ASH BENNINGTON: Bumble IPO, a sign of more hot initial public offerings to come or a bubble indicator. US Treasurys at yields of 1.2%, and of course, new developments in the crypto space. That and much more starts now. I'm Ash Bennington, joined by Ed Harrison and Jack Farley. Welcome.
ED HARRISON: Thank you very much. Good to talk to you, Ash.
ASH BENNINGTON: Good to talk to you as well. Lots going on here. What's on your mind?
ED HARRISON: First and foremost is that IPO that you were talking about right at the top. I think it popped a lot, and your question about what is it a sign of, that's the question that's on everyone's mind right now.
ASH BENNINGTON: Yeah, it's starting to feel like we're partying like it's 1999, Ed. You were there.
ED HARRISON: It feels that way. Maybe we're partying like it's 1998. Obviously in 1998, we had long term capital management, but it definitely feels like it's open season for IPOs, not just SPACs. That's another thing that we can talk about later on, but certainly for companies that are not making any money to go public. In fact, actually, Joel Greenblatt and Howard Marks were talking about this in the interview that was released, and it's on platform now, how it does seem like now we're in that season where if you're not profitable, hey, no problem. Money is there for the taking.
ASH BENNINGTON: Ed, this is my question to you and I also want to throw this open to Jack, too. What is it that people really need to know here? I think about this more broadly, I've been trying to struggle with this myself. It's like, look, there's obviously an opportunity here in the sense that there are major changes that are happening. If you think about what Bumble is, we're in the middle of this pandemic, everybody's in lockdown.
People are striving for human connection. Everything is being digitized, virtualized. There's definitely an underlying trend here. However, there is also the question of valuations. Do things look rich? Do things look bubblicious? How do you try to contextualize that?
ED HARRISON: Ash, I think it's a great question. I'm looking at this going back to the GameStop thing that we're talking about two weeks ago. This is a company, Bumble, that is trading at $80 a share. It had a huge spike. It was offered at $43 a share. Now, it's at 80. The question just like with GME is, is this something that's going to actually hurt retail investor? Because when you think about 1999, there was a bull market.
If you look at the S&P 500, it was up 20% a year for every single year from 1995 to 1999. Right at the end, in 1999, that was the end of a huge bull market and the question then was who's getting into this market at the top and therefore getting hurt when the NASDAQ is down 80%? When the S&P is down 30%, 40%? That's what I'm concerned about right now. It's not that Bumble itself is overvalued or not, it's that the people who can least afford to get crushed if it is overvalued are the ones who are piling in right at this particular moment.
ASH BENNINGTON: Really well said. Jack, what are your thoughts?
JACK FARLEY: Well, Ed, I think that the conversation that we're having about Bumble now reminds me of the conversation we had about Airbnb when it went public in December. It more than doubled on its first day of trading despite the fact that its ability to generate positive cash flow has not been substantiated. We're seeing the same thing with Bumble, but I want to turn the question to the both of you. Does that really matter? Is the reason that companies don't have to be profitable anymore because interest rates are so low, so the discount valuations are being pumped up into the sky? Is it different this time? What do you guys think?
ED HARRISON: Well, I'll answer that from the Greenblatt and Marks' perspective. They were talking about that. People are struggling with that, especially because you're not using capital. In the old days, basically, you had to pour capital in and then you had to get a return. Now, it's a different story. If you think about how they're talking about the story, it's different in terms of the capital investment. You do have to get these customers upfront, get the network effects, etc.
There might be something to be said for that accounting hasn't kept up with the way that businesses earn their money in terms of how do I spread the accounting over time in terms of the marketing in order to get a customer that's going to stay with me for seven or eight years? That's what Joel Greenblatt was saying. I'd make a second point which is that when you talk about Airbnb, and I go back to 1998, we have no idea where we are in this cycle, how much longer can go on.
The truth is that Yahoo IPOed 1996, we had other IPOs that were later, these things can happen over a longer period of time. If the economy is doing well, who's to say that we couldn't be here a year or two from now, and there are 10 Bumble type IPOs that are happening, and it's even better than it was before.
ASH BENNINGTON: To pick up on a metaphor from the 1990s, look, the thing about Amazon, for example, there are two things that I think are important when you think about longer time horizons. The first is survivorship bias. How do you know that you're buying Amazon and not pets.com? That's a critical point. The second point is that Amazon was underwater for years if you bought at the high in 1999. The reality is that there is a lot of risk in the system.
With that said, the flip side of it is also the opportunity. This sense that we are going through this period of digitization, virtualization, paradigm shift, changes in consumer sentiment, changes in consumer buying patterns, and it really is a wide open space in many ways. If you think about it, very often, the incumbents have very difficult time shifting into new areas. If you think about Walmart in terms of logistics and the massive operation that they've had in place, Amazon somehow managed to beat them to the punch at every opportunity.
Why is that? Incumbents, very difficult to interrupt themselves so you have these opportunities, where you have low base effects, opportunity to buy in at a relatively modest number relative to the potential total addressable market, but when you're making those kinds of decisions, there's a lot of risk. Raoul said it last week, if you're coming to Real Vision for personal financial advice, you're coming to the wrong place. That's not what we do here. You have to understand your own individual objectives, risk tolerance, needs, risk capacity, these are all things that you really need to understand in order not to get hurt. That's something that you can't get from analysis of markets. It's something that you need to talk to a professional about.
ED HARRISON: Yeah. Jack, where are you in this? Because you weren't investing and partying back in 1999. This is your first bout with potential bubble. That's the content campaign that we're doing right now. How are you thinking about that? Is that even the right question?
JACK FARLEY: Well, Ed, I agree with the comparison you made earlier to it being more like 1998. Not just because we could have another year or another year and a half of speculative fervor before we get to some events, market events, but also because of long term capital management. I think that's what we saw with the massive force degrossing of hedge funds over the past three weeks due to GameStop.
Now, that has largely exited the new cycle that speculative frenzy has found new homes in cannabis equities and random short squeezes that are scattered across the market that we can talk about, but yeah, I've got my eye on the credit markets because I feel like they are a little bit less rife with-- I don't want to say speculation, but in the equity markets, you have stocks going up 30% and then going down 30% a day, and these are not micro-cap stocks. Ed, to get back to your broader point, I think some of the interviews that we've done on Real Vision with Russell Napier, Lyn Alden, you talked with Lyn Alden, and today's interview with Howard Marks and Joel Greenblatt seeks to answer that question from a variety of angles.
What I like about it is I think Joel Greenblatt and Howard Marks are two of the most respected interviewers on the planet, but they're typically in the weeds. They're very micro. In this interview that aired Today on Real Vision, they put on their macro hats, and they really talked about how the Federal Reserve's actions in order to keep rates low, lower for longer, ultra-low for ultra-long, that really is such a game changer. Then those micro investors, they put on their macro hats.
Russell Napier, on the other hand, very macro oriented thinker, he put on his micro hat when he talked to Steve Clapham. He said, okay, what I believe is that inflation is coming, and that it's coming in a big way. I've actually believed that deflation-- I've been calling for deflation of the past decade, and I've been dead right. Now, I'm switching my view. I think he's well respected on that. Steve Clapham brings him into the microsphere and says, hey, if inflation is coming, how can you invest?
Obviously, we know gold as well in terms of inflation but let's say I want to hedge my bets and I don't want to completely go all in on your thesis. How can I play that? Ash, just go back to what you said, again, Real Vision is not for specific-- we don't give you specific trades. We don't really tell you to do anything. What we do is you have on investors who explain their framework, and that helps the user build their frameworks. Then they can make their decisions that coordinate with their own needs and that are in their own life.
ASH BENNINGTON: Well, yeah, we can do analysis of markets. It's the individual stuff that people really need to understand for their own risk tolerance, especially when there are so much apparent opportunity and also, at the same time, some things that appear to be structural risk arising. I'll give you an example that something that Ed sent me earlier in the day, an article about internalization of trades, the dark pools that are basically forming in those numbers. I'm just going to read a couple of numbers and then turn it over to Ed for his analysis on this.
Right now, 47.2% of US equity trading volume in January was executed outside public exchanges. That's from 39.9% year-over-year, so a pretty significant jump here. The peaks are above 50%. On peak days, high volume days, we're seeing 50% of the trade volume being executed off exchanges internalized in dark pools. Ed, what's the significance of that? Why is it something that caught your eye?
ED HARRISON: I think two significance, two points that I would make. One is about the exchanges themselves, and the whole concept of defi and other sorts of things. What we're seeing now is an atomization of the structure of finance in general. There's a more decentralized world that we're living in, and potentially, this is one avenue that it's taking that we're seeing. The other thing is, if that is what's happening, and if it's happening specifically in this particular market, we have to think about regulation, and also it goes back to what I was saying about the small guy getting hurt.
I thought it was interesting. I don't know if you guys saw this, because I think I sent you the link from Carson Block, he had this article that he wrote in the FT. He was basically saying, I think the article was labeled, The Stump Bubble Poses Significant Global Risks. I put out three takeaways on Twitter to this. My takeaways were that zero rates and leverage together are dangerous. That's risk number one.
Risk number two is a lack of regulation will lead to bad outcomes. That's exactly what I'm talking about with regard to what the dark pools thing. Then the third is that passive investing, this is what he said, and he named-checked Mike Green, specifically, passive investing is an amplifying force in both directions, both up and down. Right now, passive is amplifying you up but when the market goes down, as we saw it did in March, passive will amplify down.
Tyler Neville, he says this all the time. He's one of our friends here from RV who doesn't come on our platform as much, but he says, look, when people stop investing in their 401Ks, that's when you have to start worrying. It's when the passive flows stop going into the market. For me, that's when bad things are going to happen.
ASH BENNINGTON: Ed, we could do a four-hour show about this, because this is an incredibly important point. When I was reading that article, obviously, the guys who do the internalization talk about fractionally better execution for retail traders but here's the thing about market structure and liquidity, there's always a ton of liquidity when you don't need it. The question is what happens when prices start moving? It reminds me in some ways of the artificial suppression of volatility with low interest rates.
It's the forest fire metaphor, you clear out all of the underbrush, and maybe that doesn't have forest fires occur or spring up as often but when they do, boy, do you really have a problem. It's an unknown effect. It's an unknown impact. I'm not trying to be gloom and doom or prophecy that there's going to be something massive that's coming. It's just hard to quantify. Now, by the way, we're getting less data around execution. We're getting less data around how orders get matched.
Carson Block in the FT, a great article. Actually, it's funny, and I haven't had the opportunity yet to look at your Twitter because I made the same points that you did in my list, and it was pretty striking all the same points. When basically we're thinking about this, because we have the same backgrounds, we see the same things many times. Here's a quote from Carson Block.
"Green estimates when an incremental dollar is put to work with an active manager, it has an average effect on aggregate market capitalization of $2.50. The multiplier occurs because the number of shares available is smaller than the total number of shares outstanding, and a buyer must often pay a premium to induce a shareholder to sell. However, Green estimates that when a passive fund receives an additional dollar, the automatic decision to maintain balance by buying in proportion to market capitalization results in a market cap of $17."
$17 to one. It's all those themes that we've been talking about on Real Vision that are so important, the things that lurk beneath the surface, the structural issues, it's leverage, it's passive indexation causing perfect processional and feedback effects, it's low rates, and it's the risk of bubbles. The Mike Green analysis obviously is very sophisticated but if you want the TLDR on passive indexation via Mike Green, it's this. If you're buying something because it's big, it's getting bigger because it's big. That strikes me as something that can become really problematic.
ED HARRISON: Yeah, I would agree with that. Before jack wades in, let me just say that we-- I talked to Katie Stockton yesterday, and she had four charts that she sent me. One of the four charts was the retail index. The interesting bit was, this is the XRT ETF, is that if you look at the chart, it's relatively smooth. Then, I'm looking at it right now, in late January, it just explodes higher and then falls like a rock lower. Why? Because GameStop became a much bigger component of the ETF and as a result of that, the people who were in the ETF had to buy more GameStop.
Passive was actually amplifying the move off of GameStop. Then when it starts to go down, and GameStop actually became less of a component of the ETF, they had to start selling GameStop, too, so they were amplified in both directions. Now, think about that from the context of the S&P 500. If you get really big companies, Tesla as an example, cratering 30% for whatever reason, that's going to have a huge impact in terms of amplification via this passive indexation.
JACK FARLEY: Ed, I think that's such a good point. The GameStop scenario, that endgame, that saga we've been witnessing over the past few weeks is an excellent example of the market dynamics that you get from passive investing and when the market is dominated by passive investing. Let's say that I'm BlackRock or I am a passive investment vehicle, people give me money, and I allocate it to a specific market weighted index, and Ash, he's a shrewd guy, he's a hedge fund. He's a hedge fund who makes the big bucks as he's making the big calls, we both own GameStop. It's at $10, it goes to $300, Ash sells it because he obviously sees that the intrinsic value, wherever it is, is well below what the market is trading at all the way up here.
Me, I hold on to it. Because I don't care about valuation at all. All I want is for my own allocation, what's in the ETF or the fund to match the index and GameStop went from 0.02% of the index to 0.6% or 30 times larger in terms of the share of market, and it briefly was actually the largest stock in the Russell 2000, a lot larger than the fuel cells company. That is exactly that. When GameStop went in, and people gave me more money, I actually had to buy more GameStop.
You're seeing the same dynamics going down I think, Ash, in conversation that Mike Green had with you. He used the phrase, the market has no brakes, but it's going uphill. You can't see that the market has no brakes now but if we ever reach a crest and things go down, I think that we could see that volatility go in the opposite way. It could go down as well.
ED HARRISON: Yeah. By the way, let me just say that I know that GameStop has gotten crushed, and they're down near $50 a share AMC, because no one's talked about AMC. AMC is trading at 557 right now. AMC is another one of these meme stocks that peaked at, like 20. That's a stock that's down 70%. Just imagine if you got in not at the top, but near the top, let's say you got in at $15 a share. Now, you're at 556, you could be sitting on losses for a very long time. That's basically what I'm talking about in terms of where we are now.
Some people, they think the narrative for GameStop was that we're crushing the big guy but really, when you think about who's holding the bag, it's the people came late to the party. Many of those people are going to be retail. Going back to the IPO, I worry that these IPOs are going to start coming fast and