The Smart Money (EP.160)

Episode Summary

Executive Summary: The episode spans markets, speculation, and the changing structure of investing. The hosts debate whether the Fed—not the bond market—is keeping rates suppressed, unpack the rise of public-to-private equity and alternatives, review retail trading and fractional shares, and discuss gold, buybacks, housing, evictions, work-from-home, hotel demand, and the pandemic's economic fallout. They close with a listener Q&A and media recommendations.

Main Topics: Bond yields, inflation, and the Fed's influence (Priority: 5/5): The hosts debate why the 10-year Treasury hit record lows despite widespread expectations for inflation from fiscal stimulus and a vaccine-driven recovery. They argue the Fed may be more influential than the bond market's traditional 'smart money' reputation, especially in Treasuries. Public markets shrinking and private capital expanding (Priority: 5/5): They discuss a long-form Mobius/Callahan piece showing public companies have declined sharply over decades, mostly via micro-cap disappearance and M&A, while private equity and venture have grown in scale and visibility. Retail trading, fractional shares, and speculation (Priority: 4/5): The conversation covers Robinhood-style trading, data on retail underperformance in China, rising sports betting, and the surge in fractional-share investing as a sign of broader risk appetite and easier access to markets. Gold, ETFs, and alternative assets (Priority: 4/5): They analyze gold flows and the changing role of gold ETFs, noting that gold-backed ETFs are a smaller share of global ETF assets than in 2011 even though nominal holdings are higher. They also predict continued growth in accessible alternative investments. Corporate behavior, buybacks, and mega-cap dominance (Priority: 4/5): The hosts discuss reduced announced buybacks, record-low borrowing costs for tech giants, and the increasing concentration of S&P returns in the largest firms. They debate whether buybacks matter and whether the largest companies are gaining structural advantage. Real economy stress: housing, lumber, evictions, and hotels (Priority: 4/5): They review surging lumber and aluminum shortages, eviction risk, and collapsing hotel occupancy. These topics illustrate supply disruptions, consumer distress, and the uneven recovery across industries. Pandemic adaptation, work-from-home, and media recommendations (Priority: 3/5): The episode closes with reflections on enduring shifts in work-from-home, business travel, and city migration, plus recommendations for shows, books, and films, including a strong endorsement of Morgan Housel's book and a disagreement over Top Gun.

Key Arguments: The bond market’s low yields may reflect Fed policy power more than a true signal that inflation will not arrive. Treasuries are not the best place to apply the 'smart money' bond-market argument; corporate credit is where bond-market expertise may matter more. The public stock market has shrunk mainly because micro-caps disappeared and many firms were absorbed through M&A, not because businesses vanished outright. Private equity and venture capital have grown, but the public equity market remains vastly larger in absolute scale. Retail traders tend to trade frequently and lose money over time; more access and faster apps do not imply better outcomes. Fractional shares are beneficial for accessibility, but they also lower the barrier to impulsive or speculative behavior. Gold ETF assets look large in absolute terms, but relative to total ETF assets they are much less dominant than in 2011. Low rates encourage more alternatives, more leverage, and more experimentation across asset classes. Buybacks alone do not explain the market’s strength; mega-cap earnings and market-cap weighting distort the narrative. Work-from-home could permanently reshape business travel, city migration, hotels, and even political geography. Some distressed industries and companies were already weak before COVID-19; the pandemic mainly accelerated existing decline.

Data Points: 10-year Treasury yield: 52 basis points - All-time closing low referenced at the start of the episode Publicly listed companies: About 3,500 today vs. about 7,000 in the early 1990s - Used to illustrate the shrinking public equity market Micro-cap share of disappearing stocks: More than 90% - Share of vanished stocks since 1996 attributed to small micro-caps Average market cap of listed companies: $10 billion today vs. $700 million in 1976 (inflation-adjusted) - Shows how listed firms have become larger over time Propensity to list: Roughly one-half of mid-1990s levels - From a study on the costs and benefits of going public Survival probability of companies listed before 1970: 92% over the next five years - Historical comparison in the Mobius/Callahan piece Survival probability of companies listed in the 2000s: 63% over the next five years - Shows declining survival among newer listings U.S. domestic equity mutual funds AUM: $8.5 trillion - Breakdown of public fund assets Active equity mutual funds AUM: $5.6 trillion - Subset of domestic equity mutual funds Index equity mutual funds AUM: Close to $3 trillion - Subset of domestic equity mutual funds U.S. buyout funds AUM: $1.4 trillion - Private equity scale comparison Buyout dry powder: About $560 billion - Uninvested capital in buyout funds Venture capital AUM: $455 billion - Private venture capital scale comparison Venture dry powder: About $120 billion - Uninvested venture capital U.S. equity market vs private equity: 27x larger - Equity capitalization compared with private equity business U.S. equity market vs venture capital: 80x larger - Equity capitalization compared with venture capital Pension allocations to alternatives: Under 10% in 1990 to about 25% now - Institutional shift toward alternatives Endowment allocations to alternatives: Under 10% in 1990 to about 50% now - Institutional shift toward alternatives Shanghai Stock Exchange retail investor performance: Mostly losses, while institutions were up 11% - Used to argue retail trading often underperforms Retail trading share in China: Less than 30% ownership but 80% of trading activity - Shows retail dominance in trading volume despite smaller ownership Fractional-share accounts at Fidelity: From 100,000 in March to almost 350,000 by July - Evidence of rapid adoption of fractional investing Fractional-share accounts at Interactive Brokers: Another 120,000 - Additional platform adoption figure Fractional-share accounts at Schwab: Another 60,000 - Additional platform adoption figure Gold-backed ETFs share of global ETF holdings: 2.5% today vs. 10% in 2011 - Gold's relative role in ETF portfolios has fallen Gold held by GLD in London vaults: 1,200 tons - Scale of ETF gold holdings discussed Gold ETF holdings vs central banks: More than Japan or India - Used to emphasize the size of GLD holdings Average expected annual portfolio return in Americas: 13.2% - Survey of 23,000+ investors in April 2020 Average expected annual portfolio return in Europe: 9.4% - Same global investor survey Households unable to make next payment: More than 20% - Rent or mortgage payment distress Projected continued WFH/co-working adoption: One in six workers at least two days per week - Harvard Business School economist survey cited by Derek Thompson Marriott occupancy: 6.1% - Hospitality demand collapse Ritz-Carlton occupancy: 8% - Hospitality demand collapse W hotel occupancy: 5.8% - Hospitality demand collapse Alphabet debt issuance: $2.25 billion for 10 years at 1.1% coupon - Example of ultra-cheap corporate borrowing Mega-cap EPS growth: 2% year over year in Q2 - Aggregate performance of Facebook, Apple, Amazon, Microsoft, Google Other 495 S&P companies EPS change: -38% year over year in Q2 - Highlights concentration in index earnings Stocks up at least 10% this year: Close to 150 names - Used to argue breadth exists beyond mega-caps Stocks down at least 10% this year: 220 names - Shows uneven market outcomes S&P year-to-date performance: Up 3% - Snapshot referenced in the discussion Overstock.com market cap: About $100 million at the lows, $4 billion today - Example of extraordinary stock moves XRT weighting of Overstock: Almost 6% - Because Overstock became the largest holding in the equal-weight retail ETF Completed/announced buybacks: Announced buybacks fell off a cliff - Tracy Alloway chart discussed as evidence of slowing future buybacks Energy sector weight in S&P: About 2% now vs. 20-30% historically - Used in question about energy stocks Exxon dividend history: 37 years - Company commitment to maintaining the dividend Commercial real estate lease: 730,000 square feet - Facebook/Meta lease in New York’s old post office building

Pivotal Quotes: "I think the bond market is always smarter than the stock market." — Michael Batnick: Opening debate about Treasury yields and inflation expectations "The supply and demand for gold affects its price and its price affects supply and demand." — Ben Carlson: Discussion of gold market dynamics and ETF flows "The more they trade, the more they lose." — Transcript quoting Shanghai Stock Exchange study: Used to summarize retail investor underperformance in China

Implications: Low rates and easy trading access are reshaping capital markets, pushing investors toward alternatives, passive funds, and speculation. Meanwhile, public-market concentration and pandemic-driven real-economy damage may persist well after the crisis ends.