Market Insights: The podcast discusses the rise of crypto treasury companies, highlighting how companies like 8 Co. Holdings are seeing significant stock price increases by investing in cryptocurrencies like Worldcoin.
Investment Themes: The discussion emphasizes the trend of companies becoming crypto treasury entities, similar to Strategy (formerly MicroStrategy), which has led to substantial stock appreciation by holding cryptocurrencies.
Gold vs. Crypto: Despite the rise of cryptocurrencies, gold remains a strong investment, with a 39% year-to-date increase, outperforming Bitcoin and the S&P 500, as investors use it as a hedge against dollar depreciation.
Economic Outlook: JP Morgan's cautious short-term view on the stock market suggests that weak economic indicators might lead to Federal Reserve rate cuts, potentially boosting stock prices.
Investment Strategies: The podcast explores the benefits of reinvesting dividends for long-term growth, noting that reinvested dividends have historically contributed significantly to total returns.
Buybacks vs. Dividends: The discussion compares stock buybacks and dividends, highlighting the tax advantages of buybacks and the stability dividends provide during market downturns.
Volatility and Valuation: JP Morgan suggests that Bitcoin's reduced volatility compared to gold could justify a higher valuation, driven by corporate treasury hoarding of cryptocurrencies.
Index Inclusion: The inclusion of crypto treasury companies in indexes like the Russell 1000 could attract more passive investment flows, potentially increasing their stock market values.
Transcript
How am I sounding? How's my uh how's my timber? I was a little raspy last week. Am I becoming flammier as a person or am I okay? >> I think you're okay. I also think it's pronounced tambber. All right, >> tambber. No, timber. Tambber. >> That's how the the vocalists say it. >> I got to Google. Hold on. Is this another one of these things I've gotten wrong my whole life? It's with an I, but it's got an E. T I M B R E. >> It's French. Oh my god, it's spelled T I M B R E, but it sounds like T A M B R. >> I know. I was politely corrected last week. >> Oh my god, we're 30 seconds in and I've already face planted. Now it's not just my voice that's a problem. It's my vocabulary, too. All right, I'm going to I'm going to brush myself off and move on. listening in and you know helping along the way where it's sorely needed. Our audio producer Alexis Moore. >> Hey Jack. >> I want to talk about uh with what tambber I have. I want to talk about gold and Bitcoin. I want to talk about crypto treasury companies. And we're going to answer a couple of listener questions. I think the subject is dividends. That's coming up. There's a company that caught my eye this past week because it shares went up 3,000% in a day. You might have heard about this. The name of the company is 8 Co. Holdings and it's a tiny little thing. And I guess I could call it a former cardboard box company, although maybe that's a little dismissive. In fairness, the company was involved in corrugated packaging, but it got out of that business back in April. It was going to focus on its other business, which I've tried to get my head around. It seems to be reselling inventory from other e-commerce resellers. I guess you could call that e-re reselling. But forget all that because this past week, 8kco announced a private stock sale and plans to accumulate a cryptocurrency called Worldcoin. Let me run through this quickly. I think this touches on every part of the investment mimosphere. Worldcoin is backed by Open AI founder Sam Alman. Openai is a company behind Chat GPT. Now, there's a Wall Street analyst and Tesla Super Bowl named Dan Ies. We've had him on this podcast before. Ako appointed Dan Ives as its chairman. It also received a cash infusion from a company called Bitmine Immersion Technologies. That company is backed by a venture capitalist called Peter Theel and it's chaired by a Wall Street crypto analyst. His name is Tom Lee. That company Bitine is also in the business of stockpiling cryptocurrency. It focuses on Ethereum. So, Bitmine, which is in the business of buying Ethereum, invested some money in Aco, which is getting into the business of buying and holding Worldcoin. And Aco raised a bunch of other money to do that by issuing shares. And so because of this, Aco stock jumped a lot and the price of Worldcoin jumped a lot and the price of Bitine jumped too. And if you're saying, "Hang on a second, Jack. I don't understand." Don't sell yourself short. I think you understand perfectly by not understanding because first of all, getting into the business of buying something shouldn't make you immediately more valuable. I mean, otherwise, any company could just say, "Hey, I'm going to buy this thing." And then that company would become more valuable. But that seems to be what's happening. And I think it traces to a company formerly called Micro Strategy, now just called Strategy, which basically got into the business of buying and holding Bitcoin. That stock is up more than,00% over the past 3 years. And when a company does something that sends its share price up, 1100% over 3 years, I don't care what that thing is, a lot of other companies say, "Maybe we should do that thing, too." And now there are more than 200 companies doing that thing, which is being what's called a crypto treasury company. It's a company that's basically in the business of buying and holding on to crypto. Strategy is the largest of these. Then there's Mara Holdings. The recent number three crypto treasury company was Bit focused on Ethereum and recently backing ACco. So that's why the stock price jumped. People are saying, uh, is that thing that happened over there before about to happen here, too? I don't know. Maybe. Let's get in. For now, I'll just give you a comparison I used recently in Barrens. If you're still confused about why pretty much everything involved in the 8 deal went up in price, just picture Orville and Wilbur Wright back in 1903 on that sandy stretch near Kittyhawk, North Carolina. only instead of boarding a gasoline powered biplane, imagine that they grabbed each other's waistbands and achieved sustained flight by administering simultaneous wedgies. That to me describes the financial mechanics going on with crypto treasury companies. Now, I want to come back to this topic crypto treasuries in just a moment. Let me say a few words first about gold. We talked about gold uh earlier this year on this podcast. I did a cover story on it for Barons back in April. The stock price has kept rising since then. If you're wondering like I have whether the popularity of crypto would cut into the allure of gold among investors, the answer is no. At least so far. Gold is up 39% year-to date. That's a lot more than Bitcoin, up 22% and the S&P 500 index, which is up 12% with dividends. You might recall that we used the phrase debasement trade earlier in the year when talking about gold. That's what JP Morgan calls the stockpiling of both gold and Bitcoin to protect against declines in the value of the dollar. JP Morgan strategists have some fresh thoughts on what happens next and I see just a bit of cross wedgieification involved. Let's start with the stock market. JP Morgan says it's short-term cautious there. We had a big drop in the market this past spring. Since then, the S&P 500 index has put together its best fivemonth performance in roughly two decades. It's priced recently at 24 times this year's projected earnings. There are around 30 artificial intelligence companies in the index that together make up 43% of the index's market value. If you go back to the public introduction of chat GPT, that's the artificial intelligence uh thing that you ask questions and it gives you answers online. The the introduction was in November 2022. And since then, these AI companies in the S&P 500 have contributed nearly all of the index's returns and most of its earnings growth. Okay, we know this. The index is concentrated. JP Morgan says that a continued runup from here could depend on investors interpreting bad economic signs as good news for the stock market. For example, weak jobs numbers could strengthen the case for the Federal Reserve to cut interest rates. They appear to have done just that. Lower interest rates, all else held equal, make other assets look better, other assets like stocks. So, a Fed cut could send stocks higher. And that's even if the Fed is cutting rates in the face of an inflation rate that's still a bit higher than the Fed would like. So stocks short-term cautious. Now gold. JP Morgan is the world's largest bullion dealer and it is exceedingly bullish on gold. It calls it quote one of the most effective hedges against the risk of removal or reduction of Fed independence. But it also says that gold's recent price action can be traced to a resumption of gold's negative correlation with short real interest rates. I know that's a word circus. I'm going to try to quickly play ring leader here. The one-year Treasury recently yielded 3.6%. That's down a lot from the summer of last year. Back then, you could get over 5% on a one-year Treasury. If you look over that same time period, the inflation rate, the yearover-year increase in consumer prices, that hasn't come down that much. It was 3.1%, the latest reading that we got this past week was 2.9%. So inflation has barely come down, but the one-year Treasury yield has come down a lot. And because of that, the real Treasury yield or the Treasury yield after you subtract for inflation, that has plummeted. And what has tended to happen in the past when that real short-term Treasury yield plummets is the gold price tends to rise. And that's what's happening now. Another way of saying all this is that investors might suspect that the Fed will let inflation run a little hot, maybe to fend off joblessness. And if it does that, it could be bad for the dollar, but good for gold. So JP Morgan figures that gold is headed for just over $4,000. $4,020 by next summer from a recent price of 3,640. Let me do some fancy calculating. 10% higher for gold by next summer. Now, here's where the logic turns a bit more circular. We come to Bitcoin and JP Morgan says that the Bitcoin price now looks too low relative to gold. Why is that? Well, it has to do with hoarding by crypto treasury companies like the ones I mentioned earlier. When companies buy and hold on to crypto, they obviously take it out of circulation. Corporate treasuries now hold more than 6% of the total Bitcoin supply. That might not sound like much, but it's enough to resemble something called quantitative easing. Does everyone remember what that is? >> Whoa. >> Whoa. Alexis, is that a woe? like a nostalgic woe like, "Oh, I hadn't thought about QE in a in a little while now." Or is it a woe like I I would like a little reminder? >> Uh, a little bit of both. >> Yeah. Well, back during there was a financial panic in 2008. And what central banks did, including the Federal Reserve in the US, is they bought government bonds. And one thing that did was to push yields lower, but another thing that it did was to reduce volatility. That's the easing. And it looks like there's some easing going on right now in Bitcoin, at least in terms of the volatility, which has been cut in half this year and recently hit historically low levels. I say historically like we're talking about since the Civil War. I mean, yeah, I know Bitcoin was only born back in 2009, but still. So, call it low volatility in the history of Bitcoin. Okay. So, what does that mean for the price going forward? Well, we know that in finance, risk and return are supposed to be directly related. you know, you take more risk, you get a shot at a higher return. There's a problem there, if I'm being a stickler, in that investment risk is a pretty amorphous concept. It really defies any kind of precise measurement. Sometimes people will use past price volatility as a proxy for risk, even though those two are not nearly the same. But let's not get bogged down on details because I'm closing in on some delicious nonsense. Bitcoin's volatility relative to gold, okay? the ratio of Bitcoin's rolling six-month volatility to the same thing for gold that has fallen to 2.0 and that is the lowest level on record. And so JP Morgan figures when you look at the $5 trillion market value of private sector gold, that's gold held in exchange funds and coins and bars, $5 trillion. Then you look at the market value of Bitcoin, $2.2 trillion. Well, that Bitcoin value, if Bitcoin is twice the volatility of gold now, maybe it should be closer to half of gold's value. For that to be the case, you need Bitcoin to come up by just a smidgen, about 13%. And that is the argument that JP Morgan makes that Bitcoin deserves a price that's 13% higher. Remember that lower Bitcoin volatility is linked to corporate treasury hoarding. But that corporate buying is one of the things that's been sending crypto higher. In other words, the thing that has been sending crypto higher is part of the argument that crypto should be going higher. Enter the Wright brothers and the waistbands and we're up up and away. There's one final twist on this, which is that the leader among crypto treasury companies, formerly Micro Strategy, now just Strategy, that has so far been denied membership in the S&P 500, but it has made it into the Russell 1000. There have been other crypto treasury companies that have made it into smaller indexes. As more of these types of companies make it into indexes, JP Morgan points out that they will attract more passive investment flows. That could mean higher stock market values. And if these companies are issuing shares to raise money to buy coins, it could mean more coin purchases. I don't know what phase of the financial rally that puts us in. I'm thinking late money stampede transition into bullish Bakanelian denial, but it sounds like maybe reason for a little bit of caution, unless we can find a way to tie the goldbacked self-reinforcing Bitcoin case into a case that stocks should head even higher. I'm going to work on that one. If you have any ideas, let me know. Alexis, are you still there? Did I Did I lose you back at quantitative easing? Did you ease into a nap around the QE part? >> No, that was great. I'm here. you're still with me. How about we take a quick break and we'll come back and I'll answer those couple of questions on dividends. >> Let's do it. >> Welcome back Baron Streetwise podcast. Jack How things started off shaky. I had some uh I mispronounced tamber with some poor tamber, but uh I've been rallying since then and I think things are going swimmingly now. with me, Alexis Moore. As you know, I was in uh Phoenix for a Baron's Advisor conference this past week, and I'm continuing my string of using Baron's events to meet uh NBA heroes of the 1980s and '90s. There was Kareem Abdul Jabar a while back, and this time it was I don't know if I should say because I had um I I might have I I might have mishugged I I mishugged a little bit. I think it was um there was a fellow Kenny Smith. Annie Smith. There was a two-time uh NBA champion there and uh and a well-known NBA broadcaster. Super nice guy, loads of interesting stories. And they were taking photos. It was after the thing. There were a few of us kind of gathered privately and someone said, "Here, take pictures." And I slid in there next to the fella and uh I just assumed that we were I I I put an arm around him. I assumed that's what we were doing. >> And it wasn't like it it was fine, but it wasn't immediately reciprocated. So I then I occurred to me maybe maybe we're not doing that and I dropped my arm. I I got to see how the photo looks. I haven't seen it yet. I don't know where his arm is is in relation to me, but I might have just been solo hugging the man. I don't know. That's >> You realize your mistake. That's That's the important part. >> Just a sliver of self-awareness. Just enough. Just enough. So look, we're going to answer some listener questions and the subject is dividends if I'm not mistaken. What What do we Who do we have first? Yeah, we have I I don't know their name, but their username on Spotify is Mad Owl 76. >> Oh, yeah. Oh, yeah. Mad Owl. Good stuff. Mad Owl. That's what people say. The owl's got a reputation for excellence in uh >> and not just for being mad >> in question in question. Let's uh you're going to read it uh to us. >> I'm going to read it. So, they say regarding the div ETF. div is an ETF that we talked about maybe it was a week ago I don't quite remember and uh >> it is that's an eyesshares fund I think it's called core dividend so it's basically just if you want to invest in a broad index fund but you want one uh with stocks with decent dividends because the S&P 500 that dividend has gotten pretty skimpy so you want more dividends you buy that div ahead >> exactly would you reinvest the dividends back into the ETF or just pocket them M >> I mean I think you got to go reinvest it. I'm tempted to say that it depends on whether you need to spend the cash. I think that's what a lot of people would say, but it really doesn't depend on that. You can have stocks that pay dividends and you can use those dividends for your income as spending money, but I think it's just as easy if you need money to spend to periodically sell some stocks, put that money in cash, and spend out of your cash. There's something really powerful about reinvested dividends. I think I gave this fact last week. If not, I'll give it now. Um, since 1987 through the middle of last year, reinvested dividends made up 55% of the return for the S&P 500. Most of your money came from reinvested dividends. I know it might not feel like that lately because dividends have not been a big deal in recent years and they're looking pretty skimpy now, but they have been a much bigger deal over the long haul for investors. By reinvesting dividends, you of course put the power of compounding on your side. You also do what folks call dollar cost averaging. That's when you're going to put money into a mutual fund and you make regular contributions, the same amount every month, let's say. And what you end up doing automatically is you buy more shares when the share price is lower and fewer shares when the share price is higher. Mathematically, it's not really true. I mean, stocks tend to go up over time. So, you're usually just better off putting your money to work right away, but it is a pretty good way if you're nervous about a decline in the fund to to do it in regular installments like that. you do end up with a price that is below the average price for the fund over the time that you're adding the money. And the same thing happens when you're reinvesting regular dividend amounts into the stocks. Of course, with any luck, it won't be regular dividend amounts. It'll be rising dividend amounts. But the answer to your question, Big Owl, was it Big Owl? >> Madowl, >> Matt Angry Owl, >> the answer to your question, wise owl, is yeah, reinvest them if you got them. And that's one down. We have uh we have one more, right, Alexis? >> Exactly. >> Who do we have? Is there an audio clip for this one? >> There is. We have Ben from Boston. >> Roll them. >> Hey, Jack and Alexis. This is Ben from Boston. I enjoyed your recent episode on investing in dividend stocks as a tactic to manage risk in the current valuation environment. I was wondering whether there's a similar approach to invest in companies that focus on share buybacks rather than dividends. This seems like it would capture companies with a similar profile to high dividend payers and could be a good fit for investors who value tax efficiency over income. I'd be interested in your thoughts and whether there are any funds that focus on this strategy. Thanks so much. Thank you, Ben. It's an excellent question. Stock buybacks are where companies buy their own shares and in doing so they take those shares out of circulation. They reduce the number of outstanding shares. That means that each of the remaining shares gets a higher slice of the company's profits. In theory, it should make remaining shares more valuable. Whether you're paying shareholders a cash dividend or you're buying back shares to make their shares more valuable, you're returning money to the investors. Theoretically, the value should be the same, but there are some key differences. First of all, there's different tax treatment. Dividends are taxed right away. the increased value that you see in your shares, that's not taxed to the investor until they sell those shares. But there's also a recently introduced small tax on stock buybacks. That's meant to level the playing field. It doesn't quite do that. The Tax Policy Center did an analysis of this and they calculate that the US tax advantage for buybacks over dividends is 7.2%. That was as of last year. Buybacks used to be rare. They used to be regarded as borderline illegal. Companies used to be loathed to buy back stock because they didn't fully understand the rules of how they could do so and not be accused of insider trading. But decades ago, the government issued guidelines and stock buybacks began to increase. And in recent years, they've exceeded the amount the companies have spent on dividends. To answer your question, Ben, yes, there are buyback ETFs. For example, there's the Invesco Buyback Achievers ETF. The ticker there is PKW. Over the past 5 years, the fund has done well. It's beaten the S&P 500. The dividend ETF that we mentioned, DIVB, that's lagged behind the S&P 500. So, if dividends are a good idea, wouldn't buybacks be even better? Shouldn't you, as an investor, forget about dividends altogether and go all in on buybacks? There's one thing that gives me pause there, and I think it needs to be tested over a longer period. When a company declares a dividend, they say that they're going to pay a fixed amount going forward. Not every company does that, but the overwhelming majority of dividend payers do. Some companies say we're going to pay a variable dividend. Uh that's a percentage of earnings, but that's relatively rare. So, as an investor, you've got this fixed payment, and if your share price goes down, you've got the comfort of knowing A, uh, your income stream is still the same, or B, the amount that you're reinvesting into your shares, they're going to buy even more shares at this lower price. And I think that provides some comfort and some certainty. Buyback amounts are not fixed. Companies tend to decide as they go along how much they're going to spend on shares. Some companies just buy back stock to offset stock issuance, but other companies are genuinely trying to reduce their share count. And I think some even try to buy when prices are advantageous. But what very often happens is that when times are good and companies are feeling flush, there's plenty of cash to spend and they spend it on shares. They would prefer to do that because they know that if times become difficult down the road, they're not locked in with a dividend. they have to keep coming up with the money and with a buyback they don't. But what happens then is when we hit a big downturn and when companies are not making as much money, they're quick to pull back on their buybacks. So that thing that you counted on to keep returning cash to you, you can't count on it during the moment when you need it most, which is during a big downturn. So, I think we need to see some more testing and it'll probably take decades, including some more downturns, to see how buyback stocks fare relative to dividend stocks. For now, if I'm an investor and I'm looking at one of these two for comfort at a time when the stock market looks like it's trading at a high price, I'm going to be inclined to choose dividends, even if the 5-year performance doesn't back that up. The good news is that I don't know of a lot of companies that say, "Okay, we'll pay dividends, but we're never buying back stock." A lot of companies do both. Some investors just add the dividend spending to the buyback spending and call it total shareholder return. So, I think if you're investing in a dividend ETF, you're going to get plenty of buybacks, too. What do you think, Alexis? Did we do it? Did we do Those are all our dividend questions for now, right? I mean, we've got loads more, but those are the only ones we're doing now. I think maybe you've sparked some new ones, but for the better. >> We love it. >> Well, I guess that does it for us. If you have a question that you want answered on the podcast, you can send it in. Hey, look, you can record it on your phone, voice memo app, and send it to jack.how. Uh, it's hugbear.com. If you're a a 1980s NBA star and you're looking for an awkward hug from from a 52year-old man who uh you know used to root for you back when he was in high school and now you know it's and now he just does awkward uh social exchanges at advisor conferences. You know get in touch, reach out. Okay. >> Put hug in the subject line. >> Hug. Yeah. Put NBA hug in the subject line just so we just we can keep track of who's who. Thank you all for listening. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcast, Spotify, wherever you listen. If you listen on Apple, you can write us a review. See you next week.
Worldcoin's 3000% Gain. Plus, Gold, Dividends and Wedgification. | Barron's Streetwise
Summary
Transcript
How am I sounding? How's my uh how's my timber? I was a little raspy last week. Am I becoming flammier as a person or am I okay? >> I think you're okay. I also think it's pronounced tambber. All right, >> tambber. No, timber. Tambber. >> That's how the the vocalists say it. >> I got to Google. Hold on. Is this another one of these things I've gotten wrong my whole life? It's with an I, but it's got an E. T I M B R E. >> It's French. Oh my god, it's spelled T I M B R E, but it sounds like T A M B R. >> I know. I was politely corrected last week. >> Oh my god, we're 30 seconds in and I've already face planted. Now it's not just my voice that's a problem. It's my vocabulary, too. All right, I'm going to I'm going to brush myself off and move on. listening in and you know helping along the way where it's sorely needed. Our audio producer Alexis Moore. >> Hey Jack. >> I want to talk about uh with what tambber I have. I want to talk about gold and Bitcoin. I want to talk about crypto treasury companies. And we're going to answer a couple of listener questions. I think the subject is dividends. That's coming up. There's a company that caught my eye this past week because it shares went up 3,000% in a day. You might have heard about this. The name of the company is 8 Co. Holdings and it's a tiny little thing. And I guess I could call it a former cardboard box company, although maybe that's a little dismissive. In fairness, the company was involved in corrugated packaging, but it got out of that business back in April. It was going to focus on its other business, which I've tried to get my head around. It seems to be reselling inventory from other e-commerce resellers. I guess you could call that e-re reselling. But forget all that because this past week, 8kco announced a private stock sale and plans to accumulate a cryptocurrency called Worldcoin. Let me run through this quickly. I think this touches on every part of the investment mimosphere. Worldcoin is backed by Open AI founder Sam Alman. Openai is a company behind Chat GPT. Now, there's a Wall Street analyst and Tesla Super Bowl named Dan Ies. We've had him on this podcast before. Ako appointed Dan Ives as its chairman. It also received a cash infusion from a company called Bitmine Immersion Technologies. That company is backed by a venture capitalist called Peter Theel and it's chaired by a Wall Street crypto analyst. His name is Tom Lee. That company Bitine is also in the business of stockpiling cryptocurrency. It focuses on Ethereum. So, Bitmine, which is in the business of buying Ethereum, invested some money in Aco, which is getting into the business of buying and holding Worldcoin. And Aco raised a bunch of other money to do that by issuing shares. And so because of this, Aco stock jumped a lot and the price of Worldcoin jumped a lot and the price of Bitine jumped too. And if you're saying, "Hang on a second, Jack. I don't understand." Don't sell yourself short. I think you understand perfectly by not understanding because first of all, getting into the business of buying something shouldn't make you immediately more valuable. I mean, otherwise, any company could just say, "Hey, I'm going to buy this thing." And then that company would become more valuable. But that seems to be what's happening. And I think it traces to a company formerly called Micro Strategy, now just called Strategy, which basically got into the business of buying and holding Bitcoin. That stock is up more than,00% over the past 3 years. And when a company does something that sends its share price up, 1100% over 3 years, I don't care what that thing is, a lot of other companies say, "Maybe we should do that thing, too." And now there are more than 200 companies doing that thing, which is being what's called a crypto treasury company. It's a company that's basically in the business of buying and holding on to crypto. Strategy is the largest of these. Then there's Mara Holdings. The recent number three crypto treasury company was Bit focused on Ethereum and recently backing ACco. So that's why the stock price jumped. People are saying, uh, is that thing that happened over there before about to happen here, too? I don't know. Maybe. Let's get in. For now, I'll just give you a comparison I used recently in Barrens. If you're still confused about why pretty much everything involved in the 8 deal went up in price, just picture Orville and Wilbur Wright back in 1903 on that sandy stretch near Kittyhawk, North Carolina. only instead of boarding a gasoline powered biplane, imagine that they grabbed each other's waistbands and achieved sustained flight by administering simultaneous wedgies. That to me describes the financial mechanics going on with crypto treasury companies. Now, I want to come back to this topic crypto treasuries in just a moment. Let me say a few words first about gold. We talked about gold uh earlier this year on this podcast. I did a cover story on it for Barons back in April. The stock price has kept rising since then. If you're wondering like I have whether the popularity of crypto would cut into the allure of gold among investors, the answer is no. At least so far. Gold is up 39% year-to date. That's a lot more than Bitcoin, up 22% and the S&P 500 index, which is up 12% with dividends. You might recall that we used the phrase debasement trade earlier in the year when talking about gold. That's what JP Morgan calls the stockpiling of both gold and Bitcoin to protect against declines in the value of the dollar. JP Morgan strategists have some fresh thoughts on what happens next and I see just a bit of cross wedgieification involved. Let's start with the stock market. JP Morgan says it's short-term cautious there. We had a big drop in the market this past spring. Since then, the S&P 500 index has put together its best fivemonth performance in roughly two decades. It's priced recently at 24 times this year's projected earnings. There are around 30 artificial intelligence companies in the index that together make up 43% of the index's market value. If you go back to the public introduction of chat GPT, that's the artificial intelligence uh thing that you ask questions and it gives you answers online. The the introduction was in November 2022. And since then, these AI companies in the S&P 500 have contributed nearly all of the index's returns and most of its earnings growth. Okay, we know this. The index is concentrated. JP Morgan says that a continued runup from here could depend on investors interpreting bad economic signs as good news for the stock market. For example, weak jobs numbers could strengthen the case for the Federal Reserve to cut interest rates. They appear to have done just that. Lower interest rates, all else held equal, make other assets look better, other assets like stocks. So, a Fed cut could send stocks higher. And that's even if the Fed is cutting rates in the face of an inflation rate that's still a bit higher than the Fed would like. So stocks short-term cautious. Now gold. JP Morgan is the world's largest bullion dealer and it is exceedingly bullish on gold. It calls it quote one of the most effective hedges against the risk of removal or reduction of Fed independence. But it also says that gold's recent price action can be traced to a resumption of gold's negative correlation with short real interest rates. I know that's a word circus. I'm going to try to quickly play ring leader here. The one-year Treasury recently yielded 3.6%. That's down a lot from the summer of last year. Back then, you could get over 5% on a one-year Treasury. If you look over that same time period, the inflation rate, the yearover-year increase in consumer prices, that hasn't come down that much. It was 3.1%, the latest reading that we got this past week was 2.9%. So inflation has barely come down, but the one-year Treasury yield has come down a lot. And because of that, the real Treasury yield or the Treasury yield after you subtract for inflation, that has plummeted. And what has tended to happen in the past when that real short-term Treasury yield plummets is the gold price tends to rise. And that's what's happening now. Another way of saying all this is that investors might suspect that the Fed will let inflation run a little hot, maybe to fend off joblessness. And if it does that, it could be bad for the dollar, but good for gold. So JP Morgan figures that gold is headed for just over $4,000. $4,020 by next summer from a recent price of 3,640. Let me do some fancy calculating. 10% higher for gold by next summer. Now, here's where the logic turns a bit more circular. We come to Bitcoin and JP Morgan says that the Bitcoin price now looks too low relative to gold. Why is that? Well, it has to do with hoarding by crypto treasury companies like the ones I mentioned earlier. When companies buy and hold on to crypto, they obviously take it out of circulation. Corporate treasuries now hold more than 6% of the total Bitcoin supply. That might not sound like much, but it's enough to resemble something called quantitative easing. Does everyone remember what that is? >> Whoa. >> Whoa. Alexis, is that a woe? like a nostalgic woe like, "Oh, I hadn't thought about QE in a in a little while now." Or is it a woe like I I would like a little reminder? >> Uh, a little bit of both. >> Yeah. Well, back during there was a financial panic in 2008. And what central banks did, including the Federal Reserve in the US, is they bought government bonds. And one thing that did was to push yields lower, but another thing that it did was to reduce volatility. That's the easing. And it looks like there's some easing going on right now in Bitcoin, at least in terms of the volatility, which has been cut in half this year and recently hit historically low levels. I say historically like we're talking about since the Civil War. I mean, yeah, I know Bitcoin was only born back in 2009, but still. So, call it low volatility in the history of Bitcoin. Okay. So, what does that mean for the price going forward? Well, we know that in finance, risk and return are supposed to be directly related. you know, you take more risk, you get a shot at a higher return. There's a problem there, if I'm being a stickler, in that investment risk is a pretty amorphous concept. It really defies any kind of precise measurement. Sometimes people will use past price volatility as a proxy for risk, even though those two are not nearly the same. But let's not get bogged down on details because I'm closing in on some delicious nonsense. Bitcoin's volatility relative to gold, okay? the ratio of Bitcoin's rolling six-month volatility to the same thing for gold that has fallen to 2.0 and that is the lowest level on record. And so JP Morgan figures when you look at the $5 trillion market value of private sector gold, that's gold held in exchange funds and coins and bars, $5 trillion. Then you look at the market value of Bitcoin, $2.2 trillion. Well, that Bitcoin value, if Bitcoin is twice the volatility of gold now, maybe it should be closer to half of gold's value. For that to be the case, you need Bitcoin to come up by just a smidgen, about 13%. And that is the argument that JP Morgan makes that Bitcoin deserves a price that's 13% higher. Remember that lower Bitcoin volatility is linked to corporate treasury hoarding. But that corporate buying is one of the things that's been sending crypto higher. In other words, the thing that has been sending crypto higher is part of the argument that crypto should be going higher. Enter the Wright brothers and the waistbands and we're up up and away. There's one final twist on this, which is that the leader among crypto treasury companies, formerly Micro Strategy, now just Strategy, that has so far been denied membership in the S&P 500, but it has made it into the Russell 1000. There have been other crypto treasury companies that have made it into smaller indexes. As more of these types of companies make it into indexes, JP Morgan points out that they will attract more passive investment flows. That could mean higher stock market values. And if these companies are issuing shares to raise money to buy coins, it could mean more coin purchases. I don't know what phase of the financial rally that puts us in. I'm thinking late money stampede transition into bullish Bakanelian denial, but it sounds like maybe reason for a little bit of caution, unless we can find a way to tie the goldbacked self-reinforcing Bitcoin case into a case that stocks should head even higher. I'm going to work on that one. If you have any ideas, let me know. Alexis, are you still there? Did I Did I lose you back at quantitative easing? Did you ease into a nap around the QE part? >> No, that was great. I'm here. you're still with me. How about we take a quick break and we'll come back and I'll answer those couple of questions on dividends. >> Let's do it. >> Welcome back Baron Streetwise podcast. Jack How things started off shaky. I had some uh I mispronounced tamber with some poor tamber, but uh I've been rallying since then and I think things are going swimmingly now. with me, Alexis Moore. As you know, I was in uh Phoenix for a Baron's Advisor conference this past week, and I'm continuing my string of using Baron's events to meet uh NBA heroes of the 1980s and '90s. There was Kareem Abdul Jabar a while back, and this time it was I don't know if I should say because I had um I I might have I I might have mishugged I I mishugged a little bit. I think it was um there was a fellow Kenny Smith. Annie Smith. There was a two-time uh NBA champion there and uh and a well-known NBA broadcaster. Super nice guy, loads of interesting stories. And they were taking photos. It was after the thing. There were a few of us kind of gathered privately and someone said, "Here, take pictures." And I slid in there next to the fella and uh I just assumed that we were I I I put an arm around him. I assumed that's what we were doing. >> And it wasn't like it it was fine, but it wasn't immediately reciprocated. So I then I occurred to me maybe maybe we're not doing that and I dropped my arm. I I got to see how the photo looks. I haven't seen it yet. I don't know where his arm is is in relation to me, but I might have just been solo hugging the man. I don't know. That's >> You realize your mistake. That's That's the important part. >> Just a sliver of self-awareness. Just enough. Just enough. So look, we're going to answer some listener questions and the subject is dividends if I'm not mistaken. What What do we Who do we have first? Yeah, we have I I don't know their name, but their username on Spotify is Mad Owl 76. >> Oh, yeah. Oh, yeah. Mad Owl. Good stuff. Mad Owl. That's what people say. The owl's got a reputation for excellence in uh >> and not just for being mad >> in question in question. Let's uh you're going to read it uh to us. >> I'm going to read it. So, they say regarding the div ETF. div is an ETF that we talked about maybe it was a week ago I don't quite remember and uh >> it is that's an eyesshares fund I think it's called core dividend so it's basically just if you want to invest in a broad index fund but you want one uh with stocks with decent dividends because the S&P 500 that dividend has gotten pretty skimpy so you want more dividends you buy that div ahead >> exactly would you reinvest the dividends back into the ETF or just pocket them M >> I mean I think you got to go reinvest it. I'm tempted to say that it depends on whether you need to spend the cash. I think that's what a lot of people would say, but it really doesn't depend on that. You can have stocks that pay dividends and you can use those dividends for your income as spending money, but I think it's just as easy if you need money to spend to periodically sell some stocks, put that money in cash, and spend out of your cash. There's something really powerful about reinvested dividends. I think I gave this fact last week. If not, I'll give it now. Um, since 1987 through the middle of last year, reinvested dividends made up 55% of the return for the S&P 500. Most of your money came from reinvested dividends. I know it might not feel like that lately because dividends have not been a big deal in recent years and they're looking pretty skimpy now, but they have been a much bigger deal over the long haul for investors. By reinvesting dividends, you of course put the power of compounding on your side. You also do what folks call dollar cost averaging. That's when you're going to put money into a mutual fund and you make regular contributions, the same amount every month, let's say. And what you end up doing automatically is you buy more shares when the share price is lower and fewer shares when the share price is higher. Mathematically, it's not really true. I mean, stocks tend to go up over time. So, you're usually just better off putting your money to work right away, but it is a pretty good way if you're nervous about a decline in the fund to to do it in regular installments like that. you do end up with a price that is below the average price for the fund over the time that you're adding the money. And the same thing happens when you're reinvesting regular dividend amounts into the stocks. Of course, with any luck, it won't be regular dividend amounts. It'll be rising dividend amounts. But the answer to your question, Big Owl, was it Big Owl? >> Madowl, >> Matt Angry Owl, >> the answer to your question, wise owl, is yeah, reinvest them if you got them. And that's one down. We have uh we have one more, right, Alexis? >> Exactly. >> Who do we have? Is there an audio clip for this one? >> There is. We have Ben from Boston. >> Roll them. >> Hey, Jack and Alexis. This is Ben from Boston. I enjoyed your recent episode on investing in dividend stocks as a tactic to manage risk in the current valuation environment. I was wondering whether there's a similar approach to invest in companies that focus on share buybacks rather than dividends. This seems like it would capture companies with a similar profile to high dividend payers and could be a good fit for investors who value tax efficiency over income. I'd be interested in your thoughts and whether there are any funds that focus on this strategy. Thanks so much. Thank you, Ben. It's an excellent question. Stock buybacks are where companies buy their own shares and in doing so they take those shares out of circulation. They reduce the number of outstanding shares. That means that each of the remaining shares gets a higher slice of the company's profits. In theory, it should make remaining shares more valuable. Whether you're paying shareholders a cash dividend or you're buying back shares to make their shares more valuable, you're returning money to the investors. Theoretically, the value should be the same, but there are some key differences. First of all, there's different tax treatment. Dividends are taxed right away. the increased value that you see in your shares, that's not taxed to the investor until they sell those shares. But there's also a recently introduced small tax on stock buybacks. That's meant to level the playing field. It doesn't quite do that. The Tax Policy Center did an analysis of this and they calculate that the US tax advantage for buybacks over dividends is 7.2%. That was as of last year. Buybacks used to be rare. They used to be regarded as borderline illegal. Companies used to be loathed to buy back stock because they didn't fully understand the rules of how they could do so and not be accused of insider trading. But decades ago, the government issued guidelines and stock buybacks began to increase. And in recent years, they've exceeded the amount the companies have spent on dividends. To answer your question, Ben, yes, there are buyback ETFs. For example, there's the Invesco Buyback Achievers ETF. The ticker there is PKW. Over the past 5 years, the fund has done well. It's beaten the S&P 500. The dividend ETF that we mentioned, DIVB, that's lagged behind the S&P 500. So, if dividends are a good idea, wouldn't buybacks be even better? Shouldn't you, as an investor, forget about dividends altogether and go all in on buybacks? There's one thing that gives me pause there, and I think it needs to be tested over a longer period. When a company declares a dividend, they say that they're going to pay a fixed amount going forward. Not every company does that, but the overwhelming majority of dividend payers do. Some companies say we're going to pay a variable dividend. Uh that's a percentage of earnings, but that's relatively rare. So, as an investor, you've got this fixed payment, and if your share price goes down, you've got the comfort of knowing A, uh, your income stream is still the same, or B, the amount that you're reinvesting into your shares, they're going to buy even more shares at this lower price. And I think that provides some comfort and some certainty. Buyback amounts are not fixed. Companies tend to decide as they go along how much they're going to spend on shares. Some companies just buy back stock to offset stock issuance, but other companies are genuinely trying to reduce their share count. And I think some even try to buy when prices are advantageous. But what very often happens is that when times are good and companies are feeling flush, there's plenty of cash to spend and they spend it on shares. They would prefer to do that because they know that if times become difficult down the road, they're not locked in with a dividend. they have to keep coming up with the money and with a buyback they don't. But what happens then is when we hit a big downturn and when companies are not making as much money, they're quick to pull back on their buybacks. So that thing that you counted on to keep returning cash to you, you can't count on it during the moment when you need it most, which is during a big downturn. So, I think we need to see some more testing and it'll probably take decades, including some more downturns, to see how buyback stocks fare relative to dividend stocks. For now, if I'm an investor and I'm looking at one of these two for comfort at a time when the stock market looks like it's trading at a high price, I'm going to be inclined to choose dividends, even if the 5-year performance doesn't back that up. The good news is that I don't know of a lot of companies that say, "Okay, we'll pay dividends, but we're never buying back stock." A lot of companies do both. Some investors just add the dividend spending to the buyback spending and call it total shareholder return. So, I think if you're investing in a dividend ETF, you're going to get plenty of buybacks, too. What do you think, Alexis? Did we do it? Did we do Those are all our dividend questions for now, right? I mean, we've got loads more, but those are the only ones we're doing now. I think maybe you've sparked some new ones, but for the better. >> We love it. >> Well, I guess that does it for us. If you have a question that you want answered on the podcast, you can send it in. Hey, look, you can record it on your phone, voice memo app, and send it to jack.how. Uh, it's hugbear.com. If you're a a 1980s NBA star and you're looking for an awkward hug from from a 52year-old man who uh you know used to root for you back when he was in high school and now you know it's and now he just does awkward uh social exchanges at advisor conferences. You know get in touch, reach out. Okay. >> Put hug in the subject line. >> Hug. Yeah. Put NBA hug in the subject line just so we just we can keep track of who's who. Thank you all for listening. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcast, Spotify, wherever you listen. If you listen on Apple, you can write us a review. See you next week.