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I suspect that Burry knows the difference between CDOs and ETFs, so he probably meant a more broad analogy between the two: synthetic CDO buyers did not ask the question "is the underlying solid", while ETF buyers do not ask the question "does the current value of the stocks underneath reflect their cash flows" ...i think this is where Burry sees the analogy
I'm not sure he is saying CDOs and ETFs are the same thing, just that ETFs appear to be in a bubble at the moment, but for a completely different reason. People are piling billions into companies they would have no interest in buying if they were picking themselves, just because they are in the index. So these companies presumably will be being pumped up way beyond their real value based on earnings and profit and so on.
Hi Michael I think that's how many people interpreted his comments i.e. ETFs are like subprime CDOs which is why I try to show that's certainly not the case. At the end I talk about what is more interesting which is the price distortion in small value from money flooding into cheap, passive large-cap equity index trackers. Thanks, Ramin.
That's what i was thinking . Banks paying hardly any interest have forced tepid investors into the market . Funds have the money and need to invest it , in anything that describes the fund , even if in the real world you wouldn't . It's puffed up what should be a falling index .
I agree that people are buying stuff they don't even know they own. That sounds a lot like the CDO's to me. The appropirate participant (huge financial cartels) are buying the stuff in bulk and passing it on for a profit. The Net Asset Value line is what's on the books, just as in 2008, but in reality, it's the secondary market that is gambling huge sums that no one can possibly pay off. Yes, the etf investors will run for the exits and get trampled. I don't get this guy in this video at all.
@@monaoconnell5650 The way I see it, Index funds will always take a hit from companies that fail to show value, but that risk is accounted for and bypassed by the stocks in the index that are successful. What index funds bett on is the fact that the entire market keeps growing, which historically it has shown to do (even though it's temporarily impacted by crashes). Index funds may pump more money into companies that otherwise would not get it, but the market has always had winners and losers, and even really qualified analysts don't have an easy time seeing who those will be. Which is why, IMO index funds are still a solid bet unless you believe the world/economy will end, and in that case we are all screwed anyway.
This is slightly off topic but I just want to sincerely thank you for your content. I'm 19 years old and I've been curious about the stock market for some time, and your explanations have helped to make it accessible and way easier to understand. I know how I want to set up my investment portfolio, plus how to discuss investing with friends. Your videos make investing and personal finance really fun and interesting! Thanks again, Ramin :)
Issy the first step is to read books on it to so that you learn to follow principles, not people, in investing. The Snowball, intelligent investor, and stock market logic are good to learn about.
Play this game so you can learn the ropes. Better to do it with fake money before you go setting real money down on the table: www.marketwatch.com/game/find I am on this one: www.marketwatch.com/game/invest-until-you-die/portfolio which has no expiration date.
PensionCraft I think you are missing the whole point of what Burry is saying. Your video does a great job of breaking down ETFs and CDOs but Burry isn't saying they are the same product. He's bringing up the same issue with ETFs and Passive that nobody would admit in CDOs. That is that you don't get anything for free. Inherently there must be a risk specific to ETFs that simply building your own basket of stocks (independently owned) doesn't have. Nobody who is a supporter of the massive flows to indexing is willing to talk about any downside other than "you might not make as much because of diversification". The ETF industry is reliant on more funds to flow their way, they make up low fees with high volume. Inherently there is no incentive to look into the possibility that these vehicles might be DRIVING the market rather than TRACKING the market. That risk is when volatility goes really high and everyone hits sell on the ETF (not the underlying) the ETF mangers (or their robots) will be forced to continue to hammer the ask on ALL assets in the ETF. With lower underlying volume traded their simply will not be buyers on the other side of the trade forcing dealers to be the only people making the market. This leads to gaping and serious problem with pricing the asset, that individual holdings don't have. There is no free lunch, this is the connection that Burry is talking about, not that they "are the same vehicle" but that they will suffer from the same underlying issue of liquidity in an uncertain down gaping market when the underlying become hard to price. Personally, my outside of the mainstream bet is that at some point there will be a huge problem created by institutional investors utilizing ETFs and the vehicle will be restricted to retail investors only. Which is who they were built for, not multi billion dollar fund managers who use them to simply BUY STOOOOOCCCKKKKKSSSSS CNBC style without any thought to actual underlying value. Bogle was a fundamental game changer but he never intended for large portfolio managers to be using indexing. It was original designed to compete with overpriced mutual funds that were essential rent seeking on retail investors. But hey when your business gets big why not expand your market?
Hi John as I say in the video the liquidity of the equity market even for small cap equity is far greater than for other assets such as high yield corporate bonds and commercial property funds. So I don't agree that the equity market will collapse due to people selling ETFs such as SPY. I do agree that small caps which aren't indexed will be undervalued, but as I show at the end of the video there are funds that harvest that specific risk premium. Many others, including regulators, have pointed out the risk of liquidity mismatch risk for illiquid assets wrapped in a liquid wrapper like commercial property ETFs so that's nothing new. My concern is that some people who are new to investing would hear about CDOs compared to ETFs and think that ETFs were somehow risky in the same way that CDOs were risky and likely to trigger the next financial crisis and that's just not true. Thanks, Ramin.
I found this Pension Craft video so educational and your post really drove some of the risk point home. I truly did not know that the low liquidity stocks were being left out and all of this whole debate is so valuable. Thank you for kindly taking the time to write this response. Can I follow you on linkedin?
@@Pensioncraft My concern really has nothing to do with individual investors using ETFs as an investment vehicle, its the effect of institutional money flowing through ETFs in a far more active way than passive investing was designed for. I'm not worried about the SPY or any of the large volume ETFs. What I'm most worried about are proxy product ETFs and smaller ETFs that track underlying that aren't nearly as heavily traded. Regulators have allowed a model which works amazing for something like the SP500 to be applied to a less liquid underlying, with the same sales pitch of the SPY. There just is no such thing as making an illiquid market liquid without increasing the liquidity of the assets it's based on. That's something that cant be avoided but wont show up until there is a problem, the gaps in the pricing will be huge if the liquidity isn't there. Unfortunately we can't know for certain until a panic hits and the system takes that kind of stress. There were plenty of things in 08 that happened that we were told weren't possible. You aren't wrong that it would be a very bad development for retail investors to lose confidence and not invest in stocks at all. This is what happened to many people I knew in 2009-2011. They missed out on all that upside because they did stupid things like sell and go into gold/cash. They took all the loss on the way down got none of the upside. Retail investors are often their own worst enemy in a panic and IF the regulators are wrong (and they have been before) the people who will get smashed wont be the large institutional guys who really don't need to use the ETF products to begin with. I'm sure you wont agree but that's ok
@@jackiedane3408 Anyone who is touting the returns of 3x leveraged ETF in a decade long bull market as proof that ETFs don't have any risk clearly has no idea what they are talking about. I invite you to learn a little bit about leverage by doing some math: A 3x leveraged asset begins with a value of $1000 has 1% up days followed by 1% down days. How many days does it take for the fund to go to 0?
The question is simple. The room is full and people are eyeing the door. Who is first out the door and who is left in the room holding the bag? Wealth just transferred hands and the poor sods with the bag might just be the index funds!
Hi @@user-ww6ii6zn8m it's all here ruclips.net/video/vaMiLFANFaU/видео.html but this isn't a recommended portfolio. I try to show the method rather than stress the actual funds I've chosen or my risk level neither of which would be appropriate for anyone else! Thanks, Ramin.
Thank you for the excellent video. I was wondering if you would discuss how to profit from an index bubble collapse. Would buying things like SQQQ be a good idea to profit from such a collapse? Or will sqqq also collapse because it is a derivative vehicle?
Maybe it's time to bring this up again, can you do another video about today's financial situation. By the way I am one of your Exclusive Access Tier member on
Hi @E D good suggestion I was just talking about doing something similar the other day. Thank you for your support and i'll keep an eye out for you on our chat forum. Ramin
Ok I read the Bloomberg article. Burry says passive indexing is like the CDO bubble in that (a) it's based not on detailed analysis of individual assets but on flawed Nobel prize winning hypothetical models (b) large amounts of cash are flowing in and increase prices but are not increasing liquidity. A lot of the finer details go over my head. But given Burrys track record I'm inclined to give him the benefit of doubt
Hi Harrison I agree with him that the flow of money into cheap large-cap passive mutual funds and ETFs has distorted valuations. But these are just off-the-shelf equity portfolios and have no leverage so people shouldn't be scared away from passive funds by this warning. The implication is that small-caps are overlooked, not that ETFs and passive mutual funds are like CDOs. They are nothing like one another. Thanks, Ramin.
Wow, you have a lot of confidence in one man... I'm genuinely shocked at how you can put your financial decision making into the hands of any one man just because of his track record. Seriously, look at both sides of the argument, make sure you actually understand them both and then make an informed decision. I'd also stress to beware of bias.
Excellent presentation and explanation. Language just enough technical to not scare away viewers. I liked the models, reminded me The Great Short film.
This video presents an outstanding explanation of how CDOs & ETFs work. Advanced financial concepts are first stated in the enigmatic jargon of financiers & banksters. Then the speaker brilliantly translates those concepts into layman's plain language. If one is not familiar with the concepts involved, he will likely feel lost at first. You should have some understanding of the topics beforehand to fully appreciate what is being taught here. AGAIN, the Teacher here created one of the best videos on a critical financial subject.
Thanks for the video. Very good analysis. It's the first time I ear about CDO. I prefer ETFS. I think that you can buy stocks. But it cannot be all your portfolio. I would not have more than 8% on one stock. Also I would not try to create an ETF using stocks. But you do what you want. It's your money.
99% of what you said is cogent. I am only bringing up the potential question to one very specific thing that was said) - Argument: CDO tranches are highly correlated and ETF individual stocks (tranches) are uncorrelated. Response: When there is a market panic, assets tend to move together regardless of whether they are normally STATISTICALLY uncorrelated. The argument by statistics is only valid when the future looks like the present and that there are enough data points of similar things happening - statistical inference breaks down during bubbles. That is why we call them black swan events when bubbles burst. They are statistically rare events. Therefore, what Burry typically does is look at events where the markets/banks/asset managers are looking only at statistical inference to guide their decisions, but where these same markets/banks/asset managers have forgotten to add a sufficient margin of safety to their asset models (because they want to sell more stuff to consumers). Again, most 'tranches' in the ETFs are uncorrelated, but not during a general market crash. Therefore, to say that they are unlike CDOs because the assets within a CDO are correlated and the ETF individual stocks are not is in error. I would be glad to be corrected on this point. Burry: There is an over-reliance on statistics by the financial system creating an asset bubble. PensionCraft: No. It can't be true because of these statistics...
I’m just starting to research this theory and really understand it. But basically what you’re saying is yes there could be a crash cause by the statistical push and backing of ETFs but it would only happen if the banks realized this. So how do we know when it would be likely for the banks to recognize this?
Hi Patrick that's not what I said at all. Equities within large-cap equity ETFs are _highly_ correlated with one another. The key differences between CDOs and passive large-cap equity ETFs are leverage and liquidity. Subprime CDOs had huge leverage and contained illiquid assets (residential mortgage backed securities) whereas passive large-cap equity ETFs contain equities that are mostly very liquid. There is no model necessary to price a passive large-cap equity ETF, it's just an equity portfolio whereas subprime CDOs required pages of mathematics to price theoretically. Thanks, Ramin.
@@Pensioncraft I think I get it. I hope. And thanks. "There is no model necessary to price a passive large-cap equity ETF...whereas subprime CDOs require pages of mathematics to price theoretically." I would argue that there is no model necessary to price either. The price is whatever someone is willing to pay for it regardless of the theoretical model used (or if there is "no model" being used). However, I think this highlights the point you are trying to make (and helps me to not be so unfairly literal). 1. A CDO requires a complicated theoretical model to price correctly -- > this complication lead people of the past to incorrectly price the CDO; when the incorrect pricing is too high relative to what its value should be, it is a bubble. 2. Compared to a CDO, the ETF is easier to price (aside from the individual components being more liquid). There is less math to do and therefore less misunderstanding about the value of the ETF, which in turn reduces the likelihood of their being a bubble with ETFs. I misunderstood what was said between 5:36 and 10:05 in your excellent video. "The difference between a CDO and an ETF becomes very apparent when you look at the pricing." I thought, in error, that because you were talking so much about how "correlation is key to pricing a CDO" with the castles and sappers, that you were making an allusion to a CDO being less correlated for loss than an ETF - this was wrong. Thanks again for the clarification.
Although the ease of pricing, liquidity and less leverage are differences, I would contend that the pricing of the individual stocks within an ETF are still "not done by fundamental security-level analysis" as Burry says. In an ETF they are done by "market weighting." This creates a situation where overpriced securities and assets are unduly rewarded, not because the underlying business or investment is sound, but because they are overpriced! It turns out that a cheetah has more than 90% of the same DNA codes as a hippo (as all mammals in the physical world do, even humans). Your argument is that the bubble that this creates would be discovered and corrected by active fund managers. This is true if there are enough active managers that are also not going about things the same way as the ETFs. However, when you open the hood of these active funds, it is startling to note how many of them are not involved in price discovery activities, but instead involved in short-term momentum strategies. Since momentum strategies will only exacerbate the problem because the momentum of stocks is moving towards market weighted securities, a bubble is likely develop, despite what Jack Bogle says the % of active managers is or the "50% active" statistics of Mr. Seyffart. This is what Burry did before, looking behind the statistics to the data that makes up those averages. I have to wonder if he is seeing something in those numbers that the financial services industry is missing or doesn't want to see.
The whole market is in a bubble. Growth is slowing. Everything happens in cycles and we are due a recession now. Look at PE ratio of stocks, so expensive.
Hi Bhavin I agree that valuations are high, particularly in the US where earnings have been artificially lowered by corporate buybacks. That's why I'm pretty cautious at the moment with just a 40% equity allocation - see my video on how I invested my own money ruclips.net/video/vaMiLFANFaU/видео.html Thanks, Ramin.
@@Pensioncraft Thanks Ramin. I've read a book called market cycles and it really has put things into perspective when I buy shares. Also, I notice you like attributing certain proportion of your investments in bonds, over the long term is this better than equities. The way I see it I would rather own 10 rock solid companies and once some multi bag, slice profits and put into funds. I am a huge fan of Fundsmith and Linsdel Train.
People have always invested blindly without much understanding. Its just in the past it was in individual stocks whereas now conventional wisdom says to invest passively. So its not necessarily a bubble but rather a reallocation from individual stock selection to large cap indices. ie investing in big companies rather than small ones. Therefore if not a bubble then it cant/won't pop.
I suppose this reallocation in itself artificially pushes prices up, which in essence causes a bubble, then more people invest that wouldn't have otherwise (FOMO), and so on and so forth. Kind of answered my own question there!
Jack Bogle said the best advice he ever got when he was just starting out was from a mentor. He said "Jack my boy, always remember this. In this business, nobody knows nothing." I'll stick with index funds.
Of course indexes are a bit of a bubble right now: the market is built way up to a high point, there's all kinds of cash pushing it up from the fed to the buybucks from corporate cash and tax cuts. The indexes are supposed to match the market, so if you expect some kind of significant market correction in the mid term, which I do, you expect your indexes to take a hammer at some point. But that still doesn't mean that the average investor, somebody who has some financial knowledge but doesn't work day to day in the market at all isn't still well served by following these ups and downs over a long time scale. I'm in indexes for another 30 years, I expect to take it on the teeth at some point in the middle there and also ride some long highs like we have for the last several years. In 25 years, I'll start having to consider how to time diversifying away from indexes and try to make sure I do so at a decent time in the business cycle. But unless you're speculating in indexes or not confident in the American economy over the next 30 years, I'm not sure I understand the problem.
There's nothing that I can see to initiate the crash. In 2000 it was like the great depression, a bunch of amateurs rushed in, often with leverage, on unsteady stocks in a mania, and suddenly the prices exploded and then peaked and came down just as fast. You can see similar crashes in oil in 2008, Bitcoin in 2014 and 2018. But, these aren't manias, these are passive investments, and that's a huge difference. Passive investments are raising slowly lover years as people are going into them. In 2007 the teaser rates on the mortgages would end for a large bulk of mortgages causing massive defaults. That was a trigger. There's no mania and there's no over leveraging so what would be the trigger. A natural downturn in the market maybe that leads people to remove their money from ETFs... I mean, I don't see that happening that much at all. So I don't see a bubble that's actually workable. Now, if we were to talk about Corporate Debt being used for stock buybacks and a general recessionary destruction of called debt well that could cause a market crash, and then, that could cause the ETF's to propel a crash into something bigger.
Unemployment is at a 60 year low. What happens when unemployment rises 2-3%, like it tends to do in every recession? Market corrects and housing prices correct.
@@fredocorleone3280 Yes, but the point of indexes is to ride the market corrections and the swells and accept the gains over time. It isn't a scheme to invest in the short term. So what's the problem?
Thanks for the vid. Good explanations and relatively easy for the non-expert to follow. As a layman I've been a little suspicious of indexing for a few years after reading about finance just as a hobby. E.g., Investing in companies by market cap seemed strange to me - a large company could be mismanaged, unprofitable, unethical, deeply in debt, etc, and otherwise not a good investment opportunity. Burry expressed in more technical language a lot of the same things I was feeling on a gut level.
Dr. Burry is currently investing a lot in water according to the end of the big short. I checked and WTER is only at $1.71 per share even though the Akaline Water company is aquiring a lot of companies and has 48% revenue growth.
Hi LaxLyfters you can see his 13F filings through Scion Capital on the SEC website and there's a discussion of it here finance.yahoo.com/news/michael-burry-trapped-stocks-195013623.html As Ismail Hatipoglu says he likes Asian small-cap stocks, particularly Japanese small-cap. Thanks, Ramin.
Not sure how I missed “The Big Short”. After hearing you mention it here I’ve since gone & very much enjoyed watching the film. I wonder if there could be another story to be told in the near future: “The Brexit Short” perhaps?
Index funds will be fine long term. When the markets correct, index funds will fall like managed funds and other stocks. Most people will be taking massive risk if they speculate on individual sections of the markets like small-cap. Investors have become wise to how much money index funds save on fees over many years. Some hedge fund managers are being paid over $1bn per year and can't beat the indexes.
If I had listened to Burry a year ago and held on to my cash, waiting to pounce at bottomed out prices, I would have lost out on roughly a 30% ROI. In fact that's exactly what happened. I have now taken my money out of it's 0.5% return "savings" account and started cost averaging on a monthly basis into the S&P500.
@@Andy.mikhail137 I'm breaking even, but I kept changing strategies. I made some bad decisions while learning a lot, and lucked out with Coupang and Hycroft Mining, but I'm back on track now with better, less risky companies. To be breaking even after the crash this year is a win. Especially as most of my stocks are now dividend paying. I have only a small amount in index funds.
Good analysis and v. clear explanations - thanks. The whole thesis of ETFs being in a bubble needs a lot of qualification. If an S&P 500 ETF is in a bubble, it's because the S&P 500 is in a bubble (which it prob. is at the moment :)). There is probably a lot more risk with a narrow focus thematic ETF like one tracking batter technology or whatever, because most of the stuff inside it is speculative newbie companies with no profits driven by hype and trading on P/Es of 70 or 80! They will obviously take much more of a bath than the S&P 500 ETF when the next big correction comes. Maybe that is more what Burry what getting at...
I am inclined to agree with him. The cocktail of cheap money, eye watering gearing, shrinking 'real' relative or tangible values and the steady flow of cash from retail investors all adds up to a rather heady mix which surely raises concerns about the potential risk, hopefully not of the Molotov variety.
Hi MartinJG100 I also agree that the flood of money into cheap, passive large-cap equity index funds has boosted those stocks. However, I think calling it a bubble is hyperbole and misleading. It's created opportunity in small value and pushed up valuations in developed market large caps but it's unlikely to cause the huge repercussions that we saw in the Global Financial Crisis triggered by the US housing market bubble and subprime CDOs. I'm also worried that people will get the impression that ETFs and passive mutual funds are like subprime CDOs which could put them off the most useful and cost-effective investment vehicles for retail investors. Thanks, Ramin.
Great video, glad I discovered this channel. Not sure that he's making a direct comparison of what constitutes the core of ETFs vs. CDOs. But your explanation has finally cleared up the massive risk CDO leveraging had. Cheers from Canada!
Hi Rick, thank you! I understand what Burry meant to say but I expect that others might misunderstand the comparison and be scared off using ETFs or scared off investing altogether because they expect an imminent equity crash triggered by ETFs. Thanks, Ramin.
This was a very well needed video. I just started investing in index funds through Vanguard and saw the news. I thought it was a bit ironic. I read more on this subject and some said something similar to what you've pointed out. Even if a lot of people choose to invest passively, and this then creates opportunities for active investors to find overlooked & undervalued companies, then the equilibrium of the market will be held. I'm personally looking into investing in individual companies as well using the "value investing" strategy. I've been researching it a lot lately and I have a short list of companies that I'm interested in buying, once they go on sale. The only thing I struggle with is finding the intrinsic value of a company. Maybe that's a topic you'd like to do a video on with an example :) Cheers for the awesome video!
Hi Marius active managers are justifiably scared about losing business so there are lots of scare stories about passive funds and I expect they will grow more shrill as the outflows from expensive active funds continue. I discuss valuation in my Asset Allocation course which you can find on my website pensioncraft.com/courses-we-offer/ Thanks, Ramin.
I don't see how people buying passive index funds and artificially inflating prices will cause a bubble to burst in itself. I think sofas and armchairs are way over priced for a bit of foam and chipboard covered in materiel, but the cost of them has been high ever since I can remember.
Thank you, I was wondering what exactly Michael Burry had in mind and/or how he decided, that Passive Funds are similar to CDOs in terms of creating a bubble
ETFs and indexs drive prices up by supplying a lot of cash to have an "index portfolio" that means unless you are doing your own fundemental analysis its hard to figure out if a stock or commodity's price is determined on value or if its inflated by the demand that ETF and index products create. The issue is in the event of a sell off there is no one to make the market so you are trapped.
Hi A K as he was building up his positions I'm guessing he didn't announce what he was doing, but once he had his short position it would be in his interest to "talk his book" and say that the stocks in his portfolio or the (credit default swaps) were hugely mispricing risk. This NY Times article from March 2007 www.nytimes.com/2007/03/09/business/09insider.html talks about what happened but I couldn't find any stories about Burry before the crash. Thanks, Ramin.
he did better than that, he started a fund, put all his money it, and many investors billions i think,then the investors got scared wanted their money back, he said no, the agreement clearly said you can't,they freaked out and he held strong until poof he was proved right made his ungrateful investors rich and was not venerated hardly at all, and the same stupid commenters that totally missed it before are being listened to again while michael burry is being vastly ignored again, history repeats. maybe your different. hope so.
@@organicdudranch So the question is, if the stocks at 50% active and 50% passive, is there enough price signaling from the active traders so that the price is correct? The video suggests 10% active would be enough. It seems the problem are low volume small cap stocks that are held by a large number of ETFs and mutual funds. While orphaned small caps while still risky would have far less risk of an exit problem.
4 года назад
I was concerned about index bubble myself years ago.
I'd like to see a deeper look at the argument that ETFs don't affect price discovery - a large group of buyers blinding paying the asking price, seems, on the face of it to suggest it's going to support some overvalued assets.
Hi Terry, no it doesn't. I don't think the word bubble or comparison with subprime CDOs are helpful. However, indexing has created some opportunities in small value as I say at the end of the video. Thanks, Ramin.
Indexed annuities are safer because they have the backing of the RESERVES and stability of life insurance tables... But really Bitcoin is still the investment of a lifetime... If you could create a Blockchain Indexed fund that works the same way Indexed annuities index, their is your Trillion Dollar Idea, Thx
Pensioncraft Very instructive! Thank you. I am curious about the possibility of exaggerated moves by the various global markets (U.S., international, emerging markets, etc.) following a China-U.S. trade deal and some closure to Brexit. I would like to catch a a bit of a spike and then drop back to a more conservative E/B mix. I have already faded U.S. equities a bit to focus globally. Any suggestions?
Is it safe to say people are making smarter investments and paying less fees as we are seeing greater etf/index fund trading than mutual funds? And would smaller cap companies in these etfs and indexes trickle out of their fund from the fundamentals of economics or is it the fund that is keeping the valuation inflated and stuck in the fund?
Thanks for your videos. Can you do a video on how indexing is actually making the market more efficient? My theory is that as the size of passive funds grow in comparison to active funds. Only very efficient active funds can survive in the long run. Indexing will most probably remove any managers who have no idea what they are doing. My only concern is that what happens when passive investing becomes the majority of the market. Would it make it almost impossible for any fund manager to survive?
Comparing the bubble of the mortgage crash to a bubble in index funds doesnt sound like a fair comparison to me. Before the mortgage crisis, banks were being fraudsters acting irresponsibly by knowingly giving loans to people who cant afford them for commission, and then there were CDOs being marketed to investors to make a bad investment in those mortgages. The difference with s&p500 companies is that that we have no reason to believe theyre acting irresponsibly too. However, I do agree that the simple fact there is an s&p500 index being talked about so much means theyre getting way too much of investor’s money. However, with all that money, s&p500 companies can take advantage of capitalism and monopolizing that would give returns to their investors so they come out on top. Unfortunately, monopolies hurts smaller companies, which hurts competition, which slows economic growth as a whole in the long run.
That seems to be the theory - or just understand that anything massively owned by index funds and ETFs could be artificially inflated and price things accordingly when making investment decisions (not for the inexperienced)
First thing, you make really good videos. This one is not so clear to me, are we than in an index bubble? Are the big cap S&P 500 EFTs overpriced, or are just the small cap EFTs that track index funds overpriced because of low liquidity and their ability to produce better returns so they are being overpriced.
Hi Petar I don't think this is a classic bubble it's more of a price distortion (upwards for large caps, downward for small caps). Small and illiquid stocks are undervalued because they are "orphaned" i.e. excluded from the cheap, large cap equity ETFs that are being flooded with money. Thanks, Ramin.
After watching several videos about the so called "index/etf bubble" I still haven't got a clue of how this bubble would burst? Would there be just falling prices on all stocks and therefore ETFS? Would ETFs collapse themselves? Can anyone explain that, please? Because at the moment it feels like it just might be another market drop which you can still safely wait out holding those ETFs.
At 9:45 you show a plot of the S&P daily return and its correlation with the SPY daily return. I agree that for the existing history the relationship is very good, and no leverage means that arbitrage will drive the variation between these to zero. However, Taleb would argue that this data is not what matters because periods of time that vastly exceed the existing model (either upside or downside) will not track. Of course, the fact that there is no implicit leverage means this isn't obviously fatal but we can't use even 15 years of data to determine that a product is safe.
Hi engyn0 for physical ETFs, which are just a portfolio of equities, there's not a lot of financial engineering going on. The price matches the index because the allocations match the index weights. For synthetic ETFs it can go wrong if the counterparty (usually an investment bank) goes bust so that certainly could be a risk. For sampled ETFs there might be a divergence during periods of extreme market volatility but the ETF manager would probably make it up over time to get back in line with the index. I think market risk is a much bigger worry than tracking error. As long as the fees are low and the tracking error isn't too big I wouldn't be concerned with a physically replicated ETF. Thanks, Ramin.
If cheetahs are mispriced and hippos are mispriced then you have a similar situation with two very different animals. ETFs aren't CDOs but then again, neither are tulips.
As others have probably already mentioned. I think burry is referring to similarity of etf’s and cdo’s in that some etfs have high systematic risk, exactly as cdo’s. Synthetic cdo’s are cdo’s of cdo’s, while large portions of some etfs are similarly made of etfs. So if one etf falls or goes bust, then it will drag another and another down with it.
Hi @folmerify the point is that many ETFs are just portfolios of stocks with no leverage at all. CDOs have double-layers of leverage. If an ETF is liquidated the basket of stocks is sold and you get your money back. That does not create systemic risk and ETFs are closed down all the time if they don't get traction. Thanks, Ramin.
@@Pensioncraft Yes, most of the large mainstream ETF's consists of just stocks. But there are many ETF's (also relatively large ETF's) - that are partially or completely of other ETF's - and those ETF's are sometimes also made from ETF's. Therefore, (if I'm not completely mistaken), you have a large basket of stocks that you package into an ETF, then package that ETF into another ETF, and perhaps even package that ETF into a third ETF. All the ETF's will theoretically hold a portion of the initial basket, but only through other ETF's, and does not actually hold the stock itself. If for some reason an ETF suddenly cannot be liquidated, the other ETF's will be affected as well, because now a portion of those also cannot be liquidated. As examples of such ETF's of ETF's: IQ Hedge Multi-Strategy Tracker (QAI) - Almost solely ETF's with 20% in ULTR iShares Core Growth Allocation (AOR) - Solely ETF's with +80% within only 3 ETF's Most leveraged ETF's - such as SPUU - 97% in IVV plus a pile of index swaps Best regards
Read their semi and annual reports. The information is out there but you have to do the heavy lifting. Educate your self and don't expect the most important information on RUclips nor Facebook. Best of luck.
The key is that the if the tracker is doing so though derivative usage then you have basis risk and that is larger when the value of open interest is massively larger than the underlying.
Hi Paul, a lot of trackers are physical so this isn't an issue, but for the synthetic ones basis risk and counterparty risk are things to think about as you say. However, arbitrage will always keep the value of, say, an S&P future and the index itself closely in line. Even at the height of the Global Financial Crisis the basis risk of equity index futures for developed markets never blew out. An equity index swap might deviate due to counterparty credit risk if the solvency of banks were to be called into question again. I think that's why many people steer clear of synthetic ETFs. Thanks, Ramin.
Isn't Burry saying that sale of an ETF could stall on one side due to illiquidity in some of the low volume smaller cap components? Can shares of an ETF sell if all of the components have not been sold? That is, is the liquidity of an ETF share equal to the lowest liquidity component at that time and could lead to large spreads? It appears the sampling methods or the truncation of the index are solutions to this issue.
Hi GDC that's right. The effect of massive selling of, say, an S&P 500 ETF would cause an increase in the tracking error as units were sold, and it's the illiquid shares that are the problem. The companies that do the plumbing (Authorised Participants for ETFs) deliver their ETF units to . Then the Authorised Participant buys enough ETF shares to make a "creation unit", delivers the ETF shares to the ETF manager and receives a basket of shares in the ETF unit from the ETF manager which it can then, hopefully, sell on an exchange. The problem will lie with the Authorised Participant because the illiquid stocks will be difficult to sell. The bid-offer spread of the ETF depends on other factors, such as whether the index being tracked has a future associated with it which makes hedging easier, the volatility of the index, the size and daily volume of the ETF etc. There's a nice summary here www.ipe.com/reports/special-reports/etfs-guide/observations-on-etf-liquidity/10013218.article Thanks, Ramin.
I love the video, the accuracy, the fortress analogy. (I´m a fan of Vauban)! Thank you! My question on another subject: I know a thematic Water Fund called "Pictet-Water" Let´s say I love my cat and want to create a Thematic-Fund chosing companies in the sector Pet-Industry with interesting ESG policies. I want people to say: Cool!, and invest in my fund. What is the work involved in it? What is the benefit? Risk? Who qualifies to create this kind of Funds? Thanks in advance. I´d love if you explain the trend towards thematic funds in a video, whenever possible. Sincerely Peixe
Hi Peixe we have covered thematic funds several times on our PensionCraft member Sunday evening calls. Only asset management companies are geared up to create funds because it takes an army of people to create, manage and market them. There are also a lot of regulatory requirements that have to be satisfied before you can market a fund. Your cat might be better off investing in a fund that has already been created. There are funds for almost everything and thematic funds for most things you can think of. Thanks, Ramin.
@@Pensioncraft Thanks a lot, Ramin, for your clear and kind reply. The undertaking sounds cumbersome. I have no cat, but want to create an Ocean Fund. I might have contact to asset management companies. I owe to the sea some important moments in life, so I gess I´m spending some time on this for the next decades. Suggestions or comments from you are welcome any time. By the way ... my name is Ciro Morello. You find me on Facebook (old Greystoke-looking photo) Thanks again for your time and generosity. Ciro (PS: "Peixe Verde" means "Green Fish" in portuguese ;-)
The "orphaned" equity phenomenon is really disturbing to the ability for small cap companies to actually raise capital. Over the last 20 years the number of publicly traded companies and IPO's have collapsed. I think the passive indexing has alot to do with this since 09. Real vision had a decent video on this "are ETFs going to crash the market" the interviewee goes into way more detail then I am able to off the top of my head here. If you could do a reply video to that one it would be much appreciated. He was basically saying that these ETF's are really wagging the dog when they all fight for liquidity to rebalance. I mean it does make a hell of an arbitrage strategy for the nimble small time options player if you watch the largest funds and front run the rebalance. That in itself is a distortion. It will be hilarious to see what happens to all these etf's in a normalized rate environment.
I knew that the dot-com Nasdaq in 2000 was a bubble and knew in 2006 that houses were way ahead of themselves in price. I think the S&P 500 is about 20-28% overvalued right now (as of Sept, 22 2019) and that most houses on the west coast of the USA are overvalued by 25-40%, because current wages can't support these houses at those prices. If the stock market corrects by 20%+, this Michael Burry guy can advertise that he was right again......but many people like me know that the stock market and housing on the west coast are overvalued by 20%+, so this prediction by him isn't a revelation.
@Delman A new trade deal in 8-12 months with China will most likely become a top in the market for the next 5 years. The bond market probably just topped out in the past week. Listen very closely to the old men who have been trading bonds and stocks for 50-60 years. They are saying to expect smaller 1--3% returns in the US stock market now for the foreseeable future...whenever these old guys start saying things like that, there almost always is a correction coming. I think the S & P 500 should be trading in a healthier range of 2200-2400 right now, and not hitting 3000. Watch the last 20 mins repeatedly until you have it memorized of Ray Dalio's vid "How The Economic Machine Works by Ray Dalio". We are coming to the end of a short term credit cycle this coming year. I personally believe there are 2 more short term credit cycles left (15 years), before the long term credit cycle goes into a depression-like scenario. I don't think it's time to buy gold yet, but maybe in 10-13 years it will be. All countries seem to be maxing out their debt levels for the next 15 years (becoming like Japan to create fake inflation), after this happens, capitalism is dead and robots start taking jobs and wages and everybody moves to socialism. What should you do before a recession comes, like the one that is very likely to happen in a year? Pay off debt. Save cash, rent cheaply and be ready to buy new investments when good deals arrive. Unemployment and housing prices are inversely correlated.
Hi Antoine that's true companies usually have balance sheet leverage but the amount of debt they can issue is limited by their ability to service their debt with their profits. Thanks, Ramin.
I disagree. ETFs and CDOs are quite comparable - they both aggregate a set of financial instruments into a single tradeable entity. The fact that people are not doing their due diligence into the constituents of the ETFs is analogous to the lack of price discovery Burry noticed in CDOs where due diligence was also clearly absent. There are also clear analogies with ETFs of ETFs and synthetic CDOs. There are also ETFs where the underlying assets have potentially enormous price distortions (e.g. TSLA) or contain illiquid assets (fixed income products) much as there were CDO containing mortgage bonds comparably overvalued and/or illiquid. I have no great affection for Michael Burry, but if you disagree with his comparison, you need to eat some humble pie and acknowledge it is because you are likely not perceiving the analogy with the same breadth or depth as him.
Hi happy larry, as bizkitgo says it's all about a pricing distortion which you can profit from using cheap ETFs. Or I should say you can if you invest in the US, unfortunately there isn't much choice of small value ETFs here in the UK. Thanks, Ramin.
I was unaware that Michael Burry had talked about this stuff, but I've heard others say similar and tend to agree with what they're saying. Things are not looking good, not only for the reason they provide but for numerous other reasons as well. The only surprising thing about something that's unsustainable is not the final destination but how long and what path it takes to get there. That said, there comes a point at which it is difficult to believe things can go on as they are much longer. So, as far as Michael Burry goes, I take what he says far more seriously than you appear to. I guess it will be, just another case of wait and see. Time will reveal all. What I do find interesting is that you do appear to take the few charts, diagrams and correlations, that you displayed very seriously. Also, you take pricing based on complicated maths and simulations far too seriously as well. I imagine that if you knew a lot more about maths and stats you wouldn't. If you understood the problems with such analysis, you might understand why someone like Michael Burry might think differently, and might use superior reasoning to come to the conclusions that he does.
Hi Peter I agree with him about the price distortion. I don't agree that passive mutual funds and ETFs are anything like subprime CDOs and I suspect that few people who understand CDOs better than myself or Michael Burry would either. I think calling passive growth a bubble is misleading. I always like to look at facts myself if I can and try to make judgements based on evidence. Don't you? Thanks, Ramin.
@@Pensioncraft Except as I understand it, he is not saying that ETFs and those CDOs are similar products. He's saying that aspects of the problems with them, and with the reasoning about them that led to problems being ignored, in the lead up to 2008, are similar, which is a different matter entirely, and I get his point. Of course, they are very different beasts. No doubt about that.
The Broad market ETFs dont necessarily have any more risk, than owing the market directly. The real issue is counterparty risk, The issue with CDOs was the counterparty risk, the system crashed because there where insufficient capitalization to cover the risk. The questions is how much counterparty risk is there with ETFs, given the survived 08, I am not too concerned. But for small niche ETFs, who knows?
Hi Kris, the equations on Gaussian Copula CDO pricing are available here www.maths.ox.ac.uk/system/files/attachments/1000332.pdf and I also cover it, along with how implement the pricing calculations, in Chapter 8 of my investment book "A Financial Bestiary". Thanks, Ramin.
slightly confused. at first Burry points out that over half of the stocks in the Russell 2000 are lower volume and lower value (which sounds bad to me)....but then says there is an opportunity in small caps - which is basically the Russell 2000? is he saying there's an opportunity *because* half of the Russell 2000 is low volume/low value?
Hi Alex, the fact that small caps are orphaned is what makes them undervalued. The fact that they are illiquid means there is a risk that people selling index trackers (like Russell 2000 trackers) during an equity market selloff will swamp the market will small stocks that are extremely difficult to sell. So if he's right you might want to buy stocks which aren't referenced in passive funds. There's a great interview with James Seyfartt of Bloomberg Intelligence about just such stocks ruclips.net/video/rOKYdXQf-L4/видео.html Thanks, Ramin.
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I suspect that Burry knows the difference between CDOs and ETFs, so he probably meant a more broad analogy between the two:
synthetic CDO buyers did not ask the question "is the underlying solid", while ETF buyers do not ask the question "does the current value of the stocks underneath reflect their cash flows" ...i think this is where Burry sees the analogy
*Extremely illuminating information. And delivered in a lovely, poetic cadence. Thank You. ☮️*
Hi Blessings 2You poetic cadence - well that's very kind of you! Thanks, Ramin.
I'm not sure he is saying CDOs and ETFs are the same thing, just that ETFs appear to be in a bubble at the moment, but for a completely different reason. People are piling billions into companies they would have no interest in buying if they were picking themselves, just because they are in the index. So these companies presumably will be being pumped up way beyond their real value based on earnings and profit and so on.
Hi Michael I think that's how many people interpreted his comments i.e. ETFs are like subprime CDOs which is why I try to show that's certainly not the case. At the end I talk about what is more interesting which is the price distortion in small value from money flooding into cheap, passive large-cap equity index trackers. Thanks, Ramin.
That's what i was thinking . Banks paying hardly any interest have forced tepid investors into the market . Funds have the money and need to invest it , in anything that describes the fund , even if in the real world you wouldn't . It's puffed up what should be a falling index .
I agree that people are buying stuff they don't even know they own. That sounds a lot like the CDO's to me. The appropirate participant (huge financial cartels) are buying the stuff in bulk and passing it on for a profit. The Net Asset Value line is what's on the books, just as in 2008, but in reality, it's the secondary market that is gambling huge sums that no one can possibly pay off. Yes, the etf investors will run for the exits and get trampled. I don't get this guy in this video at all.
Good explanation! Thanks!
@@monaoconnell5650 The way I see it, Index funds will always take a hit from companies that fail to show value, but that risk is accounted for and bypassed by the stocks in the index that are successful. What index funds bett on is the fact that the entire market keeps growing, which historically it has shown to do (even though it's temporarily impacted by crashes). Index funds may pump more money into companies that otherwise would not get it, but the market has always had winners and losers, and even really qualified analysts don't have an easy time seeing who those will be. Which is why, IMO index funds are still a solid bet unless you believe the world/economy will end, and in that case we are all screwed anyway.
This is slightly off topic but I just want to sincerely thank you for your content. I'm 19 years old and I've been curious about the stock market for some time, and your explanations have helped to make it accessible and way easier to understand. I know how I want to set up my investment portfolio, plus how to discuss investing with friends. Your videos make investing and personal finance really fun and interesting! Thanks again, Ramin :)
Hi Issy that's really great to hear, thank you so much! Ramin.
Issy the first step is to read books on it to so that you learn to follow principles, not people, in investing. The Snowball, intelligent investor, and stock market logic are good to learn about.
Play this game so you can learn the ropes. Better to do it with fake money before you go setting real money down on the table: www.marketwatch.com/game/find
I am on this one: www.marketwatch.com/game/invest-until-you-die/portfolio which has no expiration date.
PensionCraft I think you are missing the whole point of what Burry is saying. Your video does a great job of breaking down ETFs and CDOs but Burry isn't saying they are the same product. He's bringing up the same issue with ETFs and Passive that nobody would admit in CDOs. That is that you don't get anything for free. Inherently there must be a risk specific to ETFs that simply building your own basket of stocks (independently owned) doesn't have.
Nobody who is a supporter of the massive flows to indexing is willing to talk about any downside other than "you might not make as much because of diversification". The ETF industry is reliant on more funds to flow their way, they make up low fees with high volume. Inherently there is no incentive to look into the possibility that these vehicles might be DRIVING the market rather than TRACKING the market.
That risk is when volatility goes really high and everyone hits sell on the ETF (not the underlying) the ETF mangers (or their robots) will be forced to continue to hammer the ask on ALL assets in the ETF. With lower underlying volume traded their simply will not be buyers on the other side of the trade forcing dealers to be the only people making the market. This leads to gaping and serious problem with pricing the asset, that individual holdings don't have. There is no free lunch, this is the connection that Burry is talking about, not that they "are the same vehicle" but that they will suffer from the same underlying issue of liquidity in an uncertain down gaping market when the underlying become hard to price.
Personally, my outside of the mainstream bet is that at some point there will be a huge problem created by institutional investors utilizing ETFs and the vehicle will be restricted to retail investors only. Which is who they were built for, not multi billion dollar fund managers who use them to simply BUY STOOOOOCCCKKKKKSSSSS CNBC style without any thought to actual underlying value. Bogle was a fundamental game changer but he never intended for large portfolio managers to be using indexing. It was original designed to compete with overpriced mutual funds that were essential rent seeking on retail investors. But hey when your business gets big why not expand your market?
Hi John as I say in the video the liquidity of the equity market even for small cap equity is far greater than for other assets such as high yield corporate bonds and commercial property funds. So I don't agree that the equity market will collapse due to people selling ETFs such as SPY. I do agree that small caps which aren't indexed will be undervalued, but as I show at the end of the video there are funds that harvest that specific risk premium. Many others, including regulators, have pointed out the risk of liquidity mismatch risk for illiquid assets wrapped in a liquid wrapper like commercial property ETFs so that's nothing new. My concern is that some people who are new to investing would hear about CDOs compared to ETFs and think that ETFs were somehow risky in the same way that CDOs were risky and likely to trigger the next financial crisis and that's just not true. Thanks, Ramin.
I found this Pension Craft video so educational and your post really drove some of the risk point home. I truly did not know that the low liquidity stocks were being left out and all of this whole debate is so valuable. Thank you for kindly taking the time to write this response. Can I follow you on linkedin?
@@Pensioncraft My concern really has nothing to do with individual investors using ETFs as an investment vehicle, its the effect of institutional money flowing through ETFs in a far more active way than passive investing was designed for. I'm not worried about the SPY or any of the large volume ETFs. What I'm most worried about are proxy product ETFs and smaller ETFs that track underlying that aren't nearly as heavily traded. Regulators have allowed a model which works amazing for something like the SP500 to be applied to a less liquid underlying, with the same sales pitch of the SPY. There just is no such thing as making an illiquid market liquid without increasing the liquidity of the assets it's based on. That's something that cant be avoided but wont show up until there is a problem, the gaps in the pricing will be huge if the liquidity isn't there. Unfortunately we can't know for certain until a panic hits and the system takes that kind of stress. There were plenty of things in 08 that happened that we were told weren't possible.
You aren't wrong that it would be a very bad development for retail investors to lose confidence and not invest in stocks at all. This is what happened to many people I knew in 2009-2011. They missed out on all that upside because they did stupid things like sell and go into gold/cash. They took all the loss on the way down got none of the upside. Retail investors are often their own worst enemy in a panic and IF the regulators are wrong (and they have been before) the people who will get smashed wont be the large institutional guys who really don't need to use the ETF products to begin with.
I'm sure you wont agree but that's ok
@@jackiedane3408 Anyone who is touting the returns of 3x leveraged ETF in a decade long bull market as proof that ETFs don't have any risk clearly has no idea what they are talking about.
I invite you to learn a little bit about leverage by doing some math: A 3x leveraged asset begins with a value of $1000 has 1% up days followed by 1% down days. How many days does it take for the fund to go to 0?
The question is simple. The room is full and people are eyeing the door. Who is first out the door and who is left in the room holding the bag? Wealth just transferred hands and the poor sods with the bag might just be the index funds!
I'm so blessed to have found your channel. Thanks!
Thank you for Watching. Ramin
This video finally explains to me the idea behind Liquidity funds. I got it now. Thx.
Hi stevo728822 that's great! Thanks, Ramin.
There has been a lot of work put into this video. Very good effort in answering the question that I also had)
very detailed and well analyzed...thank u!
Hi Tan JunJie thank you! Ramin.
Great video, you made a lot of interesting points. I believe in the strength and diversification of Index Funds so I'm going to continue to hold
Me too!
Hi Sam, I only buy index funds so Burry's comments certainly didn't put me off. Thanks, Ramin
@@Pensioncraft Smart move... what index funds do you have?
Hi @@user-ww6ii6zn8m it's all here ruclips.net/video/vaMiLFANFaU/видео.html but this isn't a recommended portfolio. I try to show the method rather than stress the actual funds I've chosen or my risk level neither of which would be appropriate for anyone else! Thanks, Ramin.
Brilliantly presented! Thank you for explaining this in a clear and concise manner.
Hi Hans, my pleasure. Thanks, Ramin.
Mate you are a genius. All the best from a fellow Brit.
Hi Ben, cheers, Ramin.
Thank you for the excellent video. I was wondering if you would discuss how to profit from an index bubble collapse. Would buying things like SQQQ be a good idea to profit from such a collapse? Or will sqqq also collapse because it is a derivative vehicle?
Maybe it's time to bring this up again, can you do another video about today's financial situation. By the way I am one of your Exclusive Access Tier member on
Hi @E D good suggestion I was just talking about doing something similar the other day. Thank you for your support and i'll keep an eye out for you on our chat forum. Ramin
Ok I read the Bloomberg article. Burry says passive indexing is like the CDO bubble in that (a) it's based not on detailed analysis of individual assets but on flawed Nobel prize winning hypothetical models (b) large amounts of cash are flowing in and increase prices but are not increasing liquidity.
A lot of the finer details go over my head. But given Burrys track record I'm inclined to give him the benefit of doubt
Hi Harrison I agree with him that the flow of money into cheap large-cap passive mutual funds and ETFs has distorted valuations. But these are just off-the-shelf equity portfolios and have no leverage so people shouldn't be scared away from passive funds by this warning. The implication is that small-caps are overlooked, not that ETFs and passive mutual funds are like CDOs. They are nothing like one another. Thanks, Ramin.
@@Pensioncraft The classical ETFs are what you talk about. What I miss in your statements: Leveraged ETFs.
Wow, you have a lot of confidence in one man... I'm genuinely shocked at how you can put your financial decision making into the hands of any one man just because of his track record. Seriously, look at both sides of the argument, make sure you actually understand them both and then make an informed decision. I'd also stress to beware of bias.
Ramin, do you have any favourite brokers if I wanted to invest in an S&P index fund?
Great content as usual - really informative and well explained.
Hi Alex, thank you! Ramin.
Excellent presentation and explanation. Language just enough technical to not scare away viewers. I liked the models, reminded me The Great Short film.
Hi Space Astronaut, I'm really pleased you enjoyed it! Ramin
I would go on and add that the BOND MARKET is also another Bubble.......the U.S is even considering going to Negative Interest rates
S H buy what?
Hi BIG FACTS I've done a video about the bond bubble ruclips.net/video/DMzNZ3J74qw/видео.html Thanks, Ramin.
BIG FACTS I have a lot in vanguard BND bond etf. Is that going to pop?? It hasn’t ballooned much and just us 4% yield. ??
06:40 had never heard the castle analogy before but it's excellent
“price discovery”? what a joke. The FED and the QE policy made sure to make that a “barbarous relic”
@Thomas Headley zoom out
Aliens -> Imperialists -> Politicians -> Fed
@Thomas Headley you wish
This video presents an outstanding explanation of how CDOs & ETFs work. Advanced financial concepts are first stated in the enigmatic jargon of financiers & banksters. Then the speaker brilliantly translates those concepts into layman's plain language. If one is not familiar with the concepts involved, he will likely feel lost at first. You should have some understanding of the topics beforehand to fully appreciate what is being taught here. AGAIN, the Teacher here created one of the best videos on a critical financial subject.
Hi Preston Mitchell, Thank you for taking the time to watch my videos and comment. I really appreciate your feedback. Ramin
Thanks for the video. Very good analysis. It's the first time I ear about CDO. I prefer ETFS. I think that you can buy stocks. But it cannot be all your portfolio. I would not have more than 8% on one stock. Also I would not try to create an ETF using stocks. But you do what you want. It's your money.
Great channel covering more complicated topics with precise and clear explanations. Great choice of topics that are not cookie cutter. Keep it up!
Hi Fireflick Ice thank you! That's really helpful and positive feedback. Is there any topic that you would like me to cover? Thanks, Ramin.
99% of what you said is cogent. I am only bringing up the potential question to one very specific thing that was said)
- Argument: CDO tranches are highly correlated and ETF individual stocks (tranches) are uncorrelated. Response: When there is a market panic, assets tend to move together regardless of whether they are normally STATISTICALLY uncorrelated. The argument by statistics is only valid when the future looks like the present and that there are enough data points of similar things happening - statistical inference breaks down during bubbles. That is why we call them black swan events when bubbles burst. They are statistically rare events. Therefore, what Burry typically does is look at events where the markets/banks/asset managers are looking only at statistical inference to guide their decisions, but where these same markets/banks/asset managers have forgotten to add a sufficient margin of safety to their asset models (because they want to sell more stuff to consumers). Again, most 'tranches' in the ETFs are uncorrelated, but not during a general market crash. Therefore, to say that they are unlike CDOs because the assets within a CDO are correlated and the ETF individual stocks are not is in error. I would be glad to be corrected on this point.
Burry: There is an over-reliance on statistics by the financial system creating an asset bubble.
PensionCraft: No. It can't be true because of these statistics...
I’m just starting to research this theory and really understand it. But basically what you’re saying is yes there could be a crash cause by the statistical push and backing of ETFs but it would only happen if the banks realized this. So how do we know when it would be likely for the banks to recognize this?
Patrick Law This was beyond helpful! Thank you so much!
Hi Patrick that's not what I said at all. Equities within large-cap equity ETFs are _highly_ correlated with one another. The key differences between CDOs and passive large-cap equity ETFs are leverage and liquidity. Subprime CDOs had huge leverage and contained illiquid assets (residential mortgage backed securities) whereas passive large-cap equity ETFs contain equities that are mostly very liquid. There is no model necessary to price a passive large-cap equity ETF, it's just an equity portfolio whereas subprime CDOs required pages of mathematics to price theoretically. Thanks, Ramin.
@@Pensioncraft I think I get it. I hope. And thanks.
"There is no model necessary to price a passive large-cap equity ETF...whereas subprime CDOs require pages of mathematics to price theoretically." I would argue that there is no model necessary to price either. The price is whatever someone is willing to pay for it regardless of the theoretical model used (or if there is "no model" being used).
However, I think this highlights the point you are trying to make (and helps me to not be so unfairly literal).
1. A CDO requires a complicated theoretical model to price correctly -- > this complication lead people of the past to incorrectly price the CDO; when the incorrect pricing is too high relative to what its value should be, it is a bubble.
2. Compared to a CDO, the ETF is easier to price (aside from the individual components being more liquid). There is less math to do and therefore less misunderstanding about the value of the ETF, which in turn reduces the likelihood of their being a bubble with ETFs.
I misunderstood what was said between 5:36 and 10:05 in your excellent video. "The difference between a CDO and an ETF becomes very apparent when you look at the pricing." I thought, in error, that because you were talking so much about how "correlation is key to pricing a CDO" with the castles and sappers, that you were making an allusion to a CDO being less correlated for loss than an ETF - this was wrong. Thanks again for the clarification.
Although the ease of pricing, liquidity and less leverage are differences, I would contend that the pricing of the individual stocks within an ETF are still "not done by fundamental security-level analysis" as Burry says. In an ETF they are done by "market weighting." This creates a situation where overpriced securities and assets are unduly rewarded, not because the underlying business or investment is sound, but because they are overpriced! It turns out that a cheetah has more than 90% of the same DNA codes as a hippo (as all mammals in the physical world do, even humans).
Your argument is that the bubble that this creates would be discovered and corrected by active fund managers. This is true if there are enough active managers that are also not going about things the same way as the ETFs. However, when you open the hood of these active funds, it is startling to note how many of them are not involved in price discovery activities, but instead involved in short-term momentum strategies. Since momentum strategies will only exacerbate the problem because the momentum of stocks is moving towards market weighted securities, a bubble is likely develop, despite what Jack Bogle says the % of active managers is or the "50% active" statistics of Mr. Seyffart. This is what Burry did before, looking behind the statistics to the data that makes up those averages. I have to wonder if he is seeing something in those numbers that the financial services industry is missing or doesn't want to see.
The whole market is in a bubble. Growth is slowing. Everything happens in cycles and we are due a recession now. Look at PE ratio of stocks, so expensive.
Hi Bhavin I agree that valuations are high, particularly in the US where earnings have been artificially lowered by corporate buybacks. That's why I'm pretty cautious at the moment with just a 40% equity allocation - see my video on how I invested my own money ruclips.net/video/vaMiLFANFaU/видео.html Thanks, Ramin.
@@Pensioncraft Thanks Ramin. I've read a book called market cycles and it really has put things into perspective when I buy shares. Also, I notice you like attributing certain proportion of your investments in bonds, over the long term is this better than equities. The way I see it I would rather own 10 rock solid companies and once some multi bag, slice profits and put into funds. I am a huge fan of Fundsmith and Linsdel Train.
@@BhavinPatel-si9uc Make sure you purchase your SPY Puts this year.
I hope you didn't miss this great run in equities in the last 3 months since your post?
@@erichvonmolder9310 oof, hows that great run going?
People have always invested blindly without much understanding.
Its just in the past it was in individual stocks whereas now conventional wisdom says to invest passively.
So its not necessarily a bubble but rather a reallocation from individual stock selection to large cap indices. ie investing in big companies rather than small ones. Therefore if not a bubble then it cant/won't pop.
I suppose this reallocation in itself artificially pushes prices up, which in essence causes a bubble, then more people invest that wouldn't have otherwise (FOMO), and so on and so forth.
Kind of answered my own question there!
Jack Bogle said the best advice he ever got when he was just starting out was from a mentor.
He said "Jack my boy, always remember this. In this business, nobody knows nothing." I'll stick with index funds.
Hi Nick V I always use index funds too pensioncraft.com/how-i-invested-20k/ Thanks, Ramin.
Of course indexes are a bit of a bubble right now: the market is built way up to a high point, there's all kinds of cash pushing it up from the fed to the buybucks from corporate cash and tax cuts. The indexes are supposed to match the market, so if you expect some kind of significant market correction in the mid term, which I do, you expect your indexes to take a hammer at some point.
But that still doesn't mean that the average investor, somebody who has some financial knowledge but doesn't work day to day in the market at all isn't still well served by following these ups and downs over a long time scale. I'm in indexes for another 30 years, I expect to take it on the teeth at some point in the middle there and also ride some long highs like we have for the last several years. In 25 years, I'll start having to consider how to time diversifying away from indexes and try to make sure I do so at a decent time in the business cycle. But unless you're speculating in indexes or not confident in the American economy over the next 30 years, I'm not sure I understand the problem.
Incredibly helpful video, thanks Ramin. This channel deserves thousands more subscribers.
Hi Damien thank you very much. Tell your friends! Ramin.
Agree
Hi @@lozza2272 thanks! Ramin
Absolutely... ETFization of every sector n market.
There's nothing that I can see to initiate the crash. In 2000 it was like the great depression, a bunch of amateurs rushed in, often with leverage, on unsteady stocks in a mania, and suddenly the prices exploded and then peaked and came down just as fast. You can see similar crashes in oil in 2008, Bitcoin in 2014 and 2018. But, these aren't manias, these are passive investments, and that's a huge difference. Passive investments are raising slowly lover years as people are going into them.
In 2007 the teaser rates on the mortgages would end for a large bulk of mortgages causing massive defaults. That was a trigger.
There's no mania and there's no over leveraging so what would be the trigger. A natural downturn in the market maybe that leads people to remove their money from ETFs... I mean, I don't see that happening that much at all. So I don't see a bubble that's actually workable.
Now, if we were to talk about Corporate Debt being used for stock buybacks and a general recessionary destruction of called debt well that could cause a market crash, and then, that could cause the ETF's to propel a crash into something bigger.
Unemployment is at a 60 year low. What happens when unemployment rises 2-3%, like it tends to do in every recession? Market corrects and housing prices correct.
@@fredocorleone3280 Yes, but the point of indexes is to ride the market corrections and the swells and accept the gains over time. It isn't a scheme to invest in the short term. So what's the problem?
Thanks for the vid. Good explanations and relatively easy for the non-expert to follow.
As a layman I've been a little suspicious of indexing for a few years after reading about finance just as a hobby. E.g., Investing in companies by market cap seemed strange to me - a large company could be mismanaged, unprofitable, unethical, deeply in debt, etc, and otherwise not a good investment opportunity. Burry expressed in more technical language a lot of the same things I was feeling on a gut level.
To put it simply risky assets or being repackaged as safe because of "diversification"
Dr. Burry is currently investing a lot in water according to the end of the big short. I checked and WTER is only at $1.71 per share even though the Akaline Water company is aquiring a lot of companies and has 48% revenue growth.
nah in the interview this is talking about he said he sold those shares and is more in japanese shares now
Hi LaxLyfters you can see his 13F filings through Scion Capital on the SEC website and there's a discussion of it here finance.yahoo.com/news/michael-burry-trapped-stocks-195013623.html As Ismail Hatipoglu says he likes Asian small-cap stocks, particularly Japanese small-cap. Thanks, Ramin.
Gee, stocks up 400%? Didn't that happen in the 1920's? Yes it did. Lucky for us the Fed only lets stocks go up. Lucky us.
Not sure how I missed “The Big Short”. After hearing you mention it here I’ve since gone & very much enjoyed watching the film. I wonder if there could be another story to be told in the near future: “The Brexit Short” perhaps?
The film is pants, read the book.
Index funds will be fine long term. When the markets correct, index funds will fall like managed funds and other stocks. Most people will be taking massive risk if they speculate on individual sections of the markets like small-cap. Investors have become wise to how much money index funds save on fees over many years. Some hedge fund managers are being paid over $1bn per year and can't beat the indexes.
If I had listened to Burry a year ago and held on to my cash, waiting to pounce at bottomed out prices, I would have lost out on roughly a 30% ROI.
In fact that's exactly what happened. I have now taken my money out of it's 0.5% return "savings" account and started cost averaging on a monthly basis into the S&P500.
how's it doing now?
@@Andy.mikhail137 I'm breaking even, but I kept changing strategies. I made some bad decisions while learning a lot, and lucked out with Coupang and Hycroft Mining, but I'm back on track now with better, less risky companies. To be breaking even after the crash this year is a win. Especially as most of my stocks are now dividend paying. I have only a small amount in index funds.
Good analysis and v. clear explanations - thanks. The whole thesis of ETFs being in a bubble needs a lot of qualification. If an S&P 500 ETF is in a bubble, it's because the S&P 500 is in a bubble (which it prob. is at the moment :)). There is probably a lot more risk with a narrow focus thematic ETF like one tracking batter technology or whatever, because most of the stuff inside it is speculative newbie companies with no profits driven by hype and trading on P/Es of 70 or 80! They will obviously take much more of a bath than the S&P 500 ETF when the next big correction comes. Maybe that is more what Burry what getting at...
I am inclined to agree with him. The cocktail of cheap money, eye watering gearing, shrinking 'real' relative or tangible values and the steady flow of cash from retail investors all adds up to a rather heady mix which surely raises concerns about the potential risk, hopefully not of the Molotov variety.
Hi MartinJG100 I also agree that the flood of money into cheap, passive large-cap equity index funds has boosted those stocks. However, I think calling it a bubble is hyperbole and misleading. It's created opportunity in small value and pushed up valuations in developed market large caps but it's unlikely to cause the huge repercussions that we saw in the Global Financial Crisis triggered by the US housing market bubble and subprime CDOs. I'm also worried that people will get the impression that ETFs and passive mutual funds are like subprime CDOs which could put them off the most useful and cost-effective investment vehicles for retail investors. Thanks, Ramin.
Holy shit... Best explanation ever.
Thanks Ryan Teo - glad you think so.
Great vid- thanks!
Hi Adam, thank you! Ramin.
What are some examples of value harvesting funds? I’d love to check those out
Nice Video. Thanks!
Thank you Blake Dextraze - I am glad you enjoyed it.
Great video, glad I discovered this channel. Not sure that he's making a direct comparison of what constitutes the core of ETFs vs. CDOs. But your explanation has finally cleared up the massive risk CDO leveraging had. Cheers from Canada!
Hi Rick, thank you! I understand what Burry meant to say but I expect that others might misunderstand the comparison and be scared off using ETFs or scared off investing altogether because they expect an imminent equity crash triggered by ETFs. Thanks, Ramin.
This was a very well needed video. I just started investing in index funds through Vanguard and saw the news. I thought it was a bit ironic.
I read more on this subject and some said something similar to what you've pointed out. Even if a lot of people choose to invest passively, and this then creates opportunities for active investors to find overlooked & undervalued companies, then the equilibrium of the market will be held.
I'm personally looking into investing in individual companies as well using the "value investing" strategy. I've been researching it a lot lately and I have a short list of companies that I'm interested in buying, once they go on sale. The only thing I struggle with is finding the intrinsic value of a company. Maybe that's a topic you'd like to do a video on with an example :)
Cheers for the awesome video!
Hi Marius active managers are justifiably scared about losing business so there are lots of scare stories about passive funds and I expect they will grow more shrill as the outflows from expensive active funds continue. I discuss valuation in my Asset Allocation course which you can find on my website pensioncraft.com/courses-we-offer/ Thanks, Ramin.
Where is the interview?
I don't see how people buying passive index funds and artificially inflating prices will cause a bubble to burst in itself. I think sofas and armchairs are way over priced for a bit of foam and chipboard covered in materiel, but the cost of them has been high ever since I can remember.
Hi Barn Star I agree. It's more of a valuation distortion rather than a bubble per se. Love your sofa analogy! Thanks, Ramin.
Great video! Would small cap index funds also be affected by a bubble burst or just the large cap ones..?
Well explained. Great video!
Hi Tibor Z thank you, Ramin.
Is it matter to me if I wanna buy index fund for more than 15yrs?
no, just buy more small cap essentially
Great video thx
Thank you Chandler Everett
Love your work mate. Will be buying your course to support the channel. Jay Aussie.
If we buy reverse index ETF is a mistake? for exemple, buy EDZ etf....which rise when SP500 ETF index goes down.
Thank you, I was wondering what exactly Michael Burry had in mind and/or how he decided, that Passive Funds are similar to CDOs in terms of creating a bubble
ETFs and indexs drive prices up by supplying a lot of cash to have an "index portfolio" that means unless you are doing your own fundemental analysis its hard to figure out if a stock or commodity's price is determined on value or if its inflated by the demand that ETF and index products create. The issue is in the event of a sell off there is no one to make the market so you are trapped.
@@bobbysnobby I just wonder, when this bubble will burst and what happens then...
Brilliant video! thank you.
Thank you! Ramin
Good explanation...
Hi Charles, thank you! Ramin.
Did he announce publicly the declining markets in 2000 and 2008?
Hi A K as he was building up his positions I'm guessing he didn't announce what he was doing, but once he had his short position it would be in his interest to "talk his book" and say that the stocks in his portfolio or the (credit default swaps) were hugely mispricing risk. This NY Times article from March 2007 www.nytimes.com/2007/03/09/business/09insider.html talks about what happened but I couldn't find any stories about Burry before the crash. Thanks, Ramin.
He announced privately by placing hundreds of millions of dollars
he did better than that, he started a fund, put all his money it, and many investors billions i think,then the investors got scared wanted their money back, he said no, the agreement clearly said you can't,they freaked out and he held strong until poof he was proved right made his ungrateful investors rich and was not venerated hardly at all, and the same stupid commenters that totally missed it before are being listened to again while michael burry is being vastly ignored again, history repeats. maybe your different. hope so.
@@organicdudranch So the question is, if the stocks at 50% active and 50% passive, is there enough price signaling from the active traders so that the price is correct? The video suggests 10% active would be enough. It seems the problem are low volume small cap stocks that are held by a large number of ETFs and mutual funds. While orphaned small caps while still risky would have far less risk of an exit problem.
I was concerned about index bubble myself years ago.
And you was wrong
Au Go 😂😂😂
I wanna join thee programe , will burry frequency of bubble prediction increase
Thanks a lot for creating very informative videos.
Hi Sadik, it's my pleasure and I'm glad you find them useful. Thanks, Ramin.
I'd like to see a deeper look at the argument that ETFs don't affect price discovery - a large group of buyers blinding paying the asking price, seems, on the face of it to suggest it's going to support some overvalued assets.
Does that mean I should start selling my vanguard portfolio ?
Hi Terry, no it doesn't. I don't think the word bubble or comparison with subprime CDOs are helpful. However, indexing has created some opportunities in small value as I say at the end of the video. Thanks, Ramin.
Indexed annuities are safer because they have the backing of the RESERVES and stability of life insurance tables... But really Bitcoin is still the investment of a lifetime... If you could create a Blockchain Indexed fund that works the same way Indexed annuities index, their is your Trillion Dollar Idea, Thx
Hang about, I’ll give you 11 Grand for your portfolio. Talk to me
Pensioncraft Very instructive! Thank you. I am curious about the possibility of exaggerated moves by the various global markets (U.S., international, emerging markets, etc.) following a China-U.S. trade deal and some closure to Brexit. I would like to catch a a bit of a spike and then drop back to a more conservative E/B mix. I have already faded U.S. equities a bit to focus globally. Any suggestions?
Is it safe to say people are making smarter investments and paying less fees as we are seeing greater etf/index fund trading than mutual funds?
And would smaller cap companies in these etfs and indexes trickle out of their fund from the fundamentals of economics or is it the fund that is keeping the valuation inflated and stuck in the fund?
Sorry, is this a podcast about finance or medieval architecture?
Hi JoelJoel321 if you keep watching you may find the metaphor useful in understanding CDO pricing. Thanks, Ramin
@@Pensioncraft I did! :)
Pretty hilarious Joel
Thanks for your videos. Can you do a video on how indexing is actually making the market more efficient? My theory is that as the size of passive funds grow in comparison to active funds. Only very efficient active funds can survive in the long run. Indexing will most probably remove any managers who have no idea what they are doing.
My only concern is that what happens when passive investing becomes the majority of the market. Would it make it almost impossible for any fund manager to survive?
Comparing the bubble of the mortgage crash to a bubble in index funds doesnt sound like a fair comparison to me. Before the mortgage crisis, banks were being fraudsters acting irresponsibly by knowingly giving loans to people who cant afford them for commission, and then there were CDOs being marketed to investors to make a bad investment in those mortgages. The difference with s&p500 companies is that that we have no reason to believe theyre acting irresponsibly too. However, I do agree that the simple fact there is an s&p500 index being talked about so much means theyre getting way too much of investor’s money. However, with all that money, s&p500 companies can take advantage of capitalism and monopolizing that would give returns to their investors so they come out on top. Unfortunately, monopolies hurts smaller companies, which hurts competition, which slows economic growth as a whole in the long run.
so, bottom line, there's price distortion, therefore buy independent small cap value stocks?
That seems to be the theory - or just understand that anything massively owned by index funds and ETFs could be artificially inflated and price things accordingly when making investment decisions (not for the inexperienced)
Excellent video!
Keep up the great work!
Thanks Evan, I appreciate your support! Ramin
First thing, you make really good videos. This one is not so clear to me, are we than in an index bubble? Are the big cap S&P 500 EFTs overpriced, or are just the small cap EFTs that track index funds overpriced because of low liquidity and their ability to produce better returns so they are being overpriced.
Hi Petar I don't think this is a classic bubble it's more of a price distortion (upwards for large caps, downward for small caps). Small and illiquid stocks are undervalued because they are "orphaned" i.e. excluded from the cheap, large cap equity ETFs that are being flooded with money. Thanks, Ramin.
After watching several videos about the so called "index/etf bubble" I still haven't got a clue of how this bubble would burst? Would there be just falling prices on all stocks and therefore ETFS? Would ETFs collapse themselves? Can anyone explain that, please? Because at the moment it feels like it just might be another market drop which you can still safely wait out holding those ETFs.
how did you apply that mouse cursor? the trailing/shooting star effect. i've never seen that
Hi LtSump it's just Google Slides with the pointer switched on. Thanks, Ramin.
@@Pensioncraft thank you! i'll definitely check that out, i like it
Try Windows 1.1 or Windows 95 ;)
At 9:45 you show a plot of the S&P daily return and its correlation with the SPY daily return. I agree that for the existing history the relationship is very good, and no leverage means that arbitrage will drive the variation between these to zero. However, Taleb would argue that this data is not what matters because periods of time that vastly exceed the existing model (either upside or downside) will not track. Of course, the fact that there is no implicit leverage means this isn't obviously fatal but we can't use even 15 years of data to determine that a product is safe.
Hi engyn0 for physical ETFs, which are just a portfolio of equities, there's not a lot of financial engineering going on. The price matches the index because the allocations match the index weights. For synthetic ETFs it can go wrong if the counterparty (usually an investment bank) goes bust so that certainly could be a risk. For sampled ETFs there might be a divergence during periods of extreme market volatility but the ETF manager would probably make it up over time to get back in line with the index. I think market risk is a much bigger worry than tracking error. As long as the fees are low and the tracking error isn't too big I wouldn't be concerned with a physically replicated ETF. Thanks, Ramin.
so interesting
If cheetahs are mispriced and hippos are mispriced then you have a similar situation with two very different animals. ETFs aren't CDOs but then again, neither are tulips.
As others have probably already mentioned. I think burry is referring to similarity of etf’s and cdo’s in that some etfs have high systematic risk, exactly as cdo’s. Synthetic cdo’s are cdo’s of cdo’s, while large portions of some etfs are similarly made of etfs. So if one etf falls or goes bust, then it will drag another and another down with it.
Hi @folmerify the point is that many ETFs are just portfolios of stocks with no leverage at all. CDOs have double-layers of leverage. If an ETF is liquidated the basket of stocks is sold and you get your money back. That does not create systemic risk and ETFs are closed down all the time if they don't get traction. Thanks, Ramin.
@@Pensioncraft Yes, most of the large mainstream ETF's consists of just stocks. But there are many ETF's (also relatively large ETF's) - that are partially or completely of other ETF's - and those ETF's are sometimes also made from ETF's.
Therefore, (if I'm not completely mistaken), you have a large basket of stocks that you package into an ETF, then package that ETF into another ETF, and perhaps even package that ETF into a third ETF.
All the ETF's will theoretically hold a portion of the initial basket, but only through other ETF's, and does not actually hold the stock itself. If for some reason an ETF suddenly cannot be liquidated, the other ETF's will be affected as well, because now a portion of those also cannot be liquidated.
As examples of such ETF's of ETF's:
IQ Hedge Multi-Strategy Tracker (QAI) - Almost solely ETF's with 20% in ULTR
iShares Core Growth Allocation (AOR) - Solely ETF's with +80% within only 3 ETF's
Most leveraged ETF's - such as SPUU - 97% in IVV plus a pile of index swaps
Best regards
What ETF's are safe and liquid... Whick ones are not and where do go to investigate this further?
Read their semi and annual reports. The information is out there but you have to do the heavy lifting. Educate your self and don't expect the most important information on RUclips nor Facebook. Best of luck.
simple average PE can be used to track if ETF is overvalued, why this is a concern to the big short?
What about leveraged etf's?
Also any good resources to learn more about this?
Preferably text books but w/e works
The key is that the if the tracker is doing so though derivative usage then you have basis risk and that is larger when the value of open interest is massively larger than the underlying.
Hi Paul, a lot of trackers are physical so this isn't an issue, but for the synthetic ones basis risk and counterparty risk are things to think about as you say. However, arbitrage will always keep the value of, say, an S&P future and the index itself closely in line. Even at the height of the Global Financial Crisis the basis risk of equity index futures for developed markets never blew out. An equity index swap might deviate due to counterparty credit risk if the solvency of banks were to be called into question again. I think that's why many people steer clear of synthetic ETFs. Thanks, Ramin.
PensionCraft .... Hi all true under normal circumstances but under stressed market conditions.
Index bubble?!? We are in a debt bubble
In a debt bubble and a debt spiral as well. Name it all the bad out there, we are in it.
Isn't Burry saying that sale of an ETF could stall on one side due to illiquidity in some of the low volume smaller cap components? Can shares of an ETF sell if all of the components have not been sold? That is, is the liquidity of an ETF share equal to the lowest liquidity component at that time and could lead to large spreads? It appears the sampling methods or the truncation of the index are solutions to this issue.
Hi GDC that's right. The effect of massive selling of, say, an S&P 500 ETF would cause an increase in the tracking error as units were sold, and it's the illiquid shares that are the problem. The companies that do the plumbing (Authorised Participants for ETFs) deliver their ETF units to . Then the Authorised Participant buys enough ETF shares to make a "creation unit", delivers the ETF shares to the ETF manager and receives a basket of shares in the ETF unit from the ETF manager which it can then, hopefully, sell on an exchange. The problem will lie with the Authorised Participant because the illiquid stocks will be difficult to sell. The bid-offer spread of the ETF depends on other factors, such as whether the index being tracked has a future associated with it which makes hedging easier, the volatility of the index, the size and daily volume of the ETF etc. There's a nice summary here www.ipe.com/reports/special-reports/etfs-guide/observations-on-etf-liquidity/10013218.article Thanks, Ramin.
I love the video, the accuracy, the fortress analogy. (I´m a fan of Vauban)! Thank you!
My question on another subject: I know a thematic Water Fund called "Pictet-Water"
Let´s say I love my cat and want to create a Thematic-Fund chosing companies in the sector Pet-Industry with interesting ESG policies.
I want people to say: Cool!, and invest in my fund.
What is the work involved in it? What is the benefit? Risk? Who qualifies to create this kind of Funds?
Thanks in advance. I´d love if you explain the trend towards thematic funds in a video, whenever possible.
Sincerely
Peixe
Hi Peixe we have covered thematic funds several times on our PensionCraft member Sunday evening calls. Only asset management companies are geared up to create funds because it takes an army of people to create, manage and market them. There are also a lot of regulatory requirements that have to be satisfied before you can market a fund. Your cat might be better off investing in a fund that has already been created. There are funds for almost everything and thematic funds for most things you can think of. Thanks, Ramin.
@@Pensioncraft Thanks a lot, Ramin, for your clear and kind reply. The undertaking sounds cumbersome. I have no cat, but want to create an Ocean Fund. I might have contact to asset management companies. I owe to the sea some important moments in life, so I gess I´m spending some time on this for the next decades.
Suggestions or comments from you are welcome any time.
By the way ... my name is Ciro Morello. You find me on Facebook (old Greystoke-looking photo)
Thanks again for your time and generosity.
Ciro
(PS: "Peixe Verde" means "Green Fish" in portuguese ;-)
The "orphaned" equity phenomenon is really disturbing to the ability for small cap companies to actually raise capital. Over the last 20 years the number of publicly traded companies and IPO's have collapsed. I think the passive indexing has alot to do with this since 09. Real vision had a decent video on this "are ETFs going to crash the market" the interviewee goes into way more detail then I am able to off the top of my head here. If you could do a reply video to that one it would be much appreciated.
He was basically saying that these ETF's are really wagging the dog when they all fight for liquidity to rebalance.
I mean it does make a hell of an arbitrage strategy for the nimble small time options player if you watch the largest funds and front run the rebalance. That in itself is a distortion.
It will be hilarious to see what happens to all these etf's in a normalized rate environment.
Curious to know your thoughts 3 years on, now that we're in a more 'normalised' interest rate world.
I knew that the dot-com Nasdaq in 2000 was a bubble and knew in 2006 that houses were way ahead of themselves in price. I think the S&P 500 is about 20-28% overvalued right now (as of Sept, 22 2019) and that most houses on the west coast of the USA are overvalued by 25-40%, because current wages can't support these houses at those prices.
If the stock market corrects by 20%+, this Michael Burry guy can advertise that he was right again......but many people like me know that the stock market and housing on the west coast are overvalued by 20%+, so this prediction by him isn't a revelation.
@Delman A new trade deal in 8-12 months with China will most likely become a top in the market for the next 5 years. The bond market probably just topped out in the past week. Listen very closely to the old men who have been trading bonds and stocks for 50-60 years. They are saying to expect smaller 1--3% returns in the US stock market now for the foreseeable future...whenever these old guys start saying things like that, there almost always is a correction coming. I think the S & P 500 should be trading in a healthier range of 2200-2400 right now, and not hitting 3000.
Watch the last 20 mins repeatedly until you have it memorized of Ray Dalio's vid "How The Economic Machine Works by Ray Dalio". We are coming to the end of a short term credit cycle this coming year. I personally believe there are 2 more short term credit cycles left (15 years), before the long term credit cycle goes into a depression-like scenario. I don't think it's time to buy gold yet, but maybe in 10-13 years it will be. All countries seem to be maxing out their debt levels for the next 15 years (becoming like Japan to create fake inflation), after this happens, capitalism is dead and robots start taking jobs and wages and everybody moves to socialism.
What should you do before a recession comes, like the one that is very likely to happen in a year? Pay off debt. Save cash, rent cheaply and be ready to buy new investments when good deals arrive. Unemployment and housing prices are inversely correlated.
Very good video! Thank you... ;)
Hi Zighy Blue, my pleasure! Thanks, Ramin.
Are all Index Funds also ETFs?
I can find no link to Burry's Bloomberg interview in its original format. Has it been everywhere removed? Sinister
@Anne Tastic Burry doesn't talk in this movie link. They talk about what he said, but he doesn't talk himself.
Hi Markus, it was an email interview, which is unusual. I'm praying that Eric Balchunas gets to interview him on Bloomberg TV. Thanks, Ramin
@@Pensioncraft thanks!
Isn't there some kind of leverage hidden in the stock value? Companies borrow money, buy their own stocks etc...
Hi Antoine that's true companies usually have balance sheet leverage but the amount of debt they can issue is limited by their ability to service their debt with their profits. Thanks, Ramin.
I disagree. ETFs and CDOs are quite comparable - they both aggregate a set of financial instruments into a single tradeable entity. The fact that people are not doing their due diligence into the constituents of the ETFs is analogous to the lack of price discovery Burry noticed in CDOs where due diligence was also clearly absent. There are also clear analogies with ETFs of ETFs and synthetic CDOs. There are also ETFs where the underlying assets have potentially enormous price distortions (e.g. TSLA) or contain illiquid assets (fixed income products) much as there were CDO containing mortgage bonds comparably overvalued and/or illiquid. I have no great affection for Michael Burry, but if you disagree with his comparison, you need to eat some humble pie and acknowledge it is because you are likely not perceiving the analogy with the same breadth or depth as him.
I’m planning ahead for this, the day before the decline I’m going 100% bonds, gold, cash x. The day before the bull I’ll buy into 100% growth stocks.
Hi A K can I borrow your crystal ball 8-)
I was joking. If I get my hands on that crystal ball I’m not telling anyone, I’d just turn $10k into $10 million in secret. Lol
I guessed you were joking, but just in case - I'd settle for time travel... Thanks, Ramin.
So where was the discussion about index bubble? there was none
Hi happy larry, as bizkitgo says it's all about a pricing distortion which you can profit from using cheap ETFs. Or I should say you can if you invest in the US, unfortunately there isn't much choice of small value ETFs here in the UK. Thanks, Ramin.
I was unaware that Michael Burry had talked about this stuff, but I've heard others say similar and tend to agree with what they're saying. Things are not looking good, not only for the reason they provide but for numerous other reasons as well. The only surprising thing about something that's unsustainable is not the final destination but how long and what path it takes to get there. That said, there comes a point at which it is difficult to believe things can go on as they are much longer.
So, as far as Michael Burry goes, I take what he says far more seriously than you appear to.
I guess it will be, just another case of wait and see. Time will reveal all.
What I do find interesting is that you do appear to take the few charts, diagrams and correlations, that you displayed very seriously. Also, you take pricing based on complicated maths and simulations far too seriously as well. I imagine that if you knew a lot more about maths and stats you wouldn't. If you understood the problems with such analysis, you might understand why someone like Michael Burry might think differently, and might use superior reasoning to come to the conclusions that he does.
Hi Peter I agree with him about the price distortion. I don't agree that passive mutual funds and ETFs are anything like subprime CDOs and I suspect that few people who understand CDOs better than myself or Michael Burry would either. I think calling passive growth a bubble is misleading. I always like to look at facts myself if I can and try to make judgements based on evidence. Don't you? Thanks, Ramin.
@@Pensioncraft Except as I understand it, he is not saying that ETFs and those CDOs are similar products. He's saying that aspects of the problems with them, and with the reasoning about them that led to problems being ignored, in the lead up to 2008, are similar, which is a different matter entirely, and I get his point. Of course, they are very different beasts. No doubt about that.
Good
Thanks
The Broad market ETFs dont necessarily have any more risk, than owing the market directly. The real issue is counterparty risk, The issue with CDOs was the counterparty risk, the system crashed because there where insufficient capitalization to cover the risk.
The questions is how much counterparty risk is there with ETFs, given the survived 08, I am not too concerned. But for small niche ETFs, who knows?
does anyone know the book/source of the mathematics at @8:13 ?? very interested to give it a read
Hi Kris, the equations on Gaussian Copula CDO pricing are available here www.maths.ox.ac.uk/system/files/attachments/1000332.pdf and I also cover it, along with how implement the pricing calculations, in Chapter 8 of my investment book "A Financial Bestiary". Thanks, Ramin.
slightly confused. at first Burry points out that over half of the stocks in the Russell 2000 are lower volume and lower value (which sounds bad to me)....but then says there is an opportunity in small caps - which is basically the Russell 2000?
is he saying there's an opportunity *because* half of the Russell 2000 is low volume/low value?
Hi Alex, the fact that small caps are orphaned is what makes them undervalued. The fact that they are illiquid means there is a risk that people selling index trackers (like Russell 2000 trackers) during an equity market selloff will swamp the market will small stocks that are extremely difficult to sell. So if he's right you might want to buy stocks which aren't referenced in passive funds. There's a great interview with James Seyfartt of Bloomberg Intelligence about just such stocks ruclips.net/video/rOKYdXQf-L4/видео.html Thanks, Ramin.