The Compound and Friends - The Tech Unwind

Episode Date: August 2, 2024

On episode 152 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Bryn Talkington of Requisite Capital Management and Athanasios Psarofagis of Bloomberg Intelligence to discuss: Fed day, the tech unwind, who is buying levered ETFs, nonfarm payroll, small caps, and much more! This episode is sponsored by Calamos. To learn more about the Calamos Alternative Nasdaq & Bond ETF, visit: https://www.calamos.com/funds/etf/calamos-alternative-nasdaq-and-bond-canq/ 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: https://www.linkedin.com/company/the-compound-media/ 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

Everybody loose? Everybody excited? Yes? I mean, this is like a fun house for me in here. Oh, you haven't been here yet? So we had you on the show from Houston. Yeah. It just occurred to me. Okay. What's the wealth management business like in Houston? My understanding is everything runs through the Fertitta family.

And if you're not in, you're out. Nah. It's not like that? So we're actually in Dallas. I go back and forth between Houston and Dallas, but requisites in Dallas. You know what? It is thriving.

If you took the jump to be independent, which we did seven years ago, it's like on Matrix, one of the best movies, do you take the red pill or the blue pill? I think the blue pill is where you go every day. Where were you before you went independent? I was at UBS for 2002 to 2017. Yeah.

Oh, wow. Yeah, a long time. And I was at Bear Stearns before that. The Wirehouses are still very powerful, though, in Dallas and in Houston. Where were you before Rockerset? Were you at Pre-Rockerset? UBS. But a bunch.

Thank you. Yeah. Well done, Michael. Thank you. I see an unsolved Rubik's Cube up there. Yeah. If you give it to me, I'll solve it while we're talking. Do you know, so my seven-year-old is obsessed with a Rubik's Cube.

They have an app on the iPad where you take a photo and it tells you how to... Kids these days. I have one in my briefcase. It's a cheat code for a Rubik's Cube. Wait, time out. Wait, are you about to Rubik's? Are you seriously doing this? Yeah, I have one in my briefcase. I can't see that. I need to be a little.

Well, okay, you start with the yellow and I'm gonna make a cross with the white. Why do you start with the yellow? You always do. Because, so. Math? Because math? Hey Josh, she's working. This is very exciting. Yeah, I mean, it's gonna take me three minutes to solve it. So if we want to like talk. Okay. I can solve it after the show. It'll take me 30 years, so that's okay. Okay, so now it's like this, and then you match the color, like I need to- I'm sorry, it's like what? It's yellow in the middle and whites all around, like a plus sign. Yeah, and then whites on the other side, right? So there's blues lined up, and so I'm gonna go like this.

I'm gonna line up the red. This is mesmerizing, and also a little bit boring, but also a little bit mesmerizing. I know, I was gonna say, we can talk, we can talk and do it. No, no, no. I want to see... You seem very definitive in the moves you're making. You're not thinking about it. Oh, right. Because I mean, I do it all the time. It's a formula.

You're acting on instinct. It's almost like the training kicks in. I don't even really have to look at it. Do you have to get one side... You can't get one side first. You have to get all the sides at once, right? That's ridiculous. You can't get all the sides at first. And so... Tom, what's the get all the sides of the curtain, so... Tom, what's the Rubik's Cube of ETFs?

Oh man. Probably the... The buffer ones. Okay, okay. Oh yeah, those are great. So while you're doing that, I'm actually going to put Tom in handcuffs and have him get himself out. Okay. Like a little Houdini trick.

Yeah, yeah. Right? Oh, look at you. No, I messed up. Look at you go though. Yeah. Oh wow. I'll get the reflection. What's going on over here?

It's almost done. So now I have the top, the top, and then I have the first layer. Okay. So you go layer by layer. Yeah. Well, we can start. All right, fine.

It's like a portfolio. Did the bear market just start? I think it did. Is it down today? Yeah, is that this top signal? Today is the first day of the bear market just start? I think it did. Is it down today? Yeah, is that the top signal? Today is the first day of the bear market. S&P is down 2%, EqualWit is down $1.60. Well, Small was down like 3 at one point.

Small should never have been up 12 to begin with though. Wait, what was the deal with the XLK rebalance? It's like all Nvidia now? Yes. What happened there? I don't get it. It's just a wonky old rule that they had. Because XLK is down. The reason why I said XLK is down 4.6%.

They timed that trade perfectly. Because now they're going to have to undo that whole trade because they sold Apple by Nvidia. But Apple has been beating Nvidia since the rebound. So they're just going to have to buy all that Apple back and sell Nvidia. So essentially they were under. This was in the calendar quarter, so like end of June.

So they were underweightIA this whole run up. And then they went really overweight NVIDIA with this while this has been going down and the underweight app. It's just this old wonky rule, they cap it at 4%. Whose rule is it? It's just an old index methodology rule. Okay. S&Ps?

Yeah, it came down from like diversification rules, but at the time when these were created, like in the 90s, they didn't think about it, right? So they were just like either they were had all the tech boom. So they were like capping these names from getting too big. And it's just like a legacy rule that stayed with the. They probably couldn't have contemplated the current state of the index and the size of these companies and the share price moves.

It's probably like hard for them to picture that ever happening. Yeah. Like five years ago in video is what 300 in the SMP and that went to one in just like a couple of years, so I don't think them to picture that ever happening. Yeah. Five years ago on video, it was what, 300 in the S&P and then it went to one in just a couple of years. So I don't think they anticipated that they would do that. I'm getting there. But I think also, I think investors have to be really careful with these sectors because they're so wonky the way they're created. You have like two stocks or 40% of a sector. The discretionary too. It's Tesla and Amazon, right?

Yeah. And so it's like like how's consumer discretionary doing? You can't look at that index to tell you that. You know who sectors are important to? Sell-side Wall Street firms who need to organize their analysts based on coverage universe. No one else should pay any attention, honestly. I agree. Now, I look at sectors to understand what's happening in the markets as a shorthand, but like that's

pretty much it. I would never say, oh, I want to have a sector-specific portfolio and try to outperform the XLK or something. It seems like an absurd thing to even worry about for most investors. I think it's like growth and value. It's like something from the 90s or 2000 that's still this year today. You're not a proponent of classifying the market by growth and value it's like something from the 90s or 2000 that's here today you're not a proponent of classifying the market by growth and value no I think something of a relic of it I like that speaking of sectors I just had

chart could do this before we hopped on four sectors are down 2% today it's three o'clock so many gas tagging communications the four of them are down oh four the last time four sectors down two percent on a day was like October, 2023. So it's a pretty ugly day. I think these are actually cattle from my ranch in Kauai. Mark. By the way, these are, they're called Mark's cows. Delicious, delicious cows.

Delicious Mark's cows. Speaking of sectors. There you go. Next time we do, so Mark came up to my house and we made Philly cheesesteak together. Next time you're bringing the cow. I'd say you did. I was more of a sous chef.

But it was really good. It was really good. That sous chef comment. OK, listen. And then at the end of the night, though, you were like, hey, so you ate enough, right? And I was like, I don't know. I could eat another one.

You're like, really? You know, usually? And I was like, I don't know. I could eat another one. You're like, really? You know, usually when you say something like to your guest. I was definitely like, yeah, we're making more. We're making more. Jeez. Did you get enough to eat? Usually your guest says, oh, yeah, I'm fine. Make me another cheesesteak, Jensen.

That's awkward. It is awkward. So just to let you know how OCD he is, so I turn around. I'm prepping the cheesesteak, and I said, Mark, cut the tomatoes. And so Mark, I handed him a knife. I'm a precision cutter. And so he cuts the tomatoes, every single one of them are perfectly to the exact millimeter.

But the really interesting thing is I was expecting all the tomatoes to be sliced and kind of stacked up kind of like a deck of cards. And when I turned around, he said he needed another plate. And the reason for that was because all of the tomatoes he cut, none of them touched each other. That's insane. Once he separates one slice of tomato from the other tomato, they shall not touch again. Yeah, look man, if you wanted them to touch, you needed to tell me that, right? You need. I'm just a sushi.

That's kind of funny. That's why he needs an AI that doesn't judge. Yeah, it's like. All right, that's Jensen Wang and Mark Zuckerberg doing shtick, I guess. The last part was kind of funny. These are like number three and five of the 10 most wealthiest people, maybe whoever lived.

And uh... Don't you guys think those Mark Zuckerberg is coming to his own self? He's like become much cooler. I like him now. He's foiling. He's got the law. He's got curly hair. He's relatable.

He probably can't do a Rubik's Cube anymore. He probably forgot how. He probably forgot how. So he has the curly hair. They actually made a joke. By the way. He looks like Jesse Isinger now. By the way, I would not have known that there was a talk between Jensen Wang and Mark Zuckerberg,

if not for the quarter app. I have alerts on certain stocks and I'm long in video. So it told me, hey, there was this thing that happened with Zuckerberg and Jensen Wang and I listened to it and it was great. It was part of a big Nvidia graphics conference and Mark was the guest of honor. But the Quarter App is really great because it just would let me know something that otherwise, and you press play, it's like a podcast. You just have it. I think in our business, I think we're AI as an RAA firm. We're seeing the productivity so quickly. And during earnings season,

the quarter app is the only app you need on your phone. Yes. I mean, it's the best, right? It's like my favorite. So shout to the guys at quarter. And obviously we've said this before, we're investors in quarter. But I'm a power user now.

Michael's probably the biggest power user. I left. Yeah, I did. Yeah, yeah. But I'm in there too. One of the interesting things about Zuckerberg, now that he's like hot, and his social media team is like really on it,

and he's posting memes of himself surfing and all the things that he's doing. No more white face. Yeah, no. With all the zinc. He's not doing that anymore. And his hair looks great, and he grew it out, and he's naturally curly,

but it looks like they're laxing it, right? So I was thinking the next step should be a face tattoo. He should go full post Malone Just like a few like words and random symbols somewhere on his cheeks. So something I feel like is the only place you go from that Anyway, how we doing with the cube? I'm good. I'm talking and Why don't we start the show, John? You got your slate? Yeah. All right. Man.

Three claps. Look at you go. Wow. All right. That's incredible. Almost done. Amazing. That works.

Three claps. The second clap is the one. Welcome to The Compounding Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed

in this podcast. Today's show is brought to you by Calimos. With its roots in convertible bonds and options expertise. Calimos has been an innovator in risk managed securities focused on equity like upside with bond like downside protection. We spoke about this on the show today. I call them equity ETFs with guardrails. Michael, if people want to learn more about these types of investment strategies, where do they go?

Go to the link in the show notes. Ladies and gentlemen, welcome to the compound and friends. I'm one of your two hosts. My name is downtown Josh Brown for first time listeners. My cohost, Mr. Michael Babbitt. Hello. Hello. Good afternoon. We have two very special guests here. A returning champion, Bryn Talkington is a managing partner, co-founder of Requisite Capital Management with a focus on capital markets, alternatives, and investor behavior.

Prior to Requisite, Bryn spent 15 years at UBS Asset Management and worked at Bear Stearns. Welcome back to the show, Bryn. Thanks, so great to be here. You know you're one of my favorite people, right? Thank you. I always say this. I've heard him say that. I really have, I really have. Oh, it means a show, Brynn. Thanks, so great to be here. You know you're one of my favorite people, right? Thank you. I always say this. I've heard him say that.

I really have. I really have. Oh, it means a lot. Thank you. And joining us for the first time and wondering what the f*** is going on. I'm gonna do this the right way. Athanasios. Yes? Yeah, very good. We're gonna call you Tom. Can you help me with the last name?

Yeah, Seraphagus. Seraphagus. That's not how it's spelled though. The P is silent. Throws everyone off. Yeah, Sarah Vegas. Sarah Vegas. Yeah. That's not how it's spelled though. No, the P is silent. Throws everyone off. Okay. Very cool. Now you're Italian?

Irish. Irish. Great. Tom is an ETF analyst for Bloomberg Intelligence. Prior to joining Bloomberg, he held roles in ETF groups at Oppenheimer Funds and Index IQ and worked in product development at NASDAQ. Tom, welcome to the show. Yeah, thank you. Glad to be on.

We're so happy to have you here. Let's start with the FOMC reaction, which is weird. It's like a two-day reaction at this point. So a day and a half reaction. So everything seemed all good after. Everyone was happy with the fact that there was no cut, but cuts are coming. They hinted the hell out of it. They did everything that they could make you do to know that it's coming. But we have until September 18th and it's only August 1st. That's a really, really long time in market. And then today we got an initial jobless claims report that I think spooked people and now

there's a lot of second guessing. Wait, why didn't they go in July? Which by the way, is what I said they should have done. I don't know, market reactions are always interesting after the FOMC, but this one seems bigger than what we've seen. Is that recency bias or? What do you think, Bryn? Well, I think that, well, two things. July was probably the right thing to do.

Yeah, of course it was. But the reality is, unfortunately, the Fed has only engineered a soft landing 10% of the time because they wait till they get hit in the head and the data is right in front of them. And understand every data number we get is in the past. And so you would think with 400 PhDs and really smart people, they could actually do some forecasting and like some educated guessing. They don't want to do that. But they don't do that. And so I think it was actually the manufacturing data

also is weaker. Yep. ISM. Right. And so because this morning, like everyone accepted Metta's numbers, like those are fine. Mark was very candid. He's going to spend more. He was honest about it. That was up. And then that manufacturing number came out. I think that really unwound everything of that. Hey, bad news is bad news. Today is the first really risk-off day that I can remember in a while.

You've got, as we mentioned in the cold open, the S&P is down 2%, the Equal Aid is down 1.6, but you've got utilities right now, HOD up 1.5%, consumer staples at the highs of the day, healthcare as well, three notoriously defensive sectors. It's been a while since we saw everything blood red, except for the most defensive names in the market. It's been a while since we saw everything blood red, except for the most defensive names in the market. It's been a while.

Tom, one of the things that Market Watchers spent most of the summer doing is these charts about how long it's been since we've had a down 2% day. So now we got two, two weeks in a row. Do you think that this feels any different than the one that happened last week, which I think we had a huge rally the next day anyway?

Yeah, we did. And we had the rally the day before, too. It always seems like, I don't know why these days of really aggressive outboard performance, underperformance, why do they always cluster together? And I don't know if that's just the beginning of a rotation. Because we've looked at some stats,

like what happens when small cap comes up a lot right so the rotation from small to large and vice versa again these days tend to cluster all the time it seems like the last time there was this clustering it opened up the door for small caps not saying it's going to outperform but there's always seems to be a reversal period against these these really aggressive clustering but usually in at bottoms or in their markets bear markets we're seeing that in a, obviously, a bull market. It's interesting, maybe Nvidia is the poster child of what we're talking about.

Two days ago, it was down, I don't know, like 9% or something. And then Microsoft came out, gap down 7%, Nvidia was down 4% in the after hours, but then AMD came out, and Nvidia was up 7% or whatever. Then yesterday, Nvidia had the largest single market cap added day of any stock of all time. What was the dollar amount? It was up $3. Then yesterday, NVIDIA had the largest single market cap added day of any stock of all time. What was the dollar amount? It was up $330 billion yesterday because AMD,

which is a proxy for NVIDIA, reported great earnings. Now today, it's down 8% giving that all back. And that's like not exactly healthy market behavior. No, it's, it's, I think, I think also investors need to understand 20 years ago ago you didn't have this algorithmic trading and zero date to expiration options. And so I think between the algorithmic trading with all the dark pools, hedge funds, et cetera, is creating this rotation out of Nvidia into small cap, made no fundamental sense.

It was a short covering, then you plus you had the options move come in and you get this flush to the upside. Absolutely right. That's just where we are. Products like NVDL. I don't know exactly how they're impacting the market, but they are. They're amplifying it.

I said today on TV, I wanted to ask you about this, Tom. I was saying like, this is the biggest casino in the world right now, Nvidia alone. The amount of options volume, zero day options, weekly options, just the amount of overall share turnover in a given day. Almost nothing that happens with the stock is based on anything fundamental. It's just gamblers against other gamblers and some day some win, some days the others win. And nothing has really changed with the story at all.

You see it the same way? Yeah. No, in NVDL, you just mentioned, it's like a top 10 traded ETF overall. That's insane. So for the listener, NVDL is the 2X Nvidia lever. So it's supposed to give you on a daily basis, not long term. It's supposed to give you twice whatever Nvidia does up or down. Yes. And I think the ETFs brought in a lot of different investor bases, right? Before it was like you were doing options. Now the ETFs brought in a lot of different, like investor bases, right?

Before it was like you either were doing options or whatever, now the ETFs have made it so easy. That thing's got what, five billion or so in it? And it's still at $200 million on the air. Amazing. You know, we were pretty, we weren't that impressed when they first came out. Like, why would you buy a single stock ETF?

Like, this makes no sense. And we were completely like overwhelmed with what that product is. Because you weren't thinking like a DJ. Yeah, exactly. Well, also it's not a single stock ETF, it's a single stock ETF with leverage. You would not buy a one for one.

No, so you can always make the case people are like, well you can just margin the account on your Schwab, you know, through Schwab, but this is so much easier. Yeah, I want to do it in my IRA. You don't have to do it, right? Or you can short it, exactly, you can't do it in that. Can't do it in an IRA. This bypasses a lot of it.

Do DayZide today lead to more aggressive trading of Nvidia or less? Do people get cleaned out and then just say I'm done playing that game? So I'm looking right now NVDL it has explosive volume today tons. Right but what happens tomorrow? Do people say well I'm not doing that ever again or do they want to do it anymore? I don't know. But here's what we know. Like, why would the volatility wane right now? It's like the VIX in general is elevated, NVIDIA is elevated, but here's what we know for certain.

At the end of the month, they're gonna crush earnings. And the stock is just getting cheaper and cheaper from a multiple, because you know if AMD, which really doesn't even have the goods that Nvidia does, that AMD... Not even close, by the way. Right, not even close, crushes it. And like Frenemies, Mark and Jensen are now besties, is telling you that Nvidia is going

to have great numbers. Well, you're right. Because, well, there was a comment Mark said like, well, I'm a very good customer or whatever. And Google and Microsoft are both saying how much they're spending on AI. And you're 100% right. Nvidia's going to crush it. I like this setup a lot more than if Nvidia was mooting into the earnings, right?

But we don't have Nvidia's earnings until August 28th. It's a long time away. Yeah, so just to sit to the volatility. Ten year yield fell below 4% today for the first time since February 1st. Let's put this chart up. I guess this is what you would expect. Number one, on the front end, we know that the next move in rates is lower. The Fed all

but guaranteed it. And then two, the economic data is now continuously surprising to the downside. How could the 10-year possibly hold up in the face of that? And the two-year as well? Yeah. There's a few truisms in our business. And the first one is the 10-year is set by the market and the short end set by the Fed and the 10-year is telling you the economy is weakening. So the chorus of people saying to get out of cash earlier this summer, of which we were very much a part of, that was the right call.

And hopefully people listened. Money markets are not going to roll over in price. You're just not going to love when they're yielding four and a half percent. Unless stocks are getting killed, you're going to like it real good. Well, then you'll like it. Then you'll like it a lot. Do you see anything in the bond ETF world? Totally. Yeah. They tend to be a little bit slower. But if you look at the cash type ETFs,

Bill, which is a one to three year treasury SGOP, massive outflows from yesterday. So you're kind of seeing that happening. People are getting the message. Getting it through. They're either piling, if they're staying in bonds, they went into ag, they went a little bit into TLT, which is the really long duration treasury, but you're definitely seeing the money move out of cash. But also when you say they, a lot of the they is model portfolios.

Models, I think that some products tend to be more, TLT I think is pretty institutional, but yeah a lot of it could be models as well. They're kind of, you know, they'll use bill as a... So a model portfolio being overseen by a CIO, they might say, okay, 30% of our fixed income allocation is sitting in SHY or sitting in bill or something like really short term. What we want to do now is lengthen that out. And so you like will you see in the data money go into like IEI which I think is a three to seven year IEF is the seven to ten year. You'll see that. Yeah. Oh yeah. There's a couple that really stick out. IEI is one IEF is seven to 10 year. Those are ones that just, we know that models use them.

So the ones are always constantly looking for. So it's not retail. This is wealth management slash tamp slash institutions. It's not to demean the retail. A lot of them don't know what IEF is. If someone was to mention what that, they wouldn't know it's a seven to 10 year. So how does this work?

Correct me if I'm wrong. It feels like the BlackRock fixed income ETFs are like the ETFsRock fixed income ETFs are like the ETFs for fixed income models. For some reason, Vanguard didn't really catch on as much in that space. How does something like that happen? They were first, they got the liquidity.

That matters a lot, meaning the second dairy market liquidity. So they see the volume on it, they want to buy it. Just also the support you get through BlackRock, right? Like calling them up. Calling calling them up their cat markets They've got the Aladdin Even on the Bloomberg terminal most of the stats you want to run are gonna be I shares ETFs So they were first to do it one other thing this I think who really missed it But this Vanguard have those duration bucket. They don't they don't slice it up

Like if you want a total market bond ETF. Well, so that's part of the answer too. But you could buy a long duration Vanguard, like EDV, but just there is this synonymous relationship with iShares, bonds, and like institutional. You're just gonna go there. Like Bill, for example, is a State Street product. So there's a couple of pockets, but for the most part,

they have like 65% of the market share on bonds is iShares. And BND is still a big fund though. Yeah. Vanguard's BND is gigantic. But that's the AG. That's the AG and that's just you know mostly for target date funds stuff like that. So I think iShares very wisely did those slices because if you're an institution and you want to express a view, buying the AG or BND is not going to get it done for you. So, of course, you could use regular bonds. You could use an active manager or you can just have this suite of, hey, I want three

to seven year instead of seven to ten. Why? It's just my opinion. That's where I want to be. People want to do that stuff. Professionals want to do that stuff. I want to ask you guys a question. So the reason why stocks are falling today is because the data is weakening.

Right? Like we have bad data, stocks tanked, yields tanked. If the Fed cut yesterday, how do you think stocks would have reacted to today's soft data? It would have been bad yesterday because that would say the Fed for once in their life, they actually saw something that we hadn't seen. You think that would be the takeaway? There was no reason for them to cut yesterday, except if they were, to your point, you were

looking forward, kind of trying to look around a corner and say, I think they should cut now. I also said it in March. I think the market would have ripped yesterday. You're thinking that investors would have said, why are they cutting? Yeah, because Powell has been so scripted, you know, in his own script about wanting to see the data. And so they changed the words, right?

Like now they see unemployment. You know, we see unemployment and now the Psalm rule, the woman that put together- She's so hot right now. I know, right? Claudia Psalm. She's on the name on everyone's lips. I heard of her three months ago,

but now that's what we're all waiting for. Well, because what Claudia Assam devised, and she'll tell you herself, it's not like foolproof, but she devised this way of looking at backward looking data, which unemployment is, but coming up with a way to speed it up and show you what the more recent trend is versus the larger trend, and almost give you like an early warning system. And when it moves up half a percent, right, 0.5, which it's moved up 0.4, right, then that has been a very good predictor of recession. But I mean, it doesn't feel like we're in a recession.

It doesn't seem going into this election cycle. We're going to go into a recession. So we have non-farm payrolls tomorrow. Well, can we do this chart with the FOMC start time? I always find this interesting. So the gap going into it and then just like parsing through what happens after, that's all algorithms, right? That's not people making decisions

based on a press conference. I was trading. Was that you? It was algorithms plus Michael. But it's pretty powerful. It is. You have software programs that are written to detect the change in the language in the statement and they just go.

And some of them will be right and some of them are betting the other way they'll be wrong. But we should not interpret that necessarily as like regular people being like, hey, what does that mean? It's not till later. It's not. Exactly. Maybe even the next day. So maybe that's what today is about

in addition to the weaker data. It's just people being like, wait, they should have cut their behind the curve. But ultimately it's like earnings have been, earnings for large cap at least have been really strong. Earnings for small cap, not so much, whatever, but earnings for large cap has been really, really positive. I'm sure Apple and Amazon will also have good numbers.

And so if you just like kind of sometimes you just ignore this economic noise, because it is just noise, that earnings are good. We'll see what happens with unemployment. We're not at 5%. We're at what? 4? 3? We're going to get Apple and Amazon in about 40 minutes.

Apple's late, but that's the only thing that could stop this probably right now. What do you think? You know what I would indicate I want to throw in that we always look at? Spy volume. It's not when it jumps up, it really kind of shows a freak out. I don't think spy volumes jumping that much today. It seems pretty normal. So we always like to look at because just spy is such a behemoth, right?

And how much it trades. It doesn't seem like it's freaking out like it did a year ago. So I know it's not highly technical, but the SPY volume I think is a pretty interesting indicator of when the market really starts to freak out. You know who does good work on this? Warren Paes looks at volume and inverse ETFs as a percentage of total trading volume. You ever look at anything like that? Yeah, we do.

And it's definitely, it's still pretty, it's not extremely bullish, but it's still on the bullish end. We run a similar indicator. What does bullish mean? That people are- They're more, they're trading the leverage long stuff more than the leverage short stuff. I mean that's like confirmation bullish? Yes and you know what else I thought was interesting so if you look at the top which was what the 15th or 16th people weren't piling the inverse ETFs. Like that you know usually that should jump up a

little bit it hasn't right. If anything they're buying... When you make a new high you mean people should be jumping into the... Or let's say during that downtrend say from the top You should see more pick up in the inverse is if anything people were probably piling into the longs It's more of a by the dip you saw the Soxel which is 3x levered semis You know, they're going the other way. So it seemed like it was more dip by me. He's got annihilator I was down 23% today. What is that? Today. 3X semiconductors?

Yes, today. Who needs this? That's crazy. Any tourist capital, there's a lot of tourist capital in the market, right? The zero date options, all that stuff, all the levered one day Nvidia long, that gets washed out, which is a good thing, right?

Because having Nvidia go up when it's split, go from 100 to 130, which is 1000 good thing, right? Because having Nvidia go up when it's split, go from 100 to 130, which is 1,000 to 1,300, that's crazy, right? It just kept feeding on itself. If I tell you the numbers in dollars, it sounds even more crazy. Like the trillions, like two trillion to three trillions? Yeah, I don't think a company,

I don't think a company fundamentally could do anything that would enable it to go from two to three trillion. So it's only sentiment at that point. Unless you tell me like, NVIDIA researchers utilizing AI, like literally just cured all forms of cancer, it's completely unjustified. Now if you're long, you're like, shut up Josh, let it keep doing that. But I think most people were, even NVIDIA bulls, were saying like, this is too much. Like it's great.

Thankfully I own it, but like it's too much. And it turned out it was too much. Yeah, I sold calls when it was there. It's like the call premium in Nvidia, a Tesla Nvidia is so big. And so as an investor, if you have a position, you can sell calls on part of that position. You have to be willing to say, I'll part with it at 150 or whatever your price is.

But in Nvidia right now, that call premium, you're getting probably 6% in call premium for the October. Which is not even that far out. No, it's like 76 days. 6%. If you annualize that, it's like 24%. Yeah. John, chart one, three. Let's talk about equities and yields on Fed Day. So for the last couple

of Fed Days, you had the Russell 2000, three of the last four, looks like five of the last seven or five of the last six outperforming S&P 500 as yields fell. So clearly- Let's get it on screen because I have no idea. Clearly the Russell 2000 is more sensitive to interest rates. And there's been... And the economy. And the economy. And there's been a lot of upside and today downside volatility.

And it's a factor of not just what the Fed says, but also it's very sensitive to economic data. Wait, so what does this mean? This is the one day change of equities and yields on the FOMC day. On that day. OK. And what's the message from Wednesday of this week relative to prior?

Is it more or was it more or less of a whole? The Russell 2000 actually underperformed the S&P. But also, it had outperformed in a dramatic fashion over the last two weeks. So who knows how much of that is noise. But you're not a believer in small cap stocks. Not right now. I mean, we, we went into small caps in fourth quarter of 2020, but not,

I think I'm a non-believer in the Russell 2000. We went into a small cap value factor base that gets rid of the crap. Here's, here's the deal, which I think you have to like understand these like longer term structural shifts is that, oh, there's that chart. Is that within Small Cap, just as of March 31st, and I'm a huge fan of Jim Grant, so I read his, comes in the mail, I get an email, but he had a great write-up on Small Cap

a couple weeks ago with his team. Is that through March 31st, just three quick data points, operating margins for the Russell 2000 were 4.7. The S&P was 13.7. In addition, Russell components are set to report a 5.6 decline versus the S&P expected to do a 9.3 beat. On top of this, this to me is like on a 12-month rolling basis, 42% of Russell members lose money. Contrast that to the beginning of 2000, the beginning of the millennium, you only had 20%. And then if I go to the very bottom thought that I have is that there's no IPOs.

And when you do have IPOs, they're not IPO-ing into the small cap. So you had Amazon was a small cap. If you go back, there were a lot of companies that started as small caps. Look at Reddit. Reddit started at what, six and a half billion? I think it's 10. The average market cap within the Russell 2000 is three to four and a half billion. And so I think you have this like, these are decreasing small operating margins.

40% are not profitable. IPO's aren't IPO's and it's small caps. A generation ago, Airbnb and Uber would have started in the Russell 2000. They would have gone public worth a few hundred million dollars each, like honestly. And now the counter to that is, yeah, but they were losing money. So it wouldn't have, you know, they would have been in the Russell, not the small cap 600 and nobody would have owned them. Maybe.

Yeah, I mean, well, 40, they would be, they would be a good company because right now 42% of the Russell is losing money. And so what happens is me is like the Russell 2000s is like where companies have gone to die Because you had super micro and micro strategy right get up up listed. That's such a good question So we should have we should have Show on our chart kid. Look at this like how many members of the Russell fell into it versus were born into it? Mm-hmm. Okay, and what is that number doing over time? What do you think it is? No, that's a good stat. I don't know. And just the thing about the small cap indices,

it's almost like the deck is stacked against you, to your point. The star players leave, right? And then you're stuck with the junk that gets downgraded from the mid cap or the large cap. And that super microcomputer is such a great comic. Because we looked at it. We looked at Russell performance. This could be a blessing or a curse, And that's Super Microcomputer is such a great comic because we looked at it. We looked at Russell Performance. This could be a blessing or a curse because it kicked out Super Microcomputer

and MicroStrategy. But they were the best performers. They were, but now with this kind of AI unwind, if they had kept it, the Russell had been almost 3% worse than what it is now if they had kept those stocks. Now, Grant, there's so many other stocks in it, but Super Microcomputer was such a massive weight. It was the largest weight that any company has ever had.

It was driving the whole index's returns. It got to almost a 3% weight, which is unbelievable in the Russell 2000. Is the Russell 2000, is IWM the largest ETF in small cap land? Yeah, it is. It's between that. IGR, it might be pretty large too, but those are the two big ones. IWM from iShares says... What's more ridiculous, bucketing stocks by value versus growth or bucketing stocks by market cap?

Yeah, they're both. Well, the exception of the S&P, right? The Q's in the S. Well, that's just the biggest. The Q's in the S, well, that's market cap, which I'm saying, yeah. Yeah, yeah. The Q's in the S&P aside, yes.

But how else would you bucket them? By alphabet, what if you didn't? What if you just said I have a cutoff? I don't invest in sub $5 billion, and I don't bucket anything. And if I hold the mid cap and it graduates into the S&P, it doesn't matter that I run a mid cap fund. I'm keeping the stock.

I still like it. I agree. There should be more of that and less of the, oh, we have to fit into Morningstar's classification, or else we're not going to get selected for the mandate, which is I think where this all came from, right? Look through all the different index providers. Everyone's going to have separate super microcomputer different. Some might be large, some might be mid, some might be small.

So it depends. Do you like MSCI? Do you like Russell? Do you like S&P? They don't always see eye to eye on the companies, right? And so there's not a set that, okay, the market has agreed that this is the cutoff. Everyone's got their own cutoff. Yeah.

I think it's about $17 or $18 billion are the smallest S&P 500 names. So the Russell 1000 is all large caps, but the S&P 500 is the largest of those large caps. My attitude is I'm sort of cap agnostic myself, but of course, like every portfolio is going to have more stocks that are big versus more stocks that are small, unless you're a professional small cap manager. Because you're just going to end up holding your winners and your winner is going to become large cap.

A counterpoint to the 2000 stinking, not just that index, but just small caps in general, is that they're valued as such. So it doesn't have to take a whole lot for some sort of, any sort of re- have to take a whole lot for some sort of any sort of rerating to send them a lot higher. I think though, it's like the play to me, the fat pitch is to buy small caps, not Russell 2000. There's a bazillion ETFs that have a brain will say and kind of do it more thoughtfully

in a downturn, in a downturn, right? Because you're going to ultimately going to come out of the downturn. In an economic downturn, right? Because you're going to, we're going to come out of the downturn. In an economic downturn. Economic downturn, because these companies are companies of America. They have no global exposure. And so that's when you want to buy when GDP is expanding, when unemployment's already high, okay?

Or, you know, because that's, they're economically sensitive. And so I just think it's too early. And I think you have to thread the needle in the economy for small caps to work versus like either the equal weight S&P. You know that can do well other things can do well but to me small caps is somewhat of an asymmetric trade with more asymmetry on the downside. So by the time the listeners are hearing this episode we will already know what non-farm payrolls are but just for fun. People listen at six.

Okay, fair. Tomorrow, July non-farm payrolls, 175,000 added jobs for the month of July. For reference, June was plus 206. The unemployment rate should be 4.1. If we add materially more than 175,000 jobs, does the market want that or not want that? I don't know, I'll defer that to you.

Take a guess. I want to have an economy that's doing well. The market wants strong data. If NFP comes in weak, pending what Amazon and Apple said, the market's going to roll over. So bad news is firmly bad. Which I love, that's how the market should work.

We want good numbers, because we don't have time for a recession. We want good numbers, amen. But back to the SOM rule thing, so we're at 249,000 initial claims. Like this is what they say is the trigger point. So I don't know, this feels like it only goes in one direction once it gets moving.

But the economy doesn't fall into a recession. It just doesn't randomly happen. There has to be either an exogenous event or the Fed, because the rates have been high for so long, and obviously in the regional banks have been acutely affected, commercial real estate acutely affected. But I don't think if the Fed cuts one or two times or waits or doesn't wait, that's going

to cause the economy to go into recession. No, it's too late. If it's going to, it's going to. Right. So that's always where, to me, you always sound smarter when you're bearish, first of all. It's easy to be a bear. It's easy to look at all the bad data.

But history will tell you the market goes up 77% of the time. Volatility is the price of admission, know what you own, the tourist capital is getting flushed out, and just like buckle up and sit through it because that's really been- Don't put trades on that can't withstand more than one scenario. One bad day. One scenario. Let's put this market implies three cuts in 2024. I don't know when they're going to do these cuts

with like running out of opportunities. So you have September, November, December. Nothing in August. They're fishing in Wyoming. And do they want to do a cut the day before the election? I don't think it's the day before. I think it's after the election. It's the day, I think it's the day after.

We should probably, I should probably look that up before I say that. I'm pretty sure it's the day after. All right. So maybe they can get away with doing that. Is that what you think? Three cuts? Sure. I think so. I'm not passionate about it. I don't know.

What if I tell you one of these could be a 50 basis point cut? You know how I know it could be? Because they said it can't be yesterday. Just like they said, we don't envision. I have this picture that I kept that that from Jay Powell He's like we don't invent Envision any 75 basis point rate and then they did three in a row Yeah, that's what I'm saying. We have to be open to the to the negative scenario that they've only engineered a soft landing about 10%

Of the time it could be this Right, if he's dated dependent, of course there are 50 basis point cuts on the table. What are we talking about? Like if things deteriorate more rapidly, right now it's normalization. That's the word that, how many times did you hear that word yesterday? Normalize, normalize, normalize.

So like that's fine. And then anything past normalization, they'll do anything. If they come in September, there's no reason to believe that they wouldn't go in November, December as well. That'd be weird. They do a cycle. Because if you think about PCE, which is what, we talk about CPI, but Chairman Powell always talks

about PCE, I've never heard him mention CPI. PCE is his inflation. Is it what, two six? And so we have fed funds at 5.2. That makes no sense. And so there's a ton of bandwidth. And historically, when they start the rate cycles, they're not doing one cut. And so I think if they start in September, and we still have a decent economy, that's going to be really positive because we know we have over 250 basis points of wiggle room. And so they could do 100 basis points over three to five meetings.

And you're still well above what that PCE number is. And so I think that could easily be positive if the Fed has a ton of room and that gives the market some breathing room to their point normalize. I like the normalization idea. There's something in between like roaring bull market and recession,

and that's just normal. Just normal. And God forbid we get a year like that. I think we will get that. And we would like to have the visible hand of the Fed out of the market and have them be neutral, but they haven't been neutral. They've been in 20, you know, starting in 2022,

up until now, all we talk about every other month is the Fed. There were periods of time when we were just not talking about the Fed. Companies too. I saw a chart from Bloomberg. The number of mentions of the Fed in earnings calls is at an all-time high. A lot of companies are like, hey, come on, we're waiting.

Do the cuts. Do the thing. All right, can we do some index stuff and the tech unwind? Because this is really, other than FOMC, this is really the... This is what people came for. This is like one of the biggest, this is one of the biggest stories, I think, of the summer. And a month ago, it seemed like this could not happen.

There was just money pouring into tech every, you know, you couldn't even have a down day. It got to the point where a flat day felt like a down day. All right, so this is not that. What's this first chart? So we're looking at the drawdown of Nvidia, and there was this idea, not entirely untrue, that the tech trade was holding up the market,

Nvidia specifically, and if Nvidia goes, watch out below. And it's a little bit premature to say that that won't happen, but I'll say that right now, Nvidia's in a 19% drawdown, got as bad as 24%. The cap weighted S&P was only down 4%. And alongside that, the equal weight was only down 1.4%. Next chart shows something similar.

We're looking at the drawdown of the S&P 500 in blue, down 2.5%. Which is literally nothing, by the way. Nothing. The average drawdown, not by market cap, so the average stock is 17.7% away from its 52 week high. If you look at the median's drawdown, it's better, which has not happened in a long time.

The median stock is only down 14% from its 52 week high. And what this is showing, in some sort of confusing way is that the rally is broadening out. So for all the money coming out of Nvidia, a lot of the rest of the market is picking up the slack big time, which is like really healthy rotation. It is. I mean, we have in our portfolio, two big ETF positions,

RSP, which we added in January. You know, as a mean reversion trade, it hasn't really mean reverted. It has a sniff of mean reverting. RSP is the equal weight of ETF. Right? Yeah.

So you had the biggest dispersion since 1998. So it's like it always comes back, whether the S&P comes down or it comes up. Hopefully it comes up with the S&P. And then we have a free cash flow yield ETF. And you've seen, although the Russell had a big, you know, whoosh on the upside, those have also, to your point, had really nice day, with the exception of today, really nice days. And so that broadening out, I see that, you know, across these two ETFs have nothing to

do with it. I love it. Media forgets though sometimes that there's something else. It's not just Russell 2000 and Mag 7. There's like another thousand stocks we're talking about, right? This is the most bullish sell off I think we've seen in a long time.

But it's doing, now that the big caps are so gigantic, it's doing this really weird thing to the market. But Spoke has a chart where they show the days over the last 50 days where price and breadth move in opposite directions, which usually doesn't happen, right? They usually confirm one another. And it's at the, it's as high as it's been since 1990. And again, we're looking at price of the index versus the number of stocks going up.

What should normally happen as the, as price goes up, the number of stocks should also go up. If the market's up 1%, more than 50% of stocks should be up on the day. Yeah. And now we're in a weird position where you're having a lot of prior to the most recent couple of weeks, you had a lot of stocks go down, the RSP go down, but big cap tech was making the cap weighted index go up, and now we're seeing the opposite side of that, where the cap weighted index is going down,

but there's more stocks participating, which is phenomenal, I think. Are flows going into these equal aid vehicles? Oh, big time. There's a lot of RSP buying. There's also a lot of market cap buying. But- Answer this.

I was talking with Ben and then James weighed in this morning. How is it possible, you guys have done a lot of work on this, in July, VOO has already set the record for an account year most inflows ever. And I think IVV is doing the same thing. Why? Like where, how? Yeah, I got, okay, I have a couple theories,

but I also have a lot of mind blowing stats. This is the best July ever for flows. Second bus month ever for flows. Equity flows are all flows. Best month for fixed income ever. So that's get out of cash. People are doing that. And this never happens in July. July is always a quiet month. Yeah. People are on vacation. The VOO thing is interesting. I think it's a lot of just retail asset allocating to that. I think there's a little bit of a wonky industry thing that Vanguard is transferring

people from their mutual fund to their ETF. Oh, that's got to be it. So I think that is a part of it. So it could be a little bit of a... But how do they do that? So actually, it's a very unique thing. If you want to get into the... I know the ETF is considered a share class, the mutual fund, but how do they physically do that? They call people up?

Yes, and because if you go on their website, you can do a free transfer from the mutual fund to the ETF. And so they're pushing people to go towards the ETF. Why are they doing that? Without tax ramifications? Yeah, without tax. Because it's the same pool of assets. a mutual fund to the ETF. And so they're pushing people to go towards the ETF. Why are they doing that? Without tax ramifications? Yeah, without tax. Because it's the same pool of assets.

You just like, you want it to do each other. No, why do they want that to happen? This is a theory. Why does Vanguard want that to happen? So one thing that, we've talked this with Eric about true in us all the time. Vanguard's not known for their customer service, right? They don't make a lot of money,

they're not investing a lot in tech. So if you are buying a Vanguard mutual fund, you have to deal with Vanguard. But guess what? If you own a Vanguard ETF, you are Schwab's problem, you are E-Trade's problem, you are Robyn's problem. The custodian's problem. And I get it. Why not? Push, it's the same thing. Push that over to them. We don't have the bandwidth to handle this. Is this new?

It's been happening for a while. I'm not saying that's the reason. It's not the new CEO though. I'll say that's the reason. Oh no, he just started. It's the only for a while. I'm not saying that's the reason. It's not the new CEO though. I'll say that's the reason. Oh no, he just started. It's the only thing that explains this. If you look at Vanguard index fund flows, they're negative from that. So why would you be selling index Vanguard mutual fund

right into this market? What do you think the pitch is to the shareholder? Like, hey, you own our mutual fund, it's just as cheap to be in the ETF, but maybe more tax-efficient. And so the cost basis transfers over too. It's a very unique thing because they have the share class option. But really, all being equal, you should favor the ETF.

It just has a slightly better tax edge. That's the same thing. No, intraday liquidity. I think a lot of the Vanguard people don't necessarily maybe care about that. But I think you're fine with VOO. You know? Interesting. Okay, so it sounds like it's customer friendly and also it's less intensive on the back office.

1940 Act funds require tons of like processing and people moving papers from one side of their desks to the other. There's a lot of shit in the background. It's not money coming out of money market funds, but it's money coming out of BIL. Is the data showing that? Is money coming? I thought so too.

It's funny, I was just having this conversation. We were looking at the flows. Where's the money coming from? The money market stuff, the ETFs are starting to come down, but not in a massive wave. That explains, is it just new money coming to the market? Is it coming from active funds? I don't know. Because yes, we talked about this small cap rotation, but there was a lot of large cap buying to like the Qs took in a lot of money. RSP is taking a lot of

money. So it's not that being sold to buy IWM. Just seems like there's this whole new flow. It's like a magic pot of money. Where's it coming from? We had we had we had Todd Sone on two weeks ago and he said actually the money never leaves money market funds the inflows slow down, but they continue and Good market bad market good economy bad economy money market funds just continuously vacuum up money no matter what so that's not the answer Is the point I?

think a reasonable guess is that it just could be as simple as people have earned a lot of money on their money for the last year and change now and maybe not all of it was allocated to money market funds. So you don't actually need to see it leave anywhere. It could just be sitting in cash. I mean, I don't know. I'm trying to figure it out myself.

There's one thing that I also thought maybe too is some foreign buying. Well, it seems like a lot of the, at least in Europe we'll look at it, they seem to be buying US stocks. So whether they're going through ETFs or funds, could also be maybe some foreign money coming in. Well, this has been a big topic of debate.

Besides Bryn, besides Bryn, who else is putting on these equal weight ETF trades, do you think? I think models are. For the same reason, right? Exactly. It's maybe going to that, is that the new hedge versus buying the inverse? Are you hedging away from the mag seven?

Why I love covering into it. I want to be in stocks and I want to be in indexes. I don't want to be 12% in video. Okay. That's reasonable to me. I don't want 30% of my portfolio to be in stocks and I want to be in indexes. I don't want to be 12% in video. Yeah, okay I don't want 30% of my portfolio to be in four names. Totally You know what's interesting by the way, it's been a good trade. It's done. Okay, it's done. Okay Yeah, it's not I have to have a lot of the ETF industry this just filed yesterday There is an S a 493 ETF that filed X mag 7

I love it. So there's Defiance. So there you go. That's why the market will find a way. The defiance guys are pretty... And they're calling it the 493. It's clever. And we joke, like we need a 493 S&P ETF and there you go. It'd be funny if people start tracking, if people start using that as a shorthand for equal weight. It's probably not equal weight. It's market cap weighted minus the top seven. I doubt it'll dislodge RSP, but I think it's an interesting... No, it's a not equal. It's market cap weighted minus the top seven. I doubt it'll dislodge RRSP, but I think it's an interesting...

It's a different idea. It's a great sentiment gauge. It's weird that RRSP is the only one that I know of. There must be another. There's a Goldman one, GSEW, but RRSP is just so... Once you kind of... Everyone knows the ticker now. Once you sort of get past that...

Is that Invesco? Yeah. It was actually a Guggenheim product that they inherited. So it's funny that they sort of bought Guggenheim and they got that I think I spoke about this What does it ticker stand for? I think somebody told me that story which which tech RSP? I should know yeah, I think might be something legacy from It should be like some some SP EQ or something yeah, not and there's equal weight stands for random random random or something. There's equal weight queues.

It stands for random stock prices. Random stock portfolio. Random stock portfolio. Maybe it could. I don't know what it's, oh, Rydex. I do know. Is that right? That's how f***ing old I am.

That's nice. Is that how old I am? I used to recommend it. I used to recommend it when it was called Rydex and it was an open and mutual fund. And I used to recommend this to risk averse people that wanted stock exposure. And the pitch was, tell me how stupid this is. You were a broker too, so you were a spec.

I was. The pitch was, do you realize that on any given day, and you would point to whatever stocks blew up that day. Stratacom. So you'd point to like Merck. Like look at Merck just blew up because whatever their drug was, Celebrex did. So you would say to somebody, what if I told you that I can minimize the damage to your portfolio by making sure that you don't own more than 0.25% of every stock. So I won't own Merck? No, you will. You'll own so little of it,

you won't even notice. And they like loved that. It's true though. First of all, I never bullshitted anyone, but it was true. It didn't exactly like work. Right. To that point Josh, of things blowing up, there's almost 20 stocks that are down at 8% today.

And the S&P, a lot of them are semiconductors. Yeah. Micron and AMD, Micron's down 37% from its high it's a lot AMD is down 34% like that's it's a lot that's why you need and the volatility right that's why you need our that's some deep knowledge that's some deep ETF knowledge that's all you remember you remember right X okay Rob and I are like the Muppet Show characters the two old guys in the balcony. What are those? Stattler and Waldorf.

Stattler and Waldorf. I can be Janis. What's that? I'm Janis. The two old guys that heckle the Muppet Show. Oh, that's a name? By the way, how much are we dating ourselves by talking about the Muppet Show? We're old.

Best show ever. Best show ever. Best show ever. You're my generation, right? Janis. I can be Janis. Okay. Perfect. I'm 100%. You can be Janice was the girl singer in the band.

The rock and roll, right. Yeah. Brian, we've got some of your charts. What do you want to talk about with QT? What do you think is the significance of the wind down of the Fed's assets? You know what? I just think it's interesting because for all of the, I mean, as QT has ramped up, obviously from four trillion to a peak of eight, or almost nine.

QE. QE, right? Wasn't supposed to be bearish. Finish your thought, I'm sorry. Yeah, that's, so I think also just like some interesting numbers, we don't have the ability typically to understand quickly the difference between a billion and a trillion,

and we kind of just say a trillion here. Same thing, right? But if you think about a billion, this is good, a billion seconds is 32 years. A trillion seconds is 32,000 years. That's crazy. That's a huge difference between, so it's huge. So these trillions of dollars, I would have thought

that the QT, the unwind, would have had more of an impact on the bond market. Why, because it's sucking liquidity out. Yeah, it's sucking liquidity out. We've never done it before, right? And so it's interesting that it really, I haven't seen an impact in equities. I haven't seen an impact in bonds.

And they've brought it down from, I think, nine trillion was the peak to 7.2. So it's just so interesting. I would have thought that would have really wreaked havoc, I guess in like the reverse repo market, which I'm not versed enough. The Fed took that over. I would say that this is one of the things, the quantitative tightening was one of the things that was most scary to contemplate. Yes. When you hear the, all right, so the Fed took its balance sheet from 4 trillion up to 9

trillion in like two years. And now they're going to take all that liquidity back, meaning they're going to stop buying bonds from Treasury and they might even start selling down their bond portfolio. On the surface, that sounds like, oh, shit. Not that it tanks the economy, but like it depresses multiples for everything. Or just like unintended consequences of an experiment that we don't know what happens on the other side. And that's one of those things.

I just think it's an interesting chart because sometimes bad things don't happen. And that's where it's like, it's always, you always sound smarter when you're bearish. And so that's where I kind of go back to like, the end of the day markets go up three quarters of the time and we're all waiting for the 20%, that they go down. There was no more obvious bear setup than this,

and it just didn't happen, right? At the end of 22, you're like, all right, I guess we're doing this, and nope, guess we didn't. Let's put up the next one, the rich get richer. What are we looking at here? Well, so I think we already talked about these. These are all my small cap sides.

We already went through all this when I was just walking through, obviously large caps. Oh, the next one I want to do. NFIB, small business sales expectations. What's going on here? It's definitely in recession territory. If you listen to like Winnebago, like these smaller companies,

like Winnebago sales aren't good, they're, the consumer's pressured. Obviously I think if you were to buy a Winnebago during COVID, you get the reverse to that. Winnebago's. Well, no. This is a popular way to vacation all over America, Michael. Oh, don't you lecture me. Well, if you get out a little bit, meet some people.

Actually, I was driving past Nickerson yesterday and there's a Winnebago park. Tons of Winnebago's. So did you get out and talk to any of the people? You should hear what's going on. So this says that small business sales expectations, this is an index, what is this based on? A survey? Yeah, yeah. They do a, this is a June survey, they small private firms, it's the National Federation

of Independent Businesses. And once again, it's like- Like the kind of people that Michael can't be bothered with. Real companies. Yeah, but you know why this is bullshit because this has been negative for like the last five years every time I think this is politically and personally sure I think there's politics in this there could easily be yeah but it's been literally has been negative every reading for the last three years this is this is all around small. This is all not about the broad economy.

This is all in the flavor of small companies have felt the pain. Totally. And so when I talk about 42% of small caps have negative earnings, it's like this is the whole issue with these smaller companies. Things are not great there. But if you go down smaller than small caps,

like real businesses that are owned by- Private companies. Yeah, just normal businesses like, okay, I have to pay- Inflation is real. I can't pay $11 an hour anymore, now it's 15. And oh, my borrowing costs are up like X-fold. Like they got killed.

Yeah, absolutely. So yeah. We did this one, we mentioned this already, but let's just go to profits wanting. Your percentage, I want people to profits wanting. This is your percentage. I want people to see this that are watching on YouTube. The percentage of Russell 2000 companies that are negative net income is almost half. That's crazy. I had no idea it was that bad.

And so once again in 99, if you think about it, you had a bunch of small companies IPO-ing, and you still had only 20%. So what are these pieces of shit? No, this is from the Zerp era. Money was free, and so profits didn't matter. And so when everyone's just so passionate about buying Russell 2000, I think it's kind of a depressing index.

When I look at the factual data behind the fundamentals, it's just like, why would you buy that? I guess if there's like a trade or what have you, but I think there's a much more thoughtful way to buy. With bonds, we used to call them fallen angels when they were investment grade credit and then they fell below a certain threshold. There's an ETF for that.

There sure is. The fallen angel ETF. You can say that, probably about anything. Is that Vanax? What's it called? Oh, yes, Angel, actually. Oh, Angel. But there's also an FALN.

But that's a legitimate investing strategy because what you're betting on is that, okay, things are bad for these companies, but it's not that bad that I'm not going to get my money back by the time the bonds mature. But that's also like a structural value play because there's companies that can't, there's corporations or whatever, investments that can't own those bonds, so they have to sell them depressing the price. Right. That's another market for them.

Exactly. So, but this sounds like it's the equity version, the modern Russell. These are companies that have fallen backward into the Russell because we're just not doing that many IPOs. And so they're like fallen angels, but on the equity side, maybe these used to be mid cap 400 and now they're small caps. I have an idea. You guys should do the work for us. Your team should do the fallen angels in the Russell 2000.

It's funny. I did have that question. Someone asked me, they want the crappiest small cap stocks. Like, just because the, you know, maybe because they saw the rally. Oh, just go on Twitter. They're like, just I want the one. I don't want S&P 600 with the profitability screen. I want the trashiest crap that is.

All the negative earners. I want the 40%. I want the 40%. Yeah. Just give him a list of the IPOs from 2021 yeah that's that's pretty much what it is but on that you know what never comes up though no one ever asked about mid caps and I don't know you know it's we always talk about small we always talk about large I don't just care yeah no one ever banks no one like did they stop using her I think but

no one ever asked me that was so awkward. State Street hired Elizabeth Banks, who I love, to do a series of commercials celebrating mid caps. And it's before the Gen Z's were using the term mid. So it kind of missed its moment. This is like 2014. This is like 10 years ago. I know. But if they would have done it now, I'm saying they could have really leaned into like the mid caps, but they're not mid

I think nothing made about mid caps like I was super weird. I don't know who greenlit that uh that series of commercials But anyway, uh nobody talks about mid caps because they're kind of like they're two in between I guess they're like they're like a Jan Brady There used to be I haven't looked at the data in a long time But I would say like five years ago when I looked at it, there was data that mid caps had been one of like the top asset classes because you know, you've made it out. You've made it, you're super micro, what have you. You've made it out and you actually have profitability,

et cetera and so I haven't looked at the data, but I think it's just to your point, people like small caps or large caps as a sector and then it's like Jan break. I bet you this year it's a great hunting ground for some of the big winners of the year. Mid cap growth ETF. What's the ETF? MDY, which you're spot on.

It's a great performer and just no one ever talks about it. It used to look like RRSP. They used to track each other pretty closely. So the biggest holding in MDY is William Sonoma. We know that company. Yeah. So I bet that's a really great place to find stocks that have been working this year and could probably continue.

And don't get sucked up in the large cap stuff, you know, and they're sort of, so I agree. I want to do more on the bond stuff that we were talking about earlier. So this is from the journal. US listed fixed income ETFs have taken in nearly 150 billion through late July. Another record through this point in the year. I just, I just, uh, so. Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, Char, funds and ETFs together, taxable bond funds were responsible for nearly 90% of net US fund inflows in the first half. So 90 cents of every dollar that went into a fund this year went into a taxable bond

fund? No, it's kind of crappy wording. No offense to Morningstar. Of the bond flows, 90% went to taxable bonds versus munis, which I don't know why they break it down. Most money goes to taxable bonds anyways. Munis are tiny relative. Yeah, so it's always like probably 80 to 90. But then I had just mentioned too,

because we just got the data today, equity bond ETFs record month ever, even more than when the Fed started their buying in 20. Wait, what do you mean equity bond ETFs? So a bond, did I say equity bonds? I just meant bonds. Did you just invent a new asset class? Equity bonds.

I'm interested. I will buy some of these. So, all right, it's so crazy to think about back to when interest rates bottomed and the price of all of these bonds peaked, how many bonds around the globe were negative yielding. So Todd's own has a great chart showing where rates were around the globe when the ag peaked in August 2020 versus where they are today. And nobody would argue that that was a better

environment for bondholders than today. No way. Made no sense. So this to me was one of the strangest parts of the 2018's decade. This might never happen again. I don't ever say never, but this was really fucking weird. Yeah, I had like a hundred year Swiss bonds, right? One of the countries. There was trillions of suffering debt that had a negative yield.

This is a combination of PTSD from the great financial crisis, like the hangover from that, and people saying, I don't even want any return. I just literally want my money back. And then that morphed into, actually, I'll pay the government just to hold my money. So that was weirdness. But that would never happen in America.

Well, you can't have that without the central banks being part of it. So they took rates to where they needed to be in order for people to think that way. They weren't part of it. They created it. They created it. In hindsight, none of those economies benefited. I don't think anyone, any of them would do this again. You would think negative interest rates, money should flow to more productive uses. No, it didn't. But I think though, you have to take a step back.

Those countries are like socialist capitalists. And so when you can't fire someone, that's a structural issue. When you have all of these services that the government pays for, just a whole different economy than the capitalist nature of America, that you have these structural issues that it's just different over there. And that's where I still think that the US is like, why buy international? Just buy the S&P. You've got what, 50, 45% of your revenues are giving you exposure over there, but you

can still fire someone if they need to be fired. Another thing that made no sense at the time, John, next chart please. We're looking at the yields of various ETFs then versus today. And you had the one to three year, the three to seven, and the seven to 10 all yielding around 1% give or take. Even TLT, which is 20 plus years, was yielding 1.3%. That was truly a rewardless risk. And he, so Todd compares the yields

then versus today and again we're in a much healthier place. Yeah. Well you're in a much healthier place if you're buying them today. If you've held them you're still negative. True. Because there's this little word called duration that you got your face ripped off if you were in the AGG the past five years. Bond ETFs are taking in a billion dollars or more in inflows per day this year. It's a fight, fight the Fed trade. But TLT for the last couple of years

has been like a widow maker. You've lost money on TLT. It finally seems like it's starting to break out. But people have been trying to play the Fed meetings for two years now on TLT. Have you ever seen money run into a fire like that? And it just kept getting lit on fire and just more money just kept coming in? 2022 was big for TLT. Have you ever seen money run into a fire like that? And it just kept getting lit on fire and just more money just kept coming in? Yeah, 2022 was big for TLT.

It was like the top five for flows, which is pretty unique for it. And it was down what, 20 something percent? It was every Fed meeting, everyone rushed into it, like this is it. They got burned. They did it again. Everyone was like so confident and being able to read the Fed. Then you could see that stop. They're like, we're going to stop front running this.

We're going to wait to see what they say. So you definitely see the, the. We have seen that we saw it in a Chinese internet stocks. Oh yeah. K web raised money the whole way down. So that was counterintuitive from how what we normally see. What we normally see is an asset class or a strategy goes up a hundred percent. And then the investors come in with the big numbers.

In this case, these things were falling knives, but part of human nature is to expect mean reversion or, hey, there were just seven reds in a row on the roulette table, I'm betting black. So there's an element of that to it too. Like how much more could this thing really fall? Or it's like, you know, you read the research for the first time and it's like Oh, well, this is this is cheap. I'm gonna buy it here and cuz you it's your entry point You think it's bottom then it just keeps going lower Tom. What's going on with active ETFs?

They're they're back but but different different. Okay, it's not active in the way that we think it's like stock picking and there's not all It's it's not arc. No, it's a little bit, it's just a technicality. A lot of it's options type stuff, buffers, covered calls. So they're active in the way that they're managing these options positions, but it's pretty systematic. It's not, yeah, there's no ARCs or. It's a boomer candy. Who came up with that?

Eric did. Yeah, it's a great term. What are these ETFs? So a lot of them, most of them are using derivatives. So essentially what they're trying to do is cap your downside and with it. Buffer ETFs. Buffer, so it's a structured product.

Like Innovator or like JEP? Yeah, Innovator. So I call that systematic or active indexing. I do not consider them to be active management, but I guess somebody has to classify it in some way. I think it's just a technicality in the ETF rules. But it's not all of a sudden stock picking's back and everyone's back to it. They're using options around these.

It's just trying to come up with an outcome. So a buffer is essentially like a structured product. You hold it for whatever period you want. Let's say if you want to buy it today, you're buying the August buffer. It's going to cap your downside up to a certain point, but then you're also giving up upside. So, I get it. It makes sense for the boomers. It stocks with guardrails. Exactly. Put this chart of active ETFs growing percent.

You're saying a third of the money coming into ETFs is coming into these quote unquote active ETFs. This is notable. This is, by the way, this is like rain in the desert for the asset management industry. They need this so bad. Oh, they have to make money. They have to make money somehow. I agree. It's not, you know, can't all be Vanguard.

What's this next chart? What does this mean? Inflows, outflows, called the beta adjusted fee demarcation line. Eric had come up with it and it makes sense. It's about realizing how cheap beta like a 500 fund, is essentially free, right? So you have these active funds coming out. A lot of them are just closet indexers, and they're charging you 45, 50 basis points.

You have to now take out beta, right? So you have something like ARK. Essentially, I don't want to pay for what I'm getting in the SB500. I want you to pay for the uniqueness of the fund. So basically the- Well, that's certainly unique. Oh, yeah. And people are willing to pay

75 basis points for it, right? But if you want to be closet indexing, which is fine, which is kind of like what DFA does, it better be a couple basis points and that's it. And so it's just realizing that you are getting the market for free. Don't charge me to hold Apple and Nvidia. I have those.

So let me try to read this. Anything that would appear below the purple line, it means it would be more expensive than, let's say, 30 bips, and it would be an outflows. You're losing money. Basically, it's based on your active share, so how much are you charging me per unit of active share? So charge me for the difference.

Don't charge me for the stocks that I already own. There are no customers for these funds. Because the only thing that matters for ETFs is what RIAs are doing. Yes or no? They're a big part of it. Like half? Yeah, they're like half the market. Okay.

So if RIAs have made the decision collectively, because they all went to future proof and drank the same Kool-Aid, or they all went to Morningstar, whatever. If we decided as an industry, we're not spending 50 basis points to pay a stock picker in a sector in an ETF wrapper, then they're just not going to do it. So like there's no customer there. So you wouldn't launch a fund doing that. Buffer funds, RIAs would pay a ton of money for that

because it answers a client concern. The client says, I want the stock market. Just not all of it. Just not all of it. And at the wirehouses, they do those in structured products. I probably bet you could not buy those buffer ETFs. You can't buy them. You cannot buy the buffer ETFs at the wirehouses

because it strips out all of the fees from the investment bank and makes a really nice same strategy. It's the same exact strategy as a structured product at a warehouse with downside. It's just with options and without all the fees. Okay. Here come the celebrity active ETFs. So round, I don't know, is this round two?

Yeah. The Kathy Wood thing came and all right. So Tom Lee, our friend Tom Lee at FunStrat is going to get into the active ETF game. So he has this thing, we talked about it on our show, granny shots, which is like really, not layups, but like a really easy free throw shot underhanded by Rick Barry. And it's like stocks that I guess he and his team think are just easy trades to make.

So I don't know what the methodology for the ETF will be, but they're filing, they're getting into the game. Credit to him though, he's gonna be- I bet you he raises three to four billion dollars in the first six months. What do you think about that? I think that's a tall order, but I think it's going to be successful. How big did ARTH get at the peak, 15?

I think it's a different thing. Do you know how famous and beloved Tom Lee is? I get that with his Twitter following, he'll do it. So there's a couple, there's a Katie Stockton, right, she's got one, she's got a couple hundred million. We love her too. I think Tom Lee could do a billion, I still think that's ambitious,

but he's got a big following. Tom, maybe you didn't hear me. They're granny shots. But they're guarantees. I think what you're overplaying is people want to know what he's holding, but I'm not going to buy the ETF That's just how I I want to see what his portfolio is But I think the Jim Kramer one right it closed but what I actually put my name in the Kramer ETF

I want to see what he's saying So I think you'll have a lot of people that will follow the ETF not necessarily a lot of people that are buying Tom doesn't take advice from me, but if I were to give him advice, I would say Paul the filing. Just do not do this. Because the reason why is not that I don't think it'll work. That's beside the point. On any given day that it's not working, or any given month that it underperforms the Nasdaq or whatever bullshit, this is what people that are jealous of him are going to

beat him over the head with. And it becomes your de facto track record. And so if you're going to be that in the public eye, I don't think you should have a daily ticker that's completely associated with you. Now Tom's got a really thick skin. He's been taking shit from people on Wall Street for 15 years. He's been mostly right. He's made people a lot of money who've listened to him and he seems to be having fun with

his critics on Twitter. This is going to make it like 10 times worse. So if Tom, if you're listening, it's not too late. It's not too late. I still think it'll be successful. And I think it'll be okay. I mean, kudos for putting your picks out there. It's not easy.

Do you want to be his investor relations guy? And Rubini too. What's he going to own? I mean, is he going to be bearish? Does it tick a doom? Yeah, is it going to... It would be funny if it was like a Vanguard index fund. There's one holding VOR.

Yeah. It's going to be, I guess it says, what did the notice say? He filed... Go anywhere. I think it's a go anywhere strategy. Go anywhere, do anything, which to me is so nebulous. I think, you know, I think that Tom and team have a track record. I know they do, right?

They have a track record for those granny shots. And so I think there's a, there's a, I know there's a strong methodology around which companies go in and which companies go out. And these are like household names. The Rubini, who's not household name even remotely. No chance. Okay. Also has been extraordinarily bearish and wrong for a very long time. And so I think that's...

He's been right but like obviously not. I think that it's so easy to structure a hedge in a portfolio these days that you don't need an ETF which is limited anyway with like what you can do and like the leverage and the derivatives inside of there. I think that a go anywhere portfolio doesn't have much. We're going to do this later in the show. Before we move on to this, a lot of this depends on the market environment. If we roll over and we're in a 20% drawdown, nobody's getting any inflows.

So we were going to do this later in the show, but let's do it now because this is tied in. There is this thing where if you have a big enough Twitter following, you could probably launch a product. Bill Ackman thought that there might be enough demand to raise $25 billion. And then he said actually more like five to ten. And then he said, you know what? You know what? I'm not doing it. And it was SPAC-y. It was a closed-end fund.

So it was a bag of cash basically. So if you give him $5 billion, he'll invest the $5 billion. Now the problem is he already has a publicly traded vehicle for Pershing Square. It trades in Amsterdam and it trades below its NAV. So why would you buy the IPO of Pershing Square in the US at NAV when you know the history is ultimately this thing will end up at a discount. He was saying it's gonna trade at a premium. Well, of course he was. Because everyone would be wanting to rush in to buy it.

Well, he has produced, so to his credit, he's produced incredible returns. Nobody would say that he hasn't. Extremely volatile, great returns. Not a closet indexer. Not a closet indexer. But if you look at the popular ETFs, they're like the everyday man's ETF. No one knows who built it. No one meaning the average investor knows anything about his track record.

What people know with him on Twitter is his political views. So to me, having a Twitter following of your stock portfolio or your ideas is one thing. It's the worst idea I've ever heard. Yeah. So I think that until the everyday investor, because I think what's tough about a hedge fund, right, which like his, I would classify his, his yoke of investing as like very activist, very specific long short, right? Concentrated. Concentrated is that as an advisor, that's so tough to explain when it's not going well. No, this is just like a cult or personality thing. No advisor is allocating to this.

And so I think that's where you need the warehouse buy-in, you need RIA buy-in, you need model buy-in, and I think that a strategy like that is a little tough to fit into any of those boxes. What do you think if you're a Persian Square LP? And he's like, I'm going to launch this thing where I'm going to invest for the masses for, I don't know, 75 basis points. Are you like, wait, what? I'm paying you two and 20?

What are you doing? You're doing a closed end? Yeah. Who knows, right? I mean, I think he's done really well for investors over a long period of time, so they probably don't care. Maybe they don't care. They don't care.

It's like, you've crushed it for me. Sorry. That was really great. I think this will come as an ETF though. I think you're going to see an ETF filing from that. So he's not giving up, but the structure- I think to your point, it's hard to raise money in those. The structure doesn't make sense, closed end.

It makes sense because it gives him the, it's a fixed share count and it gives him the latitude to do whatever he wants. Okay, fine. But there's no appetite for that because they know every, by the way, every Close Then Fund eventually trades at a discount. It's just the nature of one of this. So you think he can come back with an index strategy?

With an ETF. He's not going to get payday like an IPO, but I could see it. I don't think he's going to raise any money. And we were talking about Twitter followings. The biggest one I know of, remember Portnoy during the whole crazy production? Buzz.

Buzz, he raised 500 million. And that was the most successful launch for something like that. That's why I think Tom Lee is going to underwhelm. And that was Portnoy and he has all the DGENs and everyone else. But Tom Lee's followers have money. But Tom Lee is followed by more investors

and Dave's following is just everybody. But to want something that you were saying about unconstrained, no one wants to buy an unconstrained strategy. No one wants to do that. I think they want to see what he's doing. I don't think they're going to give their money to him. Hypothetically, in an alternate universe, if he were able to launch and the thing did trade at a premium,

you would see 10 of these right afterward, right? Totally. Right. Everyone that thinks they're better than Ackman would immediately file. It's like the club you can't get into. But kudos for him for being innovative and trying to have a vertical that can actually,

other investors that are not qualified purchasers can invest in. And so I think it's a great idea to have his strategy out to the masses. But to your point, I think the structure of closed-ins, not right. And ETF is a good idea. But he's not a household name with investors. And so he, you know.

This is the last thing we're going to do today. I want to ask you guys about interval funds. Jason Zweig went nuts on these things last week. I thought it was a really tough article to read if you're an advisor that's currently recommending interval funds because it asks a question that it's really hard to give a good answer to. So basically, we know that financial advisors want to look different for their clients versus Vanguard.

Okay, obviously. We also know that they want to seem more sophisticated than the RAA next door and there are 15,000 RAA firms in this country. Private credit and private real estate are sophisticated asset classes. They are not available to the masses in an ETF for example. So it requires some sophistication to even explain what it is to clients. But if you have the type of clients that are always like, what's next? Or what are you doing that's magical for me? These check those boxes.

They're structured as interval funds for the retail market, which means you put money in and every 90 days you could take a certain amount of your money out if you want to, but like 5%, very small. No, no, no. 5% of the fund. 5% of the fund, sad. If you're lucky. Five percent of the fund. Of the fund, yeah. If you're lucky, you'll get like.

So you have daily liquidity on the way in. Yeah. Exit liquidity every 90 days. Until everybody else wants it. Okay, so it's an $80 billion asset class, the 100 largest interval funds that currently exist. There are, first of all, there's 100 of these. There were only 14 interval funds a decade ago with under $3 billion.

So it's been a huge area for asset management. So Jason's take is, here's the problem. Number one, the illiquidity. But let's say you don't care about that. Number two, these funds are mostly leveraged and they're not just billing you fees on the money you put in. They borrow up to a third and then they bill you on the leverage. That part to me is crazy.

So I just, I want to just read this real quick. Right? They charge an expense ratio on the debt. So this is Jason. The prospectuses of several interval funds say their recent borrowings carry annual interest rates of almost 6% to more than 8.5%. Remember, they have to borrow the money, the fund itself. An interval fund that borrows one-third of

its total assets could be adding somewhere between 2% and nearly 3% to its annual expenses. On top of that, some managers charge management fees of 1% or more on the borrowed money. All this can push an interval fund's total annual expenses towards 7%. Imagine a leveraged interval fund could buy a private loan with a yield of 12%. After all costs, barely 5% might be left for you. So the question in the article is, if that's all you're getting, why not just buy JNK? Why not just buy an ETF with leveragedaged loans or something why do the interval fund then I don't maybe there's a great answer, and I don't know what it is Well the look several things I mean we do a lot of private credit

We do a lot of private investments and so to me the problem is the problem is not the illiquidity. It's the liquidity Okay, there's not there's no liquidity But they're manufacturing liquidity. As long as other investors are coming in and they have some yield to kick off the portfolio, you can take your money out. But we all know with B-rate, when everyone wants to come out at once,

these underlying assets are not illiquid, are not liquid. And so if you think about it, a real private credit strategy, first of all, you ask, what is the strategy? So I think if one is just talking about the structure, that's problem number one. You should be talking to your clients about, what are you trying to solve for?

What are you solving for? And if you're solving for something that needs a yield, the risk-free rate is the risk-free rate. So the 10 years at four, the short ends at five, if you want to get over that, you got to take risk. So J and K, once again, you're at all time lows. So that could be risky from- You're not getting paid much for that.

You're not getting paid much. But on the private side, here's the goes. Let's say you have a one and a half percent management fee and a 10% incentive fee that the manager charges, okay? But let's say it's yielding, they're going to give you a 12% yield on this credit paid quarterly. Typically though, they will have what's called

a preferred return, where until you get all your money back, you know, plus 7% annualized, we don't get our 15 or 10% incentive fee. And so you're aligned to- So I like that structure. That's one of the most remote ones. That's how it's supposed to work. And so these interval funds, to your point,

are just like layering fees, they're charging fees on the leverage, and there's no incentive that the manager really doesn't get paid. That carry is what the private manager is gonna live off of. He doesn't get paid until you get all your money back, plus your preferred return.

That doesn't exist. Is there also some element to this where why would the better managers of something like this be at a retail interval mutual fund? The better managers are probably private funds. Well, it's harder to raise capital. A lot of these funds, you have to have five million of liquid assets exclusive of your home.

And so these managers would love to be able to go out to non-qualified purchaser clients below five million, whether it's in below even accredited, and so I think there's a big incentive for these managers to create these liquid structures. And to take more risk. And to take. With more leverage. If they're charging on the.

The higher fees. Leverage, that's wild. Right, so in the private investment world, that would be like a manager charging on what's called the subscription line, and that's a no-no. That's just like, so this is a product that seems on the surface to Jason's,

the way Jason's laying it out on the surface, because I don't think you can categorize all funds. They're not all bad. No, no. No, right. He actually writes about one where it was called Cliff something. Cliffwater. Do you know that? Cliffwater? AQR? No, no, no, Cliffwater's the bit, one of the bit. No, that's Cliffasmus. Oh, it was called Cliff something. Cliffwater. Do you know them?

AQR? No, no, no. Cliffwater is one of the... No, that's Cliff Asst. They're one of the biggest. They're one of the biggest in the space. No, he writes about one where they don't charge a fee on the leverage. Which seems like that should be the industry standard, but the industry standard is the

other way. You have thoughts on these? Well, I mean, I know ETFs are trying to figure out the private equity thing, and it's a spot that seems pretty safe for now, but just more philosophical. ETFs always kind of find a way. I don't know how they're going to solve the private equity, you know, private asset thing, but look at something like... That might be the final frontier.

How do you have daily trading? No, fees always find a way. There will be an ETF for these private assets. That's not going to go well. Here's what I think is a perfect example. Right before the Bitcoin ETF come. Think about how much, 2.5% on their trust. Then the ETFs got that approved,

and then look how they were forced to cut. I think something like that will happen. I don't know the logistics of how they get there, but ETFs always find a way. I have the answer already. Tokenization. No. There's like seven or eight publicly traded private credit slash private equity firms. So you're saying just owned Blackstone. Put them in an ETF. Those exist yeah. KKR and there's a couple from Invesco. But they're always

like wrapped up in like the whole financial sector. Just give me ARI, what are the public ones? KKR, Blackstone, Apollo, Carlyle, Blue Owl. So throw those all in an ETF and buy that. I'd rather have the GP fees than the LP fees. I've heard the pitch about trying to buy like small cap growth as a proxy. What do you think about that? People are saying well buy small cap growth as a proxy for private equity. This is how Zwei's article ends. It's hard to f*** with this. Leading ETFs investing in public high-yield bonds have yields of 7 to 8% and total expenses well under 1% without making you wait up to half a decade to get your money out. Given the high expenses on many interval funds, quote, after you do the math, you're at best

only a point or two ahead of a public high yield fund, and is that extra yield worth the liquidity you give up to get it? That's Morningstar analyst Brian Moriarty. So that's the question. It's a tough question to answer. Yeah, but I will say the theory of the interval fund, you're not going to be down 25% like you're going to be down on high yield. So I think it's a little bit of apples and oranges. You're just looking at the yield on high yield not looking at the price fluctuation. They're not the same thing. They're not the same thing. We agree with that. Okay. You guys have fun on the show today?

So much fun. Yeah, this was awesome. You want to do it one more time just to make sure we got it or because we got it? Let's start. Ready to go? Did you finish the Rubik's? I had these two. I didn't want to do it. Basically. Basically, yeah. I can finish it up.

You're very smart. Pull out those meta glasses and tell me what's going on now because I saw you when you first got them. Yeah, yeah, we took pictures. Yeah, yeah. Really quick. So do you have WhatsApp? Have you seen these in the wild yet?

I heard you told me about them. Do you have WhatsApp? I have WhatsApp, but like I might not be logged in. I need to call you. So here's the deal. I can put them on. Okay. I'll take them off.

I can put them on now. This is just a new update. If I call Josh on WhatsApp and then all of a sudden I can there's a little Camera that comes a little sunglasses. I push the sunglasses and Josh can see what I see that's So we were on vacation and I was calling my friend and we were in the mountains and I was like hey She was like walking on the trail your phone number is no longer registered with whatsapp on this phone I bet these are these are these are so great they cost basically the same. So you can give me. I call you on WhatsApp. So you could be let's say you're in the Vatican taking the tour and I couldn't make the trip. Yeah. So so because I'm your elderly grandmother

and you say grandma look where I am. Yeah. And then on my phone I'm watching what you see on your glasses. That's still shit, right? It is such great clarity. It's like a 12 megapixel camera and then I don't know if it's 1080, but it feels like 1080 on the video. Now, do you see the other person? Is there like a... No.

Oh, there's a little on my phone. On your phone. There's a little picture of the person, but I'm just looking at it. My phone could be in my pocket. And what about the audio? Amazing. I listen to music and talk on the phone all the time. And you know, like on the earbuds?

People think you're talking to yourself. The people, they do. I was walking up here, because you have those AirPods on. If someone sneezes, it sounds like an engine blew up. On these, it's like you can't hear anything. When you're walking around with those, you could say to the glasses, because the glasses have a receptor for sound, a microphone. So you could say to the glasses, I want to walk to the nearest 7-Eleven,

whatever. And it'll just give you guidance visually or it'll talk to you. No, not so much. It'll say make a left? You still need to use your phone for that. You still need to go to the maps, but once it's on the maps, it can talk. But really it's like, you know, I'd say, hey, Meta, take a picture. I can push a button, but we were like traveling and no cameras were allowed and my kids have them too. And so we're like, yeah, no cameras allowed.

Oh, you guys like spies. So we'd be like, hey, Meta, take a picture. They like spy kids. All right. Yeah. Very cool. Hey, we always ended the show with favorites. And I'm going to go last today. Michael, do you have a favorite for us?

I do. All right. So the rewatchables, which is my favorite podcast, did a two part on Pulp Fiction. It was four hours long. And I rewatched Pulp Fiction, probably the movie I've seen the most, I guess. And it was always like cliche to say that Pulp Fiction is your favorite movie.

I'm not afraid to say it. It is my favorite movie. So I rewatched it in full for the first time in a while. And absent that one weird scene with Butch's girlfriend, it really does fly. And it's two hours and 30 minutes and it flies. And it is, in my opinion, for me, it's my favorite movie ever.

Wait, it's Butch's, oh, whose chopper is that? Yeah, said's dead, baby. I still don't understand that. It's just the best, my favorite movie ever. Very nice. Not afraid to say it. I like it. I love that movie.

All right, Tom, do you have a favorite for us? Anything you're reading, watching? Pulp fiction is in my top five. Are we doing movies? Not anything. Your favorite ETF? Yeah, what's your favorite ETF? What's going to perform best tomorrow?

Oh man, that's going to... I'm a pretty boring investor. It's hard to go against like the V.O.O. What's your favorite thing in the world right now that you're into? What are you doing this summer? Oh man, this is gonna be so, I might be the candidate for the most boring. All right, we like that.

You like boring? I'm like super into New York history. So I'm like, there's actually a test to get your tour guide license. Okay. So I'm actually studying for, apparently, I don't know if you had to get the license. I love that.

So I'm like just- Wait, where do you want to give tours? It's actually just more for myself, but I'm not trying to like- I know, you're giving me a tour. I'm always just like walking around, there's like so much history here. Do you do that in the financial district?

That's my favorite part of the city. That is the best part of the city. So when I got kicked out of college for the first time, I was at Nassau Community College, oh no, maybe Queens College, I can't remember where I of college for the first time, I was at NASA Community College, oh no, maybe Queens College, I can't remember where I was. I took a class, it was a walking tour class of New York City and I grew up on Long Island, I didn't grow up in the city.

And I learned so much and it was memorable. So when you get your certification, or even before it, I'm down, let's do it. So much fun. When you walk around Stone Street, Pearl Street, the whole financial district, it's like among the most historic places in the Western world.

Yeah, it's so, and you kind of just see how the city had built from there. And I live in Brooklyn Heights, which is also a really historic place. So it just starts with walking around with my friends and I'll drop these random facts. And you're such a nerd. It seems like no one cares.

Or you'd walk in, did you know that street? That's how it got its name and whatnot. Get smarter friends. Because I think that's cool. What's historic around Midtown? Where we are? This one, Crystal Palace. What's that?

Tesla Street was right there. So, well, Bryant Park, right? How did you mention that? I didn't know that. But, all right, so we're at Bryant Park. There used to be this convention hall called Crystal Palace. Like in England, it was mirroring Hyde Park. Yes, they mimic it after that.

Yes. And so it's like this stunning glass building. It only lasted for a couple of years, it burned down, but Otis had like even showcased an elevator in there. And it was just right here at Bryant Park. And then there was this big reservoir at New York Public Library. And if you actually go down there,

you can see the old stone. And do you know what was right next to it? The Hippodrome. Do you know about that? Yes. So we had horse racing right in the middle of the city. And there's still a building on Sixth Avenue called the Hippodrome building.

But we literally had like an open air. It was not like in an arena, it was like an open air like horse tracks, like in Rome. Did you read New York by Rutherford? Yes, I did. And Gotham, I have a bunch. I'm really into like the boss tweet era too. There's just so much history. Brought us an amazing favorite. Thanks. You're so interesting.

I want to take the tour with Michael. So tell us... And Brynn definitely wants to take the tour. I definitely want to go. We'll do a range of tour. Brynn, what do you have for us? Okay, so a book everybody should have in their house. I have it on my Kindle. My kids have it.

It's called The Magic of Math. Everyone should have it. This guy obscure book, Arthur Benjamin. Okay, so I'm going to do a little thing. A little teaser. Do it. So don't say it out loud, okay? so pick a number between 20 and 90. Okay, I'll do mine I'll say it out loud so you can follow with me mine's 35. Okay, add the two digits together

Okay, so mine would be eight. Okay add your digits now subtract that number from the original number So mine's 35 minus 8 you have that yeah, so you have your new number now add those two digits together from the original number. Yeah, I also chose 35. Well, it doesn't matter. You can pick any number. Everyone's number. Tell us about TurboLearn. Okay, so I love technology. Obviously, I'm a gadget person. Yeah. I have a Plod thing on my phone. I don't use it that much anymore.

There's this great desktop app for AI called TurboLearn.ai. Your kids should for sure use it. My kids are in college. I know, I think you've got college. Almost. College almost. So Turbolearn AI, it does a great job. You can record it.

You can insert a PDF. And so last night I recorded the meta earnings. And what's amazing about it, it picks up on the nuances. It gives quotes. It puts tables for you together. And what's amazing about it, it picks up on the nuances, it gives quotes, it puts tables for you together. So it's not a transcript, it is a summary that you feel, I think it's the most accurate summary I've seen from earnings calls.

And so if you think about our industry, how many investment bankers, junior investment bankers have to sit and listen on these calls? It's like, that's done, because the output from TurboLearn, it's at turbolearn I AI is except is exceptional You can insert a PDF also have so let's say average conference calls 45 minutes, right? 30 minutes boilerplate 15 minutes QA ish. Yeah

What's the output like five minutes worth of reading? Yeah, maybe five Yeah, that is amazing quarter has what to just saying Transcript which I love. No, but they also have a new AI thing where it summarizes the transcript in like two seconds. Stop glazing Quarter. I'm just saying. We didn't know for that.

All right, I want to say Evan Gurskovich is free. This is to me, like the best news story of the year. Like literally, unless the USA basketball team wins the Olympics, then that'll be, I don't know. What else makes people feel good? This makes people feel good. I know. Two prisoners released.

Yes. Multiple prisoners, I should say that. So for people that don't know Evan's story, he's a Wall Street Journal reporter. He was reporting on Russia, which is the country his parents are from. He was a Russophile. He was traveling the country, trying their restaurants restaurants and they used him to basically Get a hitman that they thought they might be exchanging for Navalny Navalny died they picked this kid up off the street a couple of weeks or months later and

Basically held them for over a year His parents are here in the United States just freaking out every single day. The Wall Street Journal has been screaming like from the front page, free heaven. And they finally got it done. And I want people to read the whole story, all the stuff they couldn't release over the last year. The Wall Street Journal has had teams of reporters on this. You will not believe how good this story is. It's like a Captain America movie. Like it's incredible. They have Green Berets who are negotiating and like lawyers and people in the White House and then people in countries all over the world. So please go to wallstreetjournal.com and read all the stories they just put out today

about Evan and his release and the negotiations. And this should definitely be a movie because it's like an incredible thing that happened. So we like, we like freedom. All right, that's it for the show this week. Guys, thank you so much for listening. Special thanks to our guests. I want to tell you where you can follow them. Bryn, you are at Bryn Talkington on Twitter.

And let's, let's, let's spell this out. No, no, no, no, no, no, Tom. Let's spell this out for people. You are on Twitter and you no, no, Tom, let's spell this out for people. You are on Twitter and you are at P S A R O F A G I S on Twitter. And, uh, you're doing, you're doing incredible stuff with Eric Balchunas, friend of the show and James. And James, they're all part of the same team. Okay, dude, you're, you guys are, you guys are the best in the biz covering ETFs.

So people who want to follow Tom, people want to learn more about ETFs or keep track of what's happening, definitely follow Tom. Thank you so much for doing the show. Thank you for coming back and doing the show. So fun. Thanks for having me. Thanks, John, Duncan, Rob, Graham, Nicole, Sean, everyone who helps us with the charts each week.

We appreciate you, Daniel. And guys, see you next time. Take us out. Good job. That was long. I know, right? That was so much fun. Yeah.

Wow. Thanks for watching!