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- [00:00]
A
James, we're about to see SpaceX IPO can be one of the biggest companies in the world immediately, but it's not going to be in the S&P 500. What's going on here?
- [00:08]
B
Yeah, so the S&P 500, the way it works is one, it's the 500 largest stocks in the US for the most part. But they won't add a stock historically unless it's had 12 months of what they call seasoning. So the committee, so there's actually a committee. A lot of people think The S&P 500, they think passive, but really there's a committee of people that decide what names go into or out of that fund. And usually you need 12 months of seasoning after an IPO before it can even remotely be considered. It also has to have profit, it has to be profitable. So it has to have one. The most recent quarter has to be profitable and the sum of the last year has to be profitable again. Goes back to the 12 month thing. But the committee was considering changing that so that they could add things after six months that meet certain criteria of what they call mega cap IPOs. So NASDAQ 100, they changed those rules. The Russell 1000 changed those rules. I actually thought the S&P 500 was also going to change the rules. They decided not to. I think most people seem to be kind of happy with that decision. S and P is like, you know, the bellwether, the bell of the ball, if you will. And they are just kind of keeping things the way they are. But as you said, it's going to come to market as one of the largest. It's going to be the largest IPO we've ever seen. But only a small portion of it is going to be actually ipo. There's going to be a small float.
- [01:20]
A
What do you think of the people that say, hey, look, now if you're borrowing it from the s and P500, passive investors can't get exposure to the greatest entrepreneur of all time.
- [01:31]
B
Yeah, I mean, there are plenty of ways you can get exposure. Granted, if you're going to buy the s and P500, you won't have it for the first year. But if you want to buy the NASDAQ 100, it'll be adding it after 15 days. If you want to buy the Russell 1000, there are plenty of ETFs that do that. It'll be in there after five days. There are a lot of ETFs and mutual funds out there that have exposure pre IPO there's space ETFs, one, there's a whole ecosystem of space ETFs have been around, tons more coming that all are going to have exposure to Space X almost immediately. And not to mention, if you really want exposure, you can just go buy the stock yourself, theoretically at or after the ipo. But like, the way to think about it is even if it did get added, it'd be such a small portion. Like I said, so would I think Elon said there were most recent stats they're targeting like a $1.8 trillion valuation. They're going to IPO with $75 billion massive number, but again, that's 4% of the float. And the S&P 500, the Russell 1000, when they weight their indices, they do it by the float because you can't go put it in at a $1.8 trillion weighting. Right. Other than that way, it'd be like a serious contender up there with, you know, Apple and Microsoft as trillion dollar plus weightings. It would be a top 10 stock in the S&P 500. But there's only $75 billion afloat. You, you can't do that. So what these indices do is they say, okay, you issued 75 billion. We're going to weight you as though you're a $75 billion stock. That's how a float works. But SpaceX is going to start releasing shares in six months. Essentially, there's going to be a first unlock. So usually it takes six months to 12 months before a new IPO unlocks shares, people that already held the shares. SpaceX is going to start unlocking shares within a couple of months of the ipo. So that will also increase the float weighting eventually. So there's no way to know exactly what it's going to look like 12 months from now, or if the S&P 500 committee is going to add it immediately. But we do know it's going to go into the Russell 1000 and the NASDAQ 100 within 15 days.
- [03:29]
A
Do you think that the indexing committee made the right call by not putting it in?
- [03:34]
B
I think most people, from what I can gather, are fine with it. Like I said, if they don't. Again, if you look at the valuations right now, I think it's coming out at something like 90 times revenue. Not earnings. 90 times revenue. There's a lot of people that don't want to own a stock like that. Even if the growth is tremendous, even if the tam, the total addressable market, is in the tens of trillions of dollars. Like they've said in their S1. There are just people out there that don't really want that necessarily dumped on them immediately after an IPO. If the market after 12 months still views its valuation to be that high and it goes in the S and P, it makes sense. But there's people that don't want it and they want to keep the rules the same. I can make the argument both ways, right? Like on one hand, this is one of the largest stocks in the world now, no matter how you slice it, it's one of the highest valuation stocks in the world. If you own a passive index that just owns the market, you should have a piece of that as quickly as possible. That would be my push for why they should have changed it. But on the flip side, like why change the rules? Why dump this right after the IPO and put it in as quickly as possible? The market has worked historically for forever why we have to change it? And the real answer is like these rules were set up when companies were IPOing at like, you know, a couple million dollars, $100 million. They hadn't necessarily had 20 years of proven business, business ability. Right. So when those things were coming to market, there was a lot more skepticism. I mean, you go back to the dot com, think about how many stocks were IPOing then. So like, yes, things have changed. But also, do you really need to change the index? It's going to get in there in 12 months anyway.
- [05:03]
A
I think those are great points. If let's say The S&P 500 did add SpaceX at some point, whether it's next week or in a year, how much passive bidding actually goes into a stock like that, you know, trillion dollar size.
- [05:20]
B
So we did the math on if The S&P 500 actually changed the rules to add it after six months. They're called fast ad rules because Russell and NASDAQ already did it. $75 billion IPO, we estimated 19 and a half billion of that would immediately be like set aside and need to be allocated to those indices based on the funds that are already tracking them. Right. Again, S&P 500 was more than half of that. Essentially because they're so large. There is $26 trillion tied to the S&P 500.
- [05:49]
A
What does that mean?
- [05:50]
B
So it's allowed 11 to 12 trillion dollars that are bench like tracking the index. So like they're doing whatever the index does. Think The S&P 500 ETFs, mutual funds, separate accounts, just private vehicles that track the index. There's another few trillion in derivatives based on the index and then there's also another 10/trillion that are benchmarked against the S&P 500. So an active manager is trying to beat The S&P 500 on, you know, absolute basis or risk adjusted basis. And the problem with adding it so quickly is that yes, the numbers we looked at is just what passive is going to do. But like I said, There's $10 trillion plus that are tracking from an active point of view and if they don't at least get to the same level of allocation that The S&P 500 would be adding SpaceX. So it would be at 75 billion. It'd be like a 0.11, 0.12% weighting or 12 bips. Not that much. But again, I talked about how there's going to be a massive unlocking of shares in the first six months. We think it'll be like 47% of the company will be float weighted by the six month mark. I mean 47% of the company will be Float weighted by the 12 month mark.
- [06:55]
A
So what does that mean?
- [06:56]
B
Basically, if it's a $2 trillion valuation, 47% of 2 trillion is how the, the stock will go into the index when it gets added. So yeah, the index committee has made some weird decisions over the, over the time. They're very active. I mean, if you look back, they waited a full quarter to add Tesla despite it being meeting the criteria back in the day because they were worried about the consistency of its ability to make profits and they ended up adding it one quarter later. MicroStrategy was famously, or I guess strategy now was famously eligible a couple of times. And The S&P 500 committee decided not to add them. Not this current rebalance, but the earlier rebalance this year. They added a company that from what I can tell technically wasn't eligible under the rules. But after every rule and every section and the index committee rules, it basically says it's up to the index discretion. They added a company called EchoStar, which gets a ton of its valuation because it has a huge position in SpaceX equity. So they actually ended up. So it's like an active manager, like they are buying things that are going up and doing well. There's a lot of momentum in equity indices and the index committee kind of leans into that. It's a hard index to beat as an active manager because like this committee is kind of active. They need profitable companies and all these things. There's all these criteria you need to meet to get in.
- [08:06]
A
Today's episode is sponsored by Public and they just launched a new product called Agents. And it's honestly one of the most compelling uses of AI in investing I've ever seen. The idea is simple. A lot of investing is repetitive. Monitoring markets, moving cash, managing risk, rebalancing positions. It's the kind of stuff investors constantly have to stay on top of. Public's new Agents product lets you automate those workflows using plain English. So instead of manually watching charts all day, you can create an agent by typing something like if the Vix hits 25, buy a weekly put option on Spy or if my cash balance goes above 20,000, move the excess into my direct index. Public's AI then turns that into an automated workflow that you can customize, review and activate directly in your portfolio. Public is essentially building what they call an agentic brokerage, a platform where AI can help automate the operational side of investing. Based on rules and strategies you define yourself. If you want to start automating ideas inside your portfolio, visit public.com openingbell that's public.com openingbell now let's get back to the show. I think that breaks so many narratives because a lot of people look at the index and think it's algorithmic or robots, you know, running this index to keep it perfectly weighted. What is this committee and like what's their actual mandate when they're trying to do this?
- [09:31]
B
Yeah, I mean it's just to follow the index rules, right? So there are certain, certain rules. But they can override and do what they want. But the things that are trying to do is like one, be the best of the best stocks in the U.S. right? Like that's the goal. They want to hold the best stocks, the largest stocks in the United States, 500 of them. But they also are requiring these companies to be profitable. So if a company you know is not profitable, they can decide not to add it. So the committee is just basically maintaining this index. It's been around 100 years, ish in different variations, so you don't really know who they are. My boss, Eric Batunas likes to call it like you can think about it like a bunch of guys smoking cigars in like a smoke filled room, like talking about like what companies are going to go in there. But by my count, in this most recent quarter, so we just got the announcement a couple of days ago around what's happening in the Q2 rebalance of 26 for that index, there were 36 stocks that were technically eligible that meet all the criteria or at least 33 that could go into the S&P 500 and over 130 stocks of the 500 that are technically not eligible to be in the index. So one of the other things they do is they try to limit turnover. Like they don't want the index changing names like tons and tons every single quarter or more frequently than that. Right. It's supposed to be a stable list of companies. So when you get added it's a really big deal. Right. So yeah, this most recent quarter they only added two and took out two. But for the most part they keep the turnover of those names rather low and it makes it, it's a good product for people who are investing for the long term at the end of the day.
- [11:03]
A
Well, it's interesting that if there's 100 plus names that are actually ineligible to be in the index that they're not taking out, that's kind of a bad sign for passive investors because most investors couldn't name all 500 stocks. Right. But if 100 of them are laggards, let's say, and they should be taken out or they're unprofitable, whatever, that's not necessarily aligned incentives, Right?
- [11:24]
B
Yeah. I mean the problem is like this. The index has gotten extremely top heavy and there needs to be a line somewhere. So one, they don't want to be adding names that are just flashes in the pan. Right. They don't want to be adding names that have done really well and kicking out a name that's had like a bad couple of quarters and its market cap fell below the limit. So the limit right now I 22.7 billion has to be your market cap in order to be eligible. And there's like 130 names in there that are lower than that, something like that. So there's a lot. But again, some of them, it could just be like they had a bad few weeks or something and they're going to turn it around. So again they go back to, they don't want a lot of turnover. Once you get added in, you're going to stay for the long term unless you really don't do well. So like Campbell's actually just got booted and a company called Pool Corp. Got booted in the most recent rebalance. So they do kick them out. For everybody that goes in, there's a stock that comes out. But yeah, it's, it's the, it goes back to this whole idea that everyone likes to talk about passive and Active. And it's like my view, it's a very much a spectrum, kind of similar to like the way people think about decentralization. A lot of people, like you're decentralized, you're not, you're active or you're not. And I don't think of it that way. I think it's a spectrum. S&P 500 is as close as you can be to passive without actually fully being passive, I guess, is how I would phrase it.
- [12:37]
A
Do you think most people don't know that or don't believe that?
- [12:40]
B
I mean a normal person. No, most people have no idea that that's the case. A lot of people in finance and in my world, we all know it. Everyone's paying attention to what the index committee is doing when, like on the Bloomberg terminal, when there's companies added or removed from the index. It happened on Friday after close. Everyone's waiting for those like quick headlines that are coming out. Like those, all those all cap tweets that people are putting out about what's going in. People in finance generally understand what's going on in that front.
- [13:04]
A
Yeah, well, Marvell was one of the names that just got added. I think they're up 12% just from the news of being added to the index. So there's a huge momentum factor to this as well. Let me ask you about SpaceX one more time. I've been seeing a lot of chatter about Space X being something that could break the market because liquidity will drain from all other corners of the market to try to chase SpaceX. What do you think of that?
- [13:28]
B
Yeah, I mean, no matter how you slice it, if you look at what's going on with the market right now, anything AI, anything space, particularly anything that overlaps there like data centers in space. Right. That has sucking all the oxygen out of the room. Crypto is getting hurt by that in some regards. Right. So it's, there's some truth to it. I'm genuinely concerned with the idea that we're going to have, you know, three mega cap IPOs, like seriously large IPOs coming to market this year in SpaceX, which is coming to market this week. OpenAI and Anthropic, all potentially trillion dollar companies coming to market with some, some form of fundraising via an ipo. So any sucking up that sort of liquidity is undoubtedly going to take money from elsewhere. Like, it's not like there's unlimited money and people just can put more money out there. There is like $8 trillion in money market accounts that could theoretically put money into some of these things. So it's not all going to have to be sold from somewhere. But these indices, when they add them, they have to sell something. So yes, they're kicking names out, but when even adding names in, they have to rebalance everything. So some names are going to actually end up with like sales. As these indices rebalance, there's just going to be some sort of suction coming from the rest of the market, likely some of these other mega cap names so that people can get exposure and liquidity to those names I mentioned. So it's a genuine concern. My not so hot take is, I think for the most part, at least with SpaceX, I'm expecting the market to be able to handle it pretty well, particularly with the S&P 500 not doing things for at least 12 months. I think, yeah, I'm like kind of mid curving this and like, yeah, I'm worried about it and I'm watching it, but I think the odds of like any sort of real situation going bad because of this, you know, this, these new, the new liquidity coming to market that needs to be hoovered up. I'm concerned about it. I think for the most part we can handle it. I would be concerned about it if like, you know, Anthropic was next month and OpenAI was the month after. That's just going to be a lot for the market to absorb. So it might take some time. But yeah, I mean this, anything AI space right now, you can't get anything not bolted down is getting bought up right now.
- [15:35]
A
You know, I've had so many friends and colleagues message me saying should they DE risk before SpaceX iPodOS. But then I've had others saying maybe I'll wait for SpaceX and then de risk when Anthropic comes to market. So it's like variations on the same idea that people are worried liquidity is going to drain from other parts of the market. But they're just trying to call it on which of these mega IPOs does the, does the trick.
- [16:00]
B
Yeah, I mean it'll be very interesting, right, because we know they're going to come to market with IPOs. If we estimate so Space X is going to be less than 4, it's going to be like 4% of the market. It's going to be a 4% float. So only 4% of new shares are going to come to market. But then like I said, it's the unlocking. So there could be this like long overhang if open air and Anthropic do the same sort of thing where they're releasing shares into the market for 612 months into the future. Particularly if AI doesn't take off or space launches and whatever doesn't take off. The way people are thinking it could be an overhang on the market for a long term. But I mean Google, I don't even know what the number is. They just raised 80 something billion I think it is. So if Google can raise 80 billion and like not even no one's like sneezing at it, I don't know. My take is I think the market will handle it absent some other cataclysmic events. This, it could be something where it's like more like the straw that broke the camel's back potentially. It's something I'm concerned about. But like yeah, I don't really have a strong view. I don't have a hot take that like this is definitely going to take down the market. Obviously. The other thing is like everyone's talking about this, right? You have random people asking you like, should I do this? And like I find it's rarely the things that everybody is concerned about that actually causes things to topple. But who knows?
- [17:14]
A
That's such a good point. You know, if the, the shoe shine starts asking you about Space X, then you start getting nervous. When you think about SpaceX as a stock and let's say you don't have any private exposure to it and you're a retail investor, are you buying on day one?
- [17:31]
B
It's, it's fully, I mean there's people that, you know, everyone talks about Trump Derangement syndrome. There's plenty of people that also have Elon Derangement syndrome, probably for related reasons. So there are plenty of ways that you can get exposure. I mean people can get allocations of the IPO. I think he's allocating 30% of these IPO shares to, to go to retail like brokerages like Interactive and Schwab and what have you. So one that's interesting. The other thing I would say is like we have 23 ETFs that have been filed that are like SpaceX specific, like not space. We have a lot of other ETFs that are related to space and broad holding a bunch of companies related space. I'm talking 21 SpaceX specific stocks, 2x inverse, 2x long covered call SpaceX and Tesla together. All these things that are filed, ready to come to market. We're going to see tons of these launch. I mean if these issuers could, they would launch It now, before SpaceX, even IPOs, they filed them months ago, they're ready to go. So it's going to be a footrace. So it's going to be a feeding frenzy to try to get exposure. So a lot of these ETF issuers are going to doing everything they can to get, you know, eyeballs and money flowing into their ship.
- [18:39]
A
There's something to be said here about. It's almost like the securitization of securities to the nth degree. My sense is that generally that feeds the gambling nature of markets and investors these days. When I hear about leveraged single stock ETFs for companies that aren't even on markets yet, that makes me nervous.
- [19:02]
B
Yeah, it does me too. We see filings constantly. I've seen, I saw a filing today for a company I've never even heard of for a 2x stock ETF. But there's a few things here. One, ETFs and markets are a big tent. There's always been an element of gambling. It's a little bit more front and center right now, obviously, and there's a lot of money to be made for these issuers that are launching these products. But if you look at Cerberus that IPO'd a few weeks ago, it started trading at like 12pm on one day and there was a 2x Cerebras ETF that launched at 930 with the market the next morning. We're going to see the same thing with SpaceX, we're going to see the same thing with Open Air, we're going to see the same thing with Anthropic, we're going to see the same thing with any even moderately sized IPO going into the future. And there are ways to get exposure to these things, but people like trading them, they like using them for hedges. And the other side is like if you're a retail investor, yes, these have high like expense ratios, but like for, you know, generating margin, like just buying these things. And as long as you understand what they are, it's actually you're basically getting institutional level costs to get leverage on an asset. Right? You're everything's being pooled and these ETF issuers are taking care of it for you. You're not paying the high margin fees that you would have to pay to short on your own. Theoretically, it's kind of being taken care of by the institution.
- [20:18]
A
Wait, so can you explain that a bit more? If you wanted to buy, let's say, 2x micron, right. If you didn't use the ETF. Where would you like? How would you do that?
- [20:27]
B
You would have to use margin on your brokerage account. Right? But this is, anyone can do this. You don't even need a margin account to buy these things as long as you understand what they are, right? These things are not. This is not to be forgotten. These are power tools. Like they are very path dependent. They only give you the stated return 2x or 2x long, 2x short over a one day time period. So what happens is if these things are volatile, like if you have a 2x long and a 2x short and this stock that it's tracking is going up, down, up, down, up, down, up, down, both of those are going to be down over time which like breaks people's brains. We call it volatility decay. There's a few other words for it. But basically you need to understand what you're dealing with when you're trading these things. These things are not meant to be held long term like they are truly power tools. And the way that they're traded, when we track these, for the most part people trading them understand like they're toning over their assets on like a regular basis like in a matter of couple days. So most people trading these products understand what they're dealing with. The problem is when you get people, you know, picking up a chainsaw that don't know how to use it and they chop their hand off, which is. You hear stories like that regularly related to ETFs and leveraged ETFs because people don't understand. And single stock ETFs are extreme versions of that in my opinion.
- [21:34]
A
My guess would be that more than 50% of people that buy into a single stock levered ETF is going to zero. Is that a fair assumption?
- [21:46]
B
I don't think going to zero for the most. I mean again these are short term trading tools. So I mean we've had VIX products that they are going to trend to zero no matter what. Like if you're going long vix. But there are time periods where like if you want to bet on volatility going up like a 2x Vix product over the next 2 or 3 days or 3x fixed product, whatever you can get is going to be the one of the best vehicles you can use, particularly as a retail investor. Now there are options experts and VIX experts that will tell you there's a way more efficient ways to make those trades. But for a normie person who's just trying to bet that volatility is going to go up in a short term trade. These are right there handed for you on a platter and that's why they're successful. People always tend to underestimate the willing up willingness to pay up for convenience. Right. Same thing happened before the Bitcoin ETFs launch. People were telling me like who is going to be buying a bitcoin etf? Like anyone who wants exposure to Bitcoin can get exposure on Coinbase or Gemini or river or Crack. And like anyone can get exposure if they want it. Like people like convenience. People like it in wrappers. They understand they want to just buy it on the brokerage platform and look at it. They were the most successful launch of all time. I think the same thing is true. We're likely going to get prediction markets ETFs in the coming years. The SEC is trying to sort that out. I get the same questions. Why would people need a prediction market ETF when they can just go to Kalshi or Polymarket and do it themselves? And the answer is convenience. So you package these trades for people, the 2x single stocks or covered call single stock or what have you. And there are plenty of people out there that are willing to pay a fee to have somebody run that strategy for them.
- [23:16]
A
How would the prediction market ETF work? Yeah, a binary outcome.
- [23:21]
B
Yeah. So they're not approved yet. The SEC is doing a lot of due diligence on this. I thought they were going to come out in May. It looked like things were going well and then some of the news came out. I don't know if you saw about like the Maduro raid and there was like an insider trading. I have a feeling that something came from above down the SEC and they're like, all right, we don't feel comfortable with this, the insider trading on prediction markets. So you need to figure that out. But there's still a whole bunch of filings. There's at least three issuers that are filed to do these things. The initial ones were set so that they would like the ETFs would actually terminate at the end of the contract so that the ETF ticker would go away. There are ETFs that do that already. They're called term bond funds. So they have, they hold bonds that will expire in some date and once they reach par or and maturity the ETF goes away. The more recent filings are doing it differently where they're going to keep the ticker around. So theoretically your, the filings that we're looking at are on politics mostly. So who's going to win the 2026 Senate and who's going to win the 2026 House and who's going to win the 2048 election? And then for each of those is a Democrat or Republican option. And what's going to happen is the way they're filed now, again, the SEC hasn't approved this is that one will functionally trade at $1 and one will functionally trade at $0 or roughly zero. And they'll close out those positions. They won't hold the underlying contracts. They'll be swap contracts with like banks in the same way that a lot of the ETFs work. And then once that ends, they'll roll it to the next iteration so it'll be the, the 2028 House and Senate elections. And the one that was a $0 ending will basically wait some time and go through a massive stock split to get the to some dollar amount and get rid of the shares or reverse stock split, I should say. And so they'll keep trading on so you every election. Theoretically, if these are approved, you'll be able to bet on the Dems or the Republicans winning the House or the Senate or the Presidency.
- [25:18]
A
That is unbelievable and mind blowing. And look, you and I sit in markets all day, every day, so we live and breathe this stuff. But if you were to have someone not in markets hear what we're talking about. Sounds ridiculous.
- [25:30]
B
It does sound ridiculous.
- [25:32]
A
It sounds like, you know, there's such a heavy gambling aspect to it, I think. And you know, I read Andrew Russ Sorkin's 1929 book, Excellent Book. And one of the things that happened in the lead up to the great crash was this proliferation of financialized products. So essentially democratizing leverage, leverage and advanced types of securities so that retail could access them. And it feels like the thing you're describing with prediction market ETFs, single stock ETFs, all these things are pointing to that same trend.
- [26:03]
B
Yeah, I actually kind of agree. I think like anything, the pendulum swings one direction and it goes too far. These products, if they are, if they do blow up or people lose interest or gambling goes away because the market gets hit pretty hard. Like the risk we were talking about with this unleashing of, of new IPO equity, they'll liquidate. It's capitalism. Right. These ETFs will cease to exist if people aren't willing to buy them and put money behind them. Right. So the market will decide where there is value. At the end of the day, the Other thing I would say is, like, the reason the SEC is holding. I think they're trying to figure out a way to draw a line. Like, I can easily make an argument why I would want to be able to hedge an election. Like, that makes complete sense to me. Or like, there are other filings for, like, will there be an economic recession? Will tech layoffs be larger this year than the year before? Like, all of that is very financial economical. It makes sense that people would want to hedge that in a very direct way. But like, sports betting, like, they need to draw a line here. Do we need, like, you know, I don't know, jets winning the Super bowl in 2027 ETF? Probably not. So I think the SEC is probably going to try to figure out a way to draw a line between, like, these things that make sense and the ones that don't. But believe me, if issuers think they can make money launching a jet Super Bowl 2027 ETF, when prediction markets, they will do it. So, yeah, I just think the other part of it is like, if you go back to when Trump first got elected in 2016, right, everyone was like, the market's going to tank. And like, if you every. All these banks had like, different baskets of stocks that you could bet on if certain people won, if certain people lost. Everyone thought bad things were going to happen if he won or lost, and they were pretty much all wrong. So, like, these prediction markets kind of take away that risk. Like, even if you do a prediction market on, like, I want to bet on, you know, Apple's AirPods sales or iPhone sales or whatever, sometimes they're like, they have a blockbuster quarter, but they guide down because they see something in the future and the stock goes down. So even if you were right on predicting those things, like, you could still get hit hard because something else happens. So there are reasons why these have value. But I agree with you. There is like this overzealous gambling type of fever that is happening in markets right now, but it's kind of always been there. Like, I've. My friends were gambling in stocks and options and trading when we were in college, and they've been gambling on sporting events since we were in college. So, like, I don't know, I just think, like, maybe it's kind of come more front and center, but I kind of think it's always been there. And like I said, pendulum will swing too far to one side and there'll be a washout of some sort.
- [28:32]
A
Yeah, the pain trade is going to hit real hard this Generation. Let me ask you about bitcoin. Bitcoin's down about 50% from its all time highs. What's going on?
- [28:46]
B
Oh my God. I think we need to record a separate podcast. I don't know. I mean it's really rarely one thing that causes this. It's usually a confluence of factors. And one of those factors is obviously I'd be remiss, not to mention the four year cycle. Like I was somebody that thought the four year cycle should mostly be done and if it's not that it should be like lower amplitude. I think there's serious risk now that we go, you know, lower than we already have. But I think part of it is like a self fulfilling cycle, right? Like you had what happened on 1010 with the liquidations, auto deleveraging and all those things. And we saw the crypto market utterly collapse and everyone is ready for the four year cycle and they're like, oh, it's happening and everyone just starts dumping and four year cycle is here. Obviously it's interesting in the sense that like risk assets and equities are flying absent last week, I guess. But for the most part, like I said, anything AI is race related is off to the races. Risk assets are doing well and bitcoin just isn't keeping up. But some of that might have to do. I mean, obviously there was a catalyst recently with, with strategy, selling some, some bitcoin. I don't know, I think it's just a huge confluence of factors that are causing what's happening. But it's interesting to see. Like one thing I did want to see is like, I don't want to see bitcoin trading exactly like stocks. But obviously if you're somebody in bitcoin, you're kind of upset it's not trading exactly like stocks, but you want it to be a diversifier, you want it to be to a different drum. So it'll be interesting to see. And like the other thing I would say is like when I look at bitcoin bear markets historically, like everyone only focuses on price. But like you got to look at the length of time that you're down here too. Which is why I'm concerned that we might not be done. I kind of thought maybe 60 would have been the bottom. Obviously. I don't know, like I'm not a don't listen to me for a prediction market on bitcoin price. But the bear markets are also measured in duration and started, I would make the argument it started in early October. So we're now into early June. So theoretically you got a few more months if, if, if history holds of at least sideways markets for bitcoin. But time will tell. I mean, anything can change. Clarity act is still potentially happening. I think that could be a positive catalyst. But yeah, there's. And then also I, we didn't even mention a Bitcoin ETFs have actually seen some meaningful outflows. But in the grand scheme of things, it's mostly the OG holders that are dumping these coins. But yeah, we're about 9ish billion dollars of outflows from the peak on 1010 and Bitcoin ETFs. But we still have almost $54 billion have come in since launch. Wow.
- [31:22]
A
You know, James, one of the things you've been writing about is the idea of this basis trade with bitcoin. I don't think most people know what that was or is. Can you explain what that is?
- [31:33]
B
Yeah. So if people are used to looking at perps in the crypto market directly, it's like, that's like the funding rate, this is like the tradfi version and it's not the same, but it's similar enough. And essentially what it is is like a lot of hedge funds, a lot of the money that came into the ETF somewhat early on were going after this basis trade. So the basis trade is there's futures, right? And they settle every single month. So at the end of the month you settle your futures, you either take delivery, you're settling cash. And when a futures market is in contango, that futures price is trading at a higher price than the current spot price. And what these hedge funds do, and people can do it too, is, and they were doing it before the ets, but it was a lot harder because they didn't have a spot asset. But what you do is you, you sell that future market for the, for bitcoin. So let's say bitcoin futures. It's not, it's trading at 100k right now. Bitcoin is 60k. You would sell 100k bitcoin and you'd buy spot right now, in this case the ETF at 60 ish K or whatever it is right now, depending on when you're listening to this and that spread you can earn, it's theoretically risk free because they should settle at the same price. Now that spread is way smaller. But you lever that up and you get exposure, that yield for a while. So in December of last year was north of 20% and virtually risk free. When the ETF first launched, it was also significant, like 10%. Usually basis yields are much lower. So this attracted a lot of hedge fund capital to come in. And flows that came into the ETFs at various points were largely like okay, basis yield is really strong, it's double digits right now. So we're going to put on a basis trade, we're going to sell that futures contract, we're going to buy the spot etf. And they don't really have any exposure to Bitcoin price, they're just better. They're benefiting from that difference, that contango that basis. The difference is the basis. So when that has gone down, which it has since October, it's been borderline nothing. It's been like 5% or less. Has it briefly went above 10% in April and into early May when you know, bitcoin made the run into 80k. So when Bitcoin is running and it's on a massive bull market, that curve steepens and it becomes really attractive for institutions to take advantage of that basis trade. For Bitcoin, Ethereum, Solana, xrp, you name it, that's where this basis trade would potentially happen. It's virtually non existent. The yield is like less than 5%. It's not much over the risk free rate for the most part. So anyone who is in that trade and was holding on for a while is like okay, I can put money elsewhere. So chunks of these outflows that we're seeing from these ETFs are likely from that. Whereas I think a lot of the advisors for the most part they're right sizing their allocations to their portfolios. They're putting up 2, 3, 5% of the portfolio. It goes down a lot. They're not super worried about it because it's such a small portion of your portfolio and they tend to be holding still and holding their Bitcoin ETFs a lot more than others. Now Ethereum ETFs on the other side, there has been a lot of advisor selling in addition to the hedge fund selling.
- [34:22]
A
So if the basis trade has sort of dwindled, let's say what are hedge funds doing now?
- [34:29]
B
They're just making markets in these ETFs. Right? So they're not really, they're probably bids and asks in the market for the etf. So they still hold them, they're still some of the larger holders that we know of. So not everyone is required to file a 13F how I track this stuff. But a lot of the hedge funds are in many cases they're like market making firms or market making arms of those hedge funds. The citadels of the world, the Jane streets, the Virtu millennium pod shops, they're doing some sort of other pairs trade or just making markets in the ETFs. There's no way to know for sure. Right. Like I'm just backing in and looking at what's happening with the open interest in the futures. Like I can see the open interest is going down so there's less people using the futures market. I can see flows coming out and I can see the basis yield going below 5% and flatlining around 5%. So that tells me a chunk of the flows that have come out of these things is likely from the basis trade. I don't know exactly what everyone else is doing that are holding these things.
- [35:23]
A
All those data points you bring up sound very bearish. It doesn't sound good for bitcoin holders.
- [35:29]
B
No, I mean this is what happens in a bear market. Like if you, you can go back anytime and look at different futures markets. We've, we've had the futures futures on Bitcoin since 2021 I think. So you can go back and look at the stuff, you can look at the off offshore exchanges. It's, it's, it's bear market things I guess is what I would say. So and if you, you know, you wait to buy until those things look way stronger, that might make sense. You like are, you know at some point you're like waiting for it to go above resistance and that's when you're going to buy. But theoretically this is what you would expect when a market is depressed. Right? Like basis is going to go down. And again when you see like a roaring bull market again, if we ever see one again in Bitcoin, you'll see one, that futures market, that futures market is going to be higher than the spot mark and you'll see that basis climb, you'll see hedge funds come in. But the only reason that basis climbs is because there's demand for the exposure and people think it's going to go up. So it's like this self fulfilling cycle. So it's not just the basis is going up, the basis is going up is because people want to be long. Like it's not there is some like self fulfilling this of it. But for the most part it's because people want to be long. The asset that that happens.
- [36:38]
A
James, you got a lot of data at the tip of your fingers here. When you look at the big picture of markets. We got these IPOs, we got crypto. What do you think most investors are getting wrong right now when they talk about markets
- [36:53]
B
getting wrong? I don't know. I get a lot of really dumb questions about crypto in particular. So it's funny, you have a lot of crypto people that don't understand how institutionalized finance is and how a lot of the things, like I feel like crypto keeps learning the lessons from Tradfi in the past. So I get a lot of questions about like, why does this even matter? I mean, a lot of the other concerns in more recent ones I've gotten a lot of like SpaceX and these index rule questions. People don't understand how the indices work. They don't understand what we talked about, that there's an index committee on the S&P 500. The other thing I would say is people don't understand how the NASDAQ 100 works. We talk about float, right? So the S&P 500, the Russell 1000, NE, MSCI, all the major industries for the most part use float weighting. So like they're not worried about, you know, too much of one of these mega cap IPO stocks coming in and, you know, overtaking there not being enough shares floating on the market for them to actually get the right exposure. NASDAQ doesn't use float. Nasdaq is the 100 names that are non financial stocks listed on Nasdaq and they use the full market cap. They don't care what the float is. So it's funny because people looked at what was going on with SpaceX and they have this 3x multiplier. So SpaceX is like we talked about 75 billion roughly whatever the IPO at NASDAQ is going to do 3x that. So NASDAQ is going to weight it in its index at 3x of whatever its IPO is. So 75 billion to 225. And people are like, that's just them trying to get exposure to SpaceX. They want SpaceX to list on Nasdaq. And that's probably partially true. They could have easily just said we're going to float weight things. But part of it is more so if they didn't change the rules for some sort of float adjustment, it would have gone in at that $1.8 trillion valuation and been like a multi 1 to 2% allocation in the NASDAQ 100. There's a lot of real niche esoteric stuff that I get my hands into. And so like a lot of the questions end up being around these real niche, detailed questions.
- [38:44]
A
Yeah, these are, I mean, certainly questions that are pretty high level, I would say. So they're pretty good questions to be getting. James, where can people find your work online?
- [38:54]
B
Yeah, I mean, I share a decent amount of it on Twitter, on x, j, s, ff. That's. I'm also on LinkedIn. But really, like, if you want full access to all my stuff, some of the notes that you read before we came on here, you need a Bloomberg terminal. So I'm going to assume a lot of people here don't have a terminal, but that's where you can find most of my stuff. And otherwise we share a pretty healthy amount of charts and data and we argue and debate with people online all the time about what we're writing and researching. And I feel like debating on those sites, particularly on X or Twitter, is the best way to like really back up your, your, your belief and thoughts and, and what's going on.
- [39:28]
A
And you are very active there. I will say you share some very good stuff. James, thank you so much for coming on the show and we'll do this again anytime.
- [39:35]
B
Yeah, thanks for having me. This was fun.