The Compound and Friends
00:18:04 · Alex Altmann
[00:18:04] S1: Well, it tells me... So that... That's the start of a of a story. Right? Because you've got dissonance now. You've already got... Okay. Customer feedback is everyone's bearish AI. Survey says you're wrong. Okay. Let's check the positioning data. So traditional hedge fund PB positioning data from some of my competitors will say hedge fund nets are super low, therefore, everyone's bearish, and they've all sold tech. What they may not necessarily tell you, and this is in no way we... No way me sort of, like, poo pooing the the quality of work from competitors, but what that data probably doesn't show necessarily or people overlook is that the range of net exposure changes by hedge funds is minimal. It'll go to... From 48% to 55% back to 48%. Right? Why? Of course. Because a lot of these guys are RV pod shops, and so they're just running market neutral neutral strategies. So in reality, they they have no or little market sensitivity beyond their beaters within the portfolio. So I don't care what they're up to. And we get... We... We've run stats around this. So the point being is is that we'll use the positioning data where we think it's valid. So what are retail positioned in? Huge vertical. I mean, the largest owner of stocks is the retail community. Next largest owner, re... Mutual funds. Right, and levered ETFs. What are they up to? Right? So these are the verticals. What are vol control funds are up to? Those guys have significant equity length. QIS strategies, Ditto, CTA, Ditto. So you build up, like, a a quantitative picture across your framework, and you say, okay. What does the positioning metrics actually look like? Now let's compare that to what the prevailing narrative is, and now let's compare it to what our customers are saying.
00:19:41 · Michael Batnick, Alex Altmann, Josh Brown
[00:19:41] S2: What do you see in retail? Is it... Was it... Is it dumb money as people say, or have they been... I feel like they've been pretty damn right the past this this cycle with buying dips. [00:19:48] S1: Vast majority of retail would... Our portfolios would have outperformed institutional portfolios. [00:19:52] S2: What does that tell you? [00:19:54] S1: It tells us a few things. First and foremost is they have more holding power. Right? So a lot of the hedge fund community are operating on much tighter drawdown limits because their mandate on... You know, they're [00:20:06] S0: They're being observed. Correct. The retail account is not being observed by anyone other than the holder and the holder's wife. [00:20:12] S1: Yes. And and and and and it's something they wanna brag about to their their friends at at dinner parties. [00:20:19] S2: I bought the dip. [00:20:19] S1: I bought [00:20:20] S0: the answering to a committee about why they're overweight semiconductors. They're just overweight semiconductors because they wanna be [00:20:27] S2: And why they draw down 400 basis points? [00:20:29] S1: Right. Right. And the only thing that will basically cause them to stop out is either their brokerage account basically margin calls them or they lose their job. That's it. Yeah. Right? That... It really is all about... People always ask me, oh, what gets retail to sell? I'm like, lose your job or when your neighbor loses their job.
00:20:29 · Alex Altmann, Michael Batnick, Josh Brown
[00:20:29] S1: Right. Right. And the only thing that will basically cause them to stop out is either their brokerage account basically margin calls them or they lose their job. That's it. Yeah. Right? That... It really is all about... People always ask me, oh, what gets retail to sell? I'm like, lose your job or when your neighbor loses their job. [00:20:46] S2: So there's been there's been times where retail has dumped stocks, like, obviously. Is that is that a buying opportunity or not necessarily? [00:20:53] S1: It depends on the starting point and how long it's been going on for. So what if I told you... We've got data on retail back to around about 1995, like, good quality data data. And what we do [00:21:02] S2: Is that relevant still in [00:21:03] S1: today's world? Absolutely. It's more relevant today than I think it's ever been. [00:21:07] S2: Wow. That's surprising. Why do [00:21:08] S1: you say that? Well, because, you know, the devices... Okay. I guess we have to kind of go back into history a little bit. 2019 was a real demarcation for retail trading. Not 2020, 2019. People don't really talk about it, and that's because in October of that year, it's when zero commission trading was introduced. Right? And it just so happened to coincide with the launch of Robinhood and some of the, you know, the more gamified [00:21:34] S0: This is when Schwab said zero, Fidelity said zero, and zero became the standard. Zero. Exactly. Yeah. [00:21:40] S2: Right? I
00:21:40 · Michael Batnick, Alex Altmann, Josh Brown
[00:21:40] S2: Right? I [00:21:40] S1: remember. So there was very, very low frictions trading. Then what happened? COVID. Right? And then what happened? [00:21:46] S2: Everyone trades. [00:21:47] S1: Bunch of stimulus checks, people sitting at home. [00:21:49] S0: 40,000,000 new brokerage accounts open in eighteen months. Exactly. Yeah. [00:21:52] S1: So... But, really, I mean, would non zero zero commission trading have changed it? Probably not. But I do think it's important because, you know, it effectively lowered your transaction friction to to to nothing. And then you got a bunch of people with checks and nothing to do, and they're basically, you know, let's face it, we're all degenerate gamblers. So a lot of people basically got involved in that, and and that obviously coincided with a significant short term correction in in equities. [00:22:20] S2: They didn't leave. They never left after the bear market. They're still here. [00:22:25] S1: They're still... Oh, no. No. They they... That's not true. They did... So there was a degree of selling by the retail community in 2022, and that was a deliberate financial tightening exercise by the Fed. [00:22:35] S2: Right? It was but it was short lived. Like, if you look at the percentage of overall volume, it's still pretty... It's still high. Is it 25%? [00:22:41] S0: The retail share of trading is still where it was. [00:22:43] S1: Oh, in terms of the share. Yeah. But what we tend to track is the evolution of both cash balances and margin balances as as a percentage versus the natural drift of Yeah.
00:22:43 · Alex Altmann, Josh Brown, Michael Batnick
[00:22:43] S1: Oh, in terms of the share. Yeah. But what we tend to track is the evolution of both cash balances and margin balances as as a percentage versus the natural drift of Yeah. [00:22:52] S0: Retail got blown out of SPACs and all that shit just like everybody else did. [00:22:56] S2: And NVIDIA felt 75% and saw the meta in 2022. I mean, that was terrible. It was... Yeah. [00:23:00] S1: It was it was a bad time for retail. And and retail genuinely lost money, but they didn't... They they did sell, but they didn't It [00:23:08] S2: didn't leave. [00:23:09] S1: They didn't they didn't completely get out of dodge. Yeah. And then ever since then, '23, '24, '25, '26, regardless of whether we've had those economic wobbles or not, they've just kind of been pretty set. [00:23:21] S2: So how is the data from the nineties relevant to today? [00:23:24] S1: So the the... In terms of the comparable? Yeah. Yeah. So we've blown through everything we saw in the nineties. The ownership of... The US household ownership of stocks today, you've got approximately two thirds of all American homes that own stocks. That's way higher than .com. And the other stat which I I sort of love to throw around is that the the next highest... The the 35%. Yeah. 35% of US household net worth is now in equities, the highest ever. The next highest wealth channel is unsurprisingly, home equity. But the gap between stocks and home equity in terms of your wealth percentage [00:24:06] S2: for Closing? [00:24:07] S1: Is the widest it's ever been in history going back to the nineteen sixties. We've only
00:24:07 · Alex Altmann, Josh Brown
[00:24:07] S1: Is the widest it's ever been in history going back to the nineteen sixties. We've only [00:24:12] S0: got But isn't it obvious why? Like, homes have appreciated 0% over three years thanks to interest rates. Yep. The stock market has doubled. Yep. Of... Like, of course. [00:24:22] S1: Of course. [00:24:23] S0: It's not causal. It's it's the it's the reverse. [00:24:26] S1: It it... It's... Well, there's a whole bunch of other stuff. Mean, think about over the past... Really, since 2022, mortgages have been completely unaffordable. You know, new homes and existing home sales have plummeted. The housing market's basically been dead or, you know, zombie fixes. [00:24:38] S0: Housing market recession? [00:24:40] S1: It's... For all intents and purposes, with housing really not doing much, right, in terms of prices. So you've got a bunch of, you know, gen y, gen zers with money that they... Savings that they've accumulated. Where are gonna put it? They're not putting it into a new home anymore. They're putting it into the stock market. Yeah. Right? So you've had that constant inflow that we estimate if you think about where, like, typical new mortgage origination from home equity down down payments, 2 to $300,000,000,000 a year. Plus you got the $40.01 k money that comes in every year. That's between 8 and $900,000,000,000 on our estimation. Right? So between that, you've got over a trillion dollars, then you've got a trillion dollars of buybacks. Even if you haircut that a little bit for the executions being low, you're still talking about 750,000,000,000.