The Compound and Friends - The Real Reason Treasury Yields Rose With Nick and Jessica, Election Bets and Market Vol With Callie Cox

Episode Date: October 29, 2024

On this TCAF Tuesday, Josh Brown is joined by Nick Colas and Jessica Rabe, co-founders of DataTrek Research, to discuss the Election, current market valuations, the Federal Debt, and more! Then, at 34:22, hear an all-new episode of What Are Your Thoughts with Michael Batnick and guest host Callie Cox! Thanks to Public for sponsoring this episode! Lock in a 6% or higher yield with a Bond Account by visiting: https://public.com/wayt Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Public Disclosure: A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the compound and friends. Tonight's show is brought to you by public public.com Created the bond account to help investors lock in a 6% or higher yield in Corporate bonds. This is in response to the question Well, okay, if I get out of cash and I want to lock in a higher yield, where do I go? So this is why public launched this thing if you think there are more rate cuts coming ahead, cash will be yielding less. Lock in your 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds today. I want you to go to public.com forward slash W-A-T as in what are your thoughts to learn

more. This has been brought to you by Public Invest investing member FINRA and SIPC. As of 9-26-2024, the average annualized yield to worse across the bond account is greater than 6%. Yield to worse is not guaranteed, not an investment recommendation. All investing involves risk. Visit public.com slash disclosures slash bond dash account for more info. Okay, we have a big one for you tonight.

First up, Nick and Jessica are back and I asked them the biggest question on every investor's mind right now, probably every economist too, which is if the Fed is cutting rates, why is the yield on the 10-year going higher, not lower? And they made me feel a lot better about what's happening, given all of the people who have been coming out lately and talking about how the deficits and the debt are what's triggering the backup in yields. Nick and Jessica don't believe that's the case, and they have a whole bunch of evidence to demonstrate why.

After that, it's a new edition of What Are Your Thoughts? Tonight, the part of Josh Brown will be played by Callie Cox. Callie is back with Michael Batnick and as always, it is a lot of fun. So stick around, listen to Jessica and Nick, listen to Michael and Callie and we'll talk to you soon. Welcome to the compound and friends. All opinions expressed by Josh Brown, Michael Batnick and their cast mates are solely their own opinions and do not reflect the opinion of Red Holes Wealth Management.

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Red Holes Wealth Management may maintain positions in the securities discussed in this podcast. Ladies and gentlemen, welcome back to The Compound. I am here for my regular check-in with two of my favorite people in the markets, Nick Kolas and Jessica Rabe are here. They are the co-founders of Datatrek Research and the authors of Datatrek's morning briefing newsletter,

which goes out daily to over 1,000 institutional and retail clients. They're also two of the smartest people I know. Nick and Jessica have their own YouTube channel, which you can find a link to in the description below. Nick, Jessica, good to see you. How's everything? Good to see you too. Well, thank you. How about you? Oh, doing okay. Somehow it's pretty much November and I'm not quite sure how that happened,

but here we are. What? You're like, what are you going to do about it? Nothing. I'm not going to do anything about it. Today, we're going to try to use data to solve the biggest question on everyone's mind, I think, other than who's going to do anything about it. Today we're going to try to use data to solve the biggest question on everyone's mind, I think, other than who's going to win the election. The Federal Reserve basically just declared victory over inflation and cut interest rates by 50 basis points. Why on earth did the yield on the 10-year treasury respond to that by rising 50 basis points?

So I wanted to just kind of lay out four scenarios here, and then I want you guys to weigh in on what you think is going on. Number one, it's a head fake, meaning this rise in the 10-year yield we've seen will melt away as quickly as it came. And I'm not sure if that's good or bad. Number two, the bond vigilantes are out talking about deficits and the national debt. Paul Tudor Jones was on TV last week talking about it. And there's like real concern for the first time that we've really gotten too far out

over our skis. Number three, it's just an unwind. A lot of money was betting on a recession. A lot of money came into bonds. Now that it looks like recession is off the table, they're selling those bonds and that's where you get the 10 year rising. Or number four, it's a brand new market bet

on higher growth, stickier inflation for 2025. So I want to get to kind of some of these scenarios and what you guys think is happening. Yes, well, first of all, I think it's entirely fair I want to get to some of these scenarios and what you guys think is happening. Yes. Well, first of all, I think it's entirely fair that people are questioning if the Fed just made a policy mistake because quite frankly, the Powell Fed has made a few pretty bad errors over the years, of course, overestimating the neutral rate of interest in 2018, which led to a short bear market in Q4 to then also saying that inflation was transitory in 2021.

In both cases, the Fed had to pivot hard and quickly to address those errors. In this case, we think the backup in yields really comes down to data that continues to show that the US economy and labor market are stronger than expected. So three quick charts just to just to lay this out. The first being initial claims if you could just please put that up. Thank you. So this shows US initial jobless claims for unemployment insurance readings since the start of 2022. And we pay close attention to initial claims because they give a real-time look into the strength of the U.S. jobs

market. The latest initial claims for the week ending October 19th came in at 227,000 on a seasonally adjusted basis. That's just 3% higher than the longer run average of just under 220,000 That's just 3% higher than the longer run average of just under $220,000 since the start of 2022, which we marked with that dotted red line you can see on there. It's also 5% below the four-week average of just under 239%. Now, continuing claims- $239,000. Correct. Yeah.

Gotcha. Okay. Continuing claims did rise to just shy of 1.9 million on a seasonally adjusted basis. That's back to levels last seen in November 2021, but they were also above 1.9 million in late 2017 and early 2018 at the end of the last economic expansion. So overall, we think that all the jobless claims data does show that we still have a decent US jobs market. And we also have another chart that shows that

now a non-traditional real-time labor market indicator with US Google Trends search volumes for Ask for a Raise over the last 20 years. And just three quick points here. You can see US Google searches for Ask for a Raise. This is funny. Jessica, how long have you been tracking this? A while. And it's freaky how much it lines up with the data. So US Google searches for Ask for a Raise peaked in June 2022, shortly after average hourly earnings hit a post-pandemic high 5.9% in March 2022. But then as US workers have lost confidence in their ability to demand higher

pay since, as shown by declining searches towards the right of the chart, average hourly earnings have also fallen steadily, now at 4% as of September. But search interest for and ask for a raise is still 17% higher this year than in 2019, again at the top of the last economic cycle. So as a result earnings growth still exceeds the 2019 average of 3.3%. So the upshot here is that wage growth remains sticky because US workers still feel they have decent bargaining power with a still growing US economy. And then our third chart on the-

Just to pause there, we're taking that as a positive. Even though it's somewhat stickier in terms of inflation, it's a positive on the economy. It's good for corporate profits, definitely. Okay. And then that's a good segue into on the economy. We have a chart of the Atlanta Fed's GDP Now model. And this is for Q3.

And this is what we really think is a crux of why yields have risen over the last few weeks. The model was forecasting 2.8 to 2.9% growth for Q3 in mid-September when the FOMC cut rates by 50 Bips, but its prediction has trended higher since as the models incorporated new data in real time. So this past Friday it forecasted 3.3% growth, which was the last revision before the release of the advanced Q3 GDP report tomorrow. If that number comes true, it would be the highest reading this year after growth of 1.6% in Q1 and 3.3% in Q2. It would even be higher than Q4 2023's 3.2%. So our bottom line here is that the US economy seems to have had a decent Q3 and solid momentum heading into Q4 and 2025.

So we think it's the strong economy that's pushing yields higher. Yeah. So Jessica, it sounds like you're in the C and or D camp. It's an unwind of recession bets combined with maybe a new market bet on even higher growth even though that higher growth will come along with higher prices. And I suppose that's the optimistic case. Even if you hate inflation, you probably hate a national debt crisis a little bit more. Yeah, you've even seen Fed funds futures adjust expectations

coming more in line with the FOMC's last projections to now just a 25 basis point cut in November, again in December, and then just two 25 basis point cuts in the first half of next year. of next year. Okay, Nick, you look like you want to weigh in on this. I do. We've got a chart of 10 year yields going back a long, long way back to 1962. And I just turned 60. So I was born in 64.

And I was just thinking about that and thinking about yields. And I pulled up this data and I think it's worth a strong look because 4.2% yields right now were exactly the same in October of 1964, so 60 plus years ago. Debt to GDP was 41% and I've broken down the rates into their components which is inflation expectations and real rates and you can see inflation expectations or inflation back then was 1.7%. That makes real rates 2.5 to get to your 4.2. And you know real GDP or debt to GDP was quite low, 41%. You go forward to 20 years ago, October of 2004, and rates were 4.6%. Inflation was a little bit higher than back in the 60s. Real rates were a little bit lower. Debit GDP was higher, 61%. And now we're back in the same place. 4.2% yields

right in line basically with 60 and 20 years ago. So no change there. Inflation is running about average between the two. Real rates are a little bit lower. And Debit GDP is double what it was in October of 2004. So looked at over the long term, it's hard to argue that the market has incorporated any of the increase in federal debt, any of the increase in deficits, because even though we're running twice the debt to GDP, we're still running the same nominal rates,

and it's anchored on inflation and real rates, which historically are very much in line with what we see today. So there's, by this measure, at least literally nothing to the argument the deficit has anything to do with yields, period. It's so nice to hear you say that definitively, even though the message of this chart is somewhere out there, there is a limit, and we don't know when we'll hit it. But if we were 41% debt to GDP in the 60s, 61% 20 years ago, which they all said was too high. Now we're 120%. Maybe the limit's 140%.

Maybe it's 180%. But you guys are arguing it's not here. And the evidence of that is look at inflation, look at real rates. We're pretty much in the same place on both throughout this entire, I don't know, 60, 70 year period of time. That's the upshot. That's the upshot. And that's just very clearly what the data says. And I think you make the right point. We don't know where the number is

and we don't know how steep the S curve is once we start to hit it. But to say that we're near it and the market's responding to it is just flat out wrong. That's not the way it's working. One of the other big memes making its way around the markets right now is we've never had a year where both gold

and the S&P 500 were up 25% simultaneously. Is that the number? Yeah, it's like 25, 30. Gold's more than 30. Gold is up 33% year to date. Silver is in the middle of a huge rally, you point out. 36% year to date. Back at its 2011 highs, gold is well through the 2011 highs and Bitcoin is hanging in there toward the upper end of

the range. What is the message there then? If we're not getting deficit concern necessarily from the bond market and that's more an economic growth story, is the debt concern happening in gold, silver, Bitcoin? Don't think so. What's happening with gold, which is dragging silver up in its gold, silver, Bitcoin? Don't think so. What's happening with gold, which is dragging silver up in its wake, silver is like a high beta version of gold. It's gold plus some economic cyclicality because more than 50% of silver usage is industrial,

where just like 5% of gold is. Gold is a whole bunch of other things. But the issue with gold is that non-US central banks aren't buying a ton of gold, literally tons of gold. So before the 2020, gold production annually is like 4,400 tons. And central banks outside the US would take about 10% of it and buy it for their reserves. Now the numbers north of 20%.

So they've upped their gold purchases by roughly double in terms of percentage of supply annually. And the reason they're doing that is gold is a better reserve asset in some ways than treasuries, which is the more common reserve asset for non-euro central banks. Because unlike treasuries, once gold is inside a country's vaults, it can't be confiscated, it can't be sanctioned. And after what happened with Russia and the US dollar, I think a lot of central banks are saying we need to diversify our holdings of reserves.

And one of those diversification tools is gold. So they're buying a lot more gold than they used to. And you're seeing it in the price. So I don't see it as a sign of deficit worries per se. I see it as a sign of the dollar being not quite as much of a safe haven in a dicey geopolitical world. Sure. If the if the EU and the United States decide that an action taken by a sovereign country flies

in the face of international law and they want to make them pay and they want to do sanctions or they want to freeze numbers on a screen, fine. Can't do that with gold bullion. Nope. Nope. It's not a QCIP based asset. It is a physical asset. And once it's there, you got it and it's yours.

And there's real value to that. And it's not just China. China is a big buyer, obviously, but it's India, it's Central Asian Republic, it's Poland. So it's a lot of non-aligned or relatively non-aligned countries that just want to have some flexibility in their reserve assets. Yeah, so I've had this heuristic where I've said gold is not really a bet on faster inflation,

although it can be. What it really is, is a bet on continued political instability, or a hedge, maybe a better way to phrase it as a hedge against political instability between countries. And I think it's not a coincidence that the last big peak in gold was 2011, where we had the debt ceiling debate here in the United States. We had the European financial crisis simultaneously. This one seems to be occurring with the Russia-Ukraine conflict in the backdrop, increasing hostility from Iran, questions about our relationship with China, the re-rise of Trump.

So that gold price rally seems to make sense more in that context than in the idea of a re-ignition of CPI, for example. It sounds like you guys agree with me. Yeah. It's a global asset and global demand drives it. If you find incremental global demand, and in 2011, it was also the Chinese middle class buying gold because their stimulus was so much more effective than ours post financial crisis that you ended up with a strong gold price and you're getting the same thing now.

I want to go back to Paul Tudor Jones. Last week he appeared on CNBC and he doesn't do that all the time. It's usually concurrent with something he's doing for the Robin Hood Foundation where they raise a lot of money for underfed New Yorkers and people all over the world. It's an amazing cause. But he probably expressed more concern last week than he has in prior years making this appearance. And his message was, we're finally at this moment where the federal debt matters.

And the fact that those comments occurred while we could all look at our screen and see that 10-year yield rising, I think really scared a lot of people. It seems to have somewhat subsided in the last couple of days, but I've been waiting all week to get your take on PTJ's comments and whether or not they exacerbated the rally in bond yields. Yes, I mean, they certainly did. People listened to him and rightly so. He's brilliant. And obviously, it made us think about this issue, talk about this issue a lot, and kind of this is where this 60-year chart data, you know, the genesis of that came from thinking about this over the long term.

I guess what's missing for me from his argument, which I get at a numerical level, is what's the catalyst? Every trade needs a catalyst. So what exactly is going to happen? Is it a failed auction? And more from a big picture standpoint, if the money is not going to go to the US, if it's not going to go to treasuries, where does it go? Do you really want to invest in euro-based bonds? Not really. I mean, the euro is not as solid as the US as far as economic currency.

You're going to Chinese bonds? No. Japan? No. That's a US bet. What's the alternative? So I was really hoping he'd like list out the catalyst, but it seems more like he's looking for some invisible hand of the market to push us up the S curve on this crisis. And okay, I just didn't hear the answer as to what's the catalyst. What if we can't think of what the catalyst is, but we've basically piled up all this kindling and when it arrives, it almost won't matter? Or is that too abstract to worry about right now? No, it's the right mental framework.

It's the same sort of concept as the S curve. I think what he's trying to say is that the relationship between crisis and debt level is not linear. You're not going to slowly work your way into it. It's going to hit a point where you go up the S curve really fast on crisis while the incremental debt is not very large. And the point of that 60 plus year chart was to say, we've been doing this for a long, long time. And there's nothing to say that rates at this point have any relationship to the deficit.

So I guess the question becomes why now? Guys, I want to do the betting odds on the 2024 presidential election. So people are going to hear this Monday and Tuesday on video and audio. We're still a few days out from the election. Normally, the S&P 500 would right now be as volatile as it gets. If you look at a composite of the election run-up, we really just didn't have that pre-election volatility. I think the big question on a lot of people's mind is, oh, are we going to have that after the election this time? Or maybe we had it in August and we kind of got through it.

I guess we'll all find out the answer together. But what are we saying here with the data that you guys have? I think we've got a table of the betting odds. This is from a couple of days ago. All this is is a summary of all the different offshore betting markets for this event. And you can basically bet on this. It's a little bit harder to bet on an election in the US, but outside the US, it's very easy. And the bottom line is that the odds shade towards Trump by, call it 60 to whatever it is, low 30s, high 30s, low 40s. So it's shades in his favor,

but you don't really get definitive numbers from a betting market until you get to 70%. So in practical terms, this is still very close to a toss-up. I wanted to ask you if you think, well, first, this is the first election where I think as many people are part of these bets on whether or not, you know, who's going to win. I think like for the first time, Robinhood just announced a product that's going to go

live in the next couple of days where they're going to allow their users to buy a contract on either Trump or Harris. So this is now a much bigger phenomenon than it had been in prior years among Americans. Would you agree with that? It is. And one thing that I've not really seen discussed, but I wanted to bring up here is there have been big bets on Polymarket, which is one of the more liquid, like two, it's a lot of money. It's like $2 billion plus in trading volume on these contracts. And there's a big whale in France who has put $30 to $40 million to work betting on

Trump. And I can tell you, if I were to work for Steve Cohen, traders don't just guess on stuff. They don't just throw stuff to the wind. There's a point to the trade. And I can't help but wonder if jacking up Trump's odds was a way to manipulate or influence other markets, like the peso, for example, which is very dependent on a Trump versus Harris victory. And I'm just wondering if this is all part of a larger trade, where you push up the odds

for one candidate that has a clear impact on capital markets, and then trade those other markets to make your money. And you don't much care if you can't unwind the whole Trump trade before the election, or maybe you just let it ride, but you're making a lot of money in the assets that are affected by this new market for predictions in US elections. Well, this is binary though.

So if you have this trade on, and I don't know what the trigger is to declare this definitive, is it a certain amount of states have to have their ballots in? Or like, how do we even know who wins this? Oh, there's rules behind every contract and they vary a little bit. But you know, it might actually just go to the certification in January. But the point of the fact that this is new, as you said, this is a new concept. This is a new way of thinking about who's going to win the election. We used to just use polls and polls kind of didn't work all that

well in the last 10 years. And so the betting markets have become part of this conversation. But the issue is that the betting markets now have influence on capital markets. And so to some degree, if you push around the odds in an illiquid market and create a better situation for another trade in another market, that is a way to make money. Jessica, if you had to guess, would you say that the betting markets will become more accurate than the surveys and the polls? Maybe not in this cycle, but ultimately, as this becomes just a more common thing for people to do?

I think so because people are putting their actual money on the line. Right. As opposed to their opinion, which might not even be their real opinion, depending on who's asking the question. Unless, to Nick's point, people are not actually expressing a view on the outcome, but hedging against the possibility. And they have some other bet that they care more about play somewhere else.

And I guess we'll never know. Yeah, ultimately the number we're looking for in the last election, the prediction markets had 63% in favor of Biden. So that's the sort of number that we can look forward to see who will win. Trump is very close to that. Okay, I wanna move on and you guys have so much great stuff. number that we can look forward to see who will win. Trump is very close to that. Okay.

I want to move on and you guys have so much great stuff. So I want to ask you guys about three year S and P and NASDAQ rolling returns, Jessica. I know you've been doing some work on this during the course of the week. Yeah. So we're hearing a lot of concerns that us equities are overextended here. Now that this will have been the second straight year that both the NASDAQ and the S&P will have rallied.

So to see if that's true or if both indices can continue to rally for a third straight year in 2025, we looked at the three-year rolling price returns for both indices over the last 50 years. So I thought we'd just first start with the S&P 500. So this shows the three-year rolling price returns for the S&P over the last five decades. And just three points here. The first is that the S&P usually generates good returns over three-year periods and rarely goes negative. The average 36-month price return

from 1974 to now is 29%. You can see that highlighted by the solid green line in the chart. That's an 8.9% annual compounded return. Even more impressively, the S&P's three-year win rate, or the percent of days with gains over this period, is 82%. And yeah, it's a huge win rate. And then my second point is that negative three-year holding period returns really only happen when there's an exogenous economic or geopolitical shock. And you could see them all on the chart with the dates highlighted in red. So you had the 1974 to 76 from the oil crisis recession, sporadically through 79 to 82 with the 79 energy crisis and fall in recession, 1990 with the Iraq invasion of Kuwait, early 2000s with the dot-com bubble bursting, the recession, 9-11 terror attacks, goal four

two, 2008 to 2010 with the financial crisis, a great recession, briefly in 2011 from the Greek debt crisis and briefly in March 2020 from the pandemic crisis. That sounds like a lot, but the important takeaway there is there needs to be a catalyst. As far as being worried about if the market's overextended, we've said this in the past on these What Did We Learn episodes, a double is a bubble. If the S&P gains 100% or more in a three-year period, which in that chart is marked by the dotted green line, history says investors should be extremely cautious. This has happened four times since 74, which we highlighted it. They're highlighted in the green dates in the chart.

We're nowhere near it. Yeah, we're nowhere near it. And those are followed by major contractions. And the only time the market was able to keep rallying after doubling in three years was in the 2010s because it had started from such a low level after the 2008 financial crisis. And I think that's kind of what's missing from the current market narrative is that 2022 was a very bad year that we're still crawling out of. So I just have one more point on this chart. The last one is that through flat Friday's closed, the S&P is up 28% over the last three years. That's super close to the long run average of 29%. So if all you knew about the index was three year return as of today, you would probably assume

that the last 36 months have been pretty routine. They've of course not been, but it looks normal. Yeah, anything but. But like overall, the upshot here is nothing in this analysis. Like you said earlier, shows that we're close to a bubble in US large caps. If anything, it all looks pretty normal actually. This is such an important topic and such a great way to explain it to people because I think there's this assumption that black has to follow red, down has to follow up. And a lot of times when bulls and bears are arguing, if you just lengthen the time horizon.

So people are looking at two years and last week, I think, or the week before, was the two year anniversary of the bottom of the market. And so it's like, well, you're not going to have another two years like you just had as though they were completely extraordinary. Your point is, well, think about it in three year terms. We've just seen an average three year return, nothing more, nothing less. By the way, it took a lot of volatility to get here. And I think that's a really important message for people who are trying to wrap their head

around staying long, maybe putting more money into the market at these levels. We did not just come off this incredible three-year period. 28%, the average is 29. No big deal. It's even more stark if you look at the NASDAQ. If you want to just throw up that real quick, just two quick points here. The first is that the NASDAQ's rallied by an average of 41% over any three-year period on a price basis over the last five decades. You can see that with

the solid green line in the chart, that's a 12.1 annual compounded return. And just like the S&P, the NASDAQ is rarely down over three-year periods. It's when rates even higher than the S&P, it's 84% over the last 50 years. And my second point here is just that the Nasdaq's up 23% over the last three years. That's well below the long run average of 41%. And that's because large cap tech was particularly hurt by 2022's rate shock. So the NASDAQ's actually been playing some catch up, having been under performing its long run average return over the last three years. So the two key points I want people to take away from these two charts is that the S&P and NASDAQ do tend to generate positive double digit returns over three

year periods, as long as we don't get a geopolitical or economic shock. And the S&P and NASDAQ's three year rolling returns have plenty of room to run before looking over extended as long as the economy and corporate profits keep growing. Nick, I bet if you asked even your clients, institutional clients, if they think the last three years was a below average NASDAQ return, none of them would say yes. Most would assume, myself included, that we've just been through an above average three year period.

Yeah, recency bias on Parade. 100%. Okay. Guys, I want to ask you about... Oh, please. Oh, no. I was just going to say that's why we love three-year returns because it smooths out seasonality and volatility.

Yes. I want to ask you about short, medium, and long-term issues. It looks like we have a VIX chart in here. What do you want to tell us here? Yes, I'll throw that up. I'll throw up that VIX chart. This is what we showed clients last week in terms of thinking about potential volatility from the election.

Because as much as we feel things are pretty well baked in and we're not going to see a lot of volatility, it could be wrong. And so what's the playbook? And the playbook is pretty straightforward. The long run average on the VIX is 20, 19.5, we call it 20. One in two standard deviations is 27 and 35. This is a chart of the VIX back to October 2020. And if you go back and look at it, if you buy the S&P when the VIX gets to 35, that second line, the

two standard deviation, you're up six and a half percent on average over the next month with a hundred percent win rates. So if you're looking for a volatility level where you can definitely step in and buy the market, 35 is the one to look at. 27 has been useful as well, because we don't always get to those very elevated levels of volatility. But those are the two levels where if over the next couple of weeks, something really untoward happens, market gets volatile, the VIX spikes, 27 and 35

are the levels to look at. And it's just a simple rule book. We've used variations of this rule book since the pandemic crisis. They work great. The VIX is an awesome signal of near-term market fear. I think that's a really helpful way to think about it. My guess, I don't know that we'll see another VIX spike akin to what we saw in August, September of this year related to the Japanese

carry trade unwind thing. But like, would I be shocked to see a VIX at 30? No. Because I understand how much technology is involved in market trading and how quickly every algorithm could move to the same side of the boat, especially if they're in risk preservation mode, capital preservation mode. So I really appreciate that. Guys, I want to tell people where they can watch the Nick and Jessica show on YouTube.

You guys are youtube.com slash at Nick Colas and Jessica Rabe. And that is the Data Trek channel. How are things going on the Data Trek channel these days? It's awesome, we love it. Having fun? Do another video this week about the single most important lesson I learned in business school. Oh, okay'm all in for that for sure and for those of you who are interested in learning

more about how you can subscribe go to datatrechresearch.com for all things Nick and Jessica. Guys thank you so much for joining us once again we love to have you and for everyone listening and watching, we appreciate you. Smash that like button. We'll see you soon. Hello, hello. Good evening, everybody. Callie? Good evening. How are you? What's up? What's up?

It's great to be here. Compound Nation. Josh is in Las Vegas, so we've got a better replacement joined by the Chief Market Strategist at Red Holes Wolf Management. The one, the only, the brilliant Callie Cox. Welcome. Welcome.

Welcome. Hey. Oh, you're too kind, Michael. Happy early Halloween, I guess. Happy early Halloween. It's almost election week. Bitcoin is Bitcoining. Got to talk about that.

The stock market is doing its thing, hanging high. Stock market isn't doing much. It's weird. Yeah. All right. We're going to get into all of that. What's going on in the market? Why is it so quiet given that there is potential disruption coming? But there's an election.

And usually, the market is doing more than it's doing today. So, okay, before we get into it, I'm sorry that I'm out of the chat, but you have my full attention, okay? I will not be encumbered by what's going on. No distractions, I'm locked in. So, John Carlo and everybody else who's hopefully in attendance, thank you as always for tuning in.

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All right, Callie, let's get it on. Oh, before we get into the first topic, the election and investing, we had some earnings this afternoon, some big earnings in fact. And we've got, let's throw this up, John, if you don't mind, from StockTwits. So they've got you covered on the updates. AMD, and I don't know if this is dated or not, but this is just the initial reaction. So AMD, not great. I saw they lowered their guidance down 6% or so.

Google's popping. Snap was down 13, then up 12, and I don't know where it is right now. Chipotle, not great. Visa, neither here nor there. Reddit up 20% or so. Let's just do Google really quick, a stock that I bought last month. That's a lot of green, a lot of green on the screen. You had revenues up 15% year over year. You had earnings up 37% year over year. YouTube up 12% year over year. Look at that.

Alex Morris. Next chart. There we go. Alex Morris says, YouTube, traveling 12-month ad revenues are $35 billion, up 130% since year-end fiscal 2019. YouTube ads and subscription trailing 12-month revenues surpass $50 billion for the first time. That's wild.

$15 billion in subscriptions. YouTube is a cash cow. Are we shocked? I mean, did Joe Rogan's on there? I'm not shocked, but there's just been a lot of noise and chatter about how AI is coming, how people don't even use Google Search anymore. They're using the AI competitors, OpenAI and whatnot, and maybe it'll be a killer, but not today. No. And this is something that I don't think people realize about big tech companies.

The story is all around AI and markets, as it should be, Michael, because markets are forward looking. They're thinking about what's ahead. But when you look at revenue and earnings for these big tech companies outside of Nvidia, because Nvidia is a separate case, but a lot of these big tech companies are still making money off of these more traditional products. For Google, it's like you said, it's ads. For Apple, it's services.

AI isn't really a money generator yet. And cloud. Cloud revenue, where is this? Was it $11 billion? Up 35% year over year. Just like insane numbers. And I think the first thing to go, if we are entering a downturn, and of course,

the economy's not in recession right now, but if it were, you would see a slowdown in ad spend. And that would hit Google, of course. That would hit Meta, of course. I don't know if Snap is like its own beast, but Snap is doing well in the after hours, at least it was. So we've got a busy week of earnings. I believe Microsoft is tomorrow.

And of course, we've got the rest of the Mag-7. We already heard from Tesla, but and Netflix. We've got Apple coming up and Nvidia is in a few weeks. So we shall see. All right, onto the first topic, which is we do have an election coming up and Nvidia is in a few weeks, so we shall see. All right, onto the first topic, which is we do have an election coming up. And I think that, Callie, we probably take for granted the fact that the market moves on many things.

And sometimes it moves on elections and politics. Like sometimes it does. But by and large, the message that we send to our clients and hopefully the people that are tuning in is that relax and zoom out. And so Callie put together this chart book with the help of Chart Kid, Chart Goat, Matt Cermonaro and Sean Russo over here. So all right, chart on.

Presidents of course don't control markets for people that are listening and not tuning in. What we're looking at is the annual return during presidential terms, and we're looking at the max drawdown within each term. And the blue is the Democrats and the red is Republicans and up down, up down. But the point that I want to make is that markets are always volatile. We have a drawdown regardless of who's in the office. Callie, you are the creator of this chart. Is that the message here or is there anything else? Yeah. I mean, I think that's exactly right. The other thing that I'll say is we didn't highlight

recessions on here. We didn't highlight profit growth. And honestly, that's what you should point out on a chart like this because the common thread in the stock market is the economy and earnings. It's not who's in the Oval Office. I've said this a lot over the past month or so, and I think I stole this from Ben, honestly, but it's a great saying. The US stock market is $57 trillion in size, huge. To think that one person can control the entire $57 trillion stock market is insane. And honestly, if I were to pick a person,

it wouldn't be the president. Might be Jay Powell, might be Jensen Huang, but I mean, what you're going to get these days is a lot of stay invested, don't pay attention to it. And while I completely agree, I think that there are a few asterisks that you can draw there, right? Like, don't buy or sell based on the president, but understand that elections often lead

to some kind of policy change, especially if Congress comes, if the changes in Congress make it a little more unified versus divided. So honestly, Michael, I get a little annoyed. I'm like, the takeaway is stay invested and you can pull data from history that just shows that over and over again. But it's like, yes, but give us more context than that. And that's exactly why we created the chart book. Yeah. Ignore the noise is horrific, horrific advice because come on, we live in the noisiest of times, so you can't ignore the noise. But I don't care what you're voting for,

but as far as your portfolio goes, just keep your eye on the ball, eye on the long term. Next chart, again, just to the point that we're making, is up and to the right. And of course, there's dips, and it's just, the president is not the thing. However, however, however, even though the president cannot control the market, certainly there are, trot off please, there are policies that matter and the market seems to be discounted

at least with respect to the potential for President Trump to come in and do what he's telegraphed as far as his policy with TARF. So John authors's via Karl Kittanea, Trump's declared policy is to hike tariffs far more aggressively and the market is wise to this. So the chart that we're looking at shows how branded retailers who stand to suffer the biggest potential tariff impact have performed relative to the average stock. And this is not great. The tariffs would not be good for these companies and so relative performance has been bad. So like, yeah, it's not that the president doesn't matter at all.

I don't think anybody's saying that. It's that there are larger forces at play. Inflation, the labor market, earnings, like all of these things are much more important over the long term than who wins next Tuesday. Exactly. Yeah. If you're a long-term investor, which I suspect many of you are, you should, like Michael said, keep your eye on the ball and the ball is the economy and earnings. This is what I like to say to clients. I basically just say, yes, it's a noisy environment. Your bar for information should be low. And look, if you're watching, what are your thoughts right now? Your bar for information is low. You're taking in a lot, but your bar for decision-making should be low. And look, if you're watching, what are your thoughts right now? Your bar for information is low. You're taking in a lot. But your bar for decision making should be high.

So take it in, but don't let the majority of that affect your decision making. Have the right filter on. Look at this next chart from YCharts. This is showing the DJT, which I guess, I don't know, is this a proxy for Trump's odds of getting elected? Is this a proxy for what people think Trump's odds are getting elected? Is this complete noise? Like, do you have any read on this?

Because clearly, well, not clearly, for people that are listening, this stock has gone from, I don't know, 15 a couple of weeks ago up to 52 today, so better than a triple, a triple and a half in a couple of weeks. I mean, my interpretation of this would be that the market is, at least this stock is optimistic

that Trump is gonna win. Yeah, I'm getting meme stock vibes. I'll be honest. I agree with you, Michael, but I think if you line this up against like polymarket odds, it probably aligns pretty well. It is, it's so hard to unpack what's really happening with the betting markets and the stocks and how much of it just feeds on itself in a moment. We don't know. We'll find out in a week.

All right. This is interesting. ChartKit has a chart of the average VIX level in election years versus the VIX in 2024. So what you see, at least my takeaway is that in previous election years, the VIX had been pretty much elevated all year in the, in the 20 or so range. And we had a low VIX until, until the, uh, the spike in the summer. And it actually has been rising. So it's not, it's, it's by no means is this like one for one, but it is rising, which is weird that, and I know, Callie, you're an expert on this. It's weird that the VIX is rising,

even though volatility is not showing itself inside the stock market anyway. Yeah, Michael, you're gonna be really sad that you said that. Go ahead. Because I am probably the biggest VIX nerd of all time. And Michael knows this, by the way. But yeah, it is really interesting. So if you don't know what we're talking about,

the VIX is obviously a gauge of S&P 500 options prices. So when fear goes up, theoretically, people trade options a little bit more. They buy puts on their portfolios. That causes the VIX to move up. It's just supply and demand. So when stocks are moving higher and the VIX is moving higher, that's weird. Like VIX, the VIX and the S&P 500 move in reverse

of each other about 75% of the time since the VIX started. But right now they are both moving higher together, right? Yeah, yeah they are. So if you look at it over the last month, yes, they both moved higher together and a lot of people are saying like, uh-oh, what's around the corner? Throw in Halloween analogy.

I just think it's the election. There are a lot of institutions buying longer or month-dated S&P options around election day. And you have to know how the VIX works to really understand this. I mean, the VIX takes in option premiums, or it kind of calculates option premiums for options that expire 23 to 37 days out. So yeah, a few weeks ago, we did see the

VIX rise up to 20. And I think the S&P hit record highs that day and everybody was like, ooh, ominous, what's going to happen? But that was also one of the first days when that 23 to 37 day range was picking up election day and the days after election day. So it's a little technical and I probably wouldn't look too far into it. But then again, here's a good way to look at it. It's just it's positioning. And I know that positioning is like the residual for everything that you don't understand or with it. Oh, it's busy. But in this case, it really is. So Todd's son is, I think it is Todd's son has a chart showing the VIX futures net position and everybody has been short or the market has been net short volatility for the better part of the last decade. Because for the most part, outside of a few blobs, we've been in a calm market.

And now you could barely see it poking up, but invest is our net long volatility, which means I think, Kylie, correct me if I'm wrong, that people are buying insurance in the case that something does go haywire next week. Yeah. And that's the environment you want before an event. You want people to be braced for it and ready for it because that leads to a relief rally after most often. So this is a good thing.

We haven't heard a lot of good news around the election. I'll give you one. People are positioning for it. Okay. Last chart before I hand the baton to you. There's still a lot of money in money market funds. I don't know that I necessarily expect money to come out of money market funds and into the stock market.

In fact, let me just say definitively, I don't expect that to happen. But there has been a dip, I guess is what I'm saying. And forget the money market part. That's neither here nor there. There hasn't been a dip. So Balchunas tweeted this. This is from Tom Sarifagus. They said, to buy the dip, there needs to be one. They say the aggressive performance chasing may stem from investors growing impatience, given there have been fewer opportunities to buy market dips in recent months. The S&P 500 has been

positive. This is what the chart shows. On 63 of the past 100 trading days, the most consistent advance since September 2007. And dating back to 2007, this is almost about as good as it gets in terms of positive days out of the last 100. So it's just, it's odd,ot off please, how calm the stock market is heading into an election that has a lot of people on both sides of the political aisle pretty anxious. Yeah. Did you have this on your bingo card at the beginning of the year? No, but this just goes to our point that not to ignore or not to turn on the TV, like listen,

we're human, but really bad. He's been pounding this drum for forever. Don't mix politics with your portfolio. Yeah. Yeah. And don't, you know, don't let it push you into making rash decisions. Actually, this is a really good handoff to the next section. So Michael, I'm going to take it. You don't mind. All right. So sitting out versus staying in. I've got a little stat of my own. You guys know I'm the stat queen. So pulled a few stats for, what are your thoughts tonight? This is the first one. So Michael, the S&P hasn't had a 1% up or down day the entire month of October, which by the way, October is the most volatile month historically for the S&P. You see a lot of 1% up and down days.

Hold on, just to repeat, I'm not saying double click, but I want to punch myself in the face for even thinking that. The fact that not only are we in an election year, not only are we in what has seasonally been the most volatile month in the calendar year. There's no volatility. It's really unbelievable. It's wild. So no 1% down day this month.

It would be the first October. If we get to the end of the month, don't get a 1% up or down day. First October since 2017 that that's happened. First October in an election year where that's happened since 1968, which I think was the Nixon election, if I remember correctly.

I did pay attention in high school history, which is wild. I mean, it's so quiet, Michael. It's like eerily quiet. And I've heard from a lot of people, some clients, some friends and family, that it's almost like nervously quiet. Almost like what's gonna, yeah, what's gonna happen? What's the next shoe to drop? Maybe it's almost like nervously quiet. It's weird. It's weird.

Yeah. What's going to happen? What's the next shoe to drop? Maybe it's the election. Maybe it's, I don't know, the October jobs report because we do have a busy few weeks coming up. I'm not a come before the storm person. I wouldn't be surprised at all if the market reacts violently one way or the other based

on whoever wins. That wouldn't surprise me either. Maybe I'm giving the market too much credit, but the other based on whoever wins. That wouldn't surprise me either. Maybe I'm giving the market too much credit, but the election's on the calendar. It's been on the calendar. We know exactly what it is. The idea that the election is going to shock people. Hopefully, this is not famous last words, but wouldn't it be sort of poetically hilarious if the market closes unchanged on Wednesday? Oh my God, I would love it. I love it. It would be the market gods screaming at us. It'll be a mic drop for us. Right. Yeah. Yeah. I wish I had election day returns that I could pull out of my brain. But chart on John, I want to show you guys

something. All right. So like I said, a lot of people have asked me about the calm October, really over the past few years, the market has been so resilient. So I've gotten this from time to time. Why is the market so quiet? Everything feels like it's falling apart. Well, markets can stay quiet for a while. This chart, as you can see, is the number of months that the S&P has stretched without a 1% down day. Right now, we're at a little over a month.

I think it's like 1.2 months. Couldn't tell you how many. It's like 40 trading days. But anyway, the S&P has gone as long as five months without a 1% down day, which is absurd. I mean, the S&P can stay quiet for a while, and I bet when that has happened, the market experts have gotten the same questions, Michael.

So do you sit out? Do you stay in? I think you stay in. What do you mean, do you sit out or do you stay in? I think you stay in. What do you mean do you sit out or do you stay in? Is it time to maybe take a few chips off the table? I'm not saying like sell and run for the hills, but I know you're not a combo for the Storm guy, but is there harm in taking a little bit

of risk off the table? I would say it depends on what you're doing. If you are, like in your 401k, never ever touch that. If you have a trading account and you've got stocks that are up 40% of the last 12 months and you wanna take some gains and just like see what happens. I mean, I don't know, it's such bad advice. I don't know.

I would say, no, what am I talking about this? No, no, no, no. Pushed him into a corner there. No, well, let me ask you this. Okay, let me ask you this. What happens, okay, so if you were to give the advice, yeah, you know what, maybe take some chips off the table and let the dust settle. Well, what happens if the market gaps up 4%? Then what? I know, then you missed it. I think that's an argument for staying in. The one thing that I'll say though, and I'll remind everybody, bull markets can last a long time and they can leave you in the dust really fast. I mean, we're talking 5.5 years on average since 1950 with average annual

gains of about 20%. I mean, that's a lot. So, I think you hit it on something really interesting, Michael. Yeah, maybe it is time to rebalance on any volatility you see. Maybe it is time to maybe cut a few tech stocks and rotate them into more value oriented stocks, more rate sensitive stocks, especially if you're feeling a little more defensive. But I think so many, so often people look at it as like a black and white thing. Yeah. Should I be in or should I be out? And it's really not.

No, it's not. There's a lot of gray there. So I would, if somebody wants to do that and say, hey, I've killed it in Nvidia, I want to get into whatever, maybe a more boring sector and maybe be defensive. That's one thing. Fine. But the idea of like, I'm going to get out

and see what the dust settles is, it's always a terrible idea because here's the two things that happen. Let's say that you're like a little bit cautious. You're just not feeling it. The market goes down 5%. OK, well, are you buying back in then? Probably not.

Because guess what? Market doesn't go down for no reason. Market goes down because people are selling. People are selling, people get scared, okay? So then you start feeling yourself. Oh, okay, okay. I'm going to wait until it goes down another 5%. Market goes down 10%.

Now you're buying? F*** no. Market's down 10%. I can't buy now, are you crazy? Okay, so that's one scenario where you just, it never comes in enough, right? Where you start to talk yourself into it, you start to get scared. That's scenario number one. Scenario number two is the market goes higher and you will never buy back a stock higher

than when you sold it. You just will never do it. So the selling is the easiest thing in the world. Oh, I feel good. I'm safe. Getting back in is impossible. So not impossible, but you know where I'm going. So I would never advocate that sort of strategy.

That's just, that's not long-term, a sustainable, successful outcome. Because how many times are you gonna do that in your life? Right, every time you get nervous, you're gonna take some chips off the table and wait to see how your emotions deal with the volatility. This is not what we need. There's a chart that I've seen,

it's called everlasting reasons to sell. I think it's pretty, I think it's a good one, Michael. That is compelling. Okay. So let's talk about the casino market. And Callie, you are the perfect person to discuss this with because you've spent your career dealing with retail investors. So you know what you're talking about. Eric Balchunas, and let me just set this up. So Josh and I were speaking with Jason Zweig, which was just what a thought for me that was. I think listeners could probably tell, but that was really, really special for Josh and I. And we were talking about what Jason refers to as the

gamification of markets. And I'm trying to be optimistic here in the sense that like, yeah, listen, my knee-jerk reaction is like to hate this stuff. Even though I love gambling, gambling in Vegas or in your FanDuel account, whatever, like maybe not so with the market. But my optimistic take on this is that people are for the most part, for the most part, I'm paid with a very broad brush, doing it with a small portion of their portfolio. They're under no illusion that they're doing anything other than gambling. And I think that the longer you do this, the more likely you're going to be like, oh, this is a waste of my time. I'm just going to read a book or try and make more money at my job or be with my friends

and family or whatever. And the sooner you get this out of your system, the better if you'll be over the long run. So that's like my optimistic take. All that being said, there is some crazy wild shit that is happening in the market. So Eric Balchunas tweeted, T-Rex's 2X MicroStrategy ETF, the ticker is MSTU, launched a mere six weeks ago and is already up 225% and trades half a billion dollars in volume, which is among the top 1% in ETFs. It already has $1 billion in assets. He said for context, the two leverage micro strategy ETFs are seeing as much volume as

gold and GLD and IBM. Chart off, please. Micro strategy, for those who are not familiar, micro strategy is in and of itself a leveraged bet on Bitcoin. This is the micro-saler company that is just taking all of its cash flow and even issuing debt to buy more Bitcoin. So MicroStrategy is a levered play on Bitcoin. In fact, I think it's up like 300% of the year. Bitcoin's up 60%. It's leverage on top of leverage. Eric makes a point, he said it's so funny. They've long had 3X, three or what's it from Inglorious Bastards? I can't, well, whatever.

3X micro strategy, there we go, ETFs in Europe, but no one cares. No assets, no volume. It's a marker for that amount of heat. There's no degens. The US on the other hand, it's make it volatile and they will come. So yeah, Eric says it's a 4X Bitcoin ETF. That's what we're doing here. And people are trading the shit out of it as much as GLD.

So what do we think, Callie? You've been in this business a long time, work with retail investors. What do we think? Is this terrible? Is it a mixed bag? Is this hedge funds that are trading this? What's happening? No. I don't think it's hedge funds. I'll start this off with, I will never judge somebody for what they do with their own money. I think you're closer to, when you say you think it's people with small accounts on the side, understanding

what they're doing, I actually think you're about right there. I really don't think micro strategy, like a two times a micro strategy ETF is one that my mom is playing or that your neighbor is playing and they don't have a 401k or an IRA out there. Investors are pretty sophisticated these days. I'm not saying this is a good idea for most investors investing for the long term, but I'm not shocked that people are rushing into it. I used to work at a huge retail brokerage globally, and MicroStrategy was consistently one of our top 20 most owned stocks. By the way, our most owned asset on that platform was Bitcoin.

You can bet that a lot of the customers holding Bitcoin were also trading micro strategy too. I don't think it's a bad thing. I think it's just a matter of access. The finance industry will always meet customers where they are. So if there's a demand for it, yeah, finance will put it out. I wouldn't trade this myself. I would probably be a little more careful. But hey, some people have different risk tolerances.

If you want to do it, go for it. I think something that you said is easy for people to ignore the fact that these are not ... This is not the dumb money that you think about. These are... And again, we're generalizing, so they're dumbasses for sure. We are generalizing. Yes, we're generalizing always. But the sophistication here, people know what they're talking about. And I think the Reddit boards have educated a lot of people and people know what they're doing. I think that, again,

painting with a broad brush, but I think that the average person who's like, what are you talking about, Michael? You think these are smart people? I think you'd be surprised. Yeah. There are a lot of technical traders who I'm sure are getting into this. And I am not a technician, but I do know when there's a lot of movement, technicals come into play. That actually was a really not a great statement. No, but not even just technicals.

There's premiums involved in micro strategy above and beyond. Like it's net asset value or what Bitcoin is worth. People know that they're overpaying. They know what's happening. They know what's on the balance sheet. They're not just like number go up. I mean, some are, of course, but I think that they know what they're doing generally. Yeah. And the other thing I'll say is, oh my God, they're getting on a brokerage account and they're putting their money in a stock. That is incredible. Americans weren't doing that at large a few decades ago. I almost boil it down to the least common denominator, Michael.

I would probably never do it, but I think it's a good thing that people are opening brokerage accounts and experiencing this for themselves. I think that's where I'm at. Taking a few steps. The bottom line is the more people invest, the better off they will eventually be. Even though if I can wave a magic wand and eliminate it, I would.

But it's not black or white, right? This is a very complicated topic that we could spend hours on. But before we bore you and do that, let's move on to the next topic. Callie, what's going on with the 10-year? Yeah, before we bore you with micro strategy, let's talk about 10 year yields. Yeah.

Isn't that hilarious? Good segue. So I want to show you guys something called the move index. Turn on, John. Move index. All right. So we were talking about the VIX a little bit earlier. The VIX, if you remember, is a gauge of S&P 500 options prices. This is an even nerdier cousin, the move index. So the move index is the price of one month over the counter options on two, five, 10 and 30 year treasuries, what people call the VIX of bonds, Michael. And the move index right now is at 131, which is about the highest it's been in a year.

So what's going on here? Like the VIX, you have to understand a little bit about how it works, a little bit about why institutions, this isn't really a retail tracking product, why institutions are buying protection or options on bonds. The answer is the 10-year yield has moved a lot over the past month. I think it's moved almost 50 basis points in October, which is a huge move. We don't see that a lot. So what's going on? To understand what's happening in the move index, you have to understand that the 10-year yield is moving.

Why is the 10-year yield moving? Why do you think, Michael? I know there are a lot of theories there, but what's your guess? Ben and I were talking about this today. I think it's, I'm just different more in pies. I think it's a combination of two things. First and foremost, well, how about this? Let me start with why I don't think it's moving. I don't think that it's the deficit. I don't think that people are all of a sudden, now real big, big, big money. I know there are plenty of people that are worried

about the deficit, but I don't think that there's enough money moving around that's worried about the deficit to send this multi-trillion dollar market one way or the other. So I think it's moving for two reasons. Number one, and this is from Warren Pies, it's the unwind of the recession fear trade. So people were preparing for lower rates and they were positioned for lower rates because they thought the economy was going to be softening, that the Fed was going to be aggressively cutting rates, getting back to neutral. And I think that they had to unwind that positioning. And now it's going the other way. And why is that going the other way? Well, this is baking to the pot, because the economy is a lot stronger than people thought a month and two months ago. Do I have it about right?

I think you're right. I think it's as easy as we thought a recession. We markets thought a recession was coming in July and August. And we were wrong. It never came. We were wrong. The economy's okay. And maybe we're tipping a little too far to the other edge now. Chart on, John. I want to show you something. Okay. So this is the chart that I've been pointing to, Michael, when people have asked me about the 10-year yield. Oh, I love this. Yeah. This is a chart of the Citi US Economic Surprise Index, which is an index that measures actual economic data and how it comes in relative to Wall Street's expectations. That's a game that a lot of analysts like to play, judging data based on what Wall Street

thought it would be. This is the Economic Surprise Index. As you can see, it's ticked up a lot on the right side of the chart since middle of September, early October, which coincidentally is around the time that the polymarket odds for Trump have started ticking up too. I'm not saying it's correlated. I'm just saying that's probably a reason why people have been assigning the 10-year yields

move to Trump election odds. Anyway, the 10-year yield has basically been correlated with the economic surprise index. That makes a lot more sense to me. The 10-year yield has basically been correlated with the economic surprise index. That makes a lot more sense to me. The 10-year yield is an economic proxy. I do think it's gone a little far though. I think 4.2 is a little hefty. Okay. So, some people will look at this chart, turn it back on please, and dismiss it and say,

well, look at the left side. There's nothing there. And all of a sudden, now listen, okay, sometimes there's noise and sometimes there's signal. And in this case, I do believe, even though I'm very sensitive to chart crimes, in this case, I do genuinely believe that the economic strength is driving yields higher. I don't think that's a stretch at all. I just think, come on, common sense, eyeballs, that's what's happening here. Yeah, sometimes it really is just common sense and the easiest answer. But let me throw one more thing out at you. So I actually forgot to put this chart in. Guys, I had an awesome chart, forgot to put it in the doc. I'm so sorry. But

the 10-year yield, if you look at breakevens, which is the difference between the 10-year yield and the 10-year tips yield, so basically the market's expectations for inflation, breakevens haven't moved over the past two weeks. So you have some people saying, oh my God, inflation is coming back. Here we go. It's the second coming of 2022. Markets aren't really reflecting that. And it's interesting because the 10-year yield is going up, inflation expectations are staying stable. That like term premium, they call it, that bucket of everything else,

every other reason that the yield could move is getting really high. It's around 2% right now. So when I think about where the 10-year yield is going, I point to that 2% term premium and I see that coming down. For what reason, what will make it come down? I don't know, but things seem lofty right now.

I also think the fact that this rise in the tenure has not coincided with the stock market sell off, which every other move of this magnitude over that period of time has, tells me that the market is not concerned about the move because it's economic growth, which is supportive of fundamental strength, earnings, and all the good stuff that drives markets higher. Yeah. And this actually ties back to what we were talking about earlier about the lack of really movement in the stock market, just grinding higher. Expectations were way too low coming into October. It doesn't mean that the economy is doing spectacularly right now, but it's doing just well enough that people are pleased.

Well, I think the initial jobless claims is real head fake. Oh yeah. It totally was a head fake. It came and it went. Yeah. Yeah. It's probably hurricane related. All right.

Good stuff. Anything else on here, Callie? No, just watch the 10 year yield. I think this is the most interesting story right now outside of the election, which probably tells you why it's quiet in markets. But hey, I'm a nerd. I think bonds are interesting. All right.

Let's talk the mega-megas. Global equity returns are big. All right. Forget about the title of the chart. Just look at the chart itself. So this is from Torsten Slak, and he's showing the market cap of Nvidia at $3.5 trillion compared to market caps of G7 countries. And outside of Japan and outside the United States,

Nvidia has a larger market cap than Canada, the UK, France, Germany, and dwarfs Italy. And now, these numbers just get lost. So I love context because the chart off plays $3.5 trillion. What's a trillion? Like it's just such a big number that it loses its meaning. You know what I mean?

So I saw this tweet from Sam Lessin that really did a great job contextualizing what the hell we're talking about here. So he said that Metta is worth almost exactly the same as the sum of all New York City real estate. Apple is two times larger. And he says sometimes it's hard to feel these huge numbers without a comparison. So yeah, I don't know that any of this is actionable, but I just, I saw it, I was like,

holy shit. I don't know which one is wrong or if they're both right. I genuinely defer to markets. But wow, Nvidia is met as worth more than all of New York City real estate. Yeah. It is one of those charts and those stats that just makes you kind of lose your breath a little. You're like, wow, you know, a trillion. We're talking about a trillion dollars. A trillion dollars is a lot of money.

Let's play that by three. Remember, I know you remember when Apple first crossed a trillion dollars, and people were like, all right, this is going to do it. This is going to be the top. And of course, you can't throw out market caps or anything without talking about, well, OK, how much revenue are they generating?

How much cash flow? What are the margins? What are the growth? And listen, we, the market investors, we're not stupid. There's a reason why Meta is worth 1.8 trillion or whatever the number is. There is a reason. And it doesn't mean that it is always right or that this won't feel foolish with the benefit of hindsight? We don't know. But that's the point. We don't know. But it is wild nonetheless to think that Apple is worth two times more than all

of the real estate in New York City. And maybe that's right. OK. Yeah. One thing I want to point out on that first Nvidia chart, John, can you throw up the? Yeah, that's right. So this is a chart from Torsten Slock.

And when Michael first sent it to me, I was like, oh great, it's another one of those stats that's like Nvidia is bigger than like these 50 economies combined. And it is kind of that, but what Torsten pointed out in the report, which I thought was really astute is the fact that, I mean, Nvidia being $3 trillion, that means that it's globally leveraged.

That means that investors all around the world are invested in it. And you can kind of see that in the numbers. I mean, Nvidia can't be that big just on American shareholders backs, you know? So I don't know if that's a good thing or a bad thing. I guess it shows you just how robust and I guess well- known our biggest companies are.

You know what I want? I want some, I want apples to apples. Is it show me the revenue of Nvidia versus Canada? No, seriously. Yeah. Like for like Nvidia versus Canadian companies is Nvidia doing more revenue than every company in Canada? No disrespect. I don't know. But I mean, it's not out of the realm of possibility. Listen, these are the type of things you don't say this on a podcast, right? Because you might look really stupid. I don't know. I don't know if it's possible or not. But I feel like I need to, you know what? Homework for ChartCube. We'll do that for next week. All right. We'll get that to Matt. Yeah. Sticking with margins and fundamentals.

Where are we going next? All right. We're talking about. Yeah. Sticking with, um, margins and fundamentals. Where are we going next? All right. We're talking about margins. So chart on John, I will never, uh, get used to saying that by the way. Okay. So I thought this was super interesting and Josh actually sent this to our little research group we have going on at Redholds. Shout out to Adam Parker. Yeah. Shout out to Adam Parker. One of the best on the street. This is a chart of profit margins, I believe operating margins, gross operating margin broken down my market cap. The blue line, as you can see, is for the top 50 stocks, I believe on the market. Then the green, wow. The black line that you see at the bottom, I know my colors, I promise. The black line is for stocks from 51 to 500.

What you can see here, and I'll remind you, so the story about profit margins is that they've been steadily rising, rising, rising since really the beginning of 2022. They took a little bit of a dip in 2023 and are back to margin higher. The talk around that is greedflation. The economy is so strong. Companies didn't get hit at all. And that's actually not true. Adam Parker found that step up, step up, step up,

and profit margins really was the result of the mega caps, Mike. It wasn't a story for every stock on the market. Certainly not every stock, but even for those large cap stocks that aren't exactly the top dogs, that aren't those tech giants with huge competitive moats. We saw a little bit of damage there in 2022 and 2023. I love this so much.

Not that I needed my faith in markets restored, because I do believe- Trudolph, please. I do believe that markets move on fundamentals. I do believe that there's a lot of dumb shit that moves markets on any given day, obviously. But what that chart showed, and chart back on please, look at the black line which shows the profit margins of the S&P 500, besides for the top 50 market cap weighted companies, margins got hit big time. They really did. Look at that.

It went from 45% down to, I don't know, 38, whatever the numbers. That's serious deterioration. And guess what? Look at a chart of RSP. It's the same thing. We're only just coming out of, we're only just making all-time highs in RRSP a couple of weeks ago as we're getting the rebound. So the businesses got hit,

the stocks got hit, the businesses recovered, the stocks recovered. This is what drives markets. And we don't know where fundamentals are going, but this is the shit. Right? So I don't care about who the president is just for the market. I don't care about who the, don't tell me who the, who wins the president. Tell me what the margins are going to be. Like that is so much more informative for where the market is going. Yeah. And this is the story of earnings too.

I mean, if you look at corporate profits, uh, you know, over the past few years, yeah, we saw a little bit of dip in 2023, a little bit of a dip in 2023, but what you didn't see if you looked at the broader view is the fact that tech really has led earnings growth over the past few years, and earnings have just now started broadening out and moving to other sectors. So we're seeing a bit of an earnings recovery right now,

which is really interesting to think about. We probably, if you had to guess without looking at the numbers, you'd probably say, we're a little more late cycle and earnings would look toppy, but that's not really the case. I think I did this years ago, just rid myself of the market cap number in terms of, oh, it's such a big number. Yeah, okay. We all have access to the same information. As long as, I think what shocked me more than the market caps was the fact that the companies

of this magnitude, Google, which just reported a 50% pop line, 37% bottom line, I never would have believed that this sort of fundamental expansion, trees don't go to the sky. Oh yeah? These trees are growing pretty tall. I know it's not forever forever, but my goodness. The bar has been high for these companies for the last decade, and they just keep raising it. So great chart from, in terms of the market's reaction

to earnings, which we are in the thick of earnings season. This is from Bank of America. We're looking at the most positive reactions to beats since the fourth quarter of 2018. And given that we're in a bull market, man, you just love to see this. So I remember talking with Josh a couple of years ago, holy shit, it's been years, huh? That even beats were getting pounded.

It was 2021. Stocks that were beating were still getting destroyed. And we know the story there. But the fact that companies that beat on both the top line and the bottom line are getting re-rated higher, shut off, please. What else do you want to see, people? This is it. This is the thing.

We're doing the thing. Companies are beating. Stocks are reacting. You love to see it. But the same is happening on the other side, Michael. Stocks are missing and they're getting punished. So what's going on there? I love to see that too. Listen, this is how the market should work. It's not index fund investors. And I'm not saying that's not maybe a piece of it. Flows matter, of course. Positioning matters, of course. It's the fundamentals. AMD. How much is AMD down in the after hours?

Okay. They reported bad whatever and the stock is getting whacked. Good. That's the fundamentals. AMD. How much is AMD down in the after hours? Okay, they reported bad, whatever, and the stock is getting whacked. Good, that's the way it should be. Michael loves chaos. No, I don't like to see anybody lose money, but I like to see that the market is tied to fundamentals. And I could hear people in the back of my mind, oh, you have the CAPE ratio, Pree, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah. The market is doing what the market should be doing, at least as far as I'm concerned. Yeah. And I think that this is a reflection of how low the bar is for earnings this season too. At the beginning of the season, I think the Wall Street estimate for profit growth is around 3%, which is low, by the way. If you look at estimates

for the quarters after, I think it's 10 plus percent, which I mean, that's Wall Street for one. I mean, they always start really high and then cut, cut, cut. But the bar was incredibly low to the point where I think revenue growth was expected to be higher than earnings growth. You don't see that a lot. You know, the bar is low. If companies hurdle the bar, people are happy. If the bar is lower than companies have an easier time hurtling.

And you have to remember to, Tesla went up 20%. So there's a little bit of her mentality there too. Yeah. Yeah. Callie, anything else for the audience? Yeah, I've got a great chart to close this out on Michael. Speaking of fundamentals, so margins, this chart, sear it in your brain.

It's one of my favorite charts to show people. This is the money chart, margins matter. Margins have lined up with market trouble in the past. The shading that you see on this chart is corrections in the S&P 500. That's a drop of 10% or more. Corrections, at least for the past 15 years, have almost perfectly lined up with drops in the profit margins. And you're looking at operating margins here. And the second thing I want to show you is the estimates for profit margins going out. Again, Wall Street does this. They like to start high and cut, cut, cut into the season, but estimates for profit margins are

basically going straight up through 2026. Is that a good story? I think it's a good story. Well, now the story's baked in and we got to get there. But one of the bear cases from one of the most prominent, let's call it bearish, shops on Wall Street is GMO. And the bear case in the 2010 decade was that profit margins are the most mean reverting series in finance. Just for the simple fact that, listen, if margins competition comes in and what they got wrong and by the way I would have gotten it wrong. I don't fault them for for not being right on the future the future is impossible what I think that that

Either they didn't understand or what they couldn't foresee because we can't we can't see the future is that the dominance of tech specifically was going to keep margins high and specifically, was going to keep margins high and continue to have them higher and higher and higher. And there's no precedent for this in history. So GMO, students of market history, there's nothing like this. The playbook, it's a new playbook. It's a new paradigm. And so yeah, there are limits and I know this sounds pretty toppy, but like the point is

margins are the thing and margins have continued to go higher. And when they come in as they did, the market goes down and when they go back up, the market goes back up. But now we got to meet them. So the good news is that markets are high, stocks, businesses are doing well. Bad news, but the expectations are higher now. so now we put up a now, or we shut up a put up. I don't know what the phrase is, but you know. You put up and shut up? Yeah. Put up and shut up?

Yeah. Gotta put up and shut up. Yeah, listen, phrases are tough when you're talking to a microphone, you realize how dumb the English language is. So, all right, listen, Callie, you are the best. Thank you for making the show so much fun tonight. We're gonna be back next week, but not on this program. This is a programming note, so to speak. Play the music, okay. There we go. All right. So next Tuesday, we're taking off

because you are going to be voting. You're going to be voting on Tuesday, but we're going to be back. Myself, Callie, Josh, and Ben are going to be here on Wednesday for a mashup election. What are your thoughts? And we're going to talk about the results of the election through the lens of the market, of course. What is the market's reaction? Is the move moving or stocks higher or lower? Whatever, whatever. Callie, thank you so much for coming on. Thank you for having me. Always a pleasure. Subscribe to Optimistic Alley. Got the best research in the business.

Without a doubt. Thank you very much for listening. Hope everybody is enjoying themselves and have a wonderful night. Whether you're just getting started as an investor or you're managing a multimillion dollar portfolio, Ritholtz Wealth Management has the solution for you. It all starts with building the right financial plan. To speak with a certified financial planner today, visit ridholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning

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