portfolios probably look something similar to that. So they're up high teens or low 20s. How many times are we going to write the death of the 60-40 before there's just total capitulation and even the bears say, you know what, it's reasonable?

What? Well, they were saying it died last year. Like, they seem to never run out of opportunities. You will never see that headline. You'll never see somebody say, look, I'm not positive on the economy. I have concerns about debt. Would you read that? But the 60-40 is probably OK.

Would you read that? I'd read the article. You'll never read that article. I wouldn't read that article. Boring. So they'll just don't call for it again next year? Doesn't matter? The Wall Street Journal, the drop in deal activity, talking about buyouts, comes as private equity firms' unspent cash dedicated to North American buyouts reaches a record $771 billion, up nearly 24% since the end of last year.

Three quarters of a trillion dollars in cash. That needs to be allocated. That needs to be allocated or else they have to give it back. So is this cash on the sidelines bullish for the illiquidity premium? Is it bearish? What do you do with three quarters of a trillion dollars? Well, you take Microsoft private. I think.

Well, hold on. On the one hand, you have people saying that valuations are at all time highs in these private deals. And then you're like, OK, well, this is reasonable. Cash is piling up because they're not being reckless with how they're spending it. Will they give it back, though? There's not a great history of these firms not deploying it. When the funds wind down, they will.

Well, let me put it to you this way. It's a little bit misleading when you say like a drop-off in deal because it's always against the comp that was a year ago and you have to go back and look what was going on a year Ago, there was one massive deal. It skews the the comp so Lower in 2019 than it was in 2015 and like less than half of what it was in 2007 What's lower the amount of US buyout deals or the total dollar figure of deals US buyout deals? amount of deals or the total dollar figure of deals? U.S. buyout deals, a dollar. Dollar amount.

It was $155 billion in 2019 through October. Through October in 2015, it was $234 billion. And in 2007, which is like off the charts, it was $366 billion. You think what I'm thinking? I don't know. What do you think? Santa Claus rally in private equity. It's a thing.

All right. The other thing is, we don't know. Wait, do you have any thoughts or not really? I do. We don't know how long that capital has to be deployed. It's not all one pool of assets. You're talking about probably 100 different funds. And even within those 100 different funds, how many different funds does KKR have out right now? How many different funds does Blackstone have? So it's not like it's $1 amount, there's a clock ticking, they have to throw it at something. This is like a rolling thing. And by the way, the minute one of these things, the period of time to deploy matures or ends, there's another fund raising money. And what's really funny to me, everyone's a contrarian now. What's really funny to me is

how many people are raising distressed funds? And they're saying, we're going to hold this in cash until the economy turns, and we're going to invest in distressed funds? And they're saying, we're going to hold this in cash until the economy turns, and we're going to invest in distressed. If everyone is ready for a distressed boom, maybe you don't get them. What if this dry powder starts investing in new funds? What do you mean? Just what I said.

One fund investing into a new fund? Just keep rolling it. Yeah, that's what we need. We need fees on fees. That's all I got for today. You got anything else? Nope. All right, listen, we need you to come into the comment section. Let us know what your thoughts are on

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