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Today's episode is sponsored

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everyone. investing to everyone. Welcome

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to Many to many happy returns

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where we aim to make you

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a better investor. I'm I'm Roman And

0:14

I'm I'm Michael. was another was another

0:17

stellar year for stocks and investor

0:19

sentiment is more bullish than ever. With

0:21

a a record share of Americans

0:23

expecting the S &P 500 to rise

0:25

in 2025, to is this the

0:27

peak of euphoria? I want

0:29

to know how to measure fear and

0:31

greed in the market. And in

0:34

today's dumb question of the week,

0:36

what's the difference between hard and

0:38

between hard and soft data? All right,

0:40

let's right, let's get into it.

0:42

Roman 2024 is is almost in the books,

0:44

and it looks like another amazing

0:46

year for the stock market. So

0:49

the S &P 500 is currently

0:51

on pace to deliver a

0:53

total return above 25 Again, that

0:55

happened last year and this

0:57

year. year. and only happened three times

0:59

before in history. times before in off

1:02

the back of And off the back of the

1:04

measures of market sentiment are showing

1:06

people being are showing optimistic about

1:08

next year's returns. about

1:10

of course, we're in a state of

1:13

euphoria. Mr. in a is really excited

1:15

about what's going on and expects things

1:17

to continue to be great on and

1:19

he's quite willing to pay a lot

1:21

for stocks. be great and he's stocks

1:23

in particular. pay a lot for stocks. American

1:25

a bit of And

1:28

in in fact, American stock ownership as a

1:30

a percentage of their financial assets

1:32

is, I think at an all

1:34

-time high, so it's over over 40%. Which

1:36

might not which might not sound that big

1:38

you you compare it to it's 40 portfolio

1:40

or something. or something, you compare it

1:42

to where we were in the to and 90s,

1:44

it's much, much higher. 90s, the 80s, it

1:46

was around So in the 80s, it was In the 10%.

1:49

it crept up to it crept up to 15%. In the

1:51

the like at the start the start of the 2000s,

1:53

the peak of the dot com bubble,

1:55

it almost got up to to 40%, but now

1:57

we've exceeded it. And what's And what's

1:59

interesting is if compare American stock ownership versus

2:01

other countries, it's a huge difference. So

2:03

in Japan, the percentage of assets that

2:05

are stocks is just 13%, Germany 16%,

2:08

France 26%. So as we know, Americans

2:10

are very happy to own stocks, particularly

2:12

right now. It's always been the case,

2:14

I think, that Americans are very happy

2:16

to own stocks as part of their

2:18

total wealth, and certainly compared to the

2:20

UK, where I think stock ownership is

2:22

still a bit of an outlier, even

2:24

after the period in 2020. when everyone

2:26

was stuck at home and investing in

2:28

stuff. But even if you are a

2:31

UK investor, so many people I speak

2:33

to just say I put it into

2:35

an S&P tracker and I don't even

2:37

bother with the rest of the world.

2:39

And it's really hard to make the

2:41

case that yes, it's a recency bias

2:43

and US stocks are very expensive and

2:45

it's usually the case that when the

2:47

US is in a state of euphoria,

2:49

the returns usually afterwards aren't so great.

2:51

All of that is just blah blah

2:54

blah blah blah blah blah blah. You

2:56

know, they just want US stocks and

2:58

that's the end of it. Well you

3:00

say the returns afterwards usually aren't so

3:02

great, but if we look at what

3:04

people say they expect over the next

3:06

12 months, that is a record level

3:08

of optimism in the market. So I

3:10

saw a note from Jim Reed, who's

3:12

a pretty famous analyst at Deutsche Bank,

3:14

and he says that US consumers bullishness

3:17

on stock performance for the next year

3:19

exceeds the optimism during the dot-com bubble.

3:21

So 56% of Americans asked in the

3:23

survey said they expect stock prices to

3:25

increase over the year ahead and only

3:27

21% expected prices to fall. That's a

3:29

record spread. Now why are people so

3:31

optimistic? I think part of it is

3:33

recency bias. They see that stock markets

3:35

have done incredibly well for a very

3:37

long period of time. They think the

3:40

new US president is going to be

3:42

very pro-stocks, pro-business. again to make America

3:44

great again and if that's the case

3:46

well that's a very positive backdrop for

3:48

the US stock market. And of

3:50

of course the economy

3:52

hasn't really had

3:54

any kind of of

3:56

In fact, fact, I

3:58

think the problem is

4:00

much more the

4:03

opposite, which is an

4:05

overheating of the

4:07

US economy. US economy. Did

4:09

you see those graphs which looked at

4:11

consumer sentiment by political alignment? And

4:13

in the run -up to the election, to the election,

4:16

asked, well, asked, is a terrible economy.

4:18

terrible soon as soon elected, was not

4:20

even in power yet, it flipped It

4:22

flipped, and are saying the are great

4:24

and Democrats are saying it's a

4:26

terrible economy. Just made me think these consumer

4:28

surveys are kind of a bit

4:30

of a bit fluffy. What are they actually

4:32

measuring? measuring? Yeah, I I think a lot of

4:34

it is to do with political alignment and

4:36

whether you think that the the in power

4:38

is going to fix things. things. And yeah, they're going

4:41

going to inherit an economy which

4:43

is pretty strong when the the Republicans

4:45

get back into power in January.

4:47

in January. A A lot of this data

4:49

comes from the conference board consumer confidence

4:51

index, which is kind of a mouthful.

4:53

but I But I went through their recent report. report.

4:55

And and one thing that Jim Reid highlighted,

4:57

which is really interesting. is is

4:59

that there's a huge difference now. now between

5:02

what people say they expect to

5:04

income to do over the next

5:06

year. from like their salary from

5:08

their job and what people expect from the stock

5:10

market. They don't think They don't think they're going

5:12

to get much of a pay rise in the

5:14

next year, but they're incredibly bullish on the stock market.

5:16

bullish on the And the spread between those

5:18

two things, wage expectations. wage versus

5:21

stock price gains. gains. is by

5:23

by far the biggest record. Usually they move pretty

5:25

much in sync when you look at the

5:27

graph, but right now the a huge, huge

5:29

difference between them. huge And I

5:31

think this is partly because people think

5:33

this we're going to see is just

5:35

a repeat of what happened in

5:37

2016, is which is tax cuts 2016, which is

5:39

tax cuts pushed up tech stock prices tech

5:41

stock prices of course, that

5:43

propelled the Magnificent the even

5:45

higher. seven to even to repeat that, it's

5:48

going to be tricky. be tricky. I I think

5:50

you can have smaller tax cuts,

5:52

but the problem is the fiscal

5:54

deficit. I'm not I'm not convinced we're

5:56

gonna see a repeat of what

5:58

happened last time around. at

6:00

least not in terms of magnitude. If

6:02

you believe what this survey is saying,

6:04

and people are right about what's going

6:07

to happen, it's basically saying corporates are

6:09

going to capture a bigger share of

6:11

GDP than labour, which maybe isn't an

6:13

unreasonable thing to expect under a Republican

6:16

administration. It's strange though that people still

6:18

feel optimistic, given that really all it

6:20

means is that more money is going

6:22

to shareholders and less into your pay

6:25

packet. But as we said at the

6:27

start, Americans are shareholders now to a

6:29

record degree. Yeah, so about 40% of

6:31

their assets are in the stock market.

6:34

So if you haven't got investments, then

6:36

you're really going to lose out in

6:38

America right now. If markets do what

6:41

people expect them to do. Yeah, and

6:43

there is a kind of self-fulfilling prophecy

6:45

here, because if people expect the stock

6:47

market's going to do well, then there'll

6:50

be lots of inflows and that'll push

6:52

prices higher. But all it takes is

6:54

something a bit unexpected to happen, to

6:56

burst what looks a little bit bubbly.

6:59

Oh yeah, I think there's no question.

7:01

This is a bubble. It's just a

7:03

question of how it's going to deflate,

7:05

how rapidly, and what the trigger's going

7:08

to be. You're doing a dangerous thing,

7:10

Roman. You're making a real-time bubble call.

7:12

Well, you know, I've made a video

7:14

about it, and, you know, I stick

7:17

to my guns. Valuations are pretty important.

7:19

almost any indicator you look at makes

7:21

stocks look expensive right now, but it's

7:23

just a matter of degree. And if

7:26

we're trying to gauge sentiment, as in

7:28

what investors think the market is going

7:30

to do, there are various different ways

7:32

of measuring that. So we mentioned the

7:35

Consumer Confidence Surveys, but there's also an

7:37

investors sentiment survey from the American Association

7:39

of Individual Investors. Now they've been running

7:41

this survey since 1987. and it looks

7:44

at where people think the market's going

7:46

to go in the next six months.

7:48

Now the latest results show a lot

7:51

of optimism. Bullish sentiment, that is the

7:53

expectation that prices are going to rise

7:55

over the next six months, is at

7:57

43% whereas... its bearish

8:00

sentiment is at 31%.

8:03

Sentiment has actually got a little bit less

8:05

bullish over the last month or so. but

8:07

it's still well above its historical average. And

8:10

in fact, optimism has been above its

8:12

long term average for 56 of the

8:14

last 58 weeks. So this isn't just

8:16

a sudden pickup in sentiment. It's

8:18

been sustained for more than a year. Yeah,

8:21

that rictus of joy on Mr Market's face must

8:23

be wearing a bit thin by now, I'd have

8:25

thought. Interesting survey though

8:27

because not only is the

8:29

name itself unpronounceable the

8:31

American American Association of Individual

8:33

Investors, but also the acronym

8:36

A -A -I -I, almost impossible. I

8:38

did take about six takes just

8:40

it, didn't I? it. But you

8:42

wouldn't know, because this show is

8:44

so beautifully edited. It is indeed. But

8:47

I think maybe the most famous

8:49

of all the kind of market sentiment

8:51

survey things is the Fear and

8:53

greed index, which is published by CNN.

8:55

And And this is obviously a

8:58

play on that famous Buffett quote, which is, Be

9:00

greedy when others are fearful and be fearful

9:02

when everyone's greedy. Did you

9:04

look at this a lot when you're a strategist did people

9:06

ask about this a lot? No, mean,

9:09

usually we looked at positioning, so

9:11

things like, you know, what's the options

9:13

market telling you? What's the futures

9:15

market telling you? We also looked

9:17

at things like VIX Index. The

9:20

good thing about derivatives is they give you

9:22

a directional view. So if it's trading

9:24

calls over puts, that suggests things are going

9:26

go up. And people have actually

9:28

put money into that bet. Whereas

9:30

so I think the trouble with some of these

9:32

indicators is people haven't put money into it. So

9:35

it's hard to know what the conviction really

9:37

is. I mean this fear

9:39

and greed index, some of those

9:41

things are in there, it's kind

9:43

of an amalgamation of seven different

9:45

indicators which they aggregate together. and

9:48

deliver a score out of 100, where

9:50

100 would be maximum greed and

9:52

zero would be, you know,

9:54

full world's kind of fear. Right

9:57

now, weirdly, we're at exactly fifth...

9:59

I was so was so surprised by

10:01

this we're at the perfect neutral

10:03

level according to the to greed index

10:05

greed But maybe it's worth us going

10:07

through the seven different indicators, what they are

10:09

and what they currently show. they are and what

10:12

first one is a pretty obvious

10:14

one, which is to do

10:16

with momentum. one, which If the stock

10:18

price is moving up If the

10:20

you measure this is the 125

10:22

day moving average, then slowing momentum

10:24

is a signal for fear,

10:26

growing momentum means greed. means greed. market

10:28

going up basically. And and

10:30

accelerating is the key, it, to

10:32

And right now, that indicator, the

10:34

market momentum, is showing greed. is showing

10:37

Whereas the second indicator

10:39

is actually showing is fear.

10:41

extreme fear. that looks at the number

10:43

of stocks on the on so

10:45

the New York of the New at 52

10:48

week highs, compared to those at

10:50

52 week lows. at 52-week lows. So

10:52

more highs and lows. That's

10:54

bullish bullish that's greedy. greedy. But

10:56

we've got a market, haven't we, where a

10:58

few stocks are doing really well and a lot are

11:00

not doing that great. lot are not doing that this

11:02

indicator is kind of showing. is

11:04

kind are fearful. people are And

11:06

really And another worry which is to

11:08

do with concentration, to do but that

11:11

isn't included in this indicator. included in

11:13

this but what we do have

11:15

as the third indicator is

11:17

stock price price breadth, which is. basically

11:19

looking at the number of shares

11:21

on the stock exchange that are rising.

11:23

rising. compared to the number of shares that are

11:25

falling. that are falling. right now, that's showing

11:28

showing as well. as well. But the But

11:30

the fourth of the indicators is is something

11:32

you mentioned earlier earlier It's to do

11:34

with the to the call options and the showing

11:36

greed. that's showing greed. that that like

11:38

because that actually has people betting

11:40

money on stock prices going

11:42

up or down. want to just Do you want

11:44

to just explain what put and call options are

11:46

very quickly? quickly? So a call option option is an

11:48

option to buy a stock at a fixed price

11:50

at a fixed point in time. buy You buy

11:52

it if you're bullish. You You make money if

11:54

the stock price goes up above your strike

11:56

price. and put and put options of the

11:58

opposite. You make money share. price goes down.

12:01

So if the market's trading calls over

12:03

puts, that suggests a directional view that

12:05

markets are going to go up.

12:07

And right now, that is what we're

12:10

seeing. People are buying more calls than

12:12

puts. Hence, the greed signal. So

12:14

that's four of the indicators. Three to

12:16

go. We've got market volatility. How

12:18

do they measure this one? So this

12:21

is based on the options prices for

12:23

stocks in the S&P 500. Now,

12:25

if people are paying a lot for

12:27

those options, that suggests that they think

12:30

that prices are going to be

12:32

moving a lot in the next 30

12:34

days. These are 30-day options. Whereas

12:36

if they don't think prices are going

12:38

to move much in the next 30

12:41

days, the VIX index will be

12:43

low. So this is the VIX, and

12:45

people have probably heard it referred to

12:47

as the fear gauge. So is

12:49

it the case that when we go

12:52

into a bare market, VIX spikes

12:54

spikes or tends to go up? Yeah,

12:56

but I think what people don't realize

12:58

is that Vix is symmetric. So

13:00

if people expect an up-crash, that would

13:03

also push up the level of Vix.

13:05

So at the moment, I think

13:07

more to do with complacency. People are

13:09

just not expecting a huge move downwards.

13:12

So they're not buying this out

13:14

of the money, put options, and so

13:16

that's not really pushing up the

13:18

value of Vix much at all. But

13:20

what it actually looks at is VIX

13:23

compared to its 50-day moving average

13:25

and it's been low across those 50

13:27

days. A lot of these signals are

13:29

actually to do with momentum, aren't

13:31

they? Momentum of different indicators in the

13:34

market. Yeah, and I think the

13:36

VIX indicator is interesting because if you

13:38

look on the fixed income equivalent, which

13:40

is the move index, and that

13:42

looks at price changes in Treasury futures,

13:45

that's still pretty high because there's more...

13:47

of a cough uphed, I'd say,

13:49

in the treasury market than there is

13:51

in the equity market right now.

13:53

It's higher than it was pre-pandemic, but

13:56

it's near its lowest point over the

13:58

line. couple of of

14:00

years. it's which do you give more you

14:02

give more weight to really the short term average or

14:04

the long term average? average? But I But I

14:06

think that's more a reflection of where

14:08

people think the stresses will be in

14:10

the market will be in the a Trump a because

14:12

if there is a fiscal deficit, a

14:14

there could be problems in the could market,

14:16

which could spill over into the equity

14:19

spill over into the equity move on to

14:21

the last two indicators in the two

14:23

and greed index. in the We've got index. We've

14:25

got safe which is showing. which is People

14:27

are greedy are now. right now. So So

14:29

that's based on treasury bond

14:31

and stock returns over the

14:33

last days. days. So fairly short

14:35

of terms of back period. period. the

14:37

idea here? what's the idea here?

14:40

If there's more demand for that's stocks,

14:42

people that's a sign that people

14:44

are nervous. because when people are scared

14:46

when people are scared, they buy bonds

14:48

and they dump stocks. At least the the

14:50

thinking. Okay, there's one there's one indicator

14:52

left in the the greed index. greed and

14:54

that is that demand. bond demand, is

14:56

showing greed right now. now. So junk

14:58

bonds are the low credit part of the

15:00

corporate bond market. These are the

15:02

companies which may well default on their

15:04

debt and they tend to pay

15:06

a higher interest rate on their debt

15:08

as a result. debt as a But the

15:11

size of the spread relative to

15:13

risk -free rates is a credit spread

15:15

measure, and that tells you how

15:17

nervous people are about defaults in

15:19

that market. And at the And at

15:21

the moment, those credit spreads are

15:23

absolutely tiny tiny getting smaller. smaller. So clearly

15:26

that's a market which is pretty much

15:28

complacent and there's not much sign

15:30

of fear there at all. sign of fear

15:32

So if we add up those we

15:34

indicators, we've got four which are

15:36

flashing four which are We've got

15:38

one which is saying which is saying And

15:41

we've got two got saying which

15:43

fear. fear. as we said, to begin

15:45

with. begin with, when CNN all

15:47

up, they come to

15:49

come to 50 neutral. Exactly neutral. So

15:51

telling us nothing. nothing. I think

15:53

think sometimes it is informative, but it's

15:55

kind of obvious. You you know when know when

15:58

this indicator is going to be signalling.

16:00

lots of fear or greed? I thought

16:02

it was going to show greed

16:04

though. When I clicked on it

16:06

this morning I was surprised it

16:08

said neutral. It has come down

16:10

a bit over time so it

16:12

was showing greed in October just

16:14

into November and it's declined since

16:16

then. Maybe the problem is that

16:18

people have been greedy for a

16:21

long time. So if it's looking

16:23

at acceleration of some of the

16:25

indicators then you're not going to

16:27

see the second derivative still being

16:29

positive. Oh, that's interesting. So for

16:31

this to show up greed or

16:33

extreme greed, people need to just

16:35

keep getting greedier. Yeah, I think

16:37

what is actually measuring is whether

16:39

Mr Market's mood is changing rather

16:41

than when he's in a continual

16:43

state of joy. It sounds a

16:45

lot like technical analysis to me.

16:47

I'm not a big fan of

16:49

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and fees apply. So

18:05

we've said that the market shows quite

18:07

a few signs of euphoria. but

18:09

that doesn't mean we're on the verge of a

18:11

crash. Not at all. Euphoria can run for a

18:14

long time. And what do you think? Has this

18:16

got further to run? How would we know that? I

18:18

think one measure that's always interesting

18:20

to look at is the amount of

18:22

leverage in the market. And there

18:25

are various ways to measure that. For

18:27

example, you can get leverage with

18:29

your broker in America often. And

18:31

at the moment, what's interesting

18:33

is that the leverage at broker

18:35

dealers is near historical lows. And

18:38

that's for data gain all the way back

18:40

to 1996. This is part of the

18:42

financial stability report from the Fed. So

18:44

that's not showing huge amounts of leverage.

18:48

And when you say leverage, you mean

18:50

people borrowing money from their broker to

18:52

buy stocks. Yeah, so

18:54

instead of investing of your own

18:56

money, you invest $80 of your own

18:58

money and $20 you borrowed from

19:00

your broker. However, if

19:03

you look at hedge funds,

19:05

their leverage is currently at

19:07

or near historic highs. So

19:09

clearly, if you're an institutional investor,

19:11

if you're a hedgy, then yeah,

19:13

they're really going for it at

19:15

the moment. The reason

19:18

why that matters is when these things

19:20

pop. then you have to

19:22

unwind your leverage and so you can get

19:24

very big sales. which

19:26

push down prices. And

19:28

if people have bought lots of illiquid stuff, they have

19:30

to sell the liquid stuff. And

19:32

that means that you can have contagion

19:34

from one market to another. So

19:37

that's the typical unwind and if there's a

19:39

lot of leverage it just makes it

19:41

more severe. But I guess

19:43

with hedge funds, they're not long only. They

19:46

can be betting either way on the market with

19:48

leverage. Yeah, that's true.

19:50

And the problem I think is

19:52

that they can have very large bets

19:54

and once you unwind those, that

19:57

sends out big shock waves, if it's

19:59

a small market. Another Fed saying they're

20:01

worried about this. This came up

20:03

in the in the right? report, right? yes

20:05

they are because a lot

20:07

of this leverage is hedge

20:09

funds buying are buying in the same

20:11

time, what they're the same time,

20:14

what they're doing is they're shorting the

20:16

in the futures market, vice versa, to make

20:18

money make money from the trade between

20:20

what's implied in a futures price

20:23

and what's available in the

20:25

cash bond market. Oh, Jesus, this Jesus. This

20:27

is typical hedge hedge fund stuff, isn't

20:29

it? it? Oh yeah, but this but this

20:31

is a very small risk trade. there's

20:33

just a few just a few basis

20:35

points of difference in the price

20:37

implied in the two different markets,

20:39

then you you it up and magnify

20:42

the the profit. Unfortunately, this

20:44

thing can unwind really quickly. and

20:47

amplify any shocks. And

20:49

that's exactly what happened in

20:51

August. For about For about a week,

20:53

we saw a pickup in volatility

20:55

and a sell a in the in the treasury

20:57

market. and the Fed says

20:59

says... in the in market as

21:01

well as other markets deteriorated

21:03

markedly but market conditions improved

21:05

rapidly. conditions And that's because of favourable

21:07

data releases later on. data

21:10

they say is, later on. But this

21:12

episode is once again how high

21:14

leverage can amplify adverse shocks. adverse

21:17

shocks. So yeah worried. worried. So I So

21:19

I guess that's the risk risk that we see

21:21

we hedge fund or a big family office

21:23

or something or up. blow up and hurt its counterpart

21:25

whether that's an investment

21:27

bank. bank. or a a broker dealer or,

21:29

forbid a market maker, maker, then all

21:31

be in trouble. in trouble. Yeah, and

21:33

it can spill over into other markets.

21:35

It can spill over into the equity

21:37

market the or any market in which the

21:39

hedge funds have positions. funds have And I

21:41

think that's one of the problems which is

21:43

that everyone is thinking the same way. is

21:46

There's no alternative way. than the US

21:48

right now. than the US right in

21:50

very crowded trades crowded then when

21:52

things change, everyone stampedes out

21:54

at the same time time. and that

21:56

can cause real problems in

21:58

terms of stability. of stability. The frustrating thing

22:00

is we never know when it's going

22:03

to happen or what's going to cause

22:05

it to happen. And we could get

22:07

a more benign unwind, couldn't we, where

22:09

the US sort of has a period

22:12

of underperformance and the rest of the

22:14

world catches up. It doesn't have to

22:16

be a big crash. That's right. It

22:19

can be a slow adjustment as people

22:21

just move on to something else or

22:23

it can be a hard shock when

22:25

something really amazing happens. and volatility simply

22:28

reflects the fact that people are unwinding

22:30

positions and changing their portfolios. But a

22:32

lot of the ingredients for a sudden

22:34

shock are there. Really stretched valuations in

22:37

the stock market, very high concentration in

22:39

the magnificent seven companies, and some big

22:41

traders, by these hedge funds, with very

22:44

high leverage. Yep, we've got the recipe.

22:46

But let's keep the party going. Don't

22:48

turn the oven off. Yeah, let's hope

22:50

the souffle just slowly collapses. Every time

22:53

I've tried to bake a souffle, I've

22:55

even managed to collapse a cheesecake. I

22:57

didn't even know you could do that.

22:59

But it's interesting that you said retail

23:02

investors don't appear to have taken a

23:04

lot of leverage compared to history at

23:06

least. So I saw a report from

23:09

Bank of America which said that in

23:11

their wealth management and brokerage accounts, which

23:13

they managed for normal Americans, the level

23:15

of bond holdings and cash holdings, are

23:18

pretty close to historic lows. which I

23:20

guess is the mirror of what we

23:22

said right at the start, which is

23:24

that Americans have put a lot into

23:27

the stock market. I guess you could

23:29

also think that if you don't rebalance

23:31

your portfolio, then just naturally you're going

23:34

to get your equity positions increasing in

23:36

value. And as a percentage of your

23:38

portfolio. Yeah, because if you never rebalanced,

23:40

then eventually your portfolio will be almost

23:43

100% equity. But there is quite a

23:45

lot of cash in money market funds.

23:47

So I guess that must be held

23:49

by institutional investors. Yeah, I don't know

23:52

if there is a breakdown, such that

23:54

we don't really know. Only companies like

23:56

Micro Strategy would put their reserves into

23:59

some... something like Bitcoin. Most

24:01

Most corporate will put put it into

24:03

money market funds. funds. Did you Did

24:05

you see that micro -strategies being

24:08

added to the added now? NASDAQ 100 now? Seriously.

24:10

Yeah the inmates are now part of the the inmates

24:12

are now part of the asylum

24:14

staff. on the In fact, they're probably

24:16

on the board now. said that

24:18

I mean you always was trading like a

24:20

was trading of the version of the now the

24:22

and now the Nasdaq is going

24:24

to be trading a bit bit like Bitcoin.

24:26

It's like feeding each other directly now. now. Yeah,

24:28

we we live in interesting times. times.

24:31

But seriously, that is kind

24:33

of a euphoric to me

24:35

that this company, which completely

24:37

changed its business model from

24:39

being a software service company being

24:41

a pure play, almost company to pure

24:43

play know, they literally bet, you know,

24:45

they new stock, issued took the money took the

24:47

put a load of Bitcoin with it. of Bitcoin

24:50

is That is now doing so well

24:52

one of of the biggest 100

24:54

companies on the NASDAQ exchange. and

24:57

is is in the NASDAQ 100 index which is

24:59

included by default in a lot of

25:01

people's retirement savings or whatever it might be

25:03

in America. might be in America. I think

25:05

I have forgotten the possibility that Bitcoin

25:07

could fall in value. fall in And

25:09

if that does happen, it's going to be a

25:11

real problem for be a real problem for But at

25:13

the moment, people are just deaf to

25:16

those risks. to those risks. There's a reason

25:18

why more companies don't do that, do it that

25:20

way. it that way. What I I find interesting is

25:22

that a lot of what we

25:24

talked about here is the signal

25:26

of greed and euphoria. investors and investors

25:28

are expecting the market to go up and and

25:30

to go up. to go up. Yet the the

25:32

investors I talk to, and I know

25:34

this is self -selecting bias, but they're all

25:36

pretty nervous and are very well aware

25:38

that the market looks overvalued, particularly in

25:40

the US, and there's high concentration, the US

25:42

and are just sort of desperately thinking,

25:44

maybe I should take a little risk

25:47

off the table, but know that you

25:49

can't time these things. know that you

25:51

can't time these things. Are Michael Austrian

25:53

be, be, be, but just

25:55

in our community though, right?

25:58

The general sense is not one

26:00

of you for you but then

26:02

that's probably because of the people

26:04

you attract from your YouTube channel.

26:06

Yeah that's right I think that

26:08

kind of reflects the the kind

26:10

of community as well and also

26:12

the fact that they've been around

26:14

the block they've certainly seen this

26:16

show before but yeah generally the

26:18

people I speak to are very

26:20

nervous at the moment and a

26:22

lot of them do have lump

26:24

sums and they're not willing to

26:26

invest them they are drip feeding

26:28

and I think I'd probably do

26:30

the same if I had a

26:32

lump sum. I think we'll know

26:34

when we've reached peak euphoria because

26:36

you will start getting power hours

26:38

where people say, I've seen this

26:40

three times leverage micro strategy ETF.

26:42

How do I buy this? Is

26:44

it a good idea? You must

26:46

tell us when you start getting

26:48

those calls. Yeah, it certainly hasn't

26:50

happened yet. But the backdrop to

26:52

all of this, I guess, is

26:54

that the US economy has avoided

26:56

recession when that didn't look like

26:58

it would be the case a

27:00

couple of years ago. It's got

27:02

inflation down. not quite to target,

27:04

but close, and the Fed is

27:06

cutting rates. And there's no real

27:08

evidence that recession is coming, although

27:10

we did briefly see the Sam

27:12

rule trigger, didn't we, earlier in

27:14

the year? Only just, and I

27:16

think it's still on the teetering

27:18

on the edge of triggering, but

27:20

not quite there. And this is

27:22

a way of looking at the

27:24

US unemployment figures as indicative of

27:26

a recession coming up. Yeah, it

27:28

looks at the momentum in unemployment,

27:30

and if it's increasing rapidly, that's

27:32

an almost infallible measure of US

27:34

recessions. Which has now proved fallible.

27:36

Yeah. There was one weird indicator,

27:38

or so-called indicator, that I saw

27:40

in the press over the last

27:42

week, which is signaling recession ahead.

27:44

And this is called the Walmart

27:46

recession signal, and it was invented

27:48

by former Wells Fargo asset management

27:51

strategist Jim Paulson. And this basically

27:53

looks at how is Walmart's share

27:55

price performing and remember Walmart is

27:57

a kind of big box disc.

27:59

account retailer. So it So

28:01

it compares Walmart's share price. to the share

28:03

to the share price of

28:05

a basket of supposedly luxury the

28:07

stocks. is that if the the reasoning is that

28:09

if the economy's slowing down and consumers don't

28:11

have as much money to spend, they'll spend

28:13

more at Walmart, more which will help Walmart. which

28:15

will help spend less on spend less

28:18

on Ferraris and all this other

28:20

stuff. and all this so And so if

28:22

is doing relatively better than

28:24

luxury goods. luxury goods, that's a

28:26

signal. signal. And that that is showing

28:28

a recession right now. now. Yeah Yeah, that's

28:30

surging at the moment. and

28:32

yeah historically historically Walmart was

28:35

very much the discount retailer,

28:37

pile them high and sell them I think

28:39

other retailers might be better at

28:41

the moment. at like Companies as people

28:43

call it, as people call it or Tarja. That's like real

28:45

discount I I used to love

28:47

going to the one in Connecticut.

28:50

I was a really good one. good

28:52

one and buying toys for my

28:54

kids at really discounted prices. prices.

28:56

But yeah, Walmart is pretty much sells everything.

28:58

It's incredible if you go to one

29:00

of their stores. go to one of I

29:02

mean, when you look at the graph

29:04

back through history of this back through indicator.

29:06

of this It does line

29:09

up ominously well it does

29:11

recessions. well with In 2008, it

29:13

spiked this indicator, then gradually came

29:15

back down in the early in the

29:17

early And then guess when it

29:19

spiked again? it spiked the pandemic

29:21

hit in 2020. hit in 2020. And

29:23

now up to levels reached in

29:26

the early pandemic. So, you know, correlation

29:28

doesn't know, correlation doesn't imply causation, we know

29:30

that, but a rare we're looking for a

29:32

rare indicator of a recession, be this might

29:34

be one. it is a And I think it

29:36

is a sentiment indicator as well if people

29:38

are worried and particularly worried about prices and

29:40

I think that might be feeding through to

29:42

the Walmart. through to the Walmart at the

29:44

moment. the moment, then you'd expect people

29:46

to shop in discount stores. stores. But

29:49

it's But it's pretty odd, given that

29:51

the wage data in the US suggests that

29:53

wage growth is pretty strong. It

29:55

is slowing down, it's decelerating. the

29:57

rate of wage increases. because of

29:59

course that's what the Fed is

30:01

trying to engineer, but it's still

30:03

quite high. And so I'm surprised

30:05

that that's really surging the Walmart

30:08

indicator. Yeah, Jim Paulson is surprised.

30:10

I saw that he wrote on

30:12

his blog, It's odd when so

30:14

many signals currently indicate stock market

30:16

optimism that investors are favoring the

30:18

quintessential defensive retailer over the most

30:20

aggressive luxury stocks. Yeah, I wouldn't

30:22

put too much faith into this

30:24

indicator. I'd say other ones are

30:26

more believable. There's a reason why

30:28

strategists would be selective about the

30:30

ones they choose, and this is

30:32

not one that they'd look at.

30:35

FT Alphaville actually had a really

30:37

good piece called the Walmart recession

30:39

signal is probably not a recession

30:41

signal. And they flagged up lots

30:43

of technical problems with this indicator.

30:45

So one is that the luxury

30:47

goods index that it's comparing it's

30:49

comparing. It's a very weird thing.

30:51

It's weighted in weird ways and

30:53

it's not just luxury companies in

30:55

there. There's all sorts of different

30:57

companies. And they're weighted by supposedly

30:59

how much of their sales are

31:01

luxury goods. And they also make

31:04

the point that Walmart is no

31:06

longer really just a discount retailer.

31:08

Its clientele is increasingly getting wealthier

31:10

when you look at the breakdown.

31:12

It's also expanded internationally into more

31:14

general retail. And it's increasingly selling

31:16

high margin services alongside goods. So

31:18

yeah, it might have worked in

31:20

the past as a signal, but

31:22

yeah, like you say, don't put

31:24

too much faith in it right

31:26

now. Another interesting one, which is

31:28

probably used by strategies, I think

31:31

we certainly mentioned it, is looking

31:33

at cyclicals versus defenseives. So what

31:35

are those? Well, a cyclical stock

31:37

would be something that benefits from

31:39

a growing economy and an accelerating

31:41

economy. Typically that would be things

31:43

like tech. maybe communication services, certainly

31:45

consumer discretionary stocks, things like Amazon,

31:47

versus things which you'd buy if

31:49

you were worried, things like utilities,

31:51

health care, things which tend to

31:53

do well in a recession like

31:55

consumer staples. So if you look

31:57

at the... ratio of

32:00

those two, then if it's going

32:02

going up. consumer cyclicals

32:04

are doing better than defensives,

32:06

then that suggests euphoria. And And

32:08

guess what at the moment?

32:10

that's That's exactly what's happening. happening.

32:12

Which is saying the opposite thing

32:14

to the to the Walmart And this is

32:16

what I believe, is I think this is

32:18

kind of more plausible. is kind of more broader based

32:20

version a of the same thing, isn't

32:22

it? really yeah. the same thing, isn't it?

32:24

Yeah. And again, this cyclicals

32:27

in 2008. 2008.

32:29

And and it crashed again in 2020. But

32:31

right now, what you say now, like you say,

32:33

it's the opposite. at the highest the highest level.

32:35

It's the last 20 odd the last So I odd years.

32:37

fair to say that So I think it's fair

32:39

to say that most of the indicators we've

32:41

mentioned are showing some degree of euphoria, some

32:43

at very extreme levels, some a bit less And

32:45

that's And that's usually to to

32:47

be a contrarian indicator, isn't it? It's

32:49

the Buffett quote, when when people agree to

32:51

be fearful. But when you look at

32:53

when you look at what the professionals are expecting

32:56

for next year. year. you you know, those

32:58

strategists at the the bank, you look

33:00

at all their different forecasts, their they're

33:02

all expecting the S &P 500 to

33:04

rise the pretty significantly next year. one

33:07

forecast of year. That's a one which I

33:09

thought, of 666 that can't be a

33:11

coincidence. can't be a Desperate for a headline. Desperate

33:13

for a headline? Well so they so they remember

33:15

it when they're on TV. on Let's not

33:17

say who made that forecast. Let's

33:19

not go along with their game. go along

33:21

with their game. But why are

33:24

the professionals being so bullish? I

33:26

I guess the the same reasons that

33:28

the general punters are? Yeah, whenever I

33:30

do whenever I do my market outlook for the

33:32

coming year, I and I do this video every

33:34

year, I've just published it for this year. for

33:36

this I always have a little comedy section

33:38

where I look at the forecasts for the following

33:40

year. for the it's so funny

33:42

so funny because you have a period

33:44

where they've got it badly wrong,

33:46

they've been too optimistic. they've been too following

33:49

year they just they it down. it down,

33:51

and if they've been too pessimistic,

33:53

they revised it up, and almost invariably,

33:55

odds with at odds with what

33:57

actually happens. this

34:00

This year, they've switched to being

34:02

too optimistic, I think, and that

34:04

certainly worries me about what's going

34:06

to happen in 2025. If I

34:08

go back to what I said

34:10

right at the very start, it

34:12

looks like we're getting back-to-back years

34:14

with a total return above 25%

34:16

for the S&P, there has never

34:18

been a period with three years

34:20

in a row of above 25%

34:22

returns. You're absolutely right, but there

34:24

have been periods when you've got,

34:26

say, five years, or maybe even

34:28

six, where you have pretty good

34:30

returns, successively. So I think I

34:33

wouldn't rule out the possibility that

34:35

we get another rise next year.

34:37

No, neither would I. Like, stocks

34:39

can do that, right? They could

34:41

just keep going up and up.

34:43

Like, the dot-com bobble had an

34:45

incredible run-up. Look at this. Total

34:47

return for the S&P. 95. 37,

34:49

37. 97, 33 percent, 98, 28

34:51

percent, 99, 21 percent. That's five

34:53

years in a row. Yeah, it

34:55

didn't quite hit my 25 percent

34:57

target every year, but it was

34:59

pretty close. That's right, you get

35:01

these runs of euphoria and sometimes

35:04

it's justified, but often it isn't.

35:06

I think the one thing that

35:08

does reassure me is that if

35:10

you do look at the magnificent

35:12

seven and their earnings forecasts, they

35:14

are above 20%. It's roughly 26%

35:16

over the next three to five

35:18

years. But of course, those are

35:20

the same brokers who are making

35:22

the forecasts that next year is

35:24

going to be a good year.

35:26

Is that the forecast for earnings

35:28

growth? Yes. And if you look

35:30

at the forecast for the next

35:32

three to five years, if it

35:35

is true that it's 26% earnings

35:37

growth, well that... justifies very high

35:39

valuations and it means that we

35:41

could get huge run-ups in stock

35:43

prices for that magnificent seven without

35:45

having to increase the price to

35:47

earnings multiple. It's AI or bust

35:49

really isn't it from here? Yeah

35:51

they've got to deliver. Okay last

35:53

question a provocative question. From where

35:55

we are today as we record

35:57

this do you think it's

35:59

more likely. that the that

36:02

the S &P 500 will rise

36:04

or fall 25% next year if one of those

36:06

next year if one of those

36:08

things but not a lot of say

36:10

full. between the two. My a

36:12

lot of difference between the two.

36:14

My expectation would be that we just

36:17

grind a little bit higher, unless

36:19

something bad happens. just so

36:21

think there's just so much positive

36:23

sentiment it's going to boil to boy

36:25

despite any bad news, unless it's

36:27

really bad news. news. You You

36:29

always retreat to base rates, don't

36:31

you? He can't help you? You can't help

36:33

yourself. But look if I had to

36:35

choose, to say, I'd 25 % down. Let's hope

36:38

hope not. you're one of those

36:40

people who's getting one of

36:42

those people who's getting nervous to you want

36:44

to discuss it with people are are in

36:46

the same boat as you are, why

36:49

not join our community? You You

36:51

can talk about it on our

36:53

chat application application maybe we'll soothe your

36:55

fears or maybe not. not. To

36:57

learn more just go to to.com. slash

37:00

membership. Okay, today's dumb question of

37:02

the week is what is the today's

37:04

dumb question of the week and

37:07

is the difference between hard and

37:09

soft data? to today's this

37:11

is a very relevant question to

37:13

today's episode been almost everything we've

37:15

been discussing have been By indicators.

37:17

we mean is that usually what we

37:19

mean is that they're just measuring

37:21

something like I don't think that I

37:24

don't think that makes them uninteresting. I

37:26

I just think it's not an official

37:28

measure. whereas a hard hard indicator would

37:30

be something like GDP growth, inflation

37:32

inflation. which are

37:35

also very which

37:37

are also very important indicators and

37:39

they're official indicators. is it true that

37:41

But is it true term, yes, the In the

37:43

long is yes, the hard data is

37:45

what matters, right? Especially company earnings. in

37:47

But in the short maybe the soft

37:49

the soft data is what

37:51

drives markets. with sentiment? Certainly I

37:53

remember when speaking to clients, as

37:55

who's a strategist, you talk

37:57

a lot more about the indicators. Because

38:00

we all know the stuff

38:02

which is published by the

38:04

or by the Bureau for the Bureau

38:06

for Labour the really interesting The really interesting stuff

38:08

was at the and it it was to do with

38:10

sentiment. And I I guess

38:12

invariably, the hard indicators are

38:15

backward looking. Certainly GDP and

38:17

unemployment and corporate earnings are.

38:19

corporate earnings are, whereas indicators tend

38:21

to be what people expect

38:23

to happen. to happen the

38:25

near future. future. And And it's about

38:27

psychology and the strange thing

38:29

about about is that a lot

38:31

of it is about psychology, not

38:33

necessarily predicting what's going to

38:35

happen to the economy, but what's

38:37

going on in people's heads people's

38:39

predicting whether they're going to

38:41

be happy going to forward or not.

38:44

or not. you get anything which is kind

38:46

of in the middle, the which is soft

38:48

is soft hard? Yeah, I think I think

38:50

the PMI indices are a

38:52

little bit like that. purchasing managers' because

38:54

really that's based on corporate

38:57

sentiment. sentiment. And the way those are

38:59

constructed is that companies fill out surveys

39:01

surveys, about about business conditions are improving,

39:03

staying the same or getting worse, or

39:05

and it's turned into a kind

39:07

of diffusion index. of Above 50 is

39:09

positive, below 50 is negative. below 50

39:11

is that's kind of halfway, I'd say. I'd

39:14

say. But it is timely, It's it's published

39:16

every month and it does seem to

39:18

lead things like GDP. GDP, although not

39:20

infallibly. I also I also

39:22

think like the Fed's projections, like the

39:24

FOMC dot plots and things the that, are kind of

39:26

soft and things like that in

39:29

kind of soft hard data is

39:31

in think, but as in it's

39:33

just what people think, but they're officials the

39:35

it matters and the market trades what they what

39:37

they think. Yeah, definitely

39:39

feeds into the thinking for institutional

39:41

investors, for these asset managers,

39:43

because they try to look look... to

39:45

kind of of second order effects. Yes, they can

39:48

they can look at the official data. this is

39:50

the stuff this is the stuff that

39:52

could really make the difference between

39:54

calling markets correctly and not. stock investors,

39:56

I stock investors, I think kind of the kind of

39:58

the in -between thing, aren't they? What do

40:00

management expect to happen in the

40:02

future? That's right. It's all based

40:04

on a game of forward guidance.

40:07

know, is this better than the

40:09

guidance we received previously or worse?

40:11

So I think that's much more

40:13

difficult for single stocks. You're often

40:15

left thinking, okay, this was a

40:17

great earnings report and the market

40:19

sold off. So why? And

40:22

then the standard answer is it

40:24

was priced in. So I think the

40:26

whole thing is a bit of

40:28

a pointless exercise there. I like it

40:30

when you get those reports which

40:32

sort of aggregate up how many times

40:35

S &P 500 CEOs have said Trump

40:37

or have said inflation or have

40:39

said Bitcoin in their quarterly earnings reports.

40:41

Yeah, exactly. And that is a

40:43

really good sentiment indicator, I think. Certainly

40:45

in terms of what's on their

40:47

minds and what's got them worried. Yeah.

40:49

So, yeah, I think all of

40:51

these feed into your kind of gestalt

40:53

picture of what's going on. But

40:55

there is no infallible way of predicting

40:57

what's going on in markets. All

40:59

of this is just a way of

41:01

keeping your finger on the pulse.

41:03

But we saw, for example, mentions of

41:05

ESG just dropped like a stone

41:07

out of corporate earnings calls, which aligned

41:10

beautifully with the flows out of

41:12

ESG funds. Management aren't stupid, are they?

41:14

Yeah, so it is a kind

41:16

of zeitgeist -y useful exercise to look

41:18

at those kind of indicators. But I'm

41:20

not convinced that it's going to

41:22

move the needle one way or another.

41:24

It's certainly not predictive. Now, as

41:26

we record this, we're just coming up

41:28

to Christmas in 2024. And I

41:30

would like to say on my behalf,

41:32

but also Michael's, I think, thank

41:34

you so much for supporting us and

41:36

listening to us over the years.

41:38

This was the year when we passed

41:40

a million downloads, which is always

41:42

a watershed moment for a podcast. And

41:45

we couldn't have done it without

41:47

you. So thank you so much. And

41:49

we will be away for two

41:51

weeks over Christmas and we'll be back

41:53

in the new year. You're giving

41:55

me two weeks off? It's unheard of!

42:00

Thank you for joining us for

42:02

Many Happy Returns. Keep sending us

42:04

your questions, no matter how dumb,

42:06

at MHR at pensioncraft.com. And do

42:08

remember to check out pensioncraft.com, for

42:10

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42:12

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42:14

Happy Returns is a pension craft

42:16

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42:18

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42:21

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42:23

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42:25

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42:29

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