Why Retail is Outperforming (EP. 432)

23:59This is the era of retail investors' dominance. And it's not going to last forever. But so long as their favorite names keep going up, party. Well, and the fact that so many people now just decided, I'm going to buy index funds and ETFs. I'm not going to try to... Some people still are, obviously. And a lot of those people are beating it. But most people have said, I'm excusing myself from the game. I'm done. I'm not going to pay fees. I'm not going to try to time the market. It depends by age cohort because the young people are not saying that. Yeah, but they're saying it with 80 % of their money, right?

24:31And then 20 % there. If you look at just the flows alone, think about it. The most popular ETF is VOO, the Vanguard S &P 500 ETF. It's bringing in more money than any ETF in history. Yep. Right? If you look just at the flows, it's not Robinhood. It's Vanguard. It's both, but point taken. All right, so this is floating around. Van Buren has$7 trillion in assets. Robinhood has what? I don't know what Robinhood's total is. I don't know. I'm going to guess$200 billion. Hundreds of billions, yeah. All right, so I saw this floating around Twitter over the weekend. Sheila Minot tweeted, there is a woman in San Francisco who charges$30K to name your baby.

25:09She started at$100, but she was going to dinner with VCs, and a friend told her to charge more, and nobody blinked. The Bay Area might be the best place in the world for this kind of business. so I saw this floating around Twitter not just from Shield but other people were sharing it as well so I wanted to read the story to find out what's going on here and I couldn't read the story because I was locked out of an article so I googled it and it turns out Ben no no no you put it in the chat GPT so you summarize this for me and it'll do it oh even if there's paywall sometimes but then it'll go if it's still paywall they'll look for it elsewhere okay good stuff That's what I do.

25:47All right. Anyway, Ben, it turns out, so people are like, top, top. How is the Fed cutting rates? This is top. Guess what? I Googled it. Here's what came up. Whack your world of baby names. Guess how much mine costs. Taylor Humphrey can find your baby. Okay. For$30 ,000. This story first came out in October, 2023. Ah, okay. So people are reusing the rage bait. I guess people thought it was fresh. It's not fresh. Also, I am very good at, I could do this for less than 30K. I could be a consultant at this. Here's what you do. There is baby name things where you can look at baby name trends by years.

26:23So you type whatever name you're looking for and you try to find one that's not popular anymore that no one else has. That's how we chose ours. Oh, so you would set the trend? Yeah, but you pick old names. That was our thesis. You picked old names. I feel like Libby is a popular name, no? Well, yeah, I guess that one went against it. But yeah, George and Kate were the other ones that people don't use anymore. Like if you want to go against the grain, you're doing Ashley or Jennifer, one of those like 90s names that no one uses anymore. Yes. You know, it didn't occur to me until just now, but George and Kate, plus eight, remember that show?

26:59Oh, yeah. I'm sure you've gotten that a lot. Actually, we haven't, but. Really? I think you're the first one, yeah. Okay. All right, so Heather Long, we got some economic data last week. Wow, final read on Q2 GDP is 3.8%. Consumption was 2.5%. Both goods and services spending was healthy. The US consumer remained a lot stronger than many thought, even the miss of the stock market sell-off and a lot of trade uncertainty. I, for one, can't believe it. I thought that there was going to be some sort of retrenching. And I'm talking at the aggregate level. I know at the lower level, there certainly is.

27:33But I'm surprised that it didn't really seem to slow us down at all. And I wonder, Ben, did the Fed make a mistake? Like, so we were on the case of the housing market is frozen. Seems a little restrictive. Let's loosen up. Let's get the housing market activity going. It's a third of the economy. But I don't know. Maybe I'm second guessing myself. Like, should we be cutting into a CapEx super cycle with inflation potentially reaccelerating? Like, is that the right move? I think the labor market is the thing that worries them the most. But to your point, I pulled this up from Exhibit A was on today.

28:13The GDP now for this up-to-end quarter is 3.9 % again, which is, you're right, it's kind of insane that growth keeps coming in. And I don't know. I still think the why should we punish the housing market because Mark Zuckerberg wants to spend a bunch of money on AI. I don't know if I think I'd take the housing market side over Zuckerberg in that scenario. All right. Well, and you frame it that way. here's a headline from Bloomberg rich people feel pretty good right now and they showed the daily consumer sentiment index which we're going to talk about later I've got questions they break it down to income level and there's just a big gap between people that make over $100 ,000 and everybody else is really the deal of the year makes sense right so I saw this other chart you put in here that shows how So people making 100K or more, their sentiment essentially tracks the stock market.

29:10That's a good chart. That's a very good chart. And that makes a lot of sense. So I updated this. I've done this before. The household and housing ownership. So 87%, the top 10 % owns 87 % of the stock market. And then the bottom 90 % owns like 55 % of the housing market. So the middle class housing is the thing. So the fact that housing is stuck right now and kind of prices, I know prices are still going up a little bit and all-time highs in housing prices, but it's certainly cooled off, obviously, and the stock market hasn't. So the fact that the lower and bottom tier housing is their big asset, but the top 10 % stock market is their big asset, it makes sense why this is the case for sentiment reasons and financial reasons, right?

29:54This is why we're never going to fix inequality, though, in this country. It's a feature, not a bug of this system. The fact that the stock market is so important and powerful now for so many more people. Like, think about it. 62 % of people own stocks in this country, right? Like, I think the stock market is just so much. Like, you couldn't have the Great Depression happen today because back then, 2 % of households own stocks. And it didn't really matter that much. We wouldn't allow it to happen today. We wouldn't let the stock market fall 80%. It would never happen. No, no, no. No, it would not happen.

30:29You know, looking back on the period of 2021, and there was a lot of finger-pointing at Robinhood, people were upset about turning the investing, which should be a long-term boring endeavor, into addictive. Yeah, people hated the confetti. Guess what? God bless Robinhood. I think that, with the benefit of hindsight, where I landed is more people in the market, the better. Now, caveats abound. Obviously, people got wrecked, and obviously, people are irresponsible. But that's nothing with Robert. Yeah, but they bought millions of new investors into the stock market. Who learned that, oh, I can make money in the stock market.

31:07And again, short-term lessons notwithstanding, like whatever. Over the long term, owning stocks is a good thing. Getting people in the market is a good thing. Hard stop. Yeah, that's true. But the fact that it's so much more important now just means the rich will continue to get richer because they have a greater share of the stock market. Well, there's that, of course. We're literally never going to solve wealth inequality. Let's be honest with ourselves. Yeah. All right. So somebody emailed us a few weeks back. So we read a tweet that 40 % of the mortgages that banks hold are adjustable rates.

31:42Somebody said, that's nonsense. He said, U.S. banks are the single largest entity of holders of mortgages and mortgage-backed securities, around$2 trillion worth. Of that amount, that is not a fixed-rate agency MBS. The rest is raw mortgage loans that the bank originated and decided to keep the raw loan on their balance sheet. Quote, held for investment as opposed to selling that loan to Fannie and Freddie. So why is almost half of those raw loans held in arms? It's because an ARM loan has about a zero interest rate duration risk for the bank. The bank gets to hold that loan with a yield of 4 % and have a limited duration risk.

32:18It's a home run for the bank. So they're offloading the other mortgages and holding out of the arms. And that's why it's such a big percentage from them. Correct. And other people own the other mortgages besides banks where arms as a total are like five to 10 % or something. So he also said, side note, the people taking out arms today are the rich people. It's not the people that can't afford it. It's the people that say, uh, I'm good. I just need the house. Like I don't, right. Right. Yeah. Right. I don't need to, I don't need to pay my loan down. I don't care. He said this kind of borrow is about a less than 1 % chance of default rate.

32:52So the banks love holding that rate. So anyway, this guy said, he finished with Mike, we need more updates on your selling and buying your house. How was it dealing with agents? Did you pay a buyer's agent fee? Any inspection stories go? Yeah, don't you have to like bring your own lawyer in in New York to buy a house or something? Yeah. We don't do that here. No lawyers? No. I've never hired a lawyer for anything in my life. Wow. Not once. What about the contract? That's what realtor's for. Why do we need a lawyer? Realtors don't do contracts, do they? Yeah, they do. And then the closing office.

33:27I don't have a lawyer for when I buy and sell a house. Hey, before I get to this, so I have a decent story, I suppose. What are the rules with, all right, I'm the new guy on the block. How long does the window stay open of me introducing myself? Because eventually it slams shut. I don't know where the line is, but in my old house, and I was there for six years. There's people that didn't say hi to for three months or six months. And then it's over. You can't introduce yourself to somebody a year after you've been at the block. Yeah, no, you just, as you drive by them, you wave, that's it. So big wave guy.

34:02Robin's like, oh, you're a big wave guy. Yeah, I want to encourage you. I do the wave every time too. You have to. Yeah. Yeah, of course. But no, I think you put it off for as long as you can. You don't want to have those conversations unless it's like forced upon you. No, you got to introduce yourself. Nah, never. Okay. No, we did. But it was mostly when we moved in, people coming to us to say hi. You know, I got caught in one of these awkward situations. I remember this vividly because it was just so uncomfortable. So I remember in Park Slope, I would strap COVID to my chest and take him to daycare.

34:37And there was a dad that we would get there at the same time every day. and like maybe I had felt like a six months, a year into it. I don't know. It was a long time, way past the appropriate time of introducing yourself. So I had my Bose headphones on, my noise-canceling headphone over the years once. And I took him off to introduce myself. And I think as soon as I did that, he like turned his body half a turn. And so I like missed him. And then I just, I'm standing there with my headphones off and waiting to, but we missed each other and I was very uncomfortable. That's very good etiquette though.

35:09Whenever you talk to someone, take your headphones out of your ears. Oh, yeah. I see people talking with the, like, if I have some in, I'm listening to something in the store, and I see something, I immediately take them out. Yeah, of course. It's very obnoxious not to. Okay, so what was your experience like buying and selling a house? Not to bore listeners to death. On the buy side, nothing too dramatic. On the sell side, I only got two offers, which was interesting, because I had a nice house in my neighborhood, not to brag, and there's just not a lot on the market. But the problem is interest rates just destroyed demand, as we know, obviously.

35:50The good news is I only needed one offer to accept, and I accepted it. Okay, so let's say your house sat on the market for two to four weeks, and it got to crunch time where would you have been willing to lower the price pretty aggressively to sell it? Yeah, I had to sell it. You had to buy a new house, I had to sell it. All right, so here's maybe for the financial part of this audience, an interesting story. So originally, I got very lucky that I sold my Long Beach house and my house at the same time. I was going to take all the proceeds and put it into the house and do an interest-only loan.

36:24Because if I put down, let's say, half the value of the home, how much more equity did I need in my house? I was attracted by the low interest rate. The guy at Bank of America, who was phenomenal, by the way. I feel like when you buy a new home and sell another one, that's when you realize that, like, oh, this equity, it's good for a down payment for a new place. But other than that, why do I need so much in it? What's the point? That's the same feeling I had. So I was going to get a 5 % arm. And he said, hey, listen, I just want to throw this out there. Because you're getting a jumbo loan for$900, you can do a rate modification, which is effectively a refinance.

37:07The difference is I don't have to submit all of the documents, which is a huge pain in the A, right? Like documents for days. And I don't have to do any closing costs or any taxes. It's just$900. And every 25 basis points, I could do the rate modification as many times as I want for$900. So I said, huh, that does sound attractive. So I'm like, all right, so what's the 30-year mortgage rate today? And every day he's like, hey, it's still 6%. But what was moving every day was the closing cost credit they were going to give me. So he would say, all right, it's 6 % with$4 ,000. Next day, 6 % with$11 ,000.

37:49Next day, 6 % with$7 ,000. So I said, hey, why are the closing costs moving around so much? How do I get more of that? He said, well, the maximum amount that we would give you is 2 % of the value of the home. I said, holy shit. 2 % of the value in the home. What do I have to do to get that? He said, you have to accept a higher interest rate. Okay. How much? 6.5%. So I said to him, let me ask you a stupid question. Can I do that and then still do the rate modification after my first mortgage payment? He said, yes. I said, really? Why would the bank allow that? It doesn't make any sense. Because rates are going to come down, right?

38:30He's like, yeah. So I said, so why would you do that? Why would the bank allow that? He said, because in the last couple of years, a lot of people that did that, thinking rates were to come down, got stuck. So it's not like a guarantee that rates are going to come down. He goes, you're gambling. I think it's a smart gamble. I said, so do I. So you're effectively a bond trader right now. I'm a bond trader. You're trading mortgage-backed. And I might be the best mortgage-backed security trader of all time because I got the 2 % against my closing credits. And he called me last week. He said, I got good news for you.

39:02I was 6.5%. Now, 5.375. Huge. Why did it drop so much? Interest rates came down. The tenure came down pretty good. It's a massive drop, though. You timed it pretty good. Yeah, so I got very lucky there. But anyway, I'm looking at the documents and the amortization schedule and how much principal I'm going to be paying. I'm sorry, how much interest I'm going to be paying. Nobody actually makes money on a house. when you say, oh, I bought it for, my parents bought it for 125 and they sold it for 800. Okay. Well, how much should they actually pay? Because it's not the sticker price. Right. The ancillary costs, all that stuff.

39:42Yes. I'm, I'm convinced no one actually has any idea what the return of their house is because no one keeps track of everything involved in the buying and selling. And you can't tell what you would pay for rent somewhere. And it's an impossible calculation to make. No one knows. So this is, this is not a popular thing to say out loud, But I almost wonder if a lot of people that wanted to buy a house who otherwise invested it in the market and rented are actually in a much better position. I made this point to you like a month ago. You don't remember that? Yeah, great point. Now, the obvious caveat is that if you outgrew your apartment because you have two kids and you need to be in a house, horrific, right?

40:20Like awful, awful. It's a lifestyle choice for most people. That's the thing. It's not an investment. It's a lifestyle. Awful, awful, awful, awful. But the people that are not in that situation who were going to buy a house just because they thought that that's like what you do, not only did they not touch a bullet, but maybe they benefited. Yeah, they could be a better spot. I think so too. All right. Anything else from your home? You're good? No, I just want to let the listeners know that maybe there's some oversharing that I need to get edited out. But otherwise, business insider had this piece on Nepo home buyers.

40:53And this is really surprising to me. It's the share of buyers with financial help from their family or friends. And it's been going down, actually. I don't believe it. For first-time homebuyers, too. And all buyers. It's been going down for the past five years or so. And then they look at the down payment. Hang on. Where's the data coming from? How could you prove that somebody's getting… National Association of Realtors has a huge report they do on this. But how do they get the data? It's a survey, obviously. I think it's a pretty big survey they've been doing for 25 years. Well, if true, if true, wow.

41:26It's surprising, right? I would have thought for sure this number would have been going way higher. It was higher coming out of the great financial crisis, which that makes more sense to me. So you know what this tells you? The people who are buying homes are, this is more wealth inequality at work, are doing fine financially and can afford it. Even though it's more expensive, they can afford it. So like the profile of the buyer is in a very good place right now. It is also weird. I mentioned earlier intellectual superiority, people saying, oh, you shouldn't buy this. There is a lot of moral superiority going on about this whole topic of conversation around the economy where it's like a race to say, how fast can you say that the bottom 10 % are getting left behind?

42:09Right. Right? It is a weird sort of dynamic that's going on. Yes. And when have we ever been in an economic environment when the bottom 10 % wasn't getting left behind? That's just, that's the way like this economy works, right or wrong. Now, I think, I think everybody would agree that there was a lot of effed up stuff in this country and wealth inequality. And the fact that people go hungry is like, makes no sense at all. I think everybody would agree with that. But it's just this weird thing how like when, when discussing how things are pretty good, there's like these people that always feel the need to point out that inflation is hurting the bottom 10%.

42:44You also have to remember though, that not everyone stays in the bottom 10, 20, 30, 50%. People move up and down income, wealth stratas. It's not set in stone forever. It feels like it is, but it's not. All right. Bloomberg had this big piece on private equity. Did you read this? Not yet. Here's the headline. Some PE firms doomed to fail as high-flying industry loses its way. Now, they're saying the fact that distributions have slowed so much is causing a real problem. So they said at the current rate, it would take about nine years for customers to collect their money from more than 12 ,000 companies held by U.S.

43:19buyout funds according to pitch book um that sounds like a weird data point well it's just saying if the distributions continue at the current pace it would take a very long time for them to get their money back so that's saying that's making them very reluctant to give more to the firm so they said private equity funds right now are seeking 3.3 trillion dollars in new fund commitments and so they're saying how are they going to get these investors to commit to new funds when their old ones are paying them back so slow. And this is, of course, why we're moving into RAs and the wealth channel. I think we'd all like to solve the puzzle.

43:53Wealth management. So here's the thing, though. They said at mid-year, so this is the reason why this is not a crisis or it won't develop like a crisis. It'll just be a slow-moving train. At mid-year, the industry was holding about$1.2 trillion for potential deals. Almost a quarter of that pledged at least four years ago, making deployment even more urgent. Like, they're sitting on such a war chest of capital. like that they can keep shoring up these companies if they want to keep them alive. And how many distressed funds have been raised that haven't been able to allocate? Right, right. Waiting for the distress to happen.

44:25Yeah, you know, these people that like fantasize everything burning to the ground, have you not learned anything? That's not how it works. No. They change the rules. Right, people are incentivized to keep things going. Yeah, that's not, it doesn't just all burn to the ground. And that's what these companies do too, though. But what I realized when I was first investing in these things with my own endowment is if the investment period is seven years, they have this legalese in the fine print that says, hey, we can extend it to 10 years if you guys say yes. And guess what they do? They extend it.

44:55Legalese is a funny word. Right? It is. So you're right. That's the point. They've changed the rules or they have the rules in the fine print that no one reads. So yeah, private equity is going to be lower returns, not some crisis that people, you're right, want to see the world burn. Yeah. So every time, I think we mentioned a couple weeks ago about people in America being so much richer than other countries. And every time we do it, someone says, well, it's okay if people in other countries aren't as rich as Americans because they get free health care and their education is much cheaper and all this other stuff.

45:27Well, here's a piece from The Telegraph in the UK, and it's called Why American Families Are So Much Richer Than Us. And so guess what? They don't care over there. And this is in the UK. Roughly four in 10 U.S. households had leftover earnings after tax of at least 70 ,000 pounds last year. In the UK, just 10 % of households ate that much. Did you know that for percent, instead of using the little squiggly circles in the line, they say PC for percent in the UK? I did not. But wait, that's interesting. Right? It's way higher than I would have thought. Four in 10 U.S. households had leftover earnings after tax of at least 70 ,000?

46:02Yes. So that's disposable income. And they say the top 10 % of disposable income in the U.S. is 153 ,000 pounds and 71 ,000 pounds in the U.K. The top 5 % by income in the U.K. is 120 grand. So we really are just so much richer than these other countries. Even if you factored in the healthcare, student loan, other stuff, the disposable income is so much higher in the U.S. than it is in other countries. Wow. But are we happier, Ben? no not at all look at this chart that shows the the top 10 percent adjusted for inflation in the u.s versus the uk all right so that's the stock market yeah that's probably you're probably right so they say the average earner in the poorest state in america which is mississippi is now substantially better off than their british counterpart it's wild wow um Um, wait, okay.

46:57Oh, you got something? I mean, I'm looking at the travel section. Is this true? Yeah. I was going to give a travel thing. So I flew back from Calgary last year, my week, my trip at Banff. And after I, we had the podcast, I went and explored and I was sending you pictures and stuff. And it's one of those beautiful places I've ever seen, which it's funny because everyone, all the Canadians there from Calgary and the surrounding area in Vancouver and such, we're saying like, it's fun. It's really nice to see someone who's never been here before to see it through their eyes because we kind of take it for granted.

47:24Like everything in life, right? They're like, I was completely blown away by the Canadian Rockies. And Banff was probably one of those beautiful little towns I've ever seen. And they were like, yeah, we kind of take it for granted because we're just so used to it, which makes sense. So it's like an hour and a half trip from Banff to the Calgary Airport. So I got there way early, way earlier than I should have just to give myself time, you know, getting my car. So I had two hours to kill in the morning. And I looked at the sign and they had this brand new lounge and it said, if you have an American Express, whatever, platinum or gold or whatever one I have, you can get in here.

47:55So, all right, I don't like the food choices out here for breakfast. I'm going to go see what they got in there. And first time I've ever set foot in an airport lounge. And I don't care. I'm not going to do it again. Not worth it. I had to wait in line to get in there. The place was full of people. The food wasn't that good. It was, I would much rather find a corner of the airport away from all people, be by myself, than sit in an airport lounge that's overflowing with people. Okay. Not a surprising take. Not worth it. At all. Not surprising at all. It was nice. I'm sure people love the free food, but it was an overrated experience.

48:33It's not worth waiting in line for. All right. One more plug in addition to people from Charlotte hitting us up is we now have a podcast for Talking Wealth, which are episodes for advisors. Heretofore, it had only been on YouTube. Did I use that right? Think so? Yep. It had only been on YouTube. We are now moving it to the podcast realm, which makes a lot of sense. A lot of people ask for this. Yeah, it's been a long time coming. At least three people. No, there's four. I'm kidding. Yes. I was also kidding. Yeah, and we'll be doing more with this channel, I think. We've already ramped it up a lot, and so, yes, take a look.

49:18All right, recommendations? So did you read 11-22-63 or did you listen to it? Okay. So I read 11-22-63. I love that book. Love. Okay. You read it. Okay. So we mentioned Stephen King a couple months ago and someone said, okay, instead of reading a horror type movie, read 11-22-63. That's a good entrance for Ben into Stephen King. So I read it and I had a three and a half hour flight from Detroit to Calgary both ways. I didn't watch one movie. I read the book the whole way. Wow. And I just think that the time travel aspect, if you gave people the ability, I think this is on Total Recall, you gave people the ability to like plug into an AI and time travel back to like the 50s or 60s or 80s or 90s, how many millions of people would sign up for that today?

50:03Like the way that he describes what it was like going from, I think this book took place in 2011 and going back to the 1960s. And his description of it, I thought was really good to think through, like how that experience would be like and how it would shape you. and the differences. And it was just, it's really good. And I thought, man, this would make a killer Netflix show. And I looked it up. It was already a Hulu show. I had no idea. With James Franco. Bombed? In like 2016. I did an 8.1 on IMDb. I'm going to try it out. I never heard that it came out even. Oh, me either. So did you finish the book?

50:36I did. It's very good. I just finished it last night. Really good. Yeah, I didn't realize you. Yeah, here's the thing. I'm not going to listen to fiction on my Audible. I'm only going to listen to nonfiction. It's too weird to listen to someone do the voices and stuff. You know? I don't know. Okay. Friends with Kids. This is a movie from 2011. I must be in the 2011 phase. Not a great movie. It's the kind of movie they don't make anymore. I rewatched it this week on Amazon Prime. Here's the cast. Adam Scott. Jennifer Westfeld wrote and directed it. She's Jon Hamm's ex-partner. Maya Rudolph, Chris O'Dowd, who's pretty funny, Kristen Wiig, Jon Hamm.

51:20Really good cast. It's like a 2010s kind of movie they don't make anymore. Never heard of it. They kind of nailed the whole dynamic of how your life changes when you have kids. And there's always the one couple who's super duper miserable and not happy with each other anymore because they had kids. I guess the dynamic of having kids, they really sort of nailed that movie. It's like a 6.5. Okay. Good airplane movie, if they got it. I got nothing new. No movies? Or how did you get to Boston? Well, the flight is 30 minutes, but I did work on the flight. The last movie I saw in the theater was Weapons.

51:55I want to see the PTA movie. It's getting rave reviews. Here's the thing, though. I haven't seen it yet, obviously. You can't trust film people anymore. No, it's universal. I know, but every time Paul Thomas Anderson comes out with a new movie, they say it's the greatest thing ever. Like, Licorice Pizza was stunk out loud. That movie was terrible. Has anyone ever watched it more than once? I would venture to guess no. Sean Fantasy. Credit to me, I haven't seen it once, and I never will. I'm sure, because Leonardo DiCaprio's in it, I'm sure this new one will be good. But you can't trust film critics anymore because they just say everything is amazing, and there's no critical elements to it anymore.

52:34I don't think that's true. Film critics are permables. That's not true. It's true. I'll see it when it comes out on streaming. Sorry. I'll wait for it. Okay. What else? Anything else? Nope. Talking wealth. Email us if you want to work with us in Charlotte. Have fun in Boston. Animal Spirits at the compound news.com. Thanks to the production team as always. They're with Michael in house today. On the road. Yeah, we had more technical difficulties than ever because the whole production team was there. Thanks guys. All right. See you next time.