In this episode of the Judgment Call Podcast Herbert Blank and I talk about:

• Why ETFs are surprisingly similar to Mutual Funds? And why they are a great tool for retail investors.
• Does ETF trading skew the price in the close auction of public markets? How do Hedge Funds take advantage of it?
• Why the market for ‘alternative data’ is so hot right now? And why ‘curve fitting’ is an increasing problem.
• Why ‘value investing’ is in trouble?
• Why ETFs are intrinsically better at rebalancing your portfolio than most investors?
• and much more!

You may watch this episode on Youtube – The Judgment Call Podcast Episode #45 – Herbert Blank (A deep dive into ETFs and alternative data).

Herbert Blank works at Global Finesse and has been a ‘quant’ for decades. He was als involved into the launch of iShares and the launch of the GLD (SPDR Gold Shares) ETF.

 

Welcome to the Judgment Call Podcast, a podcast where I bring together some of the most curious minds on the planet. Risk takers, adventurers, travelers, investors, entrepreneurs and simply mindbogglers. To find all episodes of this show, simply go to Spotify, iTunes or YouTube or go to our website judgmentcallpodcast.com. If you like this show, please consider leaving a review on iTunes or subscribe to us on YouTube. This episode of the Judgment Call Podcast is sponsored by Mighty Travels Premium. Full disclosure, this is my business. We do at Mighty Travels Premium is to find the airfare deals that you really want. Thousands of subscribers have saved up to 95% in the airfare. Those include $150 round trip tickets to Hawaii for many cities in the US or $600 life let tickets in business class from the US to Asia or $100 business class life let tickets from Africa round trip all the way to Asia. In case you didn’t know, about half the world is open for business again and accepts travelers. Most of those countries are in South America, Africa and Eastern Europe. To try out Mighty Travels Premium, go to mightytravels.com slash mtp or if that’s too many letters for you, simply go to mtp, the number four and the letter u.com to sign up for your 30 day free trial. From what I read, you were instrumental in starting one of the first gold ETF, also known as GLD, probably the biggest by now. How did that happen? I was working as a consultant with the World Gold Council and I had already been the first ETF portfolio manager in the US with Deutsche Bank with the country baskets and I had just gotten off a four year consultancy with Barclays Global Investors, now part of BlackRock, to do the iShares. When I was working with the World Gold Council, I was doing some asset allocation. We had a paper that was published in the Journal of Investing on defensive assets and comparing gold and where it belongs in the defensive asset class. I had suggested actually, there were different institutional uses, why don’t we do a depository receipt on gold and then I introduced Richard Scott Ram and Rob Weinberg to the World Gold Council to go to Phoenix at the Bank of New York to do the depository receipts on gold. Now, one thing a lot of people don’t understand, the fund structure or the structure of GLD is different than an ETF. They actually call it the ETP of Change Creative Product because it’s like an ADR, it’s a depository receipt on the underlying gold. The reason this is important is that the capital gains is taxed like a collectible, 29%, not normal capital gains tax. A lot of advisors buy for, this is a peccadillo of mine, a lot of advisors will buy for clients without realizing that it’s not a fund that it doesn’t have the tax advantages of most ETFs. I really think that if you’re taking an advisor fee and you’re buying something for someone, you should read the fact sheet and the summary prospectus. That’s a whole other topic about reading the information that’s actually behind these more structured investment products. If you step back for just a second, in people’s minds and to an extent also in my mind, though I’ve been doing more research and tried to gain more knowledge in the industry, for most people ETFs are basically low fee mutual funds. Instead of having an active manager who does a rebalancing or does changes on a daily basis, depending on that particular research that the fund does, in ETF in most people’s minds is there’s an algorithm and the computer makes all these decisions and the algorithm is basically laid bare when you sign up to an ETF. You can actually see what this ETF will invest in, basically for the lifetime of the ETF. Is that correct? It actually goes deeper than that. Let’s start with the fact that aside from special products like GLD or USO, which is a commodity trading pool and some of the exchange traded notes. Most of the products we’re talking about are actual 1940 Act funds like any mutual fund with an exception or an exemption that instead of the shares being redeemed at the distributor on every night by any holder, the shares by small holders generally trade on the exchange and it is only through a mechanism, creations and redemptions that you can create or redeem new shares with the distributor and you only do that by putting mini portfolios in or getting mini portfolios out of the fund. It’s called an in kind exchange and it’s a free receipt and delivery and that’s why ETFs have far less tax implications and that’s a structural issue. This is true whether or not the fund is just a simple capway to an index fund, whether it’s an algorithm or a robo doing an algorithm and fully disclosing it, they’re all transparent or an actively managed equity fund with the newest rate for being now you can have actively managed mutual funds with semi transparent structures like the blue tractor where you only have to display part of your holdings, a segment and give full statistics and then you can have different trading baskets every day so you can use the ETF mechanism for free receipts and deliveries without actually exposing all of your position. This is something that’s just was given by the SEC ruled last year in 2020 and a lot of funds are starting to take advantage of it. Let me put it another way to you though Torsten. Basically the and I wrote about this back in 2002 and it’s finally now hitting the market. Why is it advantageous to because you don’t want to expose what you’re invested in to the general public only to the ones who are investing in the ETF and how do you make that decision right? If it’s hidden from the public isn’t it the mutual fund then? They are mutual funds. The ETFs are Bordiac mutual funds. Right, mutual funds put with very low fees. Let’s put it this way. Not necessarily. Not all of them have very low fees and it depends which one. A couple of them have pretty high fees over 100 base disputes. It depends what it is. This is what I’m trying to explain. The mutual fund whether it’s an index, let’s put it another way. Index funds generally have low fees now whether it’s whether it’s a mutual fund say on Vanguard or Fidelity, Spartan or Schwab, whether or not the index fund is an ETF or a fund that you put in a 401k. It’s still a low fee fund and it’s analogous. Since those funds cap weighted mutual funds, cap weighted index funds, no tend to have a lot of trades anyway. There’s a slight capital gains advantage in the ETF but it’s not so dramatic. The ETF is simply a more efficient modern structure of the old mutual fund in many, many ways and that’s why now you’re seeing more active managers turn to the ETF. It’s certainly better for the investor in all ways. Not only do you have the tax advantages and not only are you able to fix your risk and know what you are paying price at a specific time which you can’t do with over trading at NAV in a mutual fund but it also eliminates the need for cash and cash grab. Most importantly, unlike the traditional structure, the ETF manager does not have to manage to daily cash flows. These transactions are not done in cash. None of the transactions are done in cash so they don’t have to worry about whether 30,000 more sold are bought on a given day unless there’s a creation or redemption. It doesn’t affect them and if there is, they still don’t have to do anything because it’s in the size of the fund. In that way, it actually helps an active manager more because he or she can manage only to their own investment decision and not have to worry about what liquidating capital gains. Oh, that’s my oldest idea. I don’t like it that much anymore but it’s got such a high capital gain. I can’t get rid of that one. Let me get rid of a pressure idea. That kind of doesn’t happen now with an ETF. It’s a modern structure. The old structure through the distributor is really an archaic structure. There are a few reasons like 401k that they’re still in existence but really it benefits the shareholder in every way for it to be there and it doesn’t benefit the fund company in perceived old ways and like a lot of things in the investment world, we always say fear and greed are the greatest motivators. Actually, the greatest motivator is resistance to change. The taxes probably. Yeah, I think ETFs and the way that you invest a little more passive so you’re not looking for a mutual fund and we’ve seen a lot of statistics that the passive investing is as profitable with the long term. Probably more because the fees are often lower, not necessarily. That’s something I learned that ETFs, I have associated them necessarily with lower fees but I’ve just learned it isn’t. One thing that a lot of people, including me, don’t really understand with the ETFs especially is there seems to be a particular emphasis to trade on their close. You just said there is a lot of trade, there’s less trading, there’s an in kind redemption but it seems there is the myth, maybe it’s a myth out there that ETFs especially because a lot of their trading happens at the close of the trading day. They seem to zoom out and change pretty intensively the close auction that often now differs quite a bit from how the stock traded during the whole day. That’s absolutely the case and furthermore there’s that 15 minute period after the general close of the market where professionals can trade and true up their ETFs and a lot of the ETF trading happens then. Do you think it has a major impact? It’s probably like hedge funds to trade against us that basically develop an algorithm, see what the ETFs have to do and basically front run them. Where is that now possible with the close auction? Front running isn’t what I would call it but they have strategies where they think that at the totally designed on that 15 minute aftermarket to try to do certain things. Sometimes I would call them arbitrage strategies rather than automatic arbitrage because it’s not a free lunch, sometimes they’re right and sometimes they’re wrong. As long as it’s 51%, you’re good to go. Front running I define it as slightly bigger. It’s not necessarily the whole flash trading thing where people actually know what transactions are going on. That seems to be a big topic. I don’t know if you looked into this, we can shed some light on this. There was a big debate and when Robin Hood seemed to be close to bankruptcy because of the new requirements and auditor to put in securities and deposits for the stocks that were very volatile. A lot of the plumbing of the actual brokerage come to light and a lot of people assume that Citadel, the one who buys the trading information from Robin Hood, they seem to make a lot of money. Although Robin Hood doesn’t charge you for any orders, they basically tell Citadel there’s someone who wants to buy something and it seems like Citadel makes a good amount of money from this. Do you think this is a myth too or that’s actually happening and Citadel makes a couple billion dollars from this? I don’t claim to have specific expertise in this area. The Robin Hoods and the other ones that have acorns and the smaller ones that are proliferating out there in the last six to 18 months, 24 months, have obviously a strong following, have people of their own and have their way of doing things but I haven’t begun to go into their plumbing or their business models. One thing about me and all of my writings and my particular bent is I am not a trader, I am an investor. I write, I create products, I put things in minds of what’s good investment, not necessarily what you’re going to make in the next 20 minutes and close out your book. I’m not against hedge fund trading, I’m just saying that’s not my particular area of expertise. My area of expertise is, and I have many of them, ETFs, ESG, alternative data and things that are used but again, like alternative data, there are some that are fleeting and can only be used for trading purposes and there are some web scraping data that have a latency of up to 45 or 90 days. I tend to stick to the latter more than the former on the work and research that I do, not that there’s anything wrong with like Ravenclaw data helping hedge funds trade. Yeah, it seems like there’s a lot of needs out there. I’ve been looking at, I find it really interesting that you say that into the alternative data universe and there seems to be a lot of interest from hedge funds primarily but I think this also goes down to individuals where you basically identify a data set that can be from anywhere, right, that can be, I don’t know, the insurance premiums in different states for drivers on average with a certain age. It kind of random data and there’s a lot more data, there’s mobility data now, there’s all these sensors and it seems there is a burgeoning market for combining this data, maybe reducing the noise a little bit and then finding a way to trade on those. As you say, the lag time is quite long, can be a couple of months but it is something that potentially in back tests, people usually run these back tests that makes money and people run these strategies forward. Do you feel, and I think this has been going on for a long time but now there’s new data proliferating, there seems to be a new boom to that industry. Do you think it is the new oil? I’m a big fan of alternative data. Let’s go back to indexing and the basic arguments for and against indexing. If you believe that you as a professional investment manager knows what value is and is smarter than the market and that most of the people in the market are stupid and because I’m an investment professional I can do better, which none of the stats bear out but if you believe that then the market is not efficient. If you believe and the results, if you believe speed, if you believe all the rest, that what that cap weighted market index represents is professional flows, is dollar weighted average opinion of what each stock of the market is worth at any given point in time. In order to actually have a better idea of what that stocks really work, you have to be smarter than that huge and usually mobile and expert dollar weighted cap flows that are out there. And guess what? Most active using these old value metrics that are already in the market, already known in inflation, balance sheet, things like that, they’re left behind because that data isn’t giving them anything or any advantage over there. Enter alternative data. How do you get an advantage? You have to look at something that’s normal investors are not looking at, that is not already in the multiple, that is not already factored into the price, that is not already a known quantity to most investors. And that’s why you take a look at credit card receipt data and see what’s doing there. You look at data that says what CEOs are doing and which ones have been absent or present. You look at ESG data, which is really a proxy for management quality in many ways, and what ESG data helps you do without argument in the broad sense at best helps you by eliminating the bottom 25 to 50% of companies in each industry, the ones who have the more aggressive policies, who have not been proactive to help to comply with rules and environmental change, who have not been proactive in new workforce technologies and employing their human capital assets and in having two way flows of conversation and diversity and inclusion. All of those things are risk factors if you’re backwards and reactive. And the same with governance, those who still have poison pills, those who are violating the rules each year by violation track or things like that, those kinds of things. So yeah, alternative data is in that way. I actually have two clients, three clients who are in that alternative space. One is brand loyalties that looks at luminosity and does an excellent job of predicting which companies are gaining or losing share within their industry using what the brightness of certain signals on the web, which I could go into further. The DTCC, one of my main clients, you know how there were these 13 F strategies and things, they now won’t provide it on individual companies on the fly, but they will give you the last three day average of the group of different kinds of investors like hedge fund, institutional banks, what do you call RIAs and retail, and they’ll tell you who’s doing what trades, you can do the same kind of strategies with their looking for expert or not, not waiting for 30 days or 45 days after the 13 Fs come in, but on the fly. That’s alternative data that wasn’t available before the hedge funds were using. There seems to be an endless amount, right? So I just thought for when the short squeezes were on, there were obviously a lot of data about which companies have the highest short interest. Then there was a lot of sentiment that you could lay against it, so not just you find companies with high short interest also that actually get a lot of buzz, so to speak, on Twitter and on Reddit. So that’s very far reaching and probably not very exact, but there seems to be an endless universe of this alternative data. The problem seems to be how do you back test it and how do you then make a judgment call, how these things will look in the future, right? And some of it has longevity like the brand loyalty’s luminosity signal I was talking to you about. They actually have data on that going back to the beginning of Amazon web services 2008. But some of the others, you know, you don’t have as much back date on the DTCC data, which is aggregates that are done in real time, even though the data didn’t exist, they can read, you know, they have the components of that, so they have it recast back to 2012. It depends on whether or not it’s possible to recast a data set and, you know, back testing, and then you can have your thesis and say, okay, it worked in this time period. Now, Thorsten, I’ve been a quant for 40 years. I can tell you definitively what a quant does best is predict the past with a greater position. Well, that’s something we are interested in. We’re interested in the future. I’ve been running into the same problem. I’ve been helping out a couple of clients with their back tests and the accuracy seems to be improving because the AI models that we work with and I work with, they’re really good at curve fitting. So they’re really good at finding trends in the past. Exactly. That doesn’t mean, but as closer they get to the curve as more fragile they become and when you extrapolate them and when you run actual traits on it, they have trouble figuring out, are they within a certain trend or so the prediction quality has really dropped off, I feel, because the AI gives you, the way we look at these AI’s and validate these models, they give you the illusion that they actually found a trend. They don’t really know, right? They can’t tell you it’s a black box system. There’s a big example of renaissance, right? Renaissance has been a hedge fund, has been very successful and they’ve been using signal recognition and have been supposedly using technology that comes from audio signal recognition. And they’ve been doing very well. They probably never had the down year and they usually made 40 to 50% a year. This year in 2020 was terrible for them because all these signals, they work in a certain market, but 2020 was just not that kind of market and that’s pretty rare. That hasn’t happened in at least a decade. But those new black swan markets or whatever you’d like to call them, happen all the time. The market has an infinite number of permutations it can take and I won’t say an infinite number of dynamics that affect it, but certainly more dynamics than I or any AI system and certainly any human being can account for. There are just so many things that change. As time changes going forward, there’s a whole new spectrum of things that haven’t happened before that haven’t come before that become a factor that are no longer a factor that start trading in groups that start not trading in groups that the information goes this way, the information goes that way. That’s important now. That’s no longer important. These companies no longer do this. It’s no longer a factor. Those are the things. This is the classic problem value investors have because if you’re looking at book to price over the last 17 years, two thirds of the market cap of the S&P doesn’t have any book value to proc to go to. The book value, the asset that’s being valued are things like human capital, patents, brand value, reputation, all things that social goodness, corporate citizenship, all things that the hardcore wants. Oh, that’s fuzzy. That’s nonsense. They’re intangible. They’ll never come back. That’s what these companies are structured on. The past utilization of factories has nothing to do with today’s company. Inventory turnover has nothing to do with today’s companies. I counted myself as one. They just never get a buying opportunity. They’ve been staying in cash for decades now because it is just nothing to buy that’s cheap enough. Because they’re using the same accounting statements, balance sheet, what do you call it? Balance sheet income statement and statement of changes in financial positions that were perfectly good 150 years ago or 100 years ago in an industry based economy, and they’re being applied to something that’s not an industry based economy, and they don’t account for the top assets of a company. Yeah, exactly. I think this is where VCE Warren Buffett changed his strategy quite some time ago. He had to write because there were very few companies that had certain potential to fit into this screening that he basically had invented before. He has a new screening. Obviously, he’s changed his way of investment, how he finds investment targets, and it seems to work out for him, but it’s quite a transition. When you think of these fallen angels, so to speak, which used to be the mainstay of value investment, companies like GameStop, they seem to be good value investments, so to speak. They seem to be relatively cheap, and they seem to have maybe a story to recover from the looming debt, maybe not, but at least probably it was worth a shot. But the actual, these are the people bought into was completely different, right? It was a short squeeze. It was something that was screening market manipulation, and not by any individual hedge fund, but a group of people. You know, what’s the word I’m looking for? There are good things and bad things about the way these things are coming out, and people are looking at the equity markets and things like that. It reminds me somewhat of the fad in the late 90s, when you bought somebody’s day trading, the day trading fad in the late 90s, where people started looking at the market as a casino and something they could win big at with the right tip or whatever, then looking at as what most people, especially people who aren’t with the highest capitalized hedge funds in the world, but most people should be looking at it, which is an investment mechanism and a mechanism to save for the various things you want in your retirement. Everyone’s in on these things, but there are prudent things you should be doing, and unless you really have a reason to believe you have better information than the market on a certain stock, a certain company, or what’s going on here, you’re swimming with the sharks, and you might catch a couple of nice things, but you’re going to get eaten eventually if you keep doing that. It’s like trying to make money at a casino long term. You might make a great, you might go in there and you might make 60,000, 100,000, maybe even a million in one night, but if you keep playing, you’re going to lose. Yeah, that definitely seems to be the problem with this. You’ve got to go big and quick, and as longer you play, as more you can be in trouble. I think a lot of people have figured that out too, but it’s quite amazing that these short squeezes come back. I mean, they’ve been around for a long time, but it’s the vigor and the way they’ve been analyzed. I read a lot of these Reddit posts, you know, these people know what they’re doing, at least the initial instigators, so to speak. They have done a careful analysis. Obviously, they don’t know what will happen, and if enough other people join to that cause. I found it really interesting that the initial post on Reddit, who actually talked about GameStop and the potential short squeeze, it recommended at the time to buy the longest dated options of the three months out. The initial short squeeze, when GameStop first started to explode so much, that was exactly 10 days after that option expired. How unpleasant is this? If you believe in it, if you buy the three month option, it goes worthless, and maybe you didn’t buy another one because you think this stock is never going to move, and then suddenly after that, it starts moving. I find that really strange, a really strange time. It shouldn’t move probably within that initial timeframe, but it didn’t move at all. You’re trying to herd cats and make them do things, and sometimes you can herd cats, but it’s really hard to herd cats on a timetable. Yeah, I call that impossible. I call it impossible, not just not possible. One thing that’s closer to the ETFs, and maybe it’s foolish for me to think, but isn’t there a way that instead of doing ETFs, which to an extent were introduced because it was hard to rebalance your own portfolio now that it’s free, it doesn’t have a tax effect, but it’s basically free, so to speak, with the zero commission brokers. Why don’t people just basically do their own ETF at home? It’s basically just a computer algo that says, I want 10% of whatever is in the S&P, or what exactly is structured like the S&P. Is it really just a tax reason that ETFs still exist that do exactly that? Well, there is tax efficiency, but again, it’s not only which stocks you want, but in what proportion and how do you save it. One of the original market that Bill Sharpe envisioned, he never envisioned a cap weighted portfolio. He just thought it was all the stocks and it was a theoretical. The first people who did this in 1973, Bill Faust, Jim Burton, and Scotty McQuown, that Mac, what they basically came up with originally, they were trading an equal weighted portfolio and they were getting killed in 1973. Transaction costs were very expensive. They were not demand. Then they ran across this S&P thing, which was the S&P 400 at the time, well, soon to be the 500, which came from an old Cal’s commission capturing these cap weighted foes. You know what they discovered? That if you’re a portfolio manager and you if you buy this today and none of the stocks leave the index and everything, you don’t have to rebalance the next day. You are already holding the right proportion that’s in the index. This is something that seems obvious, but really people don’t understand the genius of that from a portfolio management standpoint. There’s no rebalancing you have to do. And guess what? Even if you’re paying $0 to your broker for a trade, especially if you’re 500 stocks or more, you’re paying something in impact cost over time as you’re trading in the market and then there’s the tax amount. So yeah, there are of course now these custom indexing shops, a number of these that are doing this, what they call direct indexing and things like that, so they can do customized for your portfolio. But yeah, they don’t have tax advantages and it depends on the weighting. But again, one of the supposedly truisms is that equal weighting will outperform cap weighting and it always depends when and what period. I got to tell you over the last 10 years RSP, which is the equal weighted S&P 500, it was a 20 basis point fee from Invesco has underperformed quite a bit the S&P 500 IVV or VOO. And by the way, I can imagine because we have this huge trend following Universe, so every trend is just getting bigger. So you literally, I find this amazing that one of the biggest companies on the planet, Apple, is also the one that’s growing the most. And that’s just the momentum it has reached, especially the last couple of years. It’s just astonishing to me. I did never see that coming. Obviously, not just maybe, obviously the market knows something. I do not write the market seems to know that these companies will be even bigger and Apple is now bigger than the GDP of the UK. I mean, it’s incredible. Yeah, it is interesting. Each company has its own story and as time goes on, they’ll eventually not always move in the same way. That much I can tell you which one will move the wrong way first and what’s going to happen that I can’t necessarily tell you. I do know that that’s what I wanted to know from you. That’s why I have you on. If I had to pick one that 10 years from now will be as big or bigger from where it is now of the top five or six, it would be Amazon because they’re constantly creating new value. They’re constantly looking ahead and looking at what creates new value and they’re not stuck in a model saying, hey, we’re geniuses. It’s worked this way. It’s always worked this way. It’s always going to work this way. Yeah, you’re right. Absolutely. That’s really a company ethos there. But I feel like they are also the worst in terms of bureaucracy. I’ve never seen a company that’s attacked companies so much bureaucracy. It’s so many layers. It’s structured like IBM in the 70s. Holy smokes. They’ve worked for them so far. Because they’re trying to do and be at the forefront of so many different things. Everything from electric cars to alternative energy to, you know, who thought Amazon web services would be their most profitable business over anything that they sold over the internet? Well, I always believed in that. I was like customer number five or something. So I was in the early, early bed house and it just looked so good and it was so well done, especially it scaled up a couple of years later. And there’s literally no cost to them. So I mean, though, saying that this is the most profitable, they can play around with the cost, right? They put the cost into the retail arm and then the profits stay with Amazon web services. It’s a little unfair. Yeah, look at their R&D expenditures as compared to Google. I mean, not Google. I meant to say Facebook. Much more, you know, R&D expenditures, much more of that going forward, things like that. I think Facebook is eventually very vulnerable for a number of reasons, but I’m not, I’m not about to short it today. Yeah, that would be risky undertaking. But I agree with you. Facebook definitely doesn’t have this technology stack. Most of their money comes from, from violating privacy laws. Let’s put it this way. So they don’t have a lot that consumers really value if they are not, you know, dragged into whatever social interaction is going on there. So I think I fully agree with it, a very vulnerable. And they become too much of a political football and that’s not, or soccer ball, if you wish, because it’s global. It’s not just the US. Yeah, absolutely. They have a high profile for the wrong reasons and they’re, and they’re considered so dangerous to so many people. It’s just, you know, there are just too many constituencies building against them. Yeah, I have the same impression, absolutely. But I’ve been wrong so many times. So it probably doesn’t matter at all. One thing, just going back to the ETFs, one thing, you did this with gold. So it’s something that wasn’t within the reach of normal investors, at least not directly trading, and you made it possible through the mechanism of an ETF. Well, let me backstep you to, first, the country index funds, they weren’t available as stocks. They were just the closed end of funds with high management fees and things. But then the eye shares, the real genius there, the guy who hired our consulting team in there, a fellow named Lee Cranfus, who worked for Patty, Patty Dunn, Lee Cranfus called us in one day and said, we are going to be the movers and we are going to create an ETF supermarket that brings institutional type products at cheap fees to retail for the first time. And we’re going to do this to benefit the market and we’re going to be the first movers for one advantage. You know why? Because we have no existing mutual fund family to cannibalize. That’s why Vanguard wasn’t the first. That’s why State Street wasn’t the first. It was why eye shares took the lead on all the bond ETFs out there. They captured the fact that they didn’t have that internal problem and they went out there. State Street was trying to save something called its navigator funds, which should account for 10% of their revenue. But companies are crazy. I’ll show you a personal story. There used to be a specific stock exchange. They have four tech indexes. We were calling them the techies. I was doing this for New York Life Investment Management. The SEC had approved it. We were going to go effective on the following Monday. That Wednesday, four days, four business days before paying effective, all the wholesalers, all of them from main state walked into the CEO’s office and says that if you launch this ETF, we’re leaving you and we’re taking our customers with us. What happened? We didn’t launch the ETFs. Okay, so much for that. I was just curious and something similar might have happened there. The ETFs and the genius, as you say, it made so many things tradeable. The country index was one example. One was like regions. There’s a lot of places in Africa where it’s hard to trade. Huge transaction costs, hard to get into the stock exchanges. If you read Jim Rogers, usually his biggest problem was not to buy stocks or to execute the stock transactions, always opening an account, getting brokerage account, incredibly difficult. There’s minimums and you have to be registered. I always felt the ETF would be great. Obviously, the ETF would walk in, say it has a million dollars in each country, say in Africa, and then retail investors could take advantage of this. Do you think that’s coming up? That’s actually on the horizon because there’s very few friends in Africa that might have other reasons. There’s very few ETFs that are listed right now. Well, you have a few on the Joe Berg JSE and you actually have, I think, about two dozen in Mauritius stock exchange. But they don’t hold assets. They don’t track anything that’s only in that Africa. Mauritius is usually Indian investments because it’s like the tax haven for most Indians. Obviously, South Africa is there, but the rest of Africa is put at risk. There are burgeoning markets there. There are some Egyptian ETFs, I think, a handful. But most of them don’t have enough liquid stocks to have a market out there. On the fixed income side, of course, a lot of the Islamic markets, you can’t hold debt. Islam, it’s a sin to hold debt. It’s not Sharia compliance. So those are a couple of the issues, but they’re thin markets. The exchanges aren’t there. It’s not like India where there are a lot of Indian ETFs, but unless you’re in India, there’s no reasonable way to trade it without paying a lot more for the transaction than the fund is worth. Do you think there is a shot for the gap? I think we have that in the US, but do you think there is a product or a marketplace where you can trade irrespective of borders like a Bitcoin universe for equities? Do you think that someone is working on this or someone has that idea before? It seems to be you always pay way more if you go into a country as a foreigner because you can’t go into the best possible instrument. This is a very interesting point in many ways to me. There are things that you can do, but there’s so much politics. This is where cyber currency or baskets of cyber currency may eventually play a role because right now, if you have to clear through the currencies and everything, that’s the problem with even emerging markets ETFs. There are so many currencies and clearing of fluctuation. Those are the efficient ones. When you’re talking about our frontier markets, that’s where there are a couple frontier markets ETFs, but they’re not very liquid. These are the reasons there. I was involved back in 2002 for three years in something that we called Euroclear. We wanted to have European clearing on the Euro and be able to clear all the countries by Euro. One clearing system for all of Europe. We thought we’d have it done. We started in 2002. We thought we’d have it done by 2003, four, five, six. It’s 2021. It still doesn’t exist. We gave up. Europe is probably much easier than, say, a good part of Africa. Getting all the little liberties and all of it and greasing all the hands that want to be greased for regulatory approval was too much for us. I can imagine. Do you think there is a crypto future for equity? There’s all these synthetic funds. There’s absolutely no reason equities can’t be denominated in the crypto. In fact, I think there are some nascent ones that are. I will defer to my favorite cryptocurrency expert, Matt Hogan, over at Bitwise. He’s done very thorough research on that and would highly recommend him as somebody to speak to if you’re looking for a crypto program. He’s great. Matt Hogan over at Bitwise. I will do that. Absolutely. From a conceptual standpoint, yes. There’s no reason that burgeoning companies, especially ones that don’t want to be gamed, can’t or wouldn’t issue stock denominated in Bitcoin on a cyber exchange. People call this an ICO, and the ICOs have gotten a really bad rap. They were not necessarily companies you wanted to invest in, but that seemed to be the precursor to this. I guess you don’t remember when the tech bubble was burst by the mezzanine financiers and Goldman Sachs and Morgan Stanley proclaimed, ecommerce is dead. People are always going to want to come into a brick and mortar store. Well, they hopefully didn’t put too much money into that belief. Goldman Sachs is a little more clever than this. Goldman Sachs didn’t even have a website till 2003. They thought the internet was for clowns, techs, and retail. Yeah. Well, they’re not good at predicting long term trends. Let’s put it this way. They’re really good at doing it. I don’t know what it is, but steering customers who seem to be slightly less clever than them and steering them into a product, they make a lot of money. The clients usually still make some money, but way less than they do. They seem to do this in a way that’s kind of magical. I don’t actually know who are the clients of Goldman Sachs, but maybe we just need to advocate them. It’s like all these German banks that bought these structured mortgage products. That was fascinating to me. Why would you ever buy those? There is things that appeal to a lot of German fund managers, but still that seemed ridiculous, but they bought it by the billions. With the exchange now allowing the direct listing and everything, the value of an investment banker is getting less and less and less, which is a good thing because investment, I’m an ESG advocate, an advocate for transparency, an advocate for fair open and transparent, and Goldman has always been the opposite of that. Investment banking has always been the opposite of that. We fire people who don’t give positive recommendations on our investment banking out there. Now, 20 years later, the lie has been put for the most part to self side analyst recommendations. The lie has been put to the trading model that you have to trade through these guys that are giving you some kind of advantage. The lie has been put to all these things that they made money that didn’t need to be there. The last cash cow was investment banking and the lies being put to that too. If you tell me that on a current PE or PB or price sale, well, there’s no sale or price cash flow basis, that Goldman is cheap. I said, yeah, I’ll bet you’ll get cheaper because their business model doesn’t have a future. Yeah, I wouldn’t agree, but I thought that a long time ago and they’re still holding up pretty well and is out now too, but I don’t know if this is a good or bad sign, but I see the mega trend, but I thought it would have happened already, maybe impatient. Yeah, and that’s the thing about bonds. They tend to be very smart and very early and very impatient. That’s our, what’s the word I’m looking for? That’s just a stupidity. So one more thing I wanted to pick your brain at and I don’t know if you’ve seen this. So my green is a fund manager we used to work for Peter Thiel and he’s been coming up with this theory that and maybe it’s not his originally, but it’s something he propagates and he’s saying, you know, there’s all these ETFs now and that most of the transactions or most of the investment is basically done by passive investors, right? So passive investors are basically, I have money this month right now, please spend it on something like my mix of ETFs or one particular ETF. So it’s a basically. Okay, let me put the obvious case in there, the 401k or the 403b over here, you’ve got your option, here’s my index fund, you dump it into the index fund or you put it in a, what do they call that lifestyle fund and that lifestyle fund puts it in the index for you or you put it into betterment and they put it into the index for you, but you’re averaging and every time you put it, it goes into the index and that’s not going to make the index more top heavy by the way, it’s going to keep the same proportions if you’re the only investor, if the only investors are more index investors. Right, what I was trying to get to is he basic argument is well, we have this massive amount of passive investing and it’s basically 99% of the market, we just don’t see it, so there’s very few active investors who basically do the arbitrage game of buying low and selling high, so that’s why we have this high volatility, again, it’s a theory, we see higher volatility because we either have passive investors just dumping money irrespective of prices and valuations or we have passive investors, they know, I need the money this month, so I’m not investing and that’s basically this depression cycle that seems to drop the markets pretty quickly, like we saw it as a margin, the market dropped within a few days, like 40%. Analysis of the flows doesn’t hold out with that at all. First of all, the overall in market cap weighted index funds with US assets, the overall percentage is at an all time high, but that’s 34%, so still 66% is not indexed and that’s, you know, retail institutional, all of that put together and that was from PwC, they just had a study on that with S&P. So, you still have 66, now of the 66, a lot of it is cracking the index, it’s active money that’s cracking the indexes and they can’t get too far away, so there, you know, you can pull them closet index funds if you like, I think that’s one of those overdone terms like greenwashing, which at the end of the day probably hurts people who believe it more than it helps them, but you can call it a closet index whatever and others have to go there, but it’s, there’s still 66% of the money and there’s still enough money there that is, you know, calibrated on the demand for that stock. Why the demand is there for that is that, you know, it’s not all, one thing is for sure, stocks aren’t valued the way they used to be and I just gave you the reasons why they aren’t. So, it’s not all, you know, projecting what the past earnings were, pushing those earnings or revenues or book value forward and saying, okay, this is the right stream for it because those numbers are all wrong and don’t have to do with the value of the company, but what they do want to know is what they are being put or bet or flows according to where they think the most attractive place to put these quotes and monies up, but if you want to know my opinion of the number one factor that’s kept the market so resilient and has as high as it is, and I’m not the first one you’ve heard that from what I certainly think it is, at the end of the day, what is the stock price done? What, what, what is the one that if you’re, if you have auction pricing at the end of the day, what, what is the stock price done? Well, it’s certainly future expectation, right? So, you, you either expected to rise or fall. Basic, basic, basic. Supply and demand. Supply and demand. So, what, okay, so here’s the demand. Here’s all these dollars and it’s going into the stock. What, what, where else could the money go? Well, invest, what do you call it, companies could use it to invest in land. They could use it to invest in equipment. They could use it to invest in people. They’d rather buy back stock. Individuals who could use it to put in fixed income and get half a percent for 10 years. There’s nowhere else to put the money that they think they’re going to get a better return than in their own stock or in, in the existing big stock and to bet against the companies that are doing the best. Again, you should know something more than the market does and unless you do, you should probably just go with the herd. Yes, true. And well, the herd can go the wrong way. That’s always the trouble, right? That’s what a lot of investors are currently on broke waiting for the herd to go the wrong way. Timing is everything. That’s another story. Yeah, absolutely. And now we’re back to what I started with Torsten, the hubris factor. Oh, I’m an investment professional. I’m smarter. I’m going to be a contrarian. Let those rhinoceros, let those lemmings follow the crowd into the sea. I’m going to be the smart one. I’m going to be there. Yeah, but we’re closing out your book today. How smart were you? Not too smart? Well, see you later. You don’t have our money anymore. Yeah, it doesn’t work so well with these short squeezes, right? We are very vulnerable there. A lot of macroeconomists describe this as a low productivity environment and the low productivity environment just makes it very hard to find opportunities. And we see this with the super low interest rates, very few areas where you actually find decent growth. That seems to be according to what investors tell us because the prices have risen so much, seems to be tech. If you get to predict this, do you feel we keep, we’re going to be stuck in this low environment productivity and growth environment for quite some time when this is about to change? It’s an excellent question. Not one I have some thoughts, but no sagacious answer or any answer that would say, well, don’t do what you’re doing now. And I’m also not somebody who will ever predict zero or one, oh, I’m going to be 100% out of the market or 100% short market, or I’m going to be 100% in the market. I don’t believe in that because I don’t believe any of my point models and I have a lot of them. And in my theories or any of my experience will be 100% accurate in the future or 50% accurate in the future. 31%, that’s what you want, right? Yeah, I mean, it’s really tough. Number one, I want to know just what I told you, will there be somewhere better to put the money than the US equity market? Right now, the only other place people are making money and can do it and like to do is emerging markets. Emerging markets debt is very popular and emerging markets equities. And yeah, you can do that. Is the risk higher? Yeah, some people like myself put the traditional 5% allocation to gold in case things go haywire in the equity, because the one thing about gold and maybe correlated sometimes not correlated sometimes, if equities totally go to shit, gold will do fine. Yeah. Well, and some of the market currency has another safe haven asset. I’m not convinced of that. I’m not saying it definitely isn’t, but I don’t have enough evidence to trust it to be that kind of an asset to me. So there are lots of things in terms of diversification and what will go there. But we’ll go to a new normal when there is either inflation enough to raise rates. You know, if we have 100% employment is one of the things that Maxine Waters and Elizabeth Warren want the nation to pass through with their 50 50 plus percent majority. If they if we have that kind of thing, we would have inflation. If we have inflation, we’ll have higher interest rates. If we have higher interest rates, we’re going to some of the more money will need the equity market. Yeah. But I think the question is given how much money we print and how it seems that we add inflationary pressure for a long time now. You’ve seen asset prices rise quite a bit. We’ve seen that not just in equities, but we’ve seen that in lots of different assets. Strangely enough, the consumer price index and lots of things that consumers buy, they haven’t risen much, which I think is great, right? It’s a great achievement. But it seems it seems that the inflation that we track seems to be stuck in a certain area, irrespective of what we do, how much money we print, even when we had really good employment numbers before COVID. It wasn’t much effect that have you ever thought, but what’s really going on? What there has been is a bidding war on salaries. The median salary hasn’t gone up. And that that is the key indicator in inflation, along with key commodity prices that you need. And if anything, reliance on those commodities has gone down. Those are the big, big two factors that will actually move inflation. This money supply, Milton Friedman argument, I think has been proven wrong more times than it has been proven right. Again, we’re like dogs with bones. We can’t get rid of those theories. I’m an empiricist. The last five times I’ve seen that trial that hasn’t worked. M3 is bullshit, as far as the actual closing. There seems to be this marriage rate of emerging markets, especially China and technology, that has been a bigger impact than before. Maybe just because we look at the world now and it affects the U.S. different. I’m really curious to find that one answer. Maybe there is no such one answer, but why we had all this seemingly strong inflationary impacts, but they didn’t really change the CPI itself. And I was listening to David Rosenberg, and he’s like, one of the biggest inputs is literally rent and the prices you pay for fuel. If they’re relatively stable, the CPI won’t move irrespective of what the food prices do, for instance. Exactly. And that’s exactly what’s been happening. I really thank you for doing this. I know it was kind of a bit last minute, but I’ve recovered so many things I really wanted to talk about. I really appreciate it. Take care. Take care. Bye bye.