WEBVTT - 2008: The ETF Retrospective 0:00:05.880 --> 0:00:11.600 Welcome to Turians. I'm Joel Webber and I'm Eric Bell. Students, Eric, 0:00:11.640 --> 0:00:14.800 do you happen to remember what happened about ten years ago? 0:00:15.240 --> 0:00:18.960 Right now? Vaguely? Uh? You know, I was thinking, it's 0:00:18.960 --> 0:00:21.760 the ten year anniversary of two thou great financial Crisis, 0:00:21.800 --> 0:00:24.640 and when we were preparing for this, I actually didn't 0:00:24.720 --> 0:00:28.080 have many vivid memories, less than I thought. Neither did I. 0:00:28.080 --> 0:00:30.600 I actually, for me that it was I can bring 0:00:30.640 --> 0:00:33.239 this back to a podcast because Planet Money did this 0:00:33.280 --> 0:00:36.960 amazing episode about the financial crisis, and that I was 0:00:37.000 --> 0:00:39.239 not in financial journalism yet, and that was the thing 0:00:39.320 --> 0:00:43.320 that actually helped me understand what what was happening around us. 0:00:43.960 --> 0:00:46.320 I was in financial journalism at the beginning of my 0:00:46.360 --> 0:00:48.920 career in the late nineties, so I very much remember 0:00:48.920 --> 0:00:51.280 the Clinton years. But then I went to data. You know, 0:00:51.320 --> 0:00:52.760 I was working in funds, but we just had to 0:00:52.760 --> 0:00:55.400 get the n A V up, the shares out the holdings. 0:00:55.680 --> 0:00:58.760 Our job was much more mechanical than tied to the markets, 0:00:58.760 --> 0:01:01.040 whether markets up or down, you still have to get 0:01:01.040 --> 0:01:03.200 that data in there, and that was my main focus. 0:01:03.200 --> 0:01:05.479 That's why most of my memories are from my own 0:01:05.520 --> 0:01:09.800 account and remembering the political aspect to that crisis more 0:01:09.880 --> 0:01:13.440 than you know the financial aspect. But going back surprised 0:01:13.440 --> 0:01:15.360 me actually, And there's many different ways you could call 0:01:15.680 --> 0:01:17.840 call it a tenure anniversary, right, but I think the 0:01:17.840 --> 0:01:20.440 one that that everyone's gonna hang their hat on is 0:01:20.440 --> 0:01:25.399 gonna be the Lehman Brothers bankruptcy, which pappens September. And 0:01:25.440 --> 0:01:28.840 I also think that over time two thous eight becomes 0:01:28.880 --> 0:01:32.800 this boogeyman that is so big you just assume the 0:01:32.800 --> 0:01:35.039 whole year was this giant black hole. It cast this 0:01:35.120 --> 0:01:37.920 long shadow. It still gets brought up, but when you 0:01:37.959 --> 0:01:41.039 go back, there were definitely some some rough points, but 0:01:41.080 --> 0:01:44.600 it was much more diverse than just this general general 0:01:44.640 --> 0:01:46.920 black hole of of market. And then let's bring it 0:01:46.959 --> 0:01:48.360 back to et S because that's what we're going to 0:01:48.440 --> 0:01:51.920 spend the episode, talking about both what happened that year 0:01:51.960 --> 0:01:55.200 and what's happened since. And you found what five or 0:01:55.240 --> 0:01:58.080 so data points that we're gonna walk through. Yeah, So 0:01:58.200 --> 0:02:00.000 in preparing for this, I went through I just found 0:02:00.200 --> 0:02:05.200 I thought five stats that I found interesting, surprising, and 0:02:05.520 --> 0:02:10.160 pointed to deeper issues within how ETFs handled and behaved 0:02:10.240 --> 0:02:12.800 in two thousand eight. And because neither of us were 0:02:12.880 --> 0:02:15.560 really on the front lines. Were joined by a wonderful guest, 0:02:15.680 --> 0:02:19.240 Christine Harper, who is the editor of Bloomberg Markets magazine, 0:02:19.639 --> 0:02:22.160 and in two thousand eight she was actually covering banking 0:02:22.720 --> 0:02:26.239 for Bloomberg News, so she was literally at the front lines. 0:02:26.280 --> 0:02:29.359 That's basically the world started to crumble. So she'll be 0:02:29.440 --> 0:02:31.200 joining us and kind of helping us bring a different 0:02:31.240 --> 0:02:33.680 perspective of what it was actually like to be watching 0:02:33.760 --> 0:02:39.880 this thing in slow motion this week on Trilliance, Remembering 0:02:40.000 --> 0:02:43.959 two thousand eight and what it all means. Now, Okay, 0:02:44.240 --> 0:02:46.560 so Eric, you've got a stat that you want to 0:02:46.600 --> 0:02:49.400 start with. Christine Harper is joining us. She's the editor 0:02:49.440 --> 0:02:52.959 of Bloomberg Markets Magazine. She's also the author of a 0:02:53.080 --> 0:02:55.760 book forthcoming book about Paul Volker, which we're all really 0:02:55.760 --> 0:02:59.920 excited about. Eric, what's the first step. The first step 0:03:00.360 --> 0:03:02.880 is e t f s took in a hundred and 0:03:02.960 --> 0:03:06.040 seventy five billion dollars in flows in two thousand and eight. 0:03:06.960 --> 0:03:09.840 That is a bit right. So first of all, the 0:03:09.919 --> 0:03:13.679 context is I find this data shocking because the word 0:03:13.760 --> 0:03:17.520 on the street, especially from active funds, is hey, all 0:03:17.560 --> 0:03:19.800 you people going to passive that they're all weekends are 0:03:19.800 --> 0:03:21.520 going to flip out as soon as the market gets tough, 0:03:21.560 --> 0:03:24.359 and it's gonna the market will blow up even more 0:03:24.880 --> 0:03:26.520 because of all these e t f s. But if 0:03:26.560 --> 0:03:28.600 you look back in two thousand eight, e t F 0:03:28.639 --> 0:03:30.880 took in a hundred and seventy four billion, index mutual 0:03:30.919 --> 0:03:35.000 funds took in another looks like ninety billion, and active 0:03:35.080 --> 0:03:37.640 mutual funds lost two hundred and fifty nine billions. So 0:03:37.680 --> 0:03:40.960 if anything, it was the active mutual fund investors who 0:03:41.040 --> 0:03:45.240 got um you know, scared or panicked and left, whereas 0:03:45.280 --> 0:03:47.600 the e t F investors. Again, this is a net 0:03:47.720 --> 0:03:50.040 number over the year. Within months, there was definitely some 0:03:50.160 --> 0:03:52.560 volatility in and out of some products, but that is 0:03:52.720 --> 0:03:55.880 quite a shocking number in my opinion, given that you 0:03:55.920 --> 0:03:58.040 would think that e t fs are used more by 0:03:58.120 --> 0:04:02.160 retail and advisors, less sophisticated investors. They trade intra day 0:04:02.280 --> 0:04:05.520 and so they would be sold off in mass and 0:04:05.560 --> 0:04:07.360 people running for the hills. Christine, I want to I 0:04:07.400 --> 0:04:11.200 want to rewind the clock too. You were on the 0:04:11.280 --> 0:04:16.960 finance team covering Goldman Morgan Stanley. How familiar were you 0:04:17.080 --> 0:04:19.360 with ETFs at that point in time? So at that 0:04:19.400 --> 0:04:21.920 point in time, we I knew they existed, but what 0:04:22.040 --> 0:04:24.640 I'd like to say is that at that point you 0:04:24.720 --> 0:04:26.560 can almost think of the run up to the financial 0:04:26.640 --> 0:04:30.240 crisis as a run up in investment in a liquid products. 0:04:30.880 --> 0:04:33.960 I mean, Goldman Sachs disclosed in early two thousand seven 0:04:34.120 --> 0:04:37.640 that they had a hundred and eleven billion dollars of 0:04:37.800 --> 0:04:42.360 assets that they defined I gotta read this phrase as 0:04:42.480 --> 0:04:46.080 more difficult to fund on a secure basis during times 0:04:46.120 --> 0:04:48.560 of market stress that was up, that was more than 0:04:48.640 --> 0:04:52.559 double two years earlier, everybody was, you know, plunging into 0:04:53.560 --> 0:04:58.320 mortgage backed securities that were put into c d O 0:04:58.440 --> 0:05:00.560 s and then into c d O squares, things that 0:05:00.680 --> 0:05:04.440 were almost inherently illiquid, with the assumption that they would 0:05:04.440 --> 0:05:06.719 always go up in value or they could always find liquidity. 0:05:06.920 --> 0:05:09.040 And they always had these you know, great acronyms of 0:05:09.200 --> 0:05:11.360 nbs and c d O s. But the point was 0:05:11.440 --> 0:05:13.560 they were all traded through banks that none of them 0:05:13.600 --> 0:05:16.320 were on exchanges. They were very difficult to get out 0:05:16.360 --> 0:05:18.800 of when people wanted to get out of. So my 0:05:18.960 --> 0:05:22.240 theory is that E t F s, almost by dint 0:05:22.279 --> 0:05:25.680 of the fact that they were exchanged traded funds, became 0:05:25.800 --> 0:05:28.440 the one of the go to assets just purely for 0:05:30.120 --> 0:05:33.440 I mean, t bills were trading trading negatively at that period. 0:05:33.680 --> 0:05:37.000 People just wanted liquidity, no matter what the cost. So 0:05:37.760 --> 0:05:39.280 it makes a lot of sense to me that all 0:05:39.320 --> 0:05:42.560 this money that was desperately getting out of a liquid 0:05:42.600 --> 0:05:47.320 credit was going into exchange traded funds. Because also another 0:05:47.360 --> 0:05:50.120 thing that was happening at that point for the banks, 0:05:50.680 --> 0:05:54.560 there became this vogue for reporting what did you ever 0:05:54.640 --> 0:05:59.080 hear this term level three assets? Probably it rings all 0:05:59.279 --> 0:06:01.800 that became very, very very important to investors during the 0:06:01.839 --> 0:06:04.200 financial crisis because what it is is it's the most 0:06:04.520 --> 0:06:08.240 hard to value assets on banks balance sheets, and those 0:06:08.279 --> 0:06:12.120 were the ones nobody wanted, right, So exchanged anything exchange 0:06:12.120 --> 0:06:14.719 traded as a level one asset, that's great. Then level 0:06:14.760 --> 0:06:17.040 two are things where there's some inputs that are a 0:06:17.080 --> 0:06:19.680 little bit less clear. Level three are the ones where 0:06:19.720 --> 0:06:21.680 they're basically it's their own model that tells them how 0:06:21.760 --> 0:06:25.560 much it's worth. And so literally investors were demanding, we 0:06:25.640 --> 0:06:28.320 were sending headlines on the amount of level three assets 0:06:28.360 --> 0:06:31.000 that banks had and that banks were trading on how 0:06:31.240 --> 0:06:33.520 liquid they were. I'm sure those stories were getting highly 0:06:33.720 --> 0:06:36.720 highly read, yes, and so any amount of any any 0:06:37.640 --> 0:06:39.160 It makes sense to me that people are going into 0:06:39.160 --> 0:06:42.120 exchange traded funds purely for liquidity. And the other thing 0:06:42.720 --> 0:06:45.240 which we've talked about a lot, the you know c 0:06:45.400 --> 0:06:47.160 d O s and if he has were part of 0:06:47.200 --> 0:06:49.279 the problem was that you didn't know what you exact 0:06:49.680 --> 0:06:53.440 There was no transparency, and so almost the perfect antidote 0:06:53.440 --> 0:06:55.680 to that was an exchange trade exactly where you could 0:06:55.680 --> 0:06:58.400 see what you're you were getting. When when Um in 0:06:58.520 --> 0:07:02.120 the book I wrote nameless plug, one of the advantages 0:07:02.200 --> 0:07:07.080 that I don't want to hear it again. You don't 0:07:07.080 --> 0:07:09.760 even know what it is, and that's not the name 0:07:09.880 --> 0:07:12.440 the institutional e t F two. Okay, all right, we're 0:07:12.480 --> 0:07:15.520 friends again. Okay, all right. Um. One of the advantages 0:07:15.600 --> 0:07:18.200 that I will riff off this, which was when I 0:07:18.280 --> 0:07:21.119 was going through and interviewing people by advantages, is fiduciary vehicle. 0:07:21.480 --> 0:07:23.440 And I think that speaks to the level one asset, 0:07:23.720 --> 0:07:25.520 the fact that there's a prospectus tied to it, the 0:07:25.560 --> 0:07:27.800 fact that it's a forty act fund. I do think 0:07:27.840 --> 0:07:29.680 that probably give people a lot of comfort in a 0:07:29.800 --> 0:07:32.720 time of derivatives, and the fact that you know it 0:07:32.880 --> 0:07:36.400 trades like futures, but it is backed. Those stocks that 0:07:36.480 --> 0:07:38.400 are in the e t F are with a custodian 0:07:38.560 --> 0:07:42.600 physically backed probably did help that year in terms of 0:07:42.720 --> 0:07:45.400 being a contrast to these other products. And there's real 0:07:45.440 --> 0:07:55.160 time pricing, right, that's very transparent. Okay, Point number two, 0:07:55.960 --> 0:07:58.920 this one riffs great off of the first conversation, which 0:07:59.000 --> 0:08:02.440 is that each f S traded just about trillion dollars 0:08:02.480 --> 0:08:05.840 worth of shares. Now that's significant for a couple of reasons. 0:08:06.360 --> 0:08:08.000 First of all, it's more than the US GDP. That's 0:08:08.000 --> 0:08:11.560 a lot of money exchanging hands. Second, that is by 0:08:11.680 --> 0:08:14.440 and far the most et f s ever traded in 0:08:14.560 --> 0:08:17.080 a year ever to this day, and they only had 0:08:17.080 --> 0:08:20.680 a sixth of the assets back then. Why. Here's why, 0:08:20.880 --> 0:08:24.760 and it just speaks what when the going gets tough, 0:08:25.480 --> 0:08:28.120 E t f s tend to be traded more and more. 0:08:28.640 --> 0:08:32.040 They sort of thrive in volatility. They are trading vehicles, 0:08:32.080 --> 0:08:34.640 so when people are uncertain, that's when they tend to 0:08:34.679 --> 0:08:37.640 go up. And they tend to be about of the 0:08:37.840 --> 0:08:40.880 equity trading every day, but in highly volatile times they 0:08:40.920 --> 0:08:45.480 can be and this has been indicated since then. Um. 0:08:45.760 --> 0:08:50.360 In fact, I've frequently charted sp wise dollar volume with 0:08:50.520 --> 0:08:54.160 the VIX. I mean it perfectly overlays. In other words, 0:08:54.640 --> 0:08:57.199 it's almost like E t F volume is a fear gauge. 0:08:57.600 --> 0:08:59.280 And part of the reason is people can use et 0:08:59.440 --> 0:09:02.200 F to short there's options on them. There's all kinds 0:09:02.240 --> 0:09:05.959 of ways you can use them to protect yourself, go along, speculate, 0:09:06.400 --> 0:09:08.839 and ultimately their liquids so on the portfolio. If you 0:09:08.840 --> 0:09:11.120 don't want to disturb your individual holdings, the E t 0:09:11.240 --> 0:09:13.280 F might be the first thing you move around to 0:09:13.440 --> 0:09:16.440 deal with what's happening out there. I like the idea 0:09:16.640 --> 0:09:18.480 of E t F s a the fear gauge, right, 0:09:18.480 --> 0:09:21.000 And we talked about that actually a little earlier in 0:09:21.080 --> 0:09:24.000 the year with what happened back in February when we 0:09:24.080 --> 0:09:27.080 also saw some volatility. When you look back and can 0:09:27.200 --> 0:09:29.360 kind of compare the volatility at those two moments and 0:09:29.400 --> 0:09:31.760 the volumes that were happening, what do you what do 0:09:31.840 --> 0:09:34.960 you notice between what we saw earlier this year? How 0:09:35.000 --> 0:09:38.480 do they compare? Just size? Uh, you know, early February 0:09:38.559 --> 0:09:41.880 was pretty intense. Uh. The spy traded about ninety billion 0:09:42.160 --> 0:09:46.040 on a couple of days. That's almost its record was 0:09:46.080 --> 0:09:48.800 a hundred billion just about back in two thousand eight, 0:09:48.920 --> 0:09:50.559 So it had a day or two in February where 0:09:50.559 --> 0:09:52.760 almost trade as much. But you have to remember SPY 0:09:52.960 --> 0:09:55.280 is much bigger than it was back then, so if 0:09:55.320 --> 0:09:58.920 you adjust for the asset size two eight, you could 0:09:59.000 --> 0:10:01.679 argue was two or three times more than anything that's happened, 0:10:01.720 --> 0:10:05.640 since that's how mega that year was in certain days, 0:10:05.679 --> 0:10:07.560 and there was even a month where SPY traded over 0:10:07.679 --> 0:10:09.920 a trillion dollars into this day, that's the most it 0:10:09.960 --> 0:10:13.079 ever traded in a month, which which month was that October? 0:10:13.240 --> 0:10:15.120 That was the roughest month of the of the year. 0:10:15.480 --> 0:10:18.319 So what what how much bigger is the et F 0:10:18.440 --> 0:10:20.840 market now than it was ten years ago? Six times? 0:10:21.080 --> 0:10:23.160 So now it's got three point six trillion and it 0:10:23.240 --> 0:10:26.319 had about six billion back then. So that is why 0:10:26.400 --> 0:10:29.040 that number, that dollar volume number, because when you make 0:10:29.080 --> 0:10:31.480 a dollar volume, you adjust for the assets. So that's 0:10:32.280 --> 0:10:34.640 that is an I mean, if you take six billion 0:10:34.720 --> 0:10:37.200 and put into trillion, what is that that's the amount 0:10:37.200 --> 0:10:38.920 of turnover that year in e t F. It's a 0:10:39.000 --> 0:10:42.640 large number, way larger than normal. And Christine, can you 0:10:43.080 --> 0:10:46.840 now that we know October was that that that month 0:10:46.880 --> 0:10:49.040 with that volume, can you put us back in what 0:10:49.200 --> 0:10:52.480 it was like then, Well, October, you're right, I mean 0:10:52.559 --> 0:10:56.440 that was the most dire month. That was a month 0:10:56.520 --> 0:11:00.280 where you know, so it was September every but you know, 0:11:00.440 --> 0:11:05.240 Lehman got went bankrupt. Meryl was acquired by Bank of America. 0:11:05.240 --> 0:11:09.320 A week later, Goldman and Morgan Stanley converted to bank 0:11:09.400 --> 0:11:12.959 holding companies supervised by the FED. They also both got 0:11:13.080 --> 0:11:17.120 equity injections. In Goldman's case it was from Warren Buffett 0:11:17.160 --> 0:11:21.240 and uh Morgan Stanley's case it was from this Japanese bank. Um. 0:11:22.320 --> 0:11:27.320 But it wasn't until October that Paulson then sent Secretary 0:11:27.320 --> 0:11:30.120 of the Treasury Hank Paulson brought all the CEOs of 0:11:30.200 --> 0:11:33.520 the nine biggest financial institutions at the time to Washington 0:11:33.679 --> 0:11:35.959 and basically told them they were going to all get equity. 0:11:36.160 --> 0:11:38.080 This was the tart the first round of the tarp, 0:11:39.040 --> 0:11:41.520 and that was the point at which people started to 0:11:41.600 --> 0:11:44.920 feel like, okay, there's a bottom to this. But right 0:11:45.040 --> 0:11:47.680 up to that point, and that was Columbus Day. I remember, 0:11:47.760 --> 0:11:50.199 it was a it was a national it was federal holiday. 0:11:50.840 --> 0:11:54.120 Um so one of those convenient federal holidays where everybody 0:11:54.120 --> 0:11:57.079 actually works, but yeah, exactly. The markets were open, I 0:11:57.200 --> 0:12:02.840 think yeah, so um, but it was it was really unclear. 0:12:02.880 --> 0:12:05.800 And there was also that vote in Congress I think 0:12:05.880 --> 0:12:08.839 in early October before that when they voted down the 0:12:08.920 --> 0:12:12.319 TARP originally, and that was I think you'll remember that 0:12:12.400 --> 0:12:14.480 was when the market really went. That was one of 0:12:14.520 --> 0:12:17.439 the worst days in the equities market we saw, and 0:12:17.520 --> 0:12:20.760 then they reversed the vote. But I wouldn't be surprised 0:12:20.760 --> 0:12:22.760 if that day when the vote on TARP, the first 0:12:22.840 --> 0:12:25.040 vote on TARP happened, whether that wasn't the day when 0:12:25.080 --> 0:12:27.360 you saw the biggest trading. And one thing to add 0:12:27.400 --> 0:12:29.280 here is even though E t F s I think 0:12:29.320 --> 0:12:31.360 got a good grade in two thousand eight were trading 0:12:31.760 --> 0:12:33.199 and I think they did well. I just saw the 0:12:33.240 --> 0:12:35.880 Turkey et F traded fine through all the drama. Briggs 0:12:35.880 --> 0:12:38.480 that they did well, but they've had a couple problems. 0:12:38.520 --> 0:12:44.079 August fifteen, that was that was some crazy days in 0:12:44.120 --> 0:12:47.400 the market. That day, in particular, what happened was E 0:12:47.559 --> 0:12:50.040 t F started trading at discounts. And it wasn't just 0:12:50.120 --> 0:12:52.120 some exotic ones like X I V. There's been some 0:12:52.240 --> 0:12:54.520 sort of exotic blow ups here and there, but this 0:12:54.720 --> 0:12:58.120 was like Vanguard Dividend e t F, and I think 0:12:58.240 --> 0:13:00.360 what what really is important remember here is as long 0:13:00.400 --> 0:13:04.599 as the exchange is having pricing for the stocks and 0:13:04.720 --> 0:13:07.880 the bond market is it available to investors, and there's 0:13:07.920 --> 0:13:10.920 futures pricing. As long as these inputs are available to 0:13:11.000 --> 0:13:13.480 market makers, ets will trade fine. I called that the 0:13:13.480 --> 0:13:16.360 plumbing when the some hiccups start to emerge on August, 0:13:16.880 --> 0:13:19.680 they had made rules from the flash crash that had limits. 0:13:19.760 --> 0:13:21.720 So if an e t F started to trade, um, 0:13:21.920 --> 0:13:23.880 I think it was belower above ten percent, they just 0:13:24.120 --> 0:13:26.920 halted it. So what happens is stocks were halted, but 0:13:26.960 --> 0:13:29.120 the e t F wasn't, and so market makers did 0:13:29.160 --> 0:13:31.120 not know how to price what the e t F 0:13:31.280 --> 0:13:34.160 was worth. That's the worst they've cleaned that up since then. 0:13:34.200 --> 0:13:36.280 That's why Bragg's it did fine. But that's so I 0:13:36.320 --> 0:13:38.120 just want to point out that e t f s 0:13:38.200 --> 0:13:40.560 are they have a good record, but there have been 0:13:40.600 --> 0:13:44.760 some cases. Usually it's involved if there's lack of pricing 0:13:45.200 --> 0:13:47.160 in the underlying holdings of e t f s. That's 0:13:47.200 --> 0:13:48.640 when you can have a problem with the e t 0:13:48.760 --> 0:13:50.880 F trading. That's interesting because I think it was an 0:13:50.880 --> 0:13:53.880 October two thousand night also when they halted sword sales 0:13:54.840 --> 0:13:58.120 because the bank started complaining that their stocks were falling 0:13:58.200 --> 0:14:02.319 to and uh and so it's interesting that e t 0:14:02.400 --> 0:14:05.000 F survived that without any hiccups because that caused a 0:14:05.080 --> 0:14:08.079 lot of issues. If that happens, the e t F 0:14:08.160 --> 0:14:10.800 will trade, but it will move away from its fair value, 0:14:10.840 --> 0:14:14.000 and sometimes that fair value is actually stale. It hasn't 0:14:14.080 --> 0:14:18.320 taken into account like other data. Um, So the takeaway 0:14:18.360 --> 0:14:21.120 here is that, uh, you know, they're not they are 0:14:21.280 --> 0:14:24.960 vulnerable if in fact there's a problem with the anything 0:14:25.160 --> 0:14:35.680 that they hold. Okay, Number three, we're gonna talk about active, right, Yeah, 0:14:35.800 --> 0:14:38.960 because two thirds of active mutual funds underperformed the S 0:14:39.040 --> 0:14:42.200 and P five. This was big for a couple of reasons. One, 0:14:42.240 --> 0:14:45.000 the market was down, so you had to be really 0:14:45.080 --> 0:14:48.560 bad to underperform it. That to me, I think left 0:14:48.600 --> 0:14:50.880 the bad taste and a lot of investors mouths because 0:14:50.880 --> 0:14:52.760 I think they thought, hey, look, I'm paying you this money. 0:14:53.120 --> 0:14:56.440 Couldn't you have sidestep this at all? And you're seeing 0:14:56.640 --> 0:14:59.640 some high profile people actually pull off, like, you know, 0:15:00.000 --> 0:15:02.720 the biggest win of all time basically with some of 0:15:02.760 --> 0:15:06.600 their bets. Yeah, and normally two thirds of active equity 0:15:06.640 --> 0:15:09.040 funds will underperform the benchmark. But a lot of the 0:15:09.120 --> 0:15:12.160 active managers will say, well, that's just because of quantitative 0:15:12.160 --> 0:15:14.480 easing in this bull market, it's made it harder to outperform. 0:15:15.080 --> 0:15:17.920 But this data shows that it's kind of doesn't matter 0:15:18.000 --> 0:15:20.520 the market and the two thirds number, to me, is 0:15:20.560 --> 0:15:23.560 really the cost issue. If you took away all their fees, 0:15:24.000 --> 0:15:26.800 you'd have two thirds of them outperforming. So cost is 0:15:26.840 --> 0:15:28.920 a big issue why they underperformed. But the other issue 0:15:29.000 --> 0:15:32.160 is that active managers. I have empathy for them. If 0:15:32.160 --> 0:15:34.720 you're an active equity fund, a lot of times you 0:15:34.960 --> 0:15:37.680 you can't not hold these big stocks in the sp 0:15:38.360 --> 0:15:40.400 because if you don't hold them when the market's going up, 0:15:40.680 --> 0:15:43.960 you'll lag and get fired. So that's what's developed what's 0:15:43.960 --> 0:15:47.080 called closet indexing. And I don't quite blame them because 0:15:47.320 --> 0:15:50.800 advisors like something that mirrors the index, and so a 0:15:50.840 --> 0:15:52.400 lot of them were just holding the same stock, so 0:15:52.440 --> 0:15:55.080 there's no way they could have possibly sidestepped it when 0:15:55.120 --> 0:15:57.800 they're holding the same thing perform and that's the conundrum 0:15:57.800 --> 0:16:01.120 they're currently in. I mean, I'd talk of fund managers 0:16:01.120 --> 0:16:03.880 all that year, and there was a sort of desire 0:16:04.160 --> 0:16:06.120 on the part of a lot of them to believe 0:16:06.240 --> 0:16:09.120 the worst was over. So you had the Barristern's collapse 0:16:09.200 --> 0:16:13.640 in March, and then we interviewed financial stock investors who 0:16:13.680 --> 0:16:16.000 were convinced, Okay, that's it, you know, let's get in, 0:16:16.720 --> 0:16:18.440 and of course they got slaughtered. In the second half 0:16:18.440 --> 0:16:20.200 of the year, the same thing. People were getting into 0:16:20.240 --> 0:16:22.760 Fannie and Freddie convinced that there was no way it 0:16:22.800 --> 0:16:25.520 would I mean, there were just nobody had ever seen 0:16:25.600 --> 0:16:27.600 anything like this, so they kept jumping in trying to 0:16:27.680 --> 0:16:30.480 catch this falling knife and getting burned by it. And 0:16:30.560 --> 0:16:33.560 then and also I mean, I think, I think, I 0:16:33.640 --> 0:16:36.080 think hedge funds didn't didn't prove themselves to be such 0:16:36.160 --> 0:16:39.240 great hedges. And with a few very notable examples, and 0:16:39.440 --> 0:16:42.320 here's one example. The worst of the big active funds 0:16:42.360 --> 0:16:46.320 was Fidelity Magellan. It was down that year. That must 0:16:46.360 --> 0:16:54.680 have been one of the falling knife catchers. Okay, number four. 0:16:55.560 --> 0:17:00.320 Number four Gold showed the meaning of zero correlation. And 0:17:00.440 --> 0:17:02.760 what I mean by that is gold is perceived as 0:17:02.760 --> 0:17:05.400 a safe haven. Gold was up three percent that year, 0:17:05.520 --> 0:17:08.800 so while it didn't go down, it didn't exactly offset 0:17:09.359 --> 0:17:12.920 the losses in the SP correlated with anything correct, It's 0:17:12.960 --> 0:17:15.560 got zero correlation, which interesting the next year when the 0:17:15.600 --> 0:17:19.199 market rebounded, gold rebound rate with it. Well, I think 0:17:19.359 --> 0:17:22.520 what it is correlated with is inflation fears, and so 0:17:22.720 --> 0:17:24.760 as the central banks went in and started pumping in 0:17:24.840 --> 0:17:27.479 liquidity late in two thousand eight early two thousand nine, 0:17:27.880 --> 0:17:30.360 that's when you saw a lot of big investors say, oh, 0:17:30.520 --> 0:17:33.080 this is a time to start hoarding gold and buying 0:17:33.119 --> 0:17:36.960 real estate and preparing for you know, hyperinflation, which of 0:17:37.320 --> 0:17:40.879 course by two thousand twelve they realized wasn't coming. And 0:17:41.000 --> 0:17:43.080 I think that's true. Gold has a lot of currents 0:17:43.119 --> 0:17:46.080 coming at it um. You know, there's there's emerging markets, 0:17:46.119 --> 0:17:48.680 buyers that come in and weird you know. You I 0:17:48.920 --> 0:17:52.000 learned to appreciate the zero correlation because it doesn't do 0:17:52.119 --> 0:17:54.440 what anybody thinks it should do. And that's why I 0:17:54.480 --> 0:17:57.479 think it's a decent diversifier, because it's that's special. Almost 0:17:57.520 --> 0:18:00.520 everything is negative or positive correlation, but it's not. It's 0:18:00.560 --> 0:18:02.360 a shaky hedge, and I think that's where it gets 0:18:02.440 --> 0:18:05.120 miss characterized a lot. But what was a good hedge, 0:18:05.359 --> 0:18:08.240 what really worked was long dated treasuries T l T 0:18:08.440 --> 0:18:10.399 which is the twenty plus your treasury e t F 0:18:10.520 --> 0:18:12.600 was up the exact same amount of the market was down, 0:18:12.680 --> 0:18:15.680 So if you had long dated treasurys, you completely offset 0:18:16.280 --> 0:18:18.320 your losses in the market. And the best performing e 0:18:18.359 --> 0:18:20.399 t F that year was e d V, which is 0:18:20.440 --> 0:18:23.720 an extended duration TRIST Treasury strips the duration on that's 0:18:23.720 --> 0:18:25.600 like twenty seven years, so it has the highest interest 0:18:25.720 --> 0:18:29.200 rate sensitivity possible. That was up fifty that year. And 0:18:29.280 --> 0:18:31.240 as long as we're talking about performance, you pulled a 0:18:31.280 --> 0:18:33.240 couple of other numbers that are sort of noteworthy to 0:18:33.400 --> 0:18:37.280 write the VIX right. So the VIX was up and um, 0:18:37.400 --> 0:18:39.879 their vix et p s are controversial because they always 0:18:40.480 --> 0:18:43.040 they have role costs that can be a year. So 0:18:43.200 --> 0:18:48.960 VXX is down since launching. However, in a crisis, that 0:18:49.240 --> 0:18:52.080 role cost can turn into roll yield. So the VIX 0:18:52.119 --> 0:18:55.400 Futures Index, which VXX tracks, because VXX wasn't around two, 0:18:56.040 --> 0:18:58.920 it was up a hundred and twenty. In other words, 0:18:59.440 --> 0:19:02.480 if you help vicks futures, enrolled them because the demand 0:19:02.560 --> 0:19:05.320 for short term VIXED futures was so high, you actually 0:19:05.400 --> 0:19:08.320 were buying low and selling high constantly, and you actually 0:19:08.359 --> 0:19:11.760 made a one guy in his garage did that, Well, 0:19:11.800 --> 0:19:16.359 that's like the black swan, right. Well, that to me, 0:19:16.440 --> 0:19:18.520 I call that the jackpot potential. And that's why the 0:19:18.600 --> 0:19:21.840 vix products are media proof. They've never gotten a good review. 0:19:21.880 --> 0:19:24.880 They're like an Adam Sandler movie, like they've literally never 0:19:25.000 --> 0:19:27.240 They always get trashed, but they see a lot of 0:19:27.320 --> 0:19:31.000 volume because when they work, there's nothing like it um 0:19:31.240 --> 0:19:33.480 where I like, I like when people UM give possible 0:19:33.520 --> 0:19:35.320 black swans, I'm like, if you know it, it's not 0:19:35.440 --> 0:19:38.640 the black swan, right, because you're being trading it, right, Yeah, 0:19:39.720 --> 0:19:44.640 it's some unknown thing that we don't know. Okay. Number five, 0:19:45.000 --> 0:19:49.200 the junk bond etf saw inflows of one point five billion. 0:19:49.320 --> 0:19:52.520 I found this astonishing because h y G is the 0:19:52.520 --> 0:19:57.320 big junk bond I don't know. In fact, what's interesting 0:19:57.400 --> 0:19:59.000 is if you look at the h y G s 0:19:59.040 --> 0:20:03.720 performance that year, it was okay until about October, and 0:20:03.800 --> 0:20:07.520 then it went down thirty percent in ten weeks. I mean, 0:20:07.680 --> 0:20:09.720 this was a blood bath. It was the It was 0:20:09.800 --> 0:20:12.200 the reason people worry about junk bonds. This was the 0:20:12.280 --> 0:20:14.800 kind of sell off that has people shorting junk bond 0:20:14.840 --> 0:20:17.479 ETFs every now and then. In mass and it went 0:20:17.560 --> 0:20:19.480 down that much, and there was a couple of days 0:20:19.480 --> 0:20:23.160 of outflows, but mostly it saw inflows. There were buyers 0:20:23.720 --> 0:20:25.760 apparently for the e t F at that time. I 0:20:25.800 --> 0:20:28.440 don't remember. Again, I wasn't studying as it closely, but um, 0:20:28.640 --> 0:20:30.440 that's when it saw its most inflows and then when 0:20:30.480 --> 0:20:32.720 it hit that bottom boy, where the flow is really 0:20:32.760 --> 0:20:35.879 coming in. So clearly there are these vulture type buyers 0:20:35.960 --> 0:20:38.639 out there, which should give some comfort because h y 0:20:38.720 --> 0:20:40.280 G to me is the canary in the coal mine 0:20:40.600 --> 0:20:42.760 in terms of people worrying about the et F structure 0:20:43.119 --> 0:20:44.920 because they're like, well, yeah, sure to can do equities, 0:20:44.960 --> 0:20:46.639