Ep-59 Spencer Jakab: Meme Stonks and Manic Markets

Spencer Jakab: Meme Stonks and Manic Markets

Spencer Jakab joins the Gold Exchange Podcast to explore the meme stonk craze, lessons for investing in volatile markets, and why Wall Street’s dominance hasn’t been toppled.

Is the reverse Jim Cramer fund better than listening to Jim Cramer? Will AI revolutionize finance? Can markets handle veganism? Keith and Spencer give their thoughts on this investing-themed podcast.

Follow Spencer on Twitter: @SpencerJakab

Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals


Additional Resources

Heads I Win, Tails I Win

The Revolution That Wasn’t

Gold Outlook Webinar

How NOT to Think About Gold

Theory of Interest and Prices

The Case for Gold Yield in Investment Portfolios

Podcast Chapters

0:00:000:00:55 Spencer Jakab

0:01:36 Short Sellers and GME

0:04:19 Who Shorts and Why?

0:07:20 Meme to Infinity

0:09:37 The Revenge of the Reddit

0:13:59 Shorting vs Hedging

0:17:00 Imperfect Hedging

0:19:51 Low-Resolution Takes

0:23:48 Index Funds and Enron

0:28:40 ETF, GME, AMC

0:31:40 Negatively Correlated with Returns

0:34:35 Stock Allocation by Age

0:37:14 Compound Interest and Speculation

0:41:58 Share Buybacks

0:47:22 Financial Gravity

0:51:15 Junk Spreads

0:56:05 Unemployment Today

1:00:04 We are Hiring!

1:01:01 How NOT to Think About Gold

1:01:55 Investing in Celebrities

1:02:33 Jim Cramer vs SJIM

1:03:52 Bitcoin vs Gold

1:05:24 Warren Buffett Question

1:06:38 Bubble Economy

1:08:55 Veganism or Cancer Cure?

1:11:27 Lucky or Smart?

1:16:12 AI or Blockchain?

1:20:55 Spencer’s Question

1:21:40 Find Spencer

1:22:15 Monetary Metals

Transcript:

Benjamin Nadelstein:

Welcome back to the Gold Exchange podcast. My name is Benjamin Nadelstein. I’m joined, as always, by founder and CEO of Monetary Metals, Keith Wiener. And we are joined today by special guest, Spencer Jakab. Spencer, welcome to the show. Spencer is a Wall Street Journal columnist, writer of Heard on the Street. You’ve probably all heard it or read it. And he’s actually written about Reddit in his most recent book, Revolution That Wasn’t. And I also just finished your incredible book, which is Heads I Win, Tales I Win. So I absolutely suggest if Spencer writes it, you have to read it. But no more about Spencer. We want to dive right in. We’ve got a certified expert with us today. So, Spencer, can we start with something easy? What is short selling and why are short sellers so hated?

Spencer Jakab:

Short sellers were really at the center of this story that I told about GameStop Mania. And they’ve been vilified for a long time. And if you go back to the first stock exchange in the Netherlands in the 1600s, very quickly there was a ban instituted for a while on short selling. Short selling is basically doing the opposite of what most people do. You buy stocks. Today, stocks are widely on back. In that day, it was a narrative of speculators, but we’re all hoping for the same thing to get dividends and for the price to go up so you make money. Short sellers bet on the opposite happening, and that seems like a bad thing. That seems like an evil thing. Actually, it’s a huge misconception. It isn’t at all. They’re really vital to the functioning of markets because if you think about it, when you’re making a bet on something, you can either vote yes or abstain. You can say, I’m going to buy the stock or I’m not going to buy the stock. You can’t say, I’m going to not buy the stock. You don’t typically bet that something is going to go down.

But at any given time, and sometimes more than others, stocks are overvalued, or some stocks are like Enron where they’re outright frauds. And so short sellers are trawling through the market looking for opportunities like that. And they perform a pretty vital function, and they do it at great risk to themselves. Not that they’re angels, but they’re looking to profit just like anyone else, but they do it at great risk because the nature of short selling is that the most you’ll ever make is 100 %. If you pick the fraud of the century and you sell it short, so you borrow the shares and then sell them, so you have sold them without owning them, then you can have infinite losses if the stock goes up a lot. But you can only make 100 % if it goes to zero. And so their reward and risk are the inverse of a normal investors. So they have to be fairly confident. And for that reason, and this is one reason that they get criticized, is that you have to shout it from the rooftops very often if you sell a stock short because you can’t wait around forever.

It’s expensive to sell and risky to sell stock short. And so I think that Acme Corp is way overvalued or that the management or frauds or whatever. You’ve got to tell everybody about it because you’re paying money to not own the stock, but to have sold it. You borrowed it from someone, literally.

Benjamin Nadelstein:

Right. And so I borrow this stock, I sell it. The most I can make is whatever the difference between when I re give that share back. And so that’s 100 %. But my downside is essentially unlimited, which is why there’s this pressure on me to, Hey, shout from the rooftops, why do you think this stock needs to go down?

Spencer Jakab:

That’s right. And that’s a big reason why, especially if you look at… It’s not the only reason. But if you look at a stock about which many people are skeptical, and that certainly happened. All the meme stocks had that thing in common. They were in different industries, but that’s the thing that they had in common. And many other stocks do too. People are skeptical about it, then you have a lot of short interest in it. And what happens is that if the stock starts to rise for whatever reason, it could be a fundamental piece of news, but it could be something else, then the rise in that stock begets buying, not just because people are diving in saying, Hey, this thing is going up, which is the normal reaction of the stock market. People are trend followers. But you have these short sellers who are like, Oh, my God. I’m really losing a lot of money now. My prime broker is not going to stand for this. I need to trim my position. And you trim your position by purchasing the stock. So it becomes a self fulfilling prophecy if there’s a strong enough move, which is really how GameStop became the most traded security on the planet or one of the ways that it did.

Spencer Jakab:

And why that rally and the rally in the other meme stocks was so explosive. But in that case, the story was backwards because people who understood that basically specifically targeted the stocks because they were so short. They targeted them because they were bad stocks. They were stocks it was so widely agreed upon that they were bad stocks that short sellers felt very, very confident in selling them short. And they were so unglamorous that at the time, at least now they’re glamorous on Reddit, I guess. But they were so unglamorous that no one was like, This is not Tesla. This is a video game chain based in malls. It’s going to go bust, and it’s business. It’s completely toast. It’s like Blockbuster two years before Blockbuster went out of business. So there’s really very little risk in betting against this. I was going to say a.

Keith Weiner:

Bad company.

Spencer Jakab:

And a bad company. You understood that the short selling is done by people who are betting long in the market. They’re not looking out for doom. Most short selling is done, and the funds that really took the big hits in this case, too, funds that primarily own stocks that they think are going to go up, but they offset their positions by like… Maybe they think that Best Buy is going to do great and GameStop is going to do horribly. And that’s a pair trade. And then they think that they’re neutral and that they’re actually taking the cash they got from selling one stock short and investing it in purchase of another stock. So they’re building this leverage into their portfolio, but it works 95 % of the time. And then 5 % of the time it ends and it ends badly for them. And it ended very badly for a couple of funds in the story that I write about.

Keith Weiner:

I was going to say the short sellers were looking at bad businesses in a bad industry with a bad overall macro backdrop. Hard to imagine how you could lose what a bunch of kids on the internet are going to go build this thing out to infinity? And then obviously…

Spencer Jakab:

There was a bit of hubris, obviously, from the professionals because they were talking about it. You go through these message boards and they’re specifically talking about mechanically how to get the most bang for the buck. So just to point out, this is a little bit of market history, but the reason that I found this initially so incredible, I wrote to my publisher right away and said, this is going to be a huge story, before it really was being written about, was because effectuating a short squeeze and effectuating something called the corner, which is like a really extreme example of a short squeeze, has been illegal. To do it intentionally has been illegal for about a century. The securities laws passed in the wake of the 1929 crash, made it illegal. Made it illegal? Let’s say you and I, run separate hedge funds and we see that a third hedge fund is very short this stock and we’re like, Oh, we’re going to squeeze this guy. Let’s collude and buy enough of the stock to create a squeeze. You can’t go above a certain percentage without filling out certain forms. But if enough of us buy enough in collusion, then we’ll make a ton of money and we’ll have to pay a new price.

That used to happen all the time in the 19th century and the early 20th centuries until it was outlawed. But what happened in this case is that you can’t go after 500,000 people on Reddit who are sitting in mom’s basement trading through the Robin hood accounts. And it wasn’t even illegal, really, because they weren’t colluding. It was all spelled out there. And I spoke with people who lost billions of dollars in this case, and they were like, Yeah, we were aware of it. They claimed that they were aware of it, but they didn’t take it seriously. I don’t know if they were really even aware of it. It’s just not the place that they looked for fundamental queues. It wasn’t a group of people they took seriously. And then all of a sudden they did.

Benjamin Nadelstein:

In the book, you have this great quote, which is, It was like shooting fish in a barrel, but the fish started shooting back. Why don’t you explain what you mean by that?

Spencer Jakab:

Sure. That’s a quote by John Hempton, who’s a respected short seller from Australia, who was talking about the environment just generally in 2020. So the interesting thing to me about the story is not just the short squeeze that happened, but all the societal and financial forces that came together. And so you had all these young people going into the stock market. You had in excess of 10 million new brokerage accounts opened by people who had never had financial accounts before other than maybe a bank account, getting into stock trading. And the reason that it happened was complicated. One is that all of a sudden commissions at every broker in late 2019 went to zero. Then you had the pandemic hit and people basically locked down and spending 13 hours a day looking at their phones. Young people, especially with nothing to do, no social life. Then they got stimulus checks, then they had enforced savings, and all of a sudden they had more liquid net worth than they had ever had. It wasn’t a lot individually, but put together across 50 or 60 million people, it was a lot of money. And you had young men, especially, who in the past year to year and a half had really gotten into gambling basically on their phones.

All these forces created the dry kindling for it. And the generation that did this, their formative experience was the global financial crisis of 2008, 2009. None of them were really old enough to be affected to have had money lost. But they saw their parents lose money in their brokerage accounts or their 401s or lose their homes or lose their jobs. And the common narrative was that it was Wall Street’s fault. And in particular, hedge fund managers on Wall Street, they were the cartoon villains. And then if you want to be more specific, people who sold stock short and they were selling stock short like AMC and GameStop that were central to their childhoods and teenage years. I’ve got three sons. I can’t tell you how many times I’ve been to GameStop, and I’ve had to buy and swap games and things. I don’t go there anymore because like I said, it’s like Blockbuster. It’s a non entity. These were companies that meant something to them, even though they were not doing well at all at the time. They were both headed for bankruptcy, clearly. They had not made money in years. But n all the ingredients came together for these specific stocks to be not just bid up because they were heavily sold short.

And so they were discussing on these boards, and clearly there were some people who were financially sophisticated who said, Hey, this is a gamma squeeze. This is how you do a gamma squeeze, where now that you’re allowed to trade options for zero commission, here’s how an option works. If you buy this type of specific option, then you create the most artificial buying pressure because then the options dealers, once the price starts to rise, if it’s a short dated, far out of the money put then in our call, then it’ll cost you very little money. You can buy lots of contracts. But once it starts to rise, there’s these Greek letters, Delta, Gamma, Theta, Rho, that are in the black shulks’ option pricing formula. And because of the models that they have, they will mechanically have to start buying the stock too. They don’t care. They’re just hedging their… They’re not trying to make a stock go up, but you could put $1,000 down and that options dealer might have to purchase ultimately $50,000 worth of this stock if it goes up enough. And then if enough of us do it all at the same time, then it’ll become a crescendo.

It’s not a way to make money. It’s not like a… It’s not Alkami. They didn’t figure out a way for them all to make money. They mostly lost money, as a matter of fact, but they found out a great way to make markets move around in a crazy way, which was just as satisfying. And for some people, they thought they were going to make money, and some did, obviously. They didn’t all lose money. But I’m not giving you a blueprint for success. Don’t do this at home. But they figured out how to really create havoc in markets.

Benjamin Nadelstein:

Well, Keith, I want to point out a specific word that Spencer mentioned, which is they were just hedging their bets. And two of those words actually don’t really go together. First is hedging and the second is just. So, Keith, maybe you can explain to me, what’s the difference between short selling and hedging? Aren’t these the same thing?

Keith Weiner:

Classically, when people say short selling, they’re talking about a speculation that the price is going to go down and maybe a very warranted one. If you look at AMC and GameStop, as I said, bad businesses in a bad industry with a bad macro backdrop clearly headed to bankruptcy. You’re just making a directional bet on the price. When you think of hedging, particularly in a commodities context, is you’re obliged to have one position, let’s say in the physical. Let’s say you buy a shipload full of iron ore in Australia and it takes a few weeks to sell it to the smelter, you don’t really want to be betting on the price of iron ore. But the price of iron ore drops a few percentage points, you’re going to lose more than the amount of profit you stand to make by being the delivery person. So you go short an equal amount of iron ore in let’s say the futures market or some other market like that. So now you have the hedge position. You’re long in one market, you’re short in another. I don’t know if you knew that, but the word just for me is not a trigger word, but it’s a red flag word.

When people say, Oh, you just had usually with a crazy way of the hand, they think that that’s really simple and it isn’t. And there can be all kinds of little counterintuitive behaviors, asymmetries, bizarre corner cases as options head into expiration. If anybody’s trying to squeeze the market, other unbeknownst to you, I imagine just like the hedge funds that were short billions of dollars of this stuff, the people that are hedging their iron ore shipments aren’t necessarily following the Reddit boards all day long. And all of a sudden you get a bunch of slightly resentful, angry kids that suddenly have a bunch of disposable income in their pocket and decide that they want to go and mess with you. Then all kinds of bad things can happen. But hedging is a necessary part of so many different businesses, certainly in the commodity s trade. But I think in finance, too, as Spencer pointed out, if you’re the market maker and someone wants to buy a call option that’s way out of the money on games, well, you sell it to them and you price it and you have a model that says this is what you should charge for it, and then you hedge.

So you’re really just trying to make it market maker spread. And then if the market goes screwy, you find that suddenly you could be drowning in something you thought you’d make a few basis points, and now you’re suddenly losing several percentage points, and there’s no easy way out of it at that point.

Spencer Jakab:

Yeah, that’s exactly right, Keith. I just would point out the further nuance is that you had two kinds of hedging here. You had the hedge funds, which, despite their name, don’t always hedge. Were they had an imperfect hedge, right? They were like, Let’s go along this good retailer and short the bad retailer. Then if all bad retailers have a good year or a bad year, we’re even and then we’ll just capture the difference. That’s an imperfect hedge because strange things happen. The bad one went up 4,000 % and the good one stayed where it was. That’s not really in the realm of possibility as far as when you entered that trade. And so that’s why they got blown up. I mean, Gabe Plotkin lost $6 billion in four days of his investors’ money. Then you had the other type of hedging, which was the more mechanical type of hedging, which is the options example that you pointed out, where those guys, they could lose money sometimes, but the options dealers made a lot of money. And that’s why I call my book The Revolutionary and the Wars and is because it was seen as this blow against Wall Street.

And most of Wall Street is made up of businesses that just want to transact with you. They’re not taking a directional bet at all. They’re not like the hedge funds that were at the center of the story. And that’s why the headlines that came out at first were very misleading. Like, Wall Street gets a black eye, tables are turned. It’s not the case at all. It was like a great month for Wall Street writ large because the people who just sell the options, some of them may have just gotten wrong footed. But generally, they made very, very fat profits. And the market makers and the brokers that basically charge zero dollar commission but then sold the trades to the options dealers and the market makers and stocks, they made a fortune during this time. So they enriched Wall Street. They just made a couple of people poor, but they made other people… The dollar amounts are totally out of whack in terms of the benefit to the loss to Wall Street. So you’re angry at Wall Street, but you’re feeding the machine by doing this. And whenever you point that out, I mean, the amount of hate mail and stuff, you go on Amazon and…

Anyone who reads my book and is inclined to write something even neutral about it, and actually read it, I’d be very appreciative because it’s full of these people who didn’t even read it who were very angry about this being pointed out, Who’s paying you? You’re a shill. I just get paid by the Wall Street Journal. But there’s a lot of anger when you point out that you guys… They’re victims, but you point out to people that you weren’t that clever, like you really wasted a lot of money and it wound up in some guy’s pocket on Wall Street. It makes people really angry to even suggest that.

Keith Weiner:

Jordan Peterson has a great expression that I love. That is a low resolution position that when someone says, well, this is good for Wall Street or bad for Wall Street, they make no differentiation between the market maker, the broker, the bank that lent the broker, the margin because things are settled, T plus two, so there’s some credit involved. That was also part of the Robin hood story, as I recall. They just think, okay, it’s good for Wall Street, bad for Wall Street. And they have a very low resolution bumper sticker level grasp of things. We’re no strangers to getting hate mail for pointing out the simple mechanics. I write an awful lot about how the gold futures market works, and people assume, so the futures market is a very zero sum. If I buy a futures contract and you sell a futures contract and the price goes up $1 per ounce, then the clearinghouse will move a dollar out of your account into my account. And if it goes down, then it will move the dollar in the other direction. And so they assume that anyone who’s short a futures contract is making a directional bet against gold or against silver, which I write a lot about.

And nobody in their right mind would take a long term multi decades short position on any commodity, certainly not gold and silver. And so what they’re actually doing is arbitraging. It’s borrow it live or buy the spot metal, sell it as a futures contract, and then lock in a spread, which is now a couple of percentage points after paying interest expense and everything else. And they’re just in it to just pocket that spread. And you can look at movements in that spread and glean some insight as to what’s going on in the market. And people just get angry at just a description of the mechanics. This person is doing this in response to this incentive. And this is exactly, we can calculate to the penny exactly how much money they make. And if you annualize that, you can put that as a percentage and compare it to LIBOR or so for whatever you want. It’s okay. This is relatively attractive to do this trade right now. The market changed tomorrow. It’s not attractive. You’d be better off just parking in the D bills. And it doesn’t happen so much anymore. I think everybody knows my view on it.

But you just generate a lot of hate mail because people would rather believe that there’s some dark Cabal Wall Street. People call me a shill for the Fed for writing about this stuff. Who’s paying you? Echoes of what you just said a moment ago. And it’s just the mechanics of it.

Spencer Jakab:

Yeah, that’s not making a lot of friends in these chat rooms. I mean, it is what it is. I feel like I’m a part of… And I’ve written two books to really target it at individual investors. And I’ve been a written for a mass market audience in the Wall Street Journal and elsewhere, for mom and pop. And so I always feel good when I’m explaining something or demystifying something because Wall Street likes to mystify things. That’s part of its arsenal. The more mysterious it seems, the more complicated it seems, the more you can charge and the more you can obfuscate. I feel good if I’ve explained something to someone. But then, of course, there are a lot of people who don’t appreciate that. But what are you going to do? You’re not going to make some people happy. I’ve given up arguing with people. I’m happy to patiently explain something, but then it just works out maybe 5 % of the time. It’s a lot of energy on your part and to make the scales fall from someone’s eyes.

Benjamin Nadelstein:

All right, Spencer, I need you to make the scales fall from my eyes and I want you even write your email at the end of it. So when I was reading the book, you wrote that short sellers actually play an essential function because they ensure that an overpriced or even fraudulent company or stock don’t get into general index funds. So explain what that means. I mean, yeah, I was an investor in GameStop, so that was something happening over there. Why should I care?

Spencer Jakab:

You should care. Most investors should buy index funds or buy a very… If you’re going to buy individual stocks, then buy a really diverse group of stocks and own them for a long time, hopefully more conservative stocks that dividend payers and things like that. That’s my personal advice to people. But index funds are so cheap these days, broad diversified index funds, that it’s the right choice for 90 % of people. Warren Buffett said that he’s going to, when he passes away, advise his widow to keep her money in index funds. So if that the greatest investor of all time is saying it, then it’s probably good advice. Yes, but these stocks we’re talking about an Enron. What we’re talking about, I don’t know, something like Carvana, which is down, felt 97 % last year. Some things are fraudulent, some things… Most of these things are not fraudulent, but they’re overhyped. The people who are looking for a flash in the pan have bid them up to obscene levels. Allowing them to get to those obscene levels in an environment where it’s difficult, where it’s very risky for short sellers to bet against them is a bad environment for individual investors.

So you are being… If the price is more correct, let’s put it this way, I always have my college roommate and neighbors and people like that telling me that they put a bit of money where their broker put them into. Usually, they decided themselves to buy something that I happen to have a very strong feeling. And I’ve been right in most of these cases is just a bubble waiting to pop and we can go back through the greatest hits of 3D printing and dot coms and things like that, and you give people advice that I don’t really think you should do that. And people tend not to take my advice. They don’t take my advice now, even though I’ve written for the Wall Street Journal for a long time. And they were slightly more likely to take my advice when I was a managing director at an investment bank in equity research because I wore nice suits and made a lot more money then. So I guess I had more credibility. But generally people, you’ll give them advice, or they’ll even be asking you for advice, and you’ll tell them, and then they’ll come up with a counter argument.

So it’s very difficult to talk people off the ledge. But at least what these short sellers do is they puncture these bubbles before they get really, really big. That’s the service that they do. They’re not doing that out of the kindness of their hearts, but they’re out there looking for things that are clearly overvalued or probably fraudulent and puncturing the bubble earlier than it would have normally been punctured. Enron eventually would have collapsed had Jim Chagos not made a big short bet against it and pointed it out to Bethany McLean, who wrote an article that started the ball rolling downhill. But in the investigative journalists and short sellers probably saved a lot of people a lot of money that they otherwise would have lost because it would have lasted a longer time. So that is a service that they provide. They are part of the ecosystem. Just like if you want to get a bird. They’re also often called vultures. It’s a nasty word because we don’t really like vultures. They eat rotting flesh. But if you didn’t have vultures, you’d have dead squirrels all over the street. Even if you don’t like them, they’re in that ecosystem and they’re doing a good thing because it would be unpleasant if they didn’t.

Benjamin Nadelstein:

Right. So maybe I can summarize because this is what I understood. Let’s say a bunch of kids on the internet or for whatever reason, someone starts bidding up the price of Tesla or Carvana or any bubble stock or stock. Bitcoin might even be a great example. All of a sudden there’s this Bitcoin craze. People are in love with Bitcoin. And the next thing you know, Bitcoin is one of the companies on the S&P 500. Oh, my gosh. There’s a Bitcoin exchange on the S&P 500, which means that your grandma, me, everyone else who is buying this general, diverse fund of strong companies that will be in here for the long term. Now there’s a Bitcoin guy jumping in the middle of the fray there. And so a short seller can pop that bubble early and say, Hey, you’re not one of these companies that deserves to be in grandma’s index fund. Is that right? Basically, yes.

Spencer Jakab:

Although let me tell you a little anecdote. I don’t own individual stocks because of my job, because I edit so many columns about so many different companies. I just don’t want there to be the appearance of impropriety. So I own mainly exchange traded funds. And one of the funds that I own, it’s a good one. I’m not giving a recommendation. It’s IWN, which is a small cap value fund. And I happened to take a look at this fund that I owned. And lo and behold, the top two holdings a couple of months after the GameStop bubble were GameStop and AMC. So these indexes are constructed in a very clunky way. They were most definitely not value stocks, but because they were in this index and because the index is only changed periodically and was not changed for a while, I mean, they were by no stretch of the imagination value stocks, but I guess they had been before. Even though the bubble had mostly burst at that point, they were so much bigger than they were before that you weren’t owning a ton of it. But I was surprised that I was invested indirectly in those two companies that I was still so skeptical about.

Keith Weiner:

Pardon my juggling, but there’s just a certain irony to that. And sometimes in my more philosophical moments, I say that being in business is nothing more than irony appreciation training. To a person who’s written so much about that. And then you come home and you read the prospectus of your index fund and there are these two culprits. I can just imagine tearing my hair out if I came home and read that.

Spencer Jakab:

It was a little late at that point. So obviously I tend not to be very active either. And so I just waited for them to drop out of the index. But yeah, I was surprised to say, please, but I shouldn’t debate because I know how these indexes work. They’re not perfect. That’s why some people are, if you’re knowledgeable and disciplined, you might be better off, let’s say you want to own value stocks, just go to some site or some expert or do a screen yourself and then buy a handful of value stocks yourself and own them directly. And then you won’t wind up indirectly owning something. Because that’s the problem with capitalisation weighted indices is that the thing that has most recently gone up represents the biggest chunk of it, which is not necessarily the thing that you want to own. There are other ways of constructing stock indexes that are a little bit better, like equal weighted indexes and things like that that get around that problem that I wrote about in that first book of mine actually outperform for that very reason because they don’t have that mechanical problem. But it’s a small difference.

Benjamin Nadelstein:

So, Spencer, you said, Oh, I checked my stock or I checked the prospectus on the CTF, and lo and behold, there were these companies here. Okay, so what I heard you say is you want me to check every single day, check my stocks. Isn’t that right? Is that a great way to make money?

Spencer Jakab:

No, it is explicitly not a great way to make money. As a matter of fact, there are two things where there’s very, very clear, overwhelming evidence. I will accept no counter argument, are negatively correlated with your returns. The more you trade, I mean, even looking at commissions and everything backing all that stuff out, if you were to just divide traders into deciles or quintiles or whatever, say who has traded the most and who’s traded the least, there’s a very, very clear and significant outperformance among those investors who trade the least. And a corollary to that, it’s also been shown that those investors who check their investments less frequently tend to do well. And the reason for that is a psychological effect called myopic loss aversion. We hate to open up our broker’s account to see that the stock or the fund that we bought has lost money. And because prospect theory for which Daniel Kahneman won the Nobel Prize shows that we are more harmed emotionally by losses than we’re pleased by gains, where it makes people more likely to sell. That’s why you have this cresendo of selling when markets are near a bottom and then very little buying on the way up.

People buy too late and so they really hurt their long term performance through these psychological foibles. People are just wired to survive on the Savannah in 100,000 BC. They’re not wired to be investors. They’re actually very poorly wired to be investors. So all of our emotional reactions that kept our DNA in the gene pool are exactly the wrong things, unfortunately. And so the more you can short circuit that, the better you will do as an investor. The evidence is crystal clear on that. If you can basically buy a bunch of stocks or funds, put them in a drawer, not check your phone, not check your statement, automatically reinvest, perhaps automatically rebalance them. There are a lot of funds that will do that for you on autopilot. You will do better, I predict, than 85 % to 90 % of individual investors. You’ll do better than 80 % of professional investors who would charge you money for the service. So it is one of the easiest things you can do to improve your long run investment returns. And if you improve your returns by a percentage point or a one and a half percentage points, which is very likely with the lazy approach that I’m describing, then over a career of saving, that could be two times or four times as much money in your nest egg.

So compound interest works that way. These small differences really do add up. So what.

Benjamin Nadelstein:

I’m hearing is that being cheap and being lazy can actually be beneficial. I’m calling my parents after this podcast ends and I’m going to let them know. Okay, how about a couple of another question? I’m 25, maybe there’s someone who’s 55 who’s listening to this. Should we have different allocation in stock? Should we be thinking about investing differently? Or should our portfolio look the exact same? It doesn’t matter.

Spencer Jakab:

I’m going to put an asterisk on that. The conventional wisdom is that you should be more risk averse. So you should be the closer you are to needing the money, whatever it’s for, the more risk averse you should be because of the huge… That’s why stocks deliver this excess return is that you have to stomach this grinding volatility. But it’s not just that you have to deal with it emotionally. If your spending goal is five years away, for example, a college education, you pay four years of tuition for your kid and your kid is 16 years old, you don’t want to be 100 % in stocks with their college fund because it has happened and it very well could happen that the value of that account when it comes time to draw and it will be 30 % lower. On the other hand, you could be 80 years old and have a portfolio that’s very heavily invested in stocks because you don’t need the money because you have so much money and your intention is to leave it to your children and your grandchildren whose time horizon is much longer. So there’s no one size fits all.

That’s why this general formula that used to say, Oh, take your age minus 60 or whatever, and then that should be your allocation to stocks, is a very crude rule because everyone’s situation is different. That’s the one thing financial advisors are really good for that and talking you off the ledge is basically tailoring your investments to your specific risks and needs and your temperament, too. Because if you can’t deal with losing 30 % of your money on paper for a few years, it might take many years for that to be recovered, then risk less money than just give up some of the potential gain from stocks. If it’s going to cause you to do something that’s going to destroy your returns in the long run because it’s just so painful, then if you can’t visualize that and deal with it, then don’t take as big of a risk. Just don’t be in the stock market or have a much smaller allocation to stocks. It’s as simple as that because we’re emotional preachers and we’re not wired for this. Right.

Benjamin Nadelstein:

Okay. I had a word there that you mentioned, which was compound interest. So I’ve heard of this. My grandparents talked about this stuff, compound interest. I really never understood it because when I look at my savings account, it looks earily similar to my checking account, which is that interest rates are super low. There’s no way to save money now. If I saved 100 % of my paycheck, the compound interest is essentially nothing. Shouldn’t I just speculate all my money in the stock market? I mean, that’s really the only way to make returns nowadays. Isn’t that right?

Spencer Jakab:

Well, that happened to be an essential ingredient in this GameStop squeeze is that interest rates… Now we’re suddenly, for the first time in more than a decade, we have fairly decent… You can get a pretty good CD rate, you can get a pretty good rate just buying a one year one year T bill. But that’s only recently become the case. And during the time, certainly, that GameStop mania took hold, interest rates were at zero. You were really earning close to nothing by having your money sitting cash. And what that does, both psychologically and really in terms of a finance theory too, is it makes these lottery ticket like payouts much more attractive because there’s a concept in finance called duration. Duration is basically, it’s not just how much money am I going to make on something, but when is that profit going to be? And if I’m showing you a company that has some great new product, but man, in five years or 10 years, it’s going to be making money and it’s going to revolutionize waffle makers. This is going to be the best waffle maker ever. You get in now on the ground floor, you’re more likely to buy something like that when you’re not making any money in your cash than when you have an alternative.

When you have an alternative, then you’re more likely to view as an alternative to that okay interest rate you’re getting on a risk free thing like a bank deposit and look at a dividend paying stock that makes money but it’s boring and isn’t growing very fast or maybe not growing at all. So a low interest rate environment favors moonshot, which was one part of the craziness that we began to unravel a little over a year ago in the market and probably still have nothing to do.

Benjamin Nadelstein:

And that’s opportunity cost, right? So I look at my savings account and I say, listen, if I move this cash, it’s not like I’m going to lose anything anyways. But if the bank said, partner cash with us and we’ll give you a 5 % return, a 10 % return, a 20 % return. Well, you really have to convince me about that moonshot before I took that cash out of there. But with 0 % interest rates, what’s the harm? It’s not like I’m making any money anyways. Right, Keith, what do you think? It seems like this…

Spencer Jakab:

And I mean, Benjamin, you’re very much in this generation. So I assume that you and your friends get together and talk about this. It is really hard to get a nest egg, to buy a house. This generation is much 30 year olds today are much less likely to own a house than 30 year olds were 30 years ago or 60 years ago than the previous generation. They have student loans. They don’t really see the prospect of having a good nest egg. So that’s why people play the lottery, really. That’s why people say all kinds of nasty things about poor people who play the lottery. It’s a tax on a numeracy and whatever. And that’s not really true. My parents didn’t have any money at all. They just really came with the clothing on their backs. My dad used to play the lotto because at least he could dream. I think he understood exactly what his chances were and how negative his return was. He wasn’t pouring a lot of his money into it. But if you don’t see a lot of prospect of ever being wealthy, but you dream of being wealthy, then you’ll bet on these…

You’ll make these bad bets, basically, because how else are you ever going to get there? It’s not logical, but it makes sense to them. Psychologically, it’s true to them. And most people who play the lottery, I think, roughly understand that it’s not like an investment in the sense that the probabilities are in your favor. The stock market… That’s why I don’t like people comparing the stock market to a casino or a lottery because the stock market is actually a vehicle for building wealth. It’s not a casino. The casino is a vehicle for more you play, the more likely you are to wind up with zero. I wanted.

Keith Weiner:

To add one thing to the low interest rates in the stock market, and that’s the other side. And it’s another one of those, you might call it a bad hedge. But if you’re the CFO of a public company and you can borrow at two and a half %, and your stock has a dividend yield of more than two and a half %, and also has an incentive program where you stand to make life altering amounts of money if the share price were to go up and have certain thresholds, you could see how the CFO is saying, well, we’re going to sell some bonds to raise a billion dollars so that we can buy our own shares. And the cheaper the interest rate is to that company, the more that they can bid the share price up. And it’s an arbitrage between either the earnings yield or the dividend yield, depending on how they might look at it. But dividend yield is a no brainer. You’re borrowing it too and a half and your dividend yield is three. There’s just a very straight now imperfectly hedged, but there’s some serious risks in doing that. But you’re borrowing at two and a half to buy your own shares, which are paying three.

Not until your shares are paying two and a half because you bet them up.

Spencer Jakab:

I’m going to disagree with you a little bit there. I’m going to get all finance geek on you because there are definitely cases, like you mentioned, where companies got into a situation of distress because they had been borrowing a lot of money to repurchase their own shares.

Keith Weiner:

Absolutely. That’s the rarity.

Spencer Jakab:

The thing is that there’s an ideal amount of borrowing for a company. So the way that a company is balance sheet, I think there’s a few different ratios to look at. One is, what can they reinvest their money in? So if the company has generated cash this year, do they reinvest in their business? And what return are they going to get for building one more factory or renovating something or whatever, versus what return is there generally in the stock market? If the return in the business is suboptimal, then they’re doing shareholders a favor by whether through a dividend or a share buyback, paying it out. And if their borrowing capacity is barely used, they can borrow more money. Debt is tax deductible and the cost of debt is lower than the cost of equity. So there are companies out there where you’re like, you know what? This company should really not to the extent that they leave themselves exposed and take a risk, but they would do a.

Keith Weiner:

Good thing.

Spencer Jakab:

By borrowing the two and a half %, paying out money to their shareholders, whoever is on the other side of that buyback, who’s going to reinvest it at the stock market’s long term eight and a half %. So it’s not clear cut. Obviously, you’re right that there are companies that that… And the executives have stock options, and so they’re really bad at doing this. That’s the other thing is they’re very bad at making the decision. And sometimes they take risks. Look at Bed Bath & Beyond, which almost went bankrupt months after it had done this big stock buyback. And now they’re basically they’ve gone into this death spiral financing. Bed Bath & Beyond is… I happened to know a lot about it because it was one of the meme stocks. So that was really dumb. But in a lot of cases, doing buybacks and even borrowing to do buybacks is not dumb. It’s just sound financing. I’m not arguing.

Keith Weiner:

Whether it’s smart or dumb and what the ideal ratios are. My observation was simply the lower the interest rate, the more the incentive for a company to do that. And especially when the interest rate, when their actual cost of interest gets meaningfully below their dividend yield, then it’s very tempting for them to do that, especially if the C suite is compensated by some formula based on the share price or they have options which effectively same thing. Yeah, there’s. But they’re all trying to get their share price. Should they? In some cases, maybe they should. In other cases, maybe they shouldn’t. But every time the interest rate falls, it’s an additional incentive compared to where it was the day before. And so a falling interest rate, this is a big theme in my writing, a falling interest rate tends to push all asset prices up. And the so called wealth effect, and I could go on and on about all the perversity that is enabled and incentivized by it. Right. Well, I.

Benjamin Nadelstein:

Think at least the way I think about it, is that all else equal, sometimes we use this term in economics, all else equal, if you lower the interest rate, what happens on the other side? Spencer, we talk a lot about zombie firms. These are companies who make profits, they make revenues, but it’s not enough money to even pay the interest expense on their debts. So they’re supposed to be dead, right? They’re supposed to be companies that are long defunct or long bankrupt. And yet because of really forgiving credit markets and really low interest rates, these companies hold on. They survive. So they’re alive, but they’re dead. So they’re called zombie firms. And obviously, the interest rate is one of the huge factors deciding either whether these zombie firms continue to live on or if they become a zombie firm. On the margin, you were a healthy living firm, everything was okay, and then the rate takes down and lo and behold, you’re a zombie firm now, or you were saved from net status. So it’s that marginal change which either turns you into a zombie firm or maybe makes a share buyback more profitable. And it’s these changes on the margin, interest rates being a huge change.

Spencer Jakab:

Absolutely. And basically, that’s why interest rates are described as financial gravity. They affect everything. The risk free rate, which is basically the rate on treasuries or the overnight rate that the Fed charges, the pace of banks, affects everything in the financial system. But what’s so fascinating today is that because you had such a long period of extremely low and even zero interest rates, or at least overnight rates were zero, and then bond yields. At one point you had $18 trillion of sovereign debt in the world with negative yields, which is like this… People, you go back 20 years ago and tell people about that, they’d be like, That’s not possible. That can’t be. What you’re describing can’t exist. And it did exist for quite a while. So that created all sorts of distortions. But even today, where you have all this threading about interest rates being high and possibly causing an accident, interest rates are still negative in real terms today. So the short term interest rates are still well below the rate of inflation, whereas they were positive before the financial crisis. So in terms of people threading about it, causing a financial accident, of course, it could happen.

But interest rates might have to be a bit higher to really squeeze the economy because they are negative. You borrow money, you’re being bailed out by… And you have a business where you’re selling goods and services, you’re being bailed out by inflation. You’re still very happy to borrow money at these rates. I know.

Benjamin Nadelstein:

Keith, definitely has some thoughts on that. But when you said that the interest rate is this gravity of the financial world, and we’ve been living in low or zero gravity for, let’s say, five, 10 years, who knows how long, then these creatures start to evolve. They have thinner bones, or they can have feet that are better for floating and bouncing around. And then when the gravity generator, I know it’s not a lever, really, but when the lever pulls back to a little higher gravity, again, 5 % is maybe not so high, but higher gravity than these creatures are built or evolved or used to. Well, those little pads that they had to bounce around, when those touch hard ground, they break. And you’re like, Oh, my gosh, look at all these ankles breaking, or look at everyone’s hair that used to look so good. Now it looks horrible in a little higher gravity. And now you’re saying we’re at risk of an accident. So, Keith, I’ll send it to you. Maybe we’re at risk for an accident. What do you think about this?

Keith Weiner:

A lot of people would talk about the leverage in the system. I would talk about that there’s an arbitrage between the return on capital, especially at the margin, and the interest rate. And so if interest has been falling for four decades, it’s pulling down marginal return on capital. Then you raise interest rates up, you find there’s an awful lot of firms whose return on capital is lower than their cost of capital. And I think that’s the backdrop for the potential accident. So, Spencer, I’m on record of saying I think there’s no question the Fed is going to be forced to reverse itself when the next incipient crisis happens. And it’s impossible to predict when, but something is coming at this point. Because Ben, I love your analogy of all these creatures evolve in a zero G environment, and the bones get thinner and lighter, and they have all these tangible bits. And then you turn gravity back up, and then suddenly, hey, it’s not really that high. It’s still only half what the gravity used to be, but it’s more than enough to snap some ankles. So that’s what I think is likely to happen.

But we’ll see so far they fold everything together. The biggest surprise for me, I’m curious if you’ve looked at this or have an opinion, Spenser, is the spread between junk and treasures has not really blown out at all. It’s held in a nice little range. It moved up a little bit. I think it’s about a point and a quarter higher than it had been before the Fed started hiking, but nothing crazy has happened with that. And to me, it’s a mystery. Why is that not blown out more than it has? Yeah.

Spencer Jakab:

I spoke with a distressed debt expert just this morning about that and said, Do you see any signs of stress? He said, Absolutely not. Nowhere. Junk spreads are at 400 basis points or percentage points above risk, which is modest historically on the more modest side. So there’s not a lot of stress there. You are seeing… Now, this is why I tell people like you should read a newspaper. I know I’m talking my own book and talking my own employer, but if you look at the headlines today, obviously there is some threading and things like that, and if it bleeds, it leads. But if you read what’s on page one, you’re not getting a sense of any impending doom. There might be something on page A12 that’s giving you an inkling of the next thing that’s going to break. That’s where you always see it. And I love of my weird hobby is going back and reading newspapers around every major financial top and bottom, going back as far as I can. And obviously, no one saw it coming. There was always someone who says they saw it coming because they happened to have made the prediction at the time.

They just got lucky, broke and clocked right twice a day. But if you look at what was in the back papers, there were signs. And so if I’m looking today, I guess maybe it’s a self fulfilling thing because I’m always looking for something to break. Look at the CMBS market, the commercial mortgage backed securities, for example. We have a lot of people who need to refinance these office buildings that are only half full who are like, this is just not worth it. I can’t refinance this thing. I’m going to just hand the keys back. That’s more than a trillion dollar market held by insurance companies and banks and pension funds and things like that. So there are things that are starting to creak for sure. And the household balance sheets, that’s part of the explanation is, household balance sheets got so much healthier during the pandemic. And the low end, especially, usually when you have a whiff of a downturn, first of all, you don’t have unemployment at a 53 year low, and you don’t have people who don’t have college education, just high school education or not even having money thrown at them. But today, there’s so much demand for the type of labor that someone who has less than a college education is willing to do and qualified to do that their balance sheets are looking very good and they still have some money left from stimulus and things like that.

So the typical people who tend to be throwing up red flags aren’t really throwing them up, although you are seeing some signs of it. For example, subprime auto defaults are now rising at an alarming rate. So maybe they’re blowing through those savings, but not just yet. And so that’s I think one reason that you’re not seeing distress in junk, but you might still see it in some months down the line. And you mentioned you didn’t put it in those terms with the inverted yield curve. The yield curve has consistently sent very strong messages about the economy, and that’s basically what short term treasury is yield versus what longer term treasury is yield. And you’re now close to a record in terms of the difference between what a three month or a two year treasury will pay you and what a 10 year treasury will pay you. In excess of 90 basis points yesterday, I haven’t looked this morning, that has been a very reliable recession signal because what it’s saying is that people who are smart, people and bond traders are smarter than stock traders, let’s say. They’re reading the tea leaves much more carefully.

They’re much more mathematical, less swayed by emotion. They’re saying, yes, interest rates are high today, but there will be a need at some point in the not very distant future for the Fed to reverse course and start cutting again because things are going to go badly, whether it’s an accident like we’re discussing or just a downturn in the economy. And so the bond market has called recessions pretty accurately in the past, and it’s saying that there’s going to be one.

Keith Weiner:

We did a webinar yesterday and we were talking about, somebody asked me about unemployment as a lagging indicator. And I said, let me put on my business manager hat as well as my economist hat. If you look at all of the calls of recession that have occurred since, let’s say, 2012 through just before COVID, there was a number of them. And firms that still were smarting from 2008 had learned the lesson in 2008. He who lays off first, lays off best. The longer you wait, the more the worst things get. And then you may have to do multiple layoffs. You’re really killing your morale. You may run out of too much cash and then put the solvency of the firm at risk. And if you live early, then you’re much better. And so any firm that acted on that between, let’s say, 2011, 2012 and early 2020 lived to regret it, where they would do a lay off. And then three to six months later, when everything’s back to happy times, they’re going back to the people that just laid off and begging them, please, would you come back? We’ll give you giant raise. We’ll double your salary.

All these kinds of things. And so now, which I think is quite different from any of the head fakes that occurred in that eight or 10 year period, companies, I think are still more smarting from the lessons they learn, let’s say, in 2015 and 2017, than the memory of 2008 is a little bit more faded. And I think they’re extremely reluctant to want to do layoffs. And now it’s starting to accelerate. But to me, that’s one reason why unemployment, in particular, is a lagging indicator, inverted yield curve, much more of a leading indicator, I think. Yeah.

Spencer Jakab:

No, I agree 100 %. And I think that one thing is that the headlines don’t match the reality on the ground when you’re looking at the national level statistics today, because you’re seeing these headlines about Alphabet, which is Google’s parent, laying off all these workers. Meta laying off these people.

Keith Weiner:

This morning I saw Meta is announcing a big lay off this week. A third round, right?

Spencer Jakab:

But then if you look at… Well, we’re going to get jobs numbers this coming Friday, and we’ll see that. But so far, we’ve seen very, very strong payrolls growth. We’ve seen very low, historically low, jobless claims. So that is not showing up in the national statistics. I guess it’s not surprising if it’s limited to a couple of industries, then those do not represent the entire country. Those are the companies that we read about. That’s not your local supermarket. That’s not your local barber shop who has a sign out looking for an experienced hairdresser and stuff like that. The Chipotle here in my town is looking for people to sign up forever, 16, 15 hours. Where my wife works, she’s going to get a bonus for having brought someone in because they’re really, really desperate for people to do a not really fun job. So it’s a two track economy. And so absolutely, like you said, it’s a lagging indicator and it’s a weird time. And they’re stung by the shortages that they experienced in the middle of the pandemic, I guess. And so they’re hoarding labor, if anything, as opposed to being forced to lay off.

Maybe they’ll regret it. Low wage workers are very easy and cheap to lay off, also, unfortunately. Google or Alphabet, I keep calling it Google, but Alphabet’s median employee pay is the highest in the S&P 500. It’s almost $300,000 in terms of total compensation. So a company like that laying people off, first of all, it’s a lot more money at stake. Things are actually getting dicey. My oldest boy, he starts a job, he’s a programmer, but he has a lot of friends who are in that business who are all nervous about their jobs. All of a sudden they’re working for Amazon and places like that. And they’re just lucky that they’re feeling fortunate that they haven’t been laid off. They’re not really agitating for raises. They just want to keep the job.

Keith Weiner:

We pay an ounce of gold for any referral that leads to hire, and we are looking to hire a software developer right now just to get that out there!

Benjamin Nadelstein:

All right. Yeah. So I did want to get that out there, which is, Spencer, we have an ounce of gold for you if you refer the golden candidate. But I wanted to talk now really quickly because I know we’re running out of time. I wanted to say we’re putting out this white paper called How Not to Think About Gold. And one of the things you wrote in your book was, Wave of Selling Hits Markets. And, Keith, I know we talked about this. For every seller, there’s a buyer. And in your book, you said, listen, they could easily change the headline to, Wave of Buying Hits Markets. And so we call this the famous buyer’s fallacy. There’s lots of other fallacies that we go to. So we’re going to be having this white paper called How Not to Think About Gold. I recommend you do it. And now I want to get to this lightning round because we’ve had so many things. Your book is so awesome. There’s so many things we could get to and I highly recommend everyone read the book. There’s not an ounce of gold for me if you do it, but it will make me smile.

But I want to do a really quick lightning round as we end here. So it’s going to get some of the points of the book, some of the things we’ve talked about. I’ll ask you the question. We’ll start with you, Spenser. Keith, you’ll go second. And just give me a quick thought on the lightning round question. Spenser, you can invest in any celebrity. Who would it be and why?

Spencer Jakab:

Oh, man. Okay. Gosh, a year ago, I would have said Tom Brady before FTX. Patrick Mahomes, he’s very down to Earth, very marketable guy. I’d invest in him. He’d keep it simple. Okay, Patrick Mahomes.

Benjamin Nadelstein:

Keith, who are you investing?

Keith Weiner:

I’m going to wait for Vanguard to come up with a celebrity index fund and just go that way.

Benjamin Nadelstein:

Okay, smart. I like it. Cheap and lazy. Okay, next one. Who will be vindicated, Spenser? Jim Kramer or the reverse Jim Kramer Fund? Interesting question.

Spencer Jakab:

Just last week, an ETF called S Jim, short Jim Kramer, as skeptical as I am about pundits, and it’s been shown, there have been studies done on Jim Kramer, it’s slightly worse than a coin flip, I would not recommend purchasing an inverse pundit because every dog has his day. And there’s no such thing, just like there’s no such thing as talent in stock picking, really, or it’s very rare and he doesn’t have it. There’s no such thing as anti talent. So I would not recommend doing that either. I would ignore pundits, but also not bet against them. I think paying for the privilege of doing that is not the best idea. Okay.

Benjamin Nadelstein:

Keith, reverse Jim Kramer Fonda. You’re sticking with Jim?

Keith Weiner:

I’m with Spencer, I think, just because I haven’t seen the statistic, but if he’s slightly worse than a coin toss, then shorting everything that he bets on, you could have a situation where both betting on everything that he recommends is a money loser and betting against everything he recommends could also be a money loser. And so it just doesn’t seem like there’s any win there.

Benjamin Nadelstein:

Okay, next one Bitcoin. It obviously blew up in the last couple of years. Spencer, do you think Bitcoin is digital gold and it’ll overtake gold? It’s gold 2.0 or digital pie, right? It’s one of these bubbles and it’ll be gone by the next time we see it. I don’t think it’s going to go away.

Spencer Jakab:

But closer probably to digital pie, right? And people call you a muddite when you point that out. You don’t really understand the potential of the blockchain, but the potential of the blockchain is still there without this very cumbersome currency that is very easy for… Not easy, but how many hundreds of stories are there of exchanges or people’s wallets being hacked? It seems less secure than precious metals to me, for sure. There’s no basis for its value. There’s no basis for gold’s value either, I guess, because it’s not an industrial metal or it is in very limited quantities, but there’s less basis for Bitcoin’s value.

Benjamin Nadelstein:

All right, Keith, I have a feeling I know what your answer is, but Bitcoin, digital gold or digital pie, right? What can we even say on that?

Keith Weiner:

I just tweeted this morning and I said, Here’s the acid test. Suppose it became illegal to exchange Bitcoin for dollars, which actually happened to gold between 1933 and 1975, 42 years. Suppose it was illegal for 42 years for Bitcoin to be exchanged for dollars, what would happen? Is there any real question to that? I’ll just leave it there.

Benjamin Nadelstein:

Okay, next one. Spencer, you can ask Warren Buffett one question. What do you ask?

Spencer Jakab:

Do you leave me in your will? I don’t know. What question would I ask him? He’s not really in the habit of doling out investment advice, so I would ask him something personal because he’s a well loved person. So I would ask him about how to deal with people, how to manage people since I manage people at the Wall Street Journal. Something along those lines.

 

Benjamin Nadelstein:

Keith, I’m going to ask you the same question. And you can ask Warren Buffett about gold and why he said gold is a shiny pet rock, or maybe you can. But if you get one question to ask Warren Buffett, what do you ask?

Keith Weiner:

If a young person was interested in following your footsteps, how would you recommend they go about doing that? What should they read? What should they know? What things they should be striving for?

Benjamin Nadelstein:

I highly recommend Spencer’s book, and I’m sure Mr. Buffett would do the same. And hopefully one day he’ll become a monetary metal spline. We can have a little chat about that shiny pet rock comment. Okay, next question. Spencer, is the current market a bubble or not? I think that we’re.

Spencer Jakab:

Clearly in the deflating phase of a bubble. I think it met every hallmark of a bubble in terms of where we got to last year. And we’re not off by that much. Of course, the most extremely valued stocks are off much more than the general market. But there’s always this false hope on the down slope that this is it. This is the point to buy in. I feel like we have had a couple of bear market rallies and maybe a couple more to come. So I think that we have, unfortunately, there’s more downside. That shouldn’t affect your long term asset allocation because nobody knows. And I could be wrong. I’m not any smarter than anyone else. I really don’t know. That’s my personal hunch. It doesn’t affect my investment allocation because I know that I don’t know. Yeah. Listen, all of this goes.

Benjamin Nadelstein:

Without saying we’re not giving financial advice or investment advice here. But okay, Spencer might say we’re in a deflated bubble. Keith, what do you think? Bubble of everything? Where are we?

Keith Weiner:

So I’m definitely not a stock trader, so I don’t have a strong opinion about what the S&P is likely to be in the year or something like that. I wrote in a article once about bubbles defining it, that saying, okay, look, all valuation is relative to the interest rate because you have to discount future earnings and the discount rate should be the market interest rate. So the lower the interest rate, the higher prices should be. And that is the bubble that’s a function of the interest rate, which is a whole different conversation as to how does the interest rate get set and why do we have central planning of interest rates, at least on the short end in the first place. So if one wanted to assess that, one should look at earnings yields and dividend yields, real estate cap rates, just to name a few, and compare it to the Fed Funds rate, the one year T bill, the 10 year treasury, and so on, and try to assess it that way and say, Okay, from a relative perspective, is it cheap? Is it expensive? I haven’t done that analysis. I don’t know the answer to that, but that’s how I would approach it.

Benjamin Nadelstein:

Which would be more disruptive to markets? A cancer cure discovery or everyone going vegan tomorrow? Wow. Yeah.

Spencer Jakab:

So I guess you would have to die of something, of Alzheimer’s or heart disease or whatever. But yeah, you would have the dependency ratio would be off the charts if you cure every type of cancer tomorrow. Everyone would live an extra 10 or 15 years, which would alter society. But I think everyone going vegan would be far more consequential because in terms of the amount of grain that goes into a calorie of protein is seven times the number of calories. And so the world in terms of global warming, in terms of all kinds of things, just in terms of global wealth, everyone going vegan would have far, far, far more impact on commodities and other markets and on all kinds of ills in the world. Not that I’m vegan, I like meat, but it would be a good thing if we all agreed to do it tomorrow. Okay, same question.

Benjamin Nadelstein:

They find a cure for cancer, or everyone joins me in Spencer, we’re veg from here on it. Yeah, I’m with.

Keith Weiner:

Spencer on the assumption that you’re going to tell them, actually, you live longer. I’m not sure that’s true, but if that’s true, then both of them increase life expectancy. But there’s so much change to obviously all the cattle ranchers and slaughterhouses go bankrupt. There’d be a lot more disruption to financial markets, a lot more change to commodity markets, global shipping patterns that probably be impacted. How do you even get a handle on what would happen if everybody just renounced meat? Cancer Care, I think any insurance company that didn’t have a balance between life insurance and selling annuities, if they’re balanced, then they’re fine. If they’re not balanced, if they were too life insurance heavy, then you might find some life insurance companies to go bust. But other than that, I’m not sure that cancer cure would really be hurting anything. I guess the pension funds, the fine benefit pension funds would have one more blow raining down upon their head. This is why I love talking to you guys.

Benjamin Nadelstein:

I get to hear just some of the greatest takes. Okay, next one. Is it better to be smart or lucky when it comes to investing, Spencer? Oh, lucky for sure, yeah.

Spencer Jakab:

It’s always better to be lucky than smart. But I have found that people who are generally smart tend to be actually pretty poor investors because they’re more tempted to be active. And I’ll tell you, this is in the very end of the second book of Revolutionary. It wasn’t just an anecdote that I threw in there. But a colleague of mine wrote a book about Renaissance Technologies, which is the most successful hedge fund ever. It just basically uses formulas. It doesn’t take fundamental views. And it’s had this phenomenal return. And someone asked one of the founders, like, who’s on the other side of these trades? And he said it’s a lot of dentists. And that’s the old cliché is that, like, not like my dentist.

Like dentists are the classic, they have a bit of disposable income. You have to be a pretty smart kid to get into dental school. And so you figure that your general smarts will extend to something like investing and you can figure it out. And that it doesn’t, obviously. Even people who have studied finance. There’s a separate study done showing that in terms of investment brokerage account returns by profession. And people who work in finance, that didn’t specify what type of finance they worked in, had the lowest returns of any profession because they thought they knew something. And not the teachers are not smart, but teachers had the highest returns because it’s more a type of person, and they’re more female too, and they tend to be less active and more intimidated by the process. And so they let things sit, which, as I said, is the 80 % of success in the stock market is not disrupting long term compound interest. So lucky is better. And I’ve known some people who’ve gotten like, they’ve made fortunes by accident. They bought a stock and forgot about it or something like that. I know a couple of people who have made tremendous…

They bought Amazon and forgot they bought it 20 years ago, 25 years ago, stuff like that.

Benjamin Nadelstein:

Well, Spencer, my dad is a dentist, so we don’t tolerate any anti dentite language on the podcast. That is a mark against you. All right, your turn. Smart or lucky when it comes to investing.

Keith Weiner:

I’m going to take the other side of that. Even though I think I’ve shared this anecdote before when I sold my last company, it was eight months of roller coaster that was dominated by things like lawyer summer vacations and CFE as filings and all kinds of stuff. And at the end, and you think you’re smart and you think you work really hard and you think you have a great team, they work really hard. In the end, for Spencer’s benefit and anyone in the audience that doesn’t know, I sold the company to Nortel Networks. We were the last acquisition Northhow ever closed August 19 of 2008. So the CEO went out to Wall Street, I think it was September second, less than two weeks after the deal closed and basically said, The wheels are coming off. Rumors had started swirling that they had hired Ernst & Young as bankruptcy advisors, which turned out to be true, because when they filed in January of 2009, that came out. The transaction closed with probably no more than two days to spare when the C suite knew that everything was falling apart. But the mergers and acquisitions group was in Richardson, Texas, and so they didn’t call off the deal and they funded and everything was fine.

Even despite that, I think I would say if smart means high IQ just generally, then I think I agree with Spencer. There are a lot of smart people that lose their money when they try to play in the stock market. But if smart means specifically how to navigate the investment world, then I do hold that being smart matters. And luck is something you can’t count on. Lucky one day and cream the next. I would never try to plan the way Diamondware was sold to Nortel, I would never try to plan that ever again. It’s completely irreputable. Once off, the level of stress was off the charts during a lot of that. It is what it is. It got done, but yeah, smart. Okay, so I define smart.

Benjamin Nadelstein:

As anyone who reads Spencer’s books. Okay, last lightning round question, and then I have one more question for you, Spencer. So lightning round question here. Which is more likely to revolutionize finance, AI or blockchain? Spencer, what do you think?

Spencer Jakab:

Probably blockchain, probably something like blockchain where you have a secure ledger because it can apply to so many things. I mean, AI is it’s like inventing the wheel. Everyone got the wheel at the same time. Ai is so widely disseminated that it can help us make decisions. But in terms of competing against one another, it won’t give anyone a durable edge competing against the other person. And so where you’re trading pieces of paper back and forth, what difference is it really going to make? I mean, it will give someone who’s better at AI today, perhaps a temporary edge. But blockchain, even though I’m pretty skeptical about cryptocurrencies, which is the main manifestation of it today, I think blockchain is very interesting for all sorts of things. For example, just eliminating something like the title on your house, on the land where your house sits and stuff like that, where there’s gigantic inefficiencies that slow things down that cost tons and tons of money. If you’ve been through it, you’re probably too young to have bought a house or an apartment. But it’s crazy and it’s totally unnecessary. So I think that if blockchain technology is where you have this trustless system permeate finance and other things, then it could have a bigger impact.

Benjamin Nadelstein

Yeah. Keith, I’m very interested. To hear your answer here. Which is going to revolution finance more, AI or blockchain? So I have to.

Keith Weiner:

Come down certainly against so called AI. And having studied it when I was a computer science major, what they’re doing today is not intelligence in any sense of the word at all. It’s statistical models. I’ve got to write an article so I’m going to foreshadow or forecast something. I asked chat GPT to summarize my theory of interest and prices, and what I got back from chat GPT and my interaction with it, I think was fascinating. I don’t see that. I mean, yeah, it’s going to be a nice new set of models for traders to use. But as Spencer said, I totally agree. If every trader has it, then what does it really do? Now people have one more tool on their desk than they have before, but nothing really fundamentally changes. Blockchain, I agree. I mean, it’s not Bitcoin per se. The blockchain certainly has some interesting and promising applications, but I think there’s a ton of maturation it has to go through before even some of those basic use cases like putting the deed recorder’s office on the blockchain, essentially. I think there’s a lot more maturation before that remotely becomes usable. And the challenge is you have something in the real world and then there’s a listing of that thing in the real world on the blockchain, how do you guarantee that the listing in the real world isn’t changing status without that being reflected on the blockchain?

And I have an amusing joke that I saw, somebody was asking when NFTs were in their bubble, so called Non fungible tokens, somebody said, can you explain an NFT? And I said, okay, so suppose you’re married to a woman and you have a marriage certificate, that’s the NFT. Whereas this guy is sleeping with her and that’s the physical reality. How do you prevent the NFT problem? And there may be really clever solutions, but I think that work has to be done first and be proven. And if when it does, then I think it could change the game for asset custodian. Custodializing assets becomes a different game. Getting back to that low resolution picture of Wall Street, one of the Wall Street players out of many, the custodian gets disrupted. Just in that one case, if the title to all assets. It’s the title to all stock certificates were on the blockchain and you saw a bunch of other problems, then DTCC potentially goes away or gets disrupted in some way. And what does that look like? I’m not sure I have a clear picture of it, but that could be pretty big.

Benjamin Nadelstein:

Spencer, I want to thank you so much for coming on. I have one last question for you, which is, what is the question that I should ask all the future guests who come onto the podcast? Your podcasts are all more.

Spencer Jakab:

Or less about investing. I think people are hesitant to talk about this, but then their answers are very instructive. Once they stop to think about it, it’s like, what’s the biggest regret or mistake that you’ve had investing personally or professionally?

Benjamin Nadelstein:

Well, I fear for the next person. I’m going to have to ask them, okay, what do you regret the most? They’re going to have to say it live on the recorded podcast. Spencer, thank you so much for coming on to the Gold Exchange podcast. Where can people find more of your work? If they want all of Spencer Jacob all day long, where should they find you? Okay.

Spencer Jakab:

Well, my surname is spelled JAKAB, unusual spelling. So spencer Jacob on Twitter, Spencer Jacob. On Twitter, s pencerjacob. Com, which is my personal website. It’s not very active, but you can find links to my two books and articles and things like that. So those are the best places to look and you can follow my articles. I made the edit these days that heard on the street column, but you can find my articles at the Wall Street Journal by searching my name as well. And if you subscribe to that paper.

Benjamin Nadelstein:

Spencer, thank you so much for coming and we’ll have to see you again soon.

Additional Resources for Earning Interest in Gold

If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:

The New Way to Hold Gold

The New Way to Hold Gold

In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.

 

 

 

 

 

Case for Gold Yield in Investment Portfolios

The Case for Gold Yield in Investment Portfolios

Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.

 

 

 

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