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Equities and Bonds Retreat as “BANG” Stocks Squirm

Real Vision’s Jack Farley and Weston Nakamura guide viewers through a topsy-turvy day of price action where U.S. stocks and bonds sell off together as the “BANG” meme stocks (Blackberry, AMC, Nokia, and GameStop) pare some of yesterday’s gains. They also roll a pre-recorded segment of Real Vision managing editor Ed Harrison and crypto editor Ash Bennington, who reports from Miami’s 2021 Bitcoin conference. Farley and Nakamura close by reviewing the Fed’s decision to sell its holdings of corporate bonds and analyzing what the potential knock-on effects would be if the Turkish Lira were to continue to deteriorate. To read more of Weston’s thoughts on the relationship of Bitcoin, gold, and the Turkish Lira, click here: https://rvtv.io/BTCLiraGoldEXCH

Video Transcript


JACK FARLEY: Welcome to the Daily briefing. It is Wednesday, June 3. No end to the drama in the mean stock mania. There’s so much more that we have to talk to you about, bonds, equity credit. Plus we are going to have a special dispatch from Ed Harrison and Ash Bennington. They are both at the Bitcoin conference in Miami. But for all this and more, I’m joined by Real Vision’s Weston Nakamura. Weston, how are you doing?

WESTON NAKAMURA: Long time no see, Jack. How are you?

JACK FARLEY: I’m doing well. Weston, what time is it in Tokyo right now?


JACK FARLEY: And you’ve been up this all time. You trade you trade the New York-US market. So you’re on Eastern time.

WESTON NAKAMURA: Yeah, yeah. Sure. I will go with that.

JACK FARLEY: Pretty much. So Weston, what were you looking at today? A lot of oddities today. AMC plummeted in early market hours because of a share offering, but the market soaked it backed up. And it ended, well, up not on the day, but relative to that low level.

Then we have new entrants into the– I don’t want– I don’t want people saying meme stocks, but a new entrant into the hypertechnical moves in stocks Workhorse, which is a darling of electric vehicle investors. It’s what’s known as a spec– a little bit more speculative than your company, like Tesla or a Ford Volkswagen. That was up 28% today. That’s the close. It was actually up much, much more earlier, but it faltered a little bit.

And by the way, the whole stock market was somewhat dragged down by this action. I actually don’t have the closing numbers in front of me, but the even NASDAQ was down. I think it was about a point.

WESTON NAKAMURA: Yeah, basically 1%, 36 basis points down on S&P and their whole stock. And [INAUDIBLE] are there. Who cares.

JACK FARLEY: The Dow is a fake index. The largest stock in the Dow is UnitedHealth company because its price weighted, not market weighted. So I don’t consider the Dow a real index. I do not. Illegitimate, as far as I’m concerned. But Weston, I’m super long-winded. What did you make of today’s action?

WESTON NAKAMURA: So obviously, AMC was front and center. I don’t know if the stock– Slack certainly was– the options certainly were. So we have about just under 600 million. AMC volume, I believe you said it was like the largest– was the most volume traded more than Spies. Doesn’t surprise me. Because once again, there is just an insane amount of open interest out there.

So premarket. The stock was, actually– I think it was up, I don’t know, 20 something percent. Then you have this announcement come out from a corporate saying– essentially saying the same thing, the hedge fund of yesterday were overvalued and were issuing shares. This is not the first time that they issue shares, they file– file a case, and all that kind of thing.

And the speculative call buyers I was talking about yesterday, the ones who– the froth traders. The ones who are buying crypto, and then going from GME calls, to crypto, to Doge, back to AMC, and so on and so forth. They don’t care about an 8-K filing. They don’t read that stuff.

And that’s why in the premarket– I sent out a note on the exchange saying, whatever happens with the stock today, understand that institutional investors read these kind of documents in institutional versus trade in the premarket. The price rate you see right now with the stock being down pre open is institutional investors. Everything thereafter is going to be by and large, by the retail army, which even AMC acknowledges that their shareholder base is. Hence the pricing of the popcorn and all that kind of thing.

That said though, you did see some last minute shorts come into AMC on the actual equity itself. So hedge funds are coming in. It’s a very hard stock to borrow– it’s very expensive to borrow. And so you saw somebody just start slamming shares at the open– the opening shorts. And it seem to have worked, but then the stock got back to flat. And it’s basically all over the place. So we’ll see what happens. Expiry is tomorrow.

And I think that about– something like about half or so of the open interest is going to roll off. And with that, is going to go a lot of the hedging exposure positions that the market makers hold. And that they’re all [INAUDIBLE] that as well. So if this story just keeps continuing to Monday and all that, then it could probably– it could very well see potential upside there too.

But for now, AMC is not like being abandoned. There are options– there are positions now being opened. This is not a forgotten stock just because it kind of looked around directionally today. And it’s spreading into, as you mentioned, some of those other– we can call them meme stocks– meme stocks.

JACK FARLEY: Yeah, Weston. The note you referred to the 8-K when they issued the stock, I’m going to– I’m going to quote. They said, “under the circumstances, we caution you against investing in our class A common stock unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” This is on an official filing.

So I kind of thought of it, Weston, like you’re watching TV, and there’s an advertisement for an allergy medication. And then they tell you about the side effects, where they’re like, side effects include and then they list all these really nasty things that you would you’d never want. But people, they still bought the medications.

WESTON NAKAMURA: That is not the appropriate analogy. The analogy is DARE. I don’t know if you know what DARE is. Maybe or too young. Drug Abuse Resistance Education. It’s like what you– they are like you learn about not taking drugs in school. But instead what happens is people– kids learn about drugs and are introduced to them via that very program.

So basically they’re saying, don’t buy this unless you want to have speculative exposure with a ton of upside and limited downside. It’s very dangerous. That probably had people watering at the mouth instead of cautioning them away from it. So I think that it did the exact opposite. It was a almost like a probably subconscious, but marketing tool.

JACK FARLEY: That’s a good point. One other thing on the share issuance was just that because it was at such an extremely high price, they didn’t have to issue that many shares. They issued, I think, about 11 million shares. Yeah, 11.5 million shares. And they were able to raise $722 million just with those 11 million shares. Whereas early in the year, they sold 187 million shares for $3 a share. So they realize– earlier in the year, they– excuse me, they raised– excuse me, sorry. One second.


JACK FARLEY: They raised $597 million earlier this year, selling 187 million shares. And this time they raised more, $722 million, raising– selling only 6% as the number of shares. So just goes to show the eye-popping price appreciation, and how that has a real impact on how this company can secure financing.

WESTON NAKAMURA: And the fact that the dynamics of supply and demand for share issuances, all that doesn’t mean anything when you’re talking to a community of people that are buying Dogecoin, which is purposely meant to mock the system and be an inflationary cryptocurrency. None of that matters. Prices can go up with an increase of supply. They’re just turning traditional– textbook macroeconomics or economics in general, supply and demand cross just on its head.

So none of that is a deterrent. Everyone– like I said yesterday, nobody is buying this company because they want to own common stock in AMC Entertainment corp and have voting rights. That’s not what this is all about. This is just purely a buy high, sell higher, be prepared to lose 100% of your premium yellow trade. That’s all it is.

JACK FARLEY: And everybody thinks–

WESTON NAKAMURA: I was analyzing it deeper than that, reading the 8-K. You are– you are missing– you should stay away from that slot.

JACK FARLEY: Well, Watson you’re right that this is not a fundamental thing at all. It doesn’t have to do with the cinemas that are opening, the new app, the new service. It doesn’t have to do with any of that. It is not based on expectations of future earnings. It is purely sentiment and based on technicals. I will say, Weston, the fact that new shares have been issued, that is a really important technical factor, wouldn’t you agree? Even if it is in a SEC filing.

WESTON NAKAMURA: So you’re saying because there’s no supply. So that does actually matter. More so than like fundamentals on the earnings or something like that. But again, Dogecoin is supposed to be like an inflationary asset. They print more Dogecoin. They print more shares of– or they issued more shares of AMC. This isn’t like– none of those things have any effect on the price at all. In fact, it seems like because there is this insatiable, unconditional bid for these assets, be it AMC, or Doge, or whatever it is, because of that, that’s why they do take advantage of that and issue more supply.

So if anything, these traders are enabling these executives. It’s not really the other way around. But in a normal environment, I would suppose that like it’s a challenge. You get diluted down. Nobody is calculating how many shares are outstanding what. That’s not how it works. None of these people are going to execute their long call options. They’re not going to exercise their options.

JACK FARLEY: And I’m relieved that there’s so much less of the Wall Street mob, justice trade, or people who are trying to get over on Wall Street. I don’t think that is the primary motivation of people. I think they just want to make money. And I’m glad that we now can recognize that. And that, in some cases, retail traders can do much, much better than institutional players.

Weston, you mentioned short sellers. I think that AMC had a relatively high short interest of 20%. Of course, nothing compared to the 144 or something percentage of GameStop, but relatively high. Do you think that’s additional shorts added on, because you said that you think that the early price weakness was short sellers? Do you think there was a bear raid, and do you think that bear raids even exist? Because I don’t own my own thoughts on that.

WESTON NAKAMURA: Well, so even before– so today there were– there was a lot of borrow right for the open. So I’m assuming that nobody is getting– I’m assuming that that’s done off of that headline to be executed at the open. But even yesterday after market, I was looking at some of the data from various brokerage accounts, and all that. And by far, AMC is the hardest stock to borrow. And it’s like 10% funding and all that because of the relatively low float.

What I think is that just because this is borrow though, that doesn’t mean that shares have been sold short. So if I were a hedge fund, and I were out of my mind and had forgotten that Melvin just got blown up like three or four months ago, or January, and I decided to short one of these companies again. If I were to do that, what I would do is borrow the stock. But you don’t have to do it all in one clip. Just because– just the same way as you scale in and out of a position.

So you short some. And then knowing that the stock might double tomorrow. And if you do, you kind of average up in this case. And you short some more, and you short some more. And so they just keep piling in. And then eventually– and you just hold some dry powder. Eventually you get a day like today, and then you slam the hell of a the stock down. And hopefully that will manifest into a positive P&L. I don’t know that it will because the stock is clearly very resilient to these sort of headlines.

JACK FARLEY: Yes. You mentioned that the AMC stock is very hard to borrow. That makes me think of the Turkish lira, which is also notoriously hard to borrow because it is borrowed and sold short so much. Obviously the price action in the Turkish lira has been abysmal. Absolutely very, very bad. And, Wes, I know you have a lot of charts. So I’m going to ask you some questions about that later.

By the way, the price action in Tesla today that had– also the price action was very abysmal. And that was down something like 4%. But Weston, I want to ask you– because Gabriel Alvarez has a question. Can these meme stocks crash the market? What do you think about the relationship between the meme stocks and the market? Is it a microbubble that’s going to pop or could you see some real contagion?

WESTON NAKAMURA: So I don’t know what by crash the market means, but can they impact the broader market? Yeah, they can. This is what I was talking about yesterday. This is the problem with– this is why– this is how Robin Hood essentially saved the day by accident, by putting a cap on the otherwise nonstop GME buying spree that was going on. And because if that were to continue– I mean, it’s not– it wasn’t just Robin Hood. That was– Interactive Brokers was in the same situation too.

So basically you’re– you require so much more margin from the system. And then you have these issues with T plus 2 settlement that they’re trying to shorten and all that. And there’s a number of things that go wrong in a number of different ways, but all you need is basically one of these players to default or to not be able to come up with a margin. And somebody is left holding the bag. And if it’s an institutional player– I mean, the Fed is probably not in a politically good situation to bail out an institution per se. And you can’t bail out individuals. And so somebody’s going to be basically left back.

And so I think that, broadly speaking, this is a very balancing intensive. The market makers are getting torn up today. And it’s not a healthy thing for markets for this to continue. So I’m glad that AMC did kind of cool to it, but who knows.

JACK FARLEY: A lot more to get into. Wes, and I think it’s time to go to our friends, Ed and Ash, who are right now in Miami for the 2021 Bitcoin conference. They’re sharing their experience. I’m hearing that the weather has not been so clement to them. I’m hearing that there’s a little bit of a rainstorm, but I think that they’ve sort of gathered in a room to share their thoughts. So let’s play that clip.

And then when we will be back, Weston, I want to ask you about Workhose I want to ask you about the Turkish lira. I want to ask you– you’ve got your eye on your European bonds, the dollar. People in the comments are questioning about reflation. But first, let’s go to this clip of Ed and Ash in Miami.

ED HARRISON: Thanks, Jack. Hey, by the way, here we are in Miami. You can see behind us, we have like a– we’re in a hotel. That’s because we just got downpoured on. We’ve only been here one day, but we’re in the Miami Bitcoin conference.

Ash and I or in the same room in person for the first time in 15 months. And we’ve got some thoughts about how we’re thinking about what’s happening in the crypto space and global macro, how those two are coming together here in Miami. Ash, why don’t you tell us, what are you thinking about.

ASH BENNINGTON: Yeah, it’s great to be here. First of all, we apologize for the quality of the video. We’re literally shooting this from my iPhone here. This is like guerrilla filmmaking. You get dropped in to this Bitcoin conference.

I’ve been here since last night. I got down very late. And it’s just been an incredible sort of vibe when you get here. I don’t want to use the word euphoric because that implies all kinds of bubblicious types of sentiments. That’s a different conversation. But what’s happening really on the ground here is there is a very positive sentiment here.

The reality is, as I was I was just– Ed and I just had lunch together. And we were talking about this with some people from the macro side. And the reality is there’s a feeling here on the ground when you go to this conference, when you’re out at the bars, when you’re at cafes, when you’re at the restaurants. That the people who are in crypto– this is the perception, this is the vibe at least, is that you and all your friends are the smartest kids in the room. And that is a very intoxicating feeling.

And so it seems to me like there’s very positive sentiment coming into the space. Obviously this is something that I’m talking about here from a very short-term tactical angle, but there’s definitely a feeling of just exuberance about this technology. There’s a feeling of validation. I think people have been locked up in their apartments for 12, 14, 15 months. And people are out. They’re hanging out with their friends, their Lambos rolling down the street, their music bumping off the tops of the ro– of the drop tops. There’s just definitely a feeling here of this is the place to be right now.

ED HARRISON: Yeah, I’m happy you said one thing about Miami. That song by Will Smith talking about his drop top. The interesting bit from me– actually because I’ve been here for a day. And I went to dinner last night that was hosted by real money investors. These are institutional guys. And the sense that I’m getting is that Miami is a sea change. It’s a sea change in terms of how institutional money is thinking about crypto as a space. Because everyone’s coming together at this conference. This is the first sort of post-pandemic full reopening conference.

And they’re saying, OK, now we can meet people face to face in the way that we did before. Let’s get into what this place is doing? What’s happening here? What’s the regulatory environment? What are the opportunities going forward? How do we as institutional global macro individuals get access allocation to this particular sector? That’s what I’m seeing people say. They’re saying we’re interested, but we want to– we’re interested only if there are above board way for us to get into the space. And we want to buy comfort based upon the competition that we have here in Miami that we can do that.

ASH BENNINGTON: Yeah, I think that’s right. And that’s what I just described earlier was the mood here. On the more substantive level, as Ed points out, I think that’s exactly right. The word diversity comes to mind. There’s a very diverse array of people here. You have the cool tech kids in tee shirts. You have the folks who are from the macro side. You have folks who are from the traditional investing side in suits. There really is a sense.

And I think Ed is right. There’s definitely more skepticism, obviously, as you would expect. Some of the worst seasoned investors they have, I think, that will surprise no one. But there’s also the fact that, look, they’re here. They’re on the ground. They’re asking the questions. They are exploring the opportunities. And they’re here because they want to understand what this technology will do in the real world.

I’ve heard a little bit of skepticism, as I know Ed has as well, about what the real world applications for these things are, for these emerging technologies, these emerging network, these emerging protocols, what those applications are. But the reality is traditional investors, the suits, so to speak, for lack of a better term, these are folks who have a lot of other things they could be doing. And they got on a plane, they came down in Miami, and they’re here to listen. And I think that, in itself, is an important lesson.

ED HARRISON: I would– anecdotally let me just tell you two things. I think Ash will tell you the second. But the first is that, as you know I’ve been like basically living in my basement for 15 months. So I had no idea what people think of Real Vision in terms of adoption and recognition. I’ve already been recognized twice.

Ash and I, we went for lunch to this place, I think, Capital Grille. We went to the back of this room. It would turn out not to be a party. And the people looked at me and they said, Real Vision. And then they saw Ash, and they’re like, oh, definitely Real Vision. And we had a conversation with them. We exchanged niceties and talked about the crypto and the global macro environment coming together, potentially interviews, et cetera.

And based upon that, [INAUDIBLE], he was telling me, you know what? I’ve been here literally 12 hours. And I said, you probably have like three or four interviews. He said, no. Potentially six people that I’ve met who were interview worthy had something to add from a crossover perspective between what’s happening in the global macro space and what’s happening in the crypto space.

ASH BENNINGTON: Yeah, exactly. In fact, the first potential interview I met– I didn’t even have to leave New Jersey. I came to New York Airport and the person behind me in line was a VC. And she said to me, so what do you do? And I said, I work at Real Vision. She said, I’ve got an interview schedule [? Hayley ?] [? Drasmond ?] sometime next week.

So it’s pretty incredible, I think, to be here. There is so much exuberance. I know I keep repeating it, but it’s such an important point. And I think there’s a feeling, I think, almost of a kind of a new world emerging, where everyone’s been locked up. It’s easy to understand how there’s that false sense of the caterpillar emerging from the cocoon that can be pushing sentiment higher, particularly on the crypto side. But I think there are real opportunities. I think the diversity of the people we’ve seen here speaks to that point very clearly, as Ed points out. The union of traditional finance, traditional macro, types of perspectives with crypto.

We’re going to be reporting back in some form or another over the next few days when we have more sentiment and have more substance rather than simply just sentiment. I’m obviously going to be meeting with a number of people. There are a lot of things that are going on. I expect there will be some new projects announced. There will be some new things that will come out of this conference as there always are. I mean, we’re keeping a special eye on price action, as I mentioned, because of the sentiment. But it’s a really interesting place to be. And we’re definitely going to come back to you with more substance over the next few days.

ED HARRISON: And that’s it. I hope that you guys enjoy. We have to say we’re enjoying it done here in Miami. And let us know in the comments what do you want to hear when we come back from conference.

ASH BENNINGTON: Thanks for joining us. More to come.

JACK FARLEY: And we’re back. Weston, wasn’t that interesting hearing from Ed and Ash?

WESTON NAKAMURA: I’m very jealous that they’re there.

JACK FARLEY: Yeah, not so jealous of the rain. I’m glad I have a roof over my head. But Weston, Bitcoin–

WESTON NAKAMURA: I have a roof over my head. [LAUGHS]

JACK FARLEY: Yeah, no, I’m saying I’m glad that we’re inside. But Bitcoin and crypto, it’s been consolidating since the very large sell off of a few weeks ago. And there’s actually a question from Claudio Delgado who asks a question not from YouTube, but actually from the Real Vision exchange, which is at the engagement platform where you are the– you do a lot of posting. You run that exchange.

But Claudio, he has a question for you, Weston. He asks in the past 24 hours, USD-TRY, that is the US dollar to the Turkish lira is at a 52-week high. And the uptrend seems to correlate with Bitcoin bullish behavior. Weston, have you done any analysis to identify what’s the breaking point for the US dollar, Turkish lira with Bitcoin. And what seems to be a potential point of consolidation? So Weston, you’ve made a post about this exchange. So can you share your thinking in some depth? Because I think it’s important for people to understand it.

WESTON NAKAMURA: Sure, absolutely. So I did write this. It’s going to be– I think, it’s going to be in the description, like the links for it. So the Turkish lira and the Bitcoin thing that– I went through it yesterday. And then overnight, I just got a ton of more questions about it, which signals to me that there’s a lot of people out there who do not realize that this is a key core driver of Bitcoin. And gold, for that matter. Not fiat assets. Not just Bitcoin. It’s the Turkish lira.

The Turkish lira is a very, very important currency for several reasons. And it can be systemic and global of a problem for many reasons as well. Just very simply because if the lira basically continues to go downwards, there are several European banks in particular, like BBVA from Spain, that had a ton of exposure. And that might drag in like the ECB, and all that. And then becomes a [? second. ?]

But so to answer the question. It’s basically in what I had written about, but the relationship– the correlation right now is that USD-TRY up, BTC-USD down. So in other words, if the lira is weakening, the Bitcoin would strengthen. That is not how it’s typically historically been. Historically for the last several years, through Bitcoin’s existence almost, it’s been UDS-TRY higher and BTC– TRY or BTC, whatever, USD whatever, also higher.

In other words, when the lira is getting destroyed, the Turkish citizens need to get out. They need to salvage their net worth somehow. And this is a very easy way for them to do so because they’re already connected to crypto with their crypto– their early crypto adoption. And because of the fact that it’s hard to buy gold and all that. So in November of last year, when they started– when the CBRT started to at least get the perception of–

JACK FARLEY: Weston, what’s a CBRT? Sorry, can you explain that?

WESTON NAKAMURA: Central Bank Republic of Turkey. The one’s head of HR Department for the central bank. They’ve gone through– they’re under fourth now head of the Central Bank in the last three years. And so the second of the fourth came in. And essentially, he was seen as this markets guy. And he was seen as somebody who would be under– who would understand basic economics. Like we raise rates to combat inflation, not– that doesn’t cause inflation, and things like that. And he did start hiking rates.

And so Turkey actually– for a moment, starting in November of last year, actually had got some credibility from markets that they know how to navigate monetary policy and maybe find their way out of this death spiral of the lira. And when that happened, that’s when you started to see that relationship of lira down, Bitcoin up, that inverse. And from that point until basically a few days ago, that’s how it’s been. So when you see USD-TRY going up, BTC-USD would go down. And that would happen pretty tick for tick. That would have been on a longer term chart and anything in between.

But this past weekend or this past week, the last few days, what you’re observing is now a re-correlation back to how it’s historically been. So what we’re getting out of is not like a regime shift. We’re just getting back into how things used to be all along. And that is when the Turkish lira would just continue to hit record lows, which is– which it does regularly. People are getting out and buying gold, which is why– the largest reason why gold is also doing well over the last month, as well as Bitcoin.

So as far as technicals, I don’t really– I don’t do technical analysis. I don’t really know from that end. But I will say, though, that it is very early to spot like a major shift and the polarization shift from inverse to positive correlation. So you’ll probably need to see a little bit more of that. And that could also switch on a dime again, but the standard default setting is USD-TRY, or EUR-TRY, or [? quoted ?] TRY-JPY. But lira against other G5 currencies– weakening means demand for Bitcoin and Bitcoin up. That’s the standard default way. Not what we’ve done over the last few months. That’s basically an aberration.

JACK FARLEY: So I think that the normal way of doing things, not the way it is now, but the normal way is that the lira weakened. And then that is a tailwind for Bitcoin and gold. And that makes sense. Because as Turkish folks, as they see their currency depreciate, they seek a safe haven in gold and/or Bitcoin.

WESTON NAKAMURA: They’re just trying to get the hell out of there. They’re just trying to salvage their– I mean, I feel terrible for them. We don’t understand what that’s like. Unless we’ve lived in– I personally haven’t. Unless we lived in somewhere where you’re seeing inflate– if you’re not debating inflation, you’re seeing the destruction of the value of your life. This is like– this is exiting the movie theater on fire. There are no limit orders. There’s just a bargain order at any cost.

So that’s why you see gold and Bitcoin, all that, those were hitting record highs against the lira while BTC-USD was still not even halfway back to its previous record high during 2020. 2020 was– if you read the article that I posted on the exchange, you’ll get good back on about it, but 2020 was the year of the lira controlling fiat assets– I’m sorry, non-fiat assets. Gold, silver, Bitcoin, the theory on the cryptocurrencies, all that. So it’s just that people will take ill look at that.



JACK FARLEY: –we’ve got another question from Oliver Anderson, also from the exchange. And he wants to know, Weston, you’ve been so great at identifying [INAUDIBLE]. Both for meme assets as a non-meme assets alike. I love that sentence. I was wondering if you’d expand on how you identify where the flows come from, and if there are any tricks to figure out how other people might go after this.

WESTON NAKAMURA: First, I want to say Oliver Anderson has a brilliant video on the exchange about– he works in film. And he’s literally a narrative creator. And he approaches– he looks at markets and narratives through that lens as somebody who does that for a living. So it’s really, really fascinating. Amazing exchange contributor. Thanks a lot, Oliver. And thank you for that.

That’s my approach. My approach is this. Everybody– not everybody, but I’d say most people, what they do is they’ll look at the asset, they look at the stock, they look at the bond yield, they’ll look at whatever the asset is, the cryptocurrency. And then they’ll assign some sort of fair value to it, or a price target, or whatever. This should be at this price, or whatever.

That’s not what I did. Because the only thing that determines prices on anything, on any financial instrument is just flows and behavior of the capital. Simply this. Net capital in equals price up. Net capital out equals price down. That’s the only thing that determines it. Fundamentals will not determine it. Central Banks don’t determine asset prices. Regulations don’t determine asset prices. Nothing determines asset prices, except for the capital flowing in and out of it.

So instead of looking at the asset itself, I turn around and I look at the source of and behavior of capital. And that is what dictates me. So it’s not like I’m looking at the Turkish lira note for no reason. I’m looking at what the behavior of people are, and what the overlapping assets are. And that’s basically where I start.

And so I’ve seen– that’s kind of how I am able to see things that seem extremely obvious to me, but that a lot of people just totally miss. I mean, I’ve just countless examples of them. But like– every time I get pushback from them and some fundamental argument, then I know that there’s alpha to be made in that trade. Because there’s some clown out there who’s creating a wonderful opportunity.

So the lira is like– I’ve been looking at that for like the last four years or so. But the lira I got– I started looking at is because Japan retail traders are taking massively long leveraged positions going along the Turkish lira. Nobody else is going along the lira on purpose, by the way. It’s just like Japan retail, but they didn’t–

JACK FARLEY: Weston, tell people why they’re doing it. They don’t just love being in a currency that’s very unstable. There’s a reason, right?

WESTON NAKAMURA: Yeah, there’s– well, there’s a reason that you and I did already after hours with. They have a Clever Marketing Department with the cartoons and all that. But they do it because they look at nominal yields, and there’s a 20% nominal yield spread between JJBs and Turkish yields. So they see that like– they’ll trade the swap and swap. And for some reason, initial margin and the swaps for Japan retail trading is like fractions that of, if you were to do the same with like dollar, yen, or some completely non-obscure ethics paper.

So it’s very easy to get sucked into it if you’re against Japan retail. Because they’re searching for yield. There have been yield stuck here forever. And they’re also very risk averse too. Because again, it’s kind of like the mean stock trader. There’s Japan sitting on 40 trillion of household net worth. More than half of which is cash. Hence the deflation, but they have money to punch into the market. And this is partially what they do.

And so I started looking at that. I started looking at that sort of behavior. And I started to realize that there was a correlation. And then I started to realize that Bitcoin and Nikkei had a correlation in 2017. Starting September, 2017 to the very end of 2017. There was a sudden out of nowhere like 2000 point– almost 20% rally in Nikkei for no reason. And the reason was because all of these new traders who came in via Bitcoin, sat into Bitcoin, were introduced to financial markets. They started going long– like leveraged the Nikkei 2x, 3x leveraged ETFs. And at that time, Bitcoin had a higher correlation to the Nikkei than dollar, yen did.

And I would show that chart to you. This is when I was working in institutional finance. I would show that chart to people. And some people got it. And some people were like, that’s ridiculous. I’m like, this is not ridi– this is like– I didn’t draw this by hands. This is what’s happening. There are people– and then those people– because those people exist, I know that there’s some– if I could find some way to exploit that, the stuff up there. And that was a very long answer that really gave nothing, but I’ll give you some examples.

JACK FARLEY: No, no, that was important. Weston, that short on Bitcoin being more correlated to the Nikkei than the dollar, yen was. That is fascinating. And I can imagine people saying like that’s– you’re just a chart guy and you just searched a hundred different things. And you found the one thing that looks strange.

And I feel like off of when there’s a brilliant chart– the most brilliant charts, and they’re new, and they enter the foray, and people don’t really understand them, those are the charts that are most susceptible of being accused of chart crime. So I’m not saying that chart crime isn’t a thing, but I think that some time that allegation of chart crime has been bandied about perhaps a little bit too loosely.

Wes, I’m glad you talked about flows. That obviously was on my mind today with the insane volumes that we saw out of AMC and Workhorse, in fact. And we can put this chart up. AMC was the most traded stock in the entire Russell 3,000. That is a very large basket. And that is the most single traded stock by a factor of almost 3.

And by the way, number two is a very small stock, GTT Communications, which I’ve never heard of. And number 3 is Workhorse. So Weston, what does it mean to you when the most traded stocks are these meme stocks and not, say, the typical dominators such as Apple, the Fangs, and the like?

WESTON NAKAMURA: So there’s actually– by the way, AMC– yeah, that’s actually the– it’s more than spy. So it is the number one. But including the ETF as well. So it’s–

JACK FARLEY: And yeah, the ETF is S&P 500. So it’s bigger than– even bigger than I said.

WESTON NAKAMURA: It’s crazy, crazy. So what does it mean? So there’s this momentum ETF. There’s a few of them.


WESTON NAKAMURA: The biggest one is MTUM. There’s a few like JPMorgan has– I think there’s like three or four of them up there. These momentum ETFs are momentum ETFs. And so they basically are benchmarked to MSCI, the momentum index, which had a rebalance, I think– I don’t know, maybe five, six trading days ago. Somewhere around there. The rebalance was pretty significant. Because when you think of– when we think of momentum– Jack, what do you think of when you think of like momentum stocks?

JACK FARLEY: [INAUDIBLE] going up. Things that are going up.

WESTON NAKAMURA: Yeah, but what specific stocks over the last couple of years, say Apple?

JACK FARLEY: Easy. Yeah, big tech, big cap technology, growth stocks. Not value stocks, not financials, not energy at all. But Weston, my understanding that this is now no longer the case.

WESTON NAKAMURA: No longer the case. So looking at right now, they did rebalance. So financials– financials used to be– 1.6% of the index is now the top at 33%. And then at the same time, tech, which used to be 40% of the momentum index is now less than half of what it used to be. It’s at 17%.

Notably within tech, Apple, Microsoft, Adobe, Nvidia, these are all previous top 10 holdings within this particular ETF, and this index, and everything that’s benchmarked to this index. Apple, Microsoft, Adobe, and Nvidia are no longer at all represented. They have a 0% weighting. They’re not in the index at all. Consumer discretionary, Amazon and Nike, those are both out too. Instead what we have is JPMorgan, Berkshire Hathaway Class B shares, Bank of America, and Wells Fargo are now in the top 10. Energy sector, which had a 0% weighting previously now has a 2% weighting.

So this financials and energy like outperformance on the year, while it may seem like you might have missed the upside because you’re looking strictly at the price, the price like outperformance doesn’t necessarily mean that it’s crowded. I’m not saying that it is or isn’t, but you shouldn’t look at it that way either. And that there are a lot of people that are probably very skeptical to go long financials or go long energy, especially with oil at 70. How much further could we go? How much further can the yield curve steepen for the interest margin on banks, and this and that?

But now that it’s in this ETF, should this ETF continue to get inflows? You’re going to see– it’s very interesting that you’re going to start seeing the financials on energy outperform. But because of the weighting of SPX, the index itself is probably not going to do anything. It might even be down. So you’re going to get these– you get huge outperformance if you’re looking at data versus the index. Unlike JPMorgan or Bank of America, or whatever maybe, versus SPX, which might just be down or flat because their big heavyweights got booted out. Google and all that [INAUDIBLE].

So this is a very significant rebalancing. And it’s no longer just kind of fund managers individually saying, yeah, we like growth over value. I really hate those overly generic categories. But it’s no longer that. Now it’s like group together in this ETF. Whatever billions they win. And so now it’s going to manifest in markets.

JACK FARLEY: And I think if you look at the high beta ETFs, there it’s even more stock, where you have energy, which used to be 0 or very close to 0 as part of the high beta index. And now it’s something like 18% or 19%. And that really is crazy because energy is a small fraction of the S&P 500. I think it used to be 1.5% if you take the XLE relative to SPY, or just of that sector. And now, of course, it’s much bigger because you’ve had that rally.

But, Weston, it really speaks to the momentum and the size, the strength of the rally in financials and energy that you’ve had tech Titans, like Tesla trade down and trade much more down today as it happens. And things like Apple have traded sideways. Yes, Google has been up. And there’s been Apple–

WESTON NAKAMURA: [INAUDIBLE] Apple is in a bear market?

JACK FARLEY: Yeah, I mean, I don’t know what YTD– the year to date performance is. But basically, the big players have not been lifting the index up. It really has been the little guys at the bottom, the energy stocks that have really been leading the charge. Weston, my question for you is we now have a very accurate snapshot of the past year in price action. The baton was handed from tech– let’s say to SPACs. And now it is firmly in the hands of energy and financials. Weston, what, if anything, can we interpret from this going forward? What does this tell you about perhaps new incentive structure for fund managers, or is this really only a historical snapshot and we can’t look for it?

WESTON NAKAMURA: We can never look forward. So I don’t– I don’t– I don’t know what’s going to happen. I don’t know it’s happening presently. I don’t– I don’t know what to make of this. What I will say is that there’s– I think that because of this– and first of all, this only works if there are continued inflows into the momentum ETFs that are benchmarked off of this particular index, of this MSCI index.

But should that happen, I mean, you’re going to get– every year is the worst for active management, but this is going to be especially bad for active management. Because, I mean, how many fund managers are willing to go long, like energy, or financial, or any of these? Everyone– you have to hold an Apple or–

JACK FARLEY: I actually don’t know about that, Weston. Because Apple, and Google, and Facebook– because they’re such a huge part of the S&P 500. If you run an active strategy, then you’re most likely going to be actually underweight those names. Because no one’s going to pay you 2 and 20 or whatever to just own Apple.

So I actually think that from what I’ve read from Hoffstein’s paper on liquidity cascades is that active managers tend to be underweight the fang. So actually they could have active– could have– they could bloom in the desert, so to speak.

WESTON NAKAMURA: Does he does– he address this term closet indexing?

JACK FARLEY: I don’t know if he does in the paper, but I’m sure he knows what that is. What is closet indexing?

WESTON NAKAMURA: Closet indexing is basically you haven’t done your job as an active manager, which is to beat the index because your fundamental analysis, like Excel spreadsheet, sort of five year DCFS modeling and all that is no longer relevant. And you decided to not own Apple.

And then you come– this is what– like in 2019– towards the end of 2019, Apple’s been underperforming all year. Suddenly, they come out and they show that we have done like 10% of our buyback. And we have billions left. And then everybody wrestles with Apple. And Apple just has a mess of a performance. Because you have to own it. Because if you don’t, it’s your job. And you have to order it by the end of the year. You have a lot of underforce to make up for.

But what I’ll say, though, is that I think that if you actually have the strategy of going long, one of these sort of non-fang large companies that are under owned, and relatively good value, and all that kind of thing. And then you short the index, which is what, well, hedge funds do, the index is no longer going to be this unconditional thing because it’s dominated by the Apple and Microsoft, all of that. The SPX might– whatever they may be might actually form somewhat of a normal broad based index rather than a cluster of five or six tech stocks. And then 495 miscellaneous stocks in the other half. So long long, single name short the index might actually finally work as a standard strategy.

JACK FARLEY: Yeah, Weston, we’ve run over time. It’s been an absolute pleasure. There are some topics we haven’t had a chance to touch, like the Fed taper talk, the Fed’s selling its corporate bonds.

WESTON NAKAMURA: Yesterday really. And then what happened? Like the LQD is fine today.

JACK FARLEY: Yeah, yeah. That’s true. I mean, who’s worried about corporate bond default risk? I don’t even know if bond portfolio managers are. They are thinking about interest rate risk, but credit default risk is just like a kind of an afterthought. Of course, I’m being a little bit hyperbolic.

But we also didn’t talk about European bonds. And we didn’t talk about the very shrewd trade that existed in Workhorse. There’s a call spread that some shrewd traders noticed a dislocation there. Weston, perhaps you and I could talk about that in the Real Vision exchange after hours, which we’ll film right after this.

WESTON NAKAMURA: Yeah, indeed, indeed. I’m happy to do that. If you have exchange questions of how to take them there too.

JACK FARLEY: Brilliant. Well, thank you so much, Weston. And thank you to everyone who is watching, whether a Real Vision member or if you’re watching on YouTube. Thanks so much, and we will see you soon.


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