As we wrap up the year and celebrate the festive season, we wanted to share some of our favorite moments from one of your favorite Wealthion interviews from 2024: Jesse Felder with Andrew Brill. Enjoy!
All the best for a happy, healthy, and prosperous New Year!
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Original interview, aired Dec 12, 2024: https://youtu.be/9WvDrWrOB_I
Andrew Brill 0:00
Happy Holidays from all of us here at wealthion. To all of you, I’m one of your hosts here at wealthion. Andrew brill, we took a look back at this year, and hope you enjoy these favorite guest moments from one of our best interviews of 2024
Andrew Brill 0:18
is the strength of the dollar a driver behind a lot of foreign investment into the US stock market?
Jesse Felder 0:26
Yeah. I mean, one of my favorite charts is there’s a, almost a perfect correlation between the relative performance of US stocks and the dollar. Right? US stocks outperform foreign counterparts when the when the dollar goes up, and that’s just a reflection of dollar. You know, money coming into dollars. Where does it go? It goes into the into the stock market. I thought it was interesting. You know, Rutger Sharma is one of my favorite editorial writers for the Financial Times. He’s the chair of Rockefeller internationally. Wrote an interesting piece last week about he called the mother of all bubbles in the US stock market. And he, may he, you know, kind of outlines this point that US stock market has been, you know, magnet for foreign capital for a number of years. And he was at an investment conference in Singapore recently, the moderator asked, How many people in this room don’t own Nvidia? And not a single hand went up. So it just tells you, you know, globally, everybody you know wants to own the Magnificent Seven and all these stocks and and that is a trend that coincides with dollar strength. So you know, if we’re going, if we are seeing potential another peak in the dollar, similar to kind of what we saw in that 2002 time frame, then you know, we’re going to probably see the outperformance of us. Stocks potentially reverse course, and real assets probably outperform financial ones generally, just like they did from that 2002 to 2012 time frame. So
Andrew Brill 1:59
as the incoming administration and Scott bass trying to devalue the dollar a little bit. That would mean there could be an, I guess, an outflow of cash from US stocks at that point couldn’t there. And that could be that could, I don’t want to say, cause a crash, because I don’t want to, you know, set off any alarm bells, but it could seriously go down a little bit. Yeah, you
Jesse Felder 2:25
know, I mean, there’s, there’s a lot of foreign capital in US stocks. I think there’s evidence to see. You know, Japanese investors, Korean investors, even Chinese investors, support a lot of money into US stocks. I think, honestly, the bigger risk I’m concerned about in the short run is not necessarily foreign capital flight. It’s the fact that active, you know, the few active managers left in the market today have realized the only source of outperformance, or even even generating returns, is trying to front run passive flow. So much money has gone into passive and Mike Green wrote an interesting piece on this over the weekend about how, you know, literally, value investing hasn’t worked. You know, reversion to the mean hasn’t worked in any respect, in terms of for active, active investors. And what has worked is momentum. And the momentum factor over the last 12 months has had one of its, you know, best 12 month performances in the history, you know, going back through the market. I mean, I think it’s 1999 and 2021 are kind of the only times we’ve come close to what we’ve seen. And I think that is just a a, you know, a function of active managers, you know, hedge funds and these types of things, realizing, when there’s a lot of passive money coming into the market, we’ve seen record inflows into Vanguard funds and passive vehicles. This year, the best way to make money is to front run those flows. And so you get, you get a compounding effect. And in the markets where everything is highly leveraged to flows, and that, you know, obviously creates some fragility, because as soon as you don’t, soon as those flows, you know, Peter out or reverse, course, everybody is on the same side of the boat, and that trade reverses. And I think that’s something that not enough people are really paying attention to us. The you know, the history of the momentum factor also shows, whenever you have a year of big, strong momentum, there’s usually a painful hangover on the other side of that. It’s a very close correlation. It’s actually a very good predictor of 12 month returns in the s, p5, 100 the momentum factor. So you have a really good, strong year in momentum typically leads to a reversion in stock prices, broadly speaking, over the next 12 months,
Andrew Brill 4:44
we’ve had Mike on, and he is very concerned about that passive investing, because it’s done a lot by algorithms. It’s not even someone saying, Okay, we’re gonna, we’re gonna invest in this. It’s like, Look, if one numbers off slightly, doesn’t matter. Matter whether there’s a good reason or not, that passive investing could flow in or out very quickly, and it’s the retail investor that gets hurt. Yeah,
Jesse Felder 5:08
yeah. And I think that, you know, it’s as I mentioned, we’ve seen record inflows into passive this year. And so the best performing strategy in the market has been front run. Front run, those passive flows. How do you do that? You buy the biggest stocks in the market. You buy the Microsoft, Nvidia, Apple, and, you know, I just look at a stock like Apple trading at 40 times earnings, witnessing its slowest revenue growth and earnings growth over the next 12 months. It’s seen in a long time, and its highest valuation at the same time, to me, that is just, you know, the fingerprints of passive, right? Who’s willing to pay a record valuation for a company that’s seeing its slowest, slowest growth, you know, going forward, and that’s just price insensitive, insensitive buyers. And so, you know, it’s, you know, on the flip side of that too, you have Warren Buffett offloading the majority of his apple stake, because I think he’s realized these dynamics that, you know, at 40 times earnings, it does not, it’s not nearly as compelling a prospect to own this stock when it was 15 times earnings and they had a bunch of, you know, stock buybacks that they could implement in the future. I think it’s also telling that, you know, Apple’s net cash relative to its market cap is essentially nil now. I mean, they essentially have almost no cash, net cash on the balance sheet relative to their market cap when it was, you know, 15 20% only a few years ago. So you know that that opportunity to buy back massive amounts of stock at low valuations is behind it. That’s also been, obviously one of the drivers, but to me, it’s more more function. I think Apple’s kind of a poster child of how does passive affect the market? Well, take one of the biggest, you know, slowest, growing companies and put a record valuation on it. It’s not a coincidence that there’s been record flows into passive this year, driving that, that valuation extension.
Andrew Brill 7:02
Do you see a market crash coming at all, or a big, big election, you
Jesse Felder 7:09
know? I I think it’s, it’s, you know, foolish to try and predict a crash, but I will say that I think if we did have a stock market crash, I think you’d have to look back and say there were signs, right? And those signs are the strength in the momentum factor driven by this piggybacking on passive investing, and then, you know, the extreme leverage that’s being used today. I would just point to, you know, the assets in leveraged ETFs. You know, the Bloomberg published a piece, I think, on Friday, that showed at the 2021, peak, that the assets in leveraged long ETFs were five times greater than those in short ETFs. And that five to one ratio was a pretty bearish bear signal to on Friday, we hit 11 times. So we’re, you know, there’s, there’s, literally, it’s twice as extreme the amount of leverage and leverage ETFs today that we saw back in 2021 you know, there’s also things like the commitment of traders report. You look at small speculators in S p5 100 futures, and they’re about 10 times as long today as they were in 2021, so there’s, not only is there this piggybacking on the momentum factor, like I said, I think is front running, the passive flows, but it’s they’re utilizing, you know, such a, such great, you know, great amount of leverage in order to do that, via leverage, ETFs, via futures, via these types of things that it does concern me that once those flows reverse, and they obviously, they always do, right? Nothing goes on forever. And these flows always go in cycles, right? They always go, you know, big year, kind of a reversal year. And so I think when their flows do reverse. I am concerned to see how does the the system kind of absorb this type of a de leveraging, because it’s really something we haven’t haven’t seen before. Thanks again
Andrew Brill 9:10
for watching these favorite moments of 2024 and we hope we can continue to provide you with information that will help you invest wisely and be financially resilient. Wishing all of you a healthy, happy, safe and prosperous 2025.
