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- [00:05]
Michael Batnik
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management.
- [00:20]
Ben Carlson
This podcast is for informational purposes only.
- [00:23]
Michael Batnik
And should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:35]
Alex
Let's get excited. Come on, Chicago. There we go.
- [00:39]
Ben Carlson
Didn't open the bar early enough. Apparently, folks, to reiterate, Dave said thanks for showing up. I know a lot of folks have a lot of things going on, so to get part of your evening is really special for us. I know Michael and Ben need very little introduction, but by way of how we met, I think it was really when our sales guys saw you at a conference and assaulted you, which is probably what the police would have called it. But after a few conversations, we thought, well, maybe they're not as crazy as those guys were. And we've done this a few times together. I know we've got an interesting set of topics for tonight, some of which you'll guess, maybe some new stuff. You won't. We'll make some mistakes along the way. Most of them will be mine. You won't. You'll notice those, you won't notice theirs. They're very smooth at this. But appreciate you coming along afterwards. Anything we can answer, happy to do it. But with that, Michael and Ben, I'll turn it over to you.
- [01:31]
Alex
Alex, thank you for the introduction. We have an editor, so we might be a little bit less smooth in person. All right, so before we get into some of the meaty topics of the day through the lens of the financial markets, Alex, for people that are new to FM investments, what's your story? How did we get here today?
- [01:51]
Ben Carlson
Yeah, it's been a weird road. Dave and I started this business about five and a half years ago. Now, Dave will check me on that, or compliance, who's in the room will check me on that with the simple idea that there are really great alpha generators out there who often can't find their way into your portfolios. And the problem isn't that they're bad at generating alpha, it's that there's a whole business layer that needs to happen between those good ideas and ending up in everyone's portfolio. So we built the business to remove all of those roadblocks. And along the way, we've met some really great people, come up with some pretty interesting ideas, some somewhat off the wall ones like the Benchmark series, which is what really brought us together here and have helped serve now $17 billion of your and your clients assets that we appreciate and look after every day.
- [02:34]
Michael Batnik
How many different managers and strategies are we talking here?
- [02:37]
Ben Carlson
So right now it's about 60 different strategies. There's probably some flavors of that. So a few of my PMs are in the room today will say, no, it's more, it's less, but about 60 strategies, about 85 of us who do this every day. And it spans the full gamut of asset allocation, asset style primarily, though in between institutional, fixed income and equity. You're going to hear a lot about bonds today. So we did lock the doors. You can't actually leave until we're done. But turns out bonds have been interesting for a while, so it's been a good place to be.
- [03:08]
Alex
All right. One of the most interesting areas or one of the most exciting areas of the ETF market from the perspective of where dollars are going, our option overlay strategy. So when are you going to start selling calls against your fixed income? Come on, like yield on yield. Let's go.
- [03:23]
Ben Carlson
You say that, but there's a few things in the works, so give it some time.
- [03:26]
Alex
I was joking. That's a terrible idea. You're really gonna do that?
- [03:29]
Ben Carlson
You know, we've seen some buy ride strategies. You know, if you're here, if you stop by and you know, prayed at the altar of our lady of Margin Call to see me downstairs, you know, there's a lot of people who would happily take that trade.
- [03:39]
Michael Batnik
Well, we were talking earlier about your Benchmark series and the fortuitous timing of it. So you said five and a half years ago. So you guys launched the, the firm pre pandemic, basically right before the pandemic rates were, went to zero effectively in the pandemic. And you launched this series of Bond ETFs, 2022, 2023.
- [03:59]
Ben Carlson
Yep.
- [04:00]
Michael Batnik
Okay. Which was great timing because at that point rates finally went back up. Because if, if you launch when rates are all sub 1%, what is the reception going to be?
- [04:09]
Alex
0.0.
- [04:10]
Ben Carlson
Yeah. Not nil. Right. We, we stuck the landing on, on timing for sure. But it was a need in the marketplace. Right. We built it not because we thought, hey, this is a great time for rates. Let's do a single bond product. It was, we wanted to be the first consumer of the product. We had portfolios who needed exactly what the US benchmark Series T bill U2 U10 were and it didn't exist. And frankly, it took us a while to actually get up the gumption to do it because we thought clearly someone had to try this had to have been thought of before, and we just couldn't find it. And after a few months of trying, we finally realized it just needed to be done and maybe we were the right people to try. And so far, so good.
- [04:50]
Alex
There is 7 trillion, give or take dollars in money market funds and the money is not slowing down. Despite the fact that the Fed has lowered rates twice. Are you surprised that money is still pouring into money market funds? And then a corollary to that is one of your most popular strategies. T Bill Great Ticker has almost $4.5 billion, and it seems like that has not really slowed materially. Are you surprised that investors aren't extending their duration or what?
- [05:19]
Ben Carlson
Well, we see some investors doing that. We keep talking about it, and we see flows coming into the middle and longer end of the curve in our products. But when you're still getting 4% on a nominal rate, if we did that on a tips basis for you, you're getting 6.5%. The question is, is that enough to coax savers into risk assets? And so far the answer is no. You see that with the two handle, maybe things change, but right now you're used to a decade of zero and all of a sudden you get 4.5% for buying a government bond and just sitting there not having to think about it. There aren't that many more attractive opportunities for folks who wanted the security of cash.
- [05:57]
Michael Batnik
A few weeks ago on our show, I talked to Michael about the fact that the markets have been just racking of late. Right. If you look At a past 12 months in the US stock market, the small caps, large caps, we're up, I don't know, 40% or so. And I was saying this has been a lovely bull market with a little pause there for 2022, which wasn't a lot of fun.
- [06:14]
Alex
What's with the lovely? Who describes a bull market as lovely?
- [06:19]
Michael Batnik
I do. Someone who's invested in it. And so I'm just trying to figure out the juxtaposition of, okay, things change in the election. It seems like, okay, now there maybe there is some euphoria because markets took off. Even though we'd already been up a lot, they took off even more. But how do you square that with the fact that money still is pouring into T bills and money is still pouring into money markets? Is there just money everywhere that it can just be spread out and sprayed or what's going on here?
- [06:45]
Ben Carlson
I think there is money coming in from all sorts of sources. Right. And what it's not doing is finding its way to just one part of the market which is good. Right. That's what we used to see. A lot of that money that we're seeing today used to go to private funds or things that we couldn't readily track. Right. We just didn't see it as much in the statistics. They were locked up in outside enterprise. So I think we're seeing a lot of that. We're seeing a lot of those funds that people invested in five, 10 years ago that had lockups that now have cash available. And they're not re upping, they're putting it into the public markets. They're holding onto the cash, waiting to see what happens. But to your point, a week and a half ago, we. We really got animal spirits back in the market. Things were pretty good, but then we just got a shot in the arm. That sudden sense of euphoria, of loveliness, if Michael will allow us, is I think, going to keep happening. Folks want to see these things continue to rise, and there's a lot of powerful forces behind that.
- [07:38]
Alex
It's only been a week since the election and the inflection point in the markets. Are you noticing a different tone from the advisor clients that you serve?
- [07:49]
Ben Carlson
Well, I mean, I think we'd ask folks who are here that and get a better answer, but somewhat, I mean, I think there's a sense of, okay, this wasn't a fiasco. And regardless of who voted for whom or what you were hoping would happen, the big fear for markets was this wouldn't be decided today, that we would be sitting here talking about lawsuits or all sorts of other crazy things, and none of that happened. And the market was really happy about that. I think investors should be really happy that the market reacted exactly as we'd want it to. Took it in stride, went back to worrying about inflation, jobs and fundamentals, which is what we're trained to actually work with.
- [08:23]
Michael Batnik
There don't seem to be a lot of fears right now. I know certain investors are always scared of something, but it kind of seems like everyone in the pool not scared of much. Do you think investors should be afraid that rates are moving up again? Because there's always a narrative attached to this. And Michael and I always talk about this. When rates go up, it kind of is. Choose your own adventure. Right. Well, rates are going up because the economy is stronger or no, no, no, no, rates are going up because people are worried about the economy and inflation's going to come back or. No, actually it's bond vigilantes. So when parsing through this stuff, do you think there is a line in the sand where, oh, actually we should start worrying if rates get back to 5% or something in that range.
- [08:59]
Alex
Who are these bond vigilantes, Alex? Have you ever met one out in the wild?
- [09:02]
Ben Carlson
Maybe it's us, maybe we didn't know. I mean, we've certainly seen a lot of folks who are happy to buy bonds no matter what happens in the market. So there's a lot of opportunity there. To answer your question more broadly, if the short end we're moving because the Fed had to start a hiking cycle, that would be a warning sign. But the market is pretty diverse. There's a lot of things happening out there. Ten years, sitting at almost four and a half today after a pretty nice yield rally today. So prices are dropping. We. But I don't think that's anything inherently to worry about. The curve is trying to figure out policy that is yet to exist for things that have not yet happened or even been promised. So there's a lot of guessing.
- [09:43]
Michael Batnik
Well, the two years gone from, I don't know, 3.5% to 4.3, I think, is that signaling maybe not as many cuts as we thought?
- [09:51]
Ben Carlson
I think the theory that we were going to zero is coming out of the market. Right. I don't think we never subscribed to the theory that we were getting back to 0 or 1%. I think there's also a lot of fear that there'll be some inflationary policy coming down the pipe and the market is getting a little bit ahead of itself. I mean, that was a pretty strong yield rally for what happened. But that said, I don't know that it's any immediate cause to worry. The underlying fundamentals of the economy, both real and financial, are super strong. Things are just kind of working themselves out.
- [10:25]
Alex
One of our favorite theories for why rates rose is attributable to Warren Pison. He basically said that the rise in yields is not people that are not trusting our ability to pay us back and the demanding higher rates. It's that people were offsides, positioning for a weaker economy, perhaps a recession, lowering rates. Obviously that didn't come to fruition and they're just getting back on sides and it's more about positioning than fears. So this is actually a good thing.
- [10:55]
Ben Carlson
Yeah, I think that's right. Coming into November, a lot of economists were still saying there was a 15, 20% chance of recession, which last year they said there was 100% chance of recession this year and they've all been wrong. So I think there's been a lot of pre positioning and lack of faith in the economy. I know someone who we talk about from time to time, Jared Dillian over at Daily Dirt Nap says debt is a great expression of optimism and there's a lot of optimism. So a lot of things to be optimistic about, whether that's the bond market, equity market or folks belief in themselves and the ability for the economy to weather all storms. And I think we should bet on that because everyone else is.
- [11:36]
Alex
Is the Fed making a policy mistake by continuing, continuing to lower rates without incorporating the fact that yes, inflation is coming down. There's no need for, for Fed funds rates to be 200 basis points over inflation, whatever it is. But maybe they're missing the forest for the trees. Like if, if growth picks up, if asset prices keep doing what they're doing, are they fanning the flames of the fire?
- [12:00]
Ben Carlson
So in two years we might be able to say yes, they should have done it. Everything in hindsight's usually a little bit clearer, but this was a sort of preemptory cut. I was calling for 25 last time we got 50. I'll give myself half credit two times ago when not just because 25 is half a 50, but the Fed was basically saying we should have done 25 spread out in a nice even way. We had some bad data we couldn't get there.
- [12:24]
Michael Batnik
Yeah, that was an admission they were wrong.
- [12:26]
Ben Carlson
Yeah, they basically we were wrong. It was a oops. Now how do we go from here? And it's weird to hear the Fed chair say that, but they did and they moved on. I think we're going to see this cut cycle continue on for a while in this rate because that's what they said they're going to do. They want to keep doing it. They want to be seen as apolitical. They seem to be okay with making a preemptory cut. They're not going to be okay with a preemptory hike, even if all of the news says it should go there. That's a pretty bold statement from.
- [12:56]
Alex
Do you think that we get another hike in the cycle?
- [12:58]
Ben Carlson
Well, I think that would mean there's a new cycle, sort of by definition. Right. But I don't think we're going to see one for a while. You could see a prolonged pause in 2025 if CPI ticks back up, if GDP remains as strong as it is. If it turns out there are policies that are obviously and immediately inflationary, then they'll pause to start hiking again. Would send one of those true fear signals to the market.
- [13:21]
Michael Batnik
I was looking on your website today at benchmark series and you have, based on your ETFs at the different maturity levels, you have a yield curve built. Right. And the short term yields are still higher than the long term yield. So don't we want to see short term yields continue to come down to make the yield curve more normal?
- [13:38]
Ben Carlson
I think there is a obvious desire, for historical reasons, to see the yield curve in a totally normalized environment. But we've been dealing with the yield curve in some pretty funky shapes for the last two, three years now, and things seem to be fine. Kind of testing the theory that maybe it doesn't have to look exactly that way. Now, it is kind of odd that if you go back to theory, you're saying the government's more likely to go out of business in 90 days than in 10 years. I mean, that's just sort of bizarre. But somehow or another that's what the market seems to want. And the bill auctions are. They're fine. I mean, the other systematic way to assess the health of the market is to say are people showing up to the treasury auctions and is the government having a hard time issuing debt? They're not.
- [14:23]
Michael Batnik
So there's plenty of investors. Michael said the recession unwinding, that we're betting on bonds as more of a trade than an investment. It's funny, our podcast producer, Duncan, he said he bought TLT when the Fed announced we're gonna make cuts.
- [14:35]
Alex
Why are you throwing Duncan under the bus?
- [14:37]
Michael Batnik
Sorry, Duncan, but from the day the Fed first cut rates, the eight trading days after that, TLT was down eight days in a row and he couldn't figure it out. And why is this happening? A lot of people were, I think, implicitly making that bet. But as an advisor, I didn't wanna see rates go right back down. I wanted to see rates stay in the 4 to 5% range. Cause that's better to just clip that coupon. As an investor, right, we should want this as fixed income investors, correct?
- [15:07]
Ben Carlson
Yeah. No, the higher rates in that sense are good for bond collectors. And if you look at say the IG market you're going to see now, most of the return is actually coupon. That's certainly true in the high yield market, where if you're not at least equal weight to benchmark, you're losing out on the carry there. And a lot of folks who are buying bonds for total return hoping that there was some convexity sitting there that would give them this really sweet return. When rates went exactly the way they hoped, they've been a little disappointed. But if you were buying it more for, for income, why we call it fixed income, you've been pretty happy with what you've got. And as long as you are in the more liquid side of the market, things are still healthy.
- [15:45]
Alex
So spreads are tight because the economy is good. Defaults are low. They should be tight. It would be weird if they weren't. One of the other reasons why they're tight is because I think investors are, are happy with the absolute level of, of returns or yields from their investment grade bonds. I remember, I think it was during the pandemic, Microsoft issued bonds at like literally like 2.3%.
- [16:07]
Ben Carlson
Yep.
- [16:08]
Alex
I was like who the F is buying these? Like why? Literally why? And so if, if you're only getting 100 basis points spread or whatever it is, the number is. But the, the measuring stick is 4%. It's still a pretty juicy return.
- [16:22]
Ben Carlson
Yeah, no, I mean, look, there's a lot of opportunities in all aspects of the market today. I think there's fewer of those bonds floating out there now and a lot of them have made their way to portfolios that are going to hold them to maturity. So as a new investor to the market, you have to ask what's actually available, what's out there. The new issue market though remains strong, yields are good, coupon rates are reasonable, so you get a nice return. Like if you look at the 80 basis point spread of two year new issue debt versus two year treasury, that's a nice space. And if you look at the default rate in the IG space, it is very low and it will probably stay pretty low for the foreseeable future. And that probably is true of the high yield market and certainly the muni market.
- [17:02]
Michael Batnik
We were talking about tips out there over a Modelo, which is a great thing to do, drinking beers.
- [17:07]
Alex
Nerd alert.
- [17:08]
Michael Batnik
So I was looking today, the break evens, I think the 5 year breakeven is 2.4% or something. I mean the breakevens were negative in the pandemic. I think I know that there were some investors who got burned by tips, Michael. And I heard from a ton of people that emailed in and said what's going on here? I thought inflation was coming following the pandemic. I put my money to tips and then they got killed when rates went up and they acted more like bonds than they did in inflation protection. But if you have a higher yield now and a high real yield, aren't tips just a wonderful opportunity at the moment?
- [17:40]
Ben Carlson
We think so. We have to ask also, why did folks so much despised TIPS last year, two years ago? It wasn't that they didn't like tips. They actually got the inflation protection. They thought they are really bonds underneath it. It's that they bought bonds that were three, five, six years duration. So your inflation protection worked. Just your duration hurts you far more than you saw the immediate impact of that inflation protection. Hold onto that bond for another three, four years, you're going to get your money back plus all the inflation that you thought and it'll be a pretty healthy real return. We think folks just need to reassess. What were you getting? I think most folks thought they were buying tips. They were getting T bill plus inflation protection, and they weren't. And that's. That's the next. Next, as it were.
- [18:25]
Alex
Alex, this may be a non sequitur of the conversation and you could punt if it is, but one of the biggest themes in wealth management has been the rise of private markets, specifically private credit.
- [18:34]
Ben Carlson
Yep.
- [18:35]
Alex
So loans being made to companies that can't tap public markets. Any thoughts on those markets, what they're doing to issuers or anything that investors should know about?
- [18:46]
Ben Carlson
I think you'll see a lot of debt issued there, some by issuers who can top public markets but have found it's easier to do this or they have other debt stacks that they can more readily refinance without a traditional underwriting process. You're going to see a lot of ETFs and other products that take these Wall street products and try to bring them to Main Street. And that's going to be a real experiment because the thing about it being private is it doesn't have all the conventional rules and there's generally one or two people who get to decide what is and is not allowed in that.
- [19:18]
Michael Batnik
So are they really going to try to do private credit in an ETF structure?
- [19:21]
Alex
Well, Kent should have doing it, but also, aren't there rules that you can only have 15% of the fund in things that aren't liquid? So what is that even?
- [19:29]
Ben Carlson
Well, yes, And I think 85% of the fund is going to be mostly liquid stuff, some less liquid versions of it. But Even at that 15%, even if you found a way to create a swap or something else where you were impersonating elements of that private credit, who's setting the market. Those things aren't redeemed and created every day. So there needs to be a liquidity provider in the middle. That liquidity provider is going to set the price. And when things are good, that's probably a fair price. When things are not. We haven't yet tested what that looks like.
- [20:01]
Alex
Said it all once again, the number.
- [20:03]
Michael Batnik
That we read was private credit makes up maybe 6%, 5 to 6% of the IG market. And so it's still a pretty small amount. But does it ever get to a point where that money somehow impacts spreads in investment grade credit or is that just so big that it doesn't really matter?
- [20:20]
Ben Carlson
I'm going to guess it's so big it doesn't matter for the foreseeable future. Certainly private credit gets an awful lot of attention despite being 5% of the market.
- [20:29]
Michael Batnik
Well, in our inbox it does. It's 5% of the market. But 95% of advisor inboxes these days. And I always say that it's the easiest sale you could ever make. Yield is an easy sale. So if you tell an advisor, I'm going to get your clients 10%, 12%, 14% multi distributions. Yeah, no volume. That sounds amazing. My question is that asset for your client is a liability for someone else. How do these companies taking on these loans keep running when they're paying 12, 14% on their debt loans to pay.
- [21:02]
Ben Carlson
The loans, more loans. And I think this is the cynical view is this is a great opportunity for folks who've issued that debt to find a whole new set of investors to allow them to refinance it off their books and try again so they.
- [21:14]
Michael Batnik
Can refinance this because so much money's pouring in.
- [21:16]
Alex
Sounds like musical chairs.
- [21:19]
Ben Carlson
The fear is that it becomes that and that's what the regulators will need to determine if that is going to happen. How do they stop it? And the unknown there if one, it will be approved in that state and unknown if it is approved in that state if that's what's actually going to happen. But it seems like that's a good bet.
- [21:35]
Michael Batnik
But do you think that these big players, the big private Apollos and kkrs and Blackstones and Blackrocks of the world, if they just say listen, we're putting 5 or 10% of our client model portfolios into private credit, there is enough of a wave to keep this stuff going for a lot longer than people would assume.
- [21:53]
Ben Carlson
Yeah, no, they could move enough of their own asset base to create a microcosm here. Sure. But at Some point, if the returns don't actually materialize, you wait your five or your seven years and your IRR is six, not 14. All of a sudden, I think those assets start to go somewhere else.
- [22:11]
Michael Batnik
And that's more likely than. Because a lot of people are saying this is going to be a calamity in the next recession. This is going to be a huge come to Jesus moment. But I would think that just lower returns than you expect is probably more likely.
- [22:23]
Ben Carlson
Yeah. Once you're afraid you're not going to get any of your money back, you're happy to get most of it back. So if you went from thinking you're getting 14, afraid you're going to get 0 and you get 8, you're all of a sudden pretty happy. And that may be the outcome. There may be enough fresh money for a while that some of the funds don't have that risk or don't have that reality. But eventually something has to give. And you can't keep running 14% return, no volume forever. There just isn't enough in those private companies.
- [22:50]
Alex
Alex, one of the questions that we got in our inbox probably every week, and I don't know that we're equipped to answer this. Maybe you are, is the deficit keeps going up. The pace at which is which it's going up is accelerating. What are your thoughts? Should investors be worried that the US Government is going to run out of money or there's going to be a crisis in the bond market? And what are your thoughts on. On the deficit and what it means to investors?
- [23:20]
Ben Carlson
That's an easy one to answer. Probably a good opening line at Thanksgiving too.
- [23:24]
Michael Batnik
No one will get mad at that.
- [23:25]
Ben Carlson
Yeah, no, not at all. Don't have to tread carefully. Look, we're not going to run out of money. We have a printing press and they know how to use it. So I think they'll avoid that. The incoming administration historically has tried to talk down the strength of the dollar, so that gives us some room to make more dollars to pay some of the debt. But we will eventually get to a spot where we now owe enough money on our current money that we have to issue more money and pay more money to do that. That we get to the spiral similar to the private credit cycle, where now there will be something we'll have to give until there's a major change in the amount of debt. We need to function every day how.
- [23:59]
Michael Batnik
Much help will be. So I think I read the other day it's 13 or 14% of the budget in 2024. Was interest expense, which is effectively the same as the defense budget. But isn't the Fed cutting rates going to make that a little better? Depending on the maturity spectrum, I guess.
- [24:15]
Ben Carlson
There should make it somewhat better. But that's assuming that everything was issued on the short end, won't all be, and that those auctions will continue to be believed in as much as they are today. And that faith could wane at some point and it probably will wane in the bond market before the broader market.
- [24:32]
Michael Batnik
But isn't the whole day of reckoning this is a lot of what the hedge fund and billionaires say. There's going to be a day of reckoning that comes and people are going to stop buying government debt. First of all, I don't know where else they would go. I don't know what's the next best option.
- [24:43]
Alex
But shiba inu coin.
- [24:45]
Michael Batnik
But couldn't the Fed just say, okay, we're going to issue a bunch of short term T bills. You're not going to buy T bills. Isn't that like for the day of reckoning scenario? Isn't there a ton of stuff the Fed could do before there's an actual crisis that people are predicting?
- [24:57]
Ben Carlson
Certainly. And there are a lot of commentators who I think as you pointed out, right. The number one rule investing is don't take advice from hedge fund managers. Where it turns to be true. There's like this odd fetish of figuring out how the end of financial economy is going to happen. And they're always wrong. So there's the good news is don't worry too much about it. They've always been wrong. They will be. The government couldn't keep financing itself only on 90 day bills. Right. We have longer term goals on that. Employees want to know that they're going to get paid. So we will always need that and money will go there if only because there are a lot of laws that say certain institutions have to buy that debt so they can kind of insulate themselves against some of that.
- [25:35]
Michael Batnik
Yeah, well that's the other thing is people don't realize again, the other side of that liability is an asset. And pension funds and insurance companies and baby boomers in the years ahead are going to want and need that. I was telling you earlier, the baby boomers have just got it. They're the luckiest generation, aren't they? Because they rode the wave of a 40 year bond bull market. Yeah, bonds struggle there, but now we're getting into the teeth of retirement and we're talking 4 or 5% yields on bonds, It's a pretty good scenario.
- [26:02]
Alex
Counterpoint, they had three channels, four channels, whatever it was.
- [26:06]
Ben Carlson
But they saw the rise of cable television, they saw the rise of espn. I mean, that's good to be there for. But I think the answer is yes. On a real return basis, you'll see 6%. And that's why you'll see us dip out into the tips market in the coming weeks and months as we start to offer some new products to help folks deal with a longer period of inflation, where that's going to be a real thing and where your real return is going to continue to be material for the foreseeable future.
- [26:31]
Alex
So, Alex, you mentioned at the start that the animal spirits have kicked into the markets this week. You're seeing crypto go nuts, not SPACs. Klarna just announced an IPO. The IPO window should open wide in 2025. Large cap stocks, small cap. I mean, everything is really having a good time. Are you seeing flows slow down at all in terms of what you're seeing in your fixed income products?
- [26:57]
Ben Carlson
Not really. We see fluctuations we'd expect for time of year, for tax harvest, for other reasons. But assets are still coming in, as you pointed out. Still $7 trillion in money markets that can make their way over and are. And there are a lot of folks who I think are still looking at that absolute level of return you're getting of yield, and they're still really happy with it. And although it looks nice to say the S and p is up 30%, you didn't know that was going to be the case. And if you believe the economists, exactly one year ago you would have been short the S&P 500 this year because constant doom was coming and it missed. So it's a great place to hang out and still make 3,4% with no real risk to your portfolio.
- [27:35]
Michael Batnik
We've heard from a few asset managers who are just salivating at that $7 trillion in money markets.
- [27:40]
Alex
Yeah, BlackRock mentions that every earnings.
- [27:42]
Michael Batnik
Yeah, they talk about it a lot. Do you think that that money is more likely to make its way into fixed income than stocks?
- [27:47]
Ben Carlson
I don't know. I mean, for the benchmark series sake, I hope it does. But I think you're going to see it go a lot of places that you hadn't expected. And that's just because investors are going to be forced to rebalance in ways they didn't know. The baby boomer generation is passing that wealth on. And those new investors are not necessarily using the exact same playbook their parents did. And we don't know exactly what that's going to look like. We do know it's not going to be the exact same. And some of that asset may leave the public markets, might go back to private things. Some of it's going to go to real estate. It's pretty expensive to buy out your parents house or buy out your siblings so you can live in the house you grew up in. So you're going to see it move in different ways and take a little while longer to trickle back out to the risk asset market.
- [28:29]
Alex
Alex, you guys are entrepreneurs. You're innovators at FM Investments. What's the last I'm putting on spot? You don't have to answer this. Is there an ETF that you saw launch that you're like, yeah, I wish I thought of that?
- [28:40]
Ben Carlson
Oh, we see them every day. The ones that get me aren't the ones I wish we thought of. It's ones that we thought of and we didn't do. We see those happen, you know, every few weeks. Like, oh man, we should have done that one. I mean, obviously the easiest one is why didn't we do a bitcoin one too? That seemed like you could throw your hat in the ring. There were a lot of good ideas that wasn't historically anything we looked at. But I think we've been pretty happy with the success that we have had that we don't spend a lot of time looking back on the things that we didn't get a chance to do.
- [29:08]
Alex
Anything that you could tease or is that not kosher?
- [29:11]
Ben Carlson
Well, as we talked about, we're going to do some stuff inflation. So you'll see some TIPS funds from us come out. We really think with the Benchmark series, it's a great opportunity to really own the rate space. So you'll see some other.
- [29:20]
Michael Batnik
And what are the maturities there in the TIPS yield curve?
- [29:23]
Ben Carlson
So right now they'll go out to about 10 years. They're not issued as regularly and they don't have as many spots on the curve, so you'll see fewer of them. We'll probably focus on something more active on the short end. So think of something like a real cash version of T Bill. So T Bill is your nominal rate TIPS fund will go after the real rate of cash.
- [29:40]
Michael Batnik
So if you had a T Bill TIPS fund, essentially you're getting all of the inflation protection. Right, because the duration piece is taken out of it.
- [29:49]
Ben Carlson
Exactly. So we think that's what folks really thought they were buying. So we want to give that to them. And we'll do some other parts on the curve because we get a lot of requests. Our inbox gets filled up with, hey, I think the curve is going to do this. How should I play it? Well, here's two or three ways to do it. We're going to start to wrap those trades up for folks who want to play that, and then you'll see us start to dip our toe out into the equity space. We launched a thematic equity ETF in the life sciences space for small caps. It was a great time to be there, and we'll start doing some more of that as we start to figure out what investors really want in 2025.
- [30:20]
Michael Batnik
The advisor space is the bell of the ball these days. Michael and I talk about the private and the private asset managers are coming for the RIA channel because the institutional bucket, they're tapped out. So they see growth, their funds see growth, fintech sees growth there. When you think about the Advisor channel, when you make your products, are you thinking more about advisors than retail investors, or are you just saying no, It's a whole w swath of people?
- [30:46]
Ben Carlson
Well, everything we build, we want to be accessible to everybody. But most of the things that we're good at doing, most of the clients we work with, folks who are here with us today manage money for some other asset owner. So we want generally to build products that fit into that portfolio, that asset allocation you have that solve an actual problem you have today for investors. Nothing we built should be unusable by the retail market. But we appreciate not everything will have the same sex appeal. Is t bill or U2. Some of them are going to be used more by professionals to solve professional problems for large groups of clients or to solve operational or other concerns that you have as an advisor.
- [31:22]
Alex
All right, we've been talking for 30 minutes. Oh, 32 minutes. And I'm about out of questions. Does anybody in the audience have any questions? Any men who are balding that need some advice? If it's time to shave it, I'm happy to answer those questions, too. No full heads of hair.
- [31:38]
Michael Batnik
Every time we get on a zoom call and there's another bald on the call, that's Michael's icebreaker is, oh, nice haircut. And it works every time.
- [31:45]
Alex
I'm not a talker.
- [31:46]
Ben Carlson
I like how you just offered that a bald is a thing. You just inserted that into the language.
- [31:52]
Alex
Alex, you have anything else on your mind?
- [31:54]
Ben Carlson
No. I appreciate everyone showing up. Thanks, you guys. This is what, our third or fourth, fifth? I'm losing track now go round. But good stuff. Let us know what's in your inbox so we can start solving those problems, too.
- [32:05]
Michael Batnik
All right?
- [32:05]
Alex
Anybody have any questions? For real? No? Cool. Drinks, food? All right, thank you, everybody.
- [32:12]
Ben Carlson
Thank you. Big round of applause for Michael, Ben and Alex.