- Every once in a while, Barrington and I,
we give you a headline, it's lazy,
we don't read all the details.
Then you come across something
where you just can't fake it
and you need to bring an expert in.
And thankfully for this next headline,
we actually have the appropriate person,
that we work with or
work for, I should say.
Mr. Richard Carlton, and let me,
Barrington let me read
the headline and then,
I just wanna make it very
clear to those watching
that this doesn't implicate Barrington.
So the title of this headline
is bears are going extinct
and stock markets $13 trillion rebound.
And for this question, we've
brought in Richard Carlton
to help us explain.
With everything around
us burning to the ground,
how is the stock market rallying
and seeing all time highs
and we're even using the word trillions.
So Richard, welcome to the show.
- Welcome to the show Richard.
And for those that follow us
and follow me on Instagram
with my bear market handle,
I was concerned that I was going extinct
and I wanna rest assured that I'm not.
But here to dispel any rumor about that,
is our very own Richard Carlton.
Is this happening?
- Thank you very much, gentlemen.
And indeed it would be a tragedy
if bears were to go extinct.
And again, it's a real
pleasure to join you
because, you know, three
time guy on hashtag finance
and now first time on,
you know, after hours.
Do I get like a, you know,
a bathrobe or something?
I can, try out?
- If you get on SNL five times as a host,
you'd hang in a special lounge
with Steve Martin and Tom Hanks.
- Well, there's, you know,
earlier in the show we were
talking about the Broochini, so.
(hosts laugh)
- We'll get a, we'll get
you a Broochini for summer.
- Okay, well let's get
into the deep, you know,
market structure conversation
before we get too crazy.
But you know, when we look at
all time highs, market highs.
We have to understand that
we're looking at indices.
You know, S&P 500, the Dow
Jones, the S&P/TSX Composite,
the CSE Composite Index.
And, you know, the issue here is,
you have to understand
what's in that index
and where is the performance coming from?
And it's what investment professionals
refer to as performance attribution.
So who is, or what
companies are contributing
to the rise in the indices.
And when you look at it, you know,
over the last six months
or so, the vast majority,
and in fact this has been
true the last five years
in the United States, is that
the Netflix, Google, Apple,
Amazon, Facebook have been responsible
for a huge percentage of
the returns of the S&P 500.
And, you know, the other
broad market indices.
Companies in the industrial
sector, the banking sector,
and the hardest hit of all of course
is the energy production sector,
have not been doing very well at all.
And so the investor intention,
and in fact the increase in prices
has been limited to a very
small number of stocks.
We talked earlier today
about Exxon yesterday
being removed from the Dow Jones.
And what was it?
Eight years ago, it was the
largest company in the world.
- 2012, largest company in the world.
- And now it's coming out of
the Dow Jones, which is a,
you know, 30 stocks.
So it's not a broad market measure,
but it's basically being
replaced by Salesforce.
You know, another company that's done well
over the last few years and
particular through the pandemic.
So when people talk about
these all time highs,
understand that it's not every segment
of the stock market by a long shot.
In fact, it's very narrowly
focused on a small group of,
generally speaking, technology stocks.
That are expected to, as we return
to whatever normal looks like
over the next 12 to 24 months,
do well under the new market
and business conditions.
- Right.
And Barrington earlier
you were talking about
what happens when things do get better.
When more people go back to work,
what impact that's gonna have.
- It's like, okay,
things are bad right now.
Yeah, we're seeing trillion dollar gains.
When things do return back
to some sort of normality
and people are, as what we were used to.
Does that mean the stock
market's gonna go down?
Does that mean, what does it mean?
- Well, that's a great question
because of course, you know,
when we look at where the
performance has come from,
do you expect those stocks to
perform well in the, you know,
the two to five year time horizon?
And the answer is probably yes, right?
I mean, those companies
can continue to grow
from where they are.
There's addressable business
for them to do and to capture.
They can grow some more.
And in fact, if you think about retailing,
is Walmart gonna take
Amazon's rise lying down?
Are they gonna compete with Shopify?
Are they going to join forces with Shopify
to compete against Amazon?
Like, there's a lot of growth
in that particular space to come.
And that can drive these overall indices
in ways that you think,
"Hey, everything's great."
But the reality is maybe 80%
of the stocks aren't doing so well.
And that in fact reflects what's going on
in the real economy, not in the markets.
And again, we talked earlier
today about, you know,
how tough it is for lots people.
I mean, obviously unemployment is,
if you wanna talk about a
pandemic there's a pandemic
of unemployment in Canada
and the United States.
Incomes are shrinking.
It's tough for people in the real economy.
But we do have a small segment
of really big companies
that are doing extraordinarily well
under the current conditions
and that growth can in fact continue.
Now, there's another factor,
of course, it has to be looked at
when we examine the
overall market conditions.
And these are the sorts of things
that we understand by looking
at behavioral economics.
How do individuals make their
buying and selling decisions?
And there's been a lot of work
done over the last generation
in terms of how people decide
to buy and sell stocks.
And one of the things
that we've learned is
that people fear loss more
than they enjoy the gains.
And that drives an enormous
number of decisions.
In fact, it drives all the decisions.
And one of the things that happens is
if people see prices rising
in a particular sector,
they're terrified that they're missing it,
fear of missing out.
And they will pile in-
- FOMO.
- Exactly.
And those prices will get bid up.
I mean, does any of us believe that Tesla
has the ability to grow at a faster rate
and command higher margins than the rest
of the automobile sector combined?
You know, that's kind of a tough one,
but is it a good company?
Do they provide good products,
are their customer service
rankings very, very high?
Yeah, absolutely.
But does it value, does it
justify the current valuations?
Well, you know, that's
kind of a hard question.
Now, it doesn't matter
because Tesla is actually
not in the S&P 500 at this point,
it's part of the broader market
that people and in particular
retail investors are trading.
I was looking at some data
this morning and, you know,
average daily turnover
in the United States,
which was in the eight or 9
billion share a day range.
Over the last quarter has been
as high as 17 billion shares a day.
And a lot of that increase has
come from the retail space.
And the stocks that they tend to trade,
in the cash equity space, are
non S&P 500 listed stocks.
- Really?
- Yeah, yeah.
So I was looking at the
most recent Robinhood report
and some other information
that was released by the
other big us discount brokers.
So, obviously the folks who
service the retail population
in the United States and, you know,
people are trading individual stocks.
And, you know, of course
Tesla is a hard stock
for retail investor to trade.
What's the board lot these days?
- Well they just split it.
And we put the price up on
two episodes ago, I think.
- Yeah, they did a five for one.
- Yeah, yeah. So it's a few hundred bucks,
but yeah it's one of those things where-
- But it's still worth that $20,000 trade
to trade a hundred shares, I think.
As opposed to-
- Depending on the board lot.
- A hundred thousand
dollars share trade, right?
So, as I say, it's a tough
name to trade for retail,
but they are.
Now, in the (indistinct) by a merge,
but you know, again, people
are in fact piling in
for fear of missing out on
what they see as the gains
on this particular market.
And what's particularly
interesting is that, you know,
again, not to shine the
flashlight on Robinhood unduly,
but their clientele is
generally speaking, quite young.
Mobile savvy users who have not
had brokerage accounts before
and their clientele are coming
into the market literally by the millions.
And that's having a profound effect.
And we see similar patterns in Canada
where retail participation rates are up.
The Canadian securities exchange volumes
are increasing month over month.
I think we've had our first
June to July increase,
which never happens because
people tend to go on vacation,
they're not trading
individual stocks and so on.
Yet this year, we saw an
increase in volume from June,
which was very healthy to July,
which was a really good month.
Today, we traded almost 140
million shares, you know.
So it's active and it's largely driven
by the retail population
that, you know, are active
and engaged in the markets at this time.
- Do you think people are disenfranchised
by packaged investment products like ETFs
or mutual funds where,
it's not great water cooler talk anymore.
People aren't chatting about
the huge double digit gains
they got on their ETF
or their mutual fund.
- Well, as one of the
founders of the ETF industry
in Canada and I guess that makes the world
because we were the first
to get to an ETF listed
on the Toronto stock
exchange way back in the day.
The, you know, you're right.
I mean, you know, ETFs
aren't supposed to be water cooler talk.
They're supposed to be an
extremely cost effective way
for people to acquire access
to broader market trends.
And one of the things that we know,
from hundreds of years
of data at this point,
is that equity markets
tend to return somewhere
between 6% and 8% compounded
annually over the long term.
And it's extremely unlikely
for individual stock pickers to beat
that benchmark, again on
similar sort of time horizons
that people should be thinking about
for their retirement savings,
their children's education and so on.
Now, that said, again, we're getting back
into the behavioral economics, you know,
people love to talk about the penny stock
that they bought that has gone up.
- I got a 30 bagger, I got a 50 bagger.
- Absolutely.
You know, that touches
some pleasure centers deep
in the lizard brain of the human beings.
And it brings people back
to that particular market
and don't get me wrong, I mean,
it's a extremely important part
of the capital formation
process for young companies.
Because Lord knows big companies
are gotta come from somewhere.
And by and large, you know, we're,
at the Canadian securities exchange
in a position to nurture the
growth of those companies.
But again, it's a very
complicated dynamic.
Cause people think about instead of
these sort of broad market investments,
looking at individual stock picking.
Which is really what goes on
more in the small cap space
than in the large cap space.
- I got a question and I don't,
I'm not sure how we are for time.
But earlier, when we
were talking off camera,
you were discussing a lot about inflation
and the role that inflation
played in what's going on today.
Could you just briefly touch on that?
- Yeah, absolutely.
Well, it's not just inflation,
but of course, interest
rates as well Barrington.
You've got a situation now where,
you know, money is effectively free
and you have signals from
the leading central banks
in the world that they're
basically prepared
to pump unlimited amounts of
liquidity into the system.
To prevent the, in effect
to finance markets,
whether it's debt or
equity from seizing up.
And, you know, that's had a few effects.
I mean, one of them is, you know,
it does make equity look very attractive
because companies are able
to secure growth capital
at a very low cost.
Entrepreneurs are able to build businesses
without having to pay,
you know, significant,
double digit rates in
order to raise capital.
But by the same token, there
a bunch of folks out there
who sense that this could lead,
in the longer term to inflation.
And with this amount of money being pumped
into the system by the central banks.
And that's why you see the
dramatic increase in gold,
which is traditionally seen
as a hedge against inflation.
And, you know, as a knock-on
consequence of that,
the gold exploration space
and the gold production space
has gone up quite dramatically
over the last, as you know,
from, you know, three to six months.
And again, what we see in the business
that we're working on at the
Canadian securities exchange
are a number of new exploration projects
that are attracting funding from investors
and in the secondary
market investors looking
to buy names that come up
with promising results.
So again, cheap money
right now, but concerns
that there are significant
inflationary pressures
to come in a maybe two to
five year time horizon.
- So everyone's using this cheap capital
to move to the suburbs,
not gonna work anymore,
buy a stock pick and hope
to make their fortunes
so they never have to go back to work.
- Well, James, I guess
I'm countering the trend
because, as you know, we've
sold the rural property
and we're moving back to the city.
So you know which may be, you know, again,
moving against the heard, I dunno,
but we'll see how that works.
- Based on our Trader TV discussion.
You are a contrarian.
- Maybe.
(James laughs)
- So we don't see a lot of
bear signals in the market,
but we do see a bear
on the podcast tonight.
So that's all I care about.
And we'll keep an eye on this topic
as the trillions get higher
and things get more whipped up
into a frenzy in the market.
Richard, I'm sure we'll bring you back
for a second Aftermarket,
after all you are our boss.
- Not unless I get a bathrobe.
- Really want you to earn that Broochini.
And you know what, you can have one,
I will buy one for you, what the heck.
But thanks again.
We really appreciate your
insight on this stuff.
We do wanna provide educational content
and engaging educational content at that
through Aftermarket.
So thank you for your knowledge.
And until next time,
Richard, we'll keep an eye
on the market together
and we'll see you soon.
- Real pleasure, gentlemen.
Thank you.
- Thanks a lot, Richard.
And this has been a segment
of Going Beyond The Headline.
- Boom.
(cheerful music)
