If you're somebody who's in debt and you're in a lot of debt, there's basically two ways you can rightsize your debt. One, you can default. And for a government, especially a major country in the globe to outright default on their debt would be incredibly destabilizing especially because the integration of most of that government debt in the banking sector.
So I think that the system's basically been built to ensure that that doesn't occur. And that leaves the other way to restructure your debt, but maybe more elegantly, is through devaluing it in real terms, which is if stated in another way, you inflate it away. And if you look at what happened out of World War II, in the middle of World War II, if you would have bought a 10-year US Treasury, and you put $100 into it, you would've got paid back your 2% rate of interest. But in real terms, the $100 you showed up with would have been more like $65 or $67 in real terms by the time you got it back. Because inflation rate was well above the interest rate on the debt.
And so it does seem like there's-- incentives often do drive actions. And there's a strong set of incentives for governments to make the math work I think for the position that they're in right now.
Hi, everyone, and welcome to our second Behind the Numbers Podcast. We have another really interesting guest. We're going to talk about will you pay more taxes in the future, and that's the theme for February. We're also going to discuss everything from debt and government debt, which goes along with paying taxes.
We're going to talk about bond investing. We're going to even talk about SPACs, maybe even a little Bitcoin, and GameStop just because I think that's something people want to hear about. And as usual, I'm with my associate [INAUDIBLE] Jeff. Jeff, how's it going, buddy?
Not too bad. How about you?
Pretty good. Thanks. So Jeff, I think this morning, you did a full re-balance. So it's funny because we don't really talk about the mechanics of it. We talked a lot about methodology and process. So why don't you tell us what a full re-balance entails. Just give our audience like a one-minute explanation.
Sure. So this is basically since this morning. So once all our systems are updated with the overnight-- whatever happened yesterday in terms of pricing and you start to generate trade lists. Obviously, we have our own models that are built. They're all linked to all of our client accounts. You tell the software to build up trade lists and align each account with our model. And then it obviously build up a big list of trades to do. So I think in total today, there was about 24,000 or 25,000 trades that I placed.
Obviously, it's not done one by one. It's done a lot in bulk. So it sounds like more than it is. But it took me about most of the morning. So I start when the market open. It took until around 1:00 PM, I'd say. And that pretty much re-balance the entire book. So pretty much every account that we managed has been brought back into line.
Very impressive. So I'm glad you highlighted that, because we talk a lot about the process and everything. But we don't talk about the mechanics of it. And if you're at home and you think you can do 24,000 trades in a few hours, good luck with that. So last podcast, we talked about growth investing. And we debunked the value versus growth debate.
It was our first podcast. We had Vitaly from TD. It was awesome. He came over. He gave us an outside perspective on how he views growth, highlighted some awesome opportunities in various spaces. He's back from Japan, by the way. And if you're listening, Vitaly, welcome back. Welcome back to The Great White North.
And so today, we have another brilliant guest. Someone that is not only a personal friend of the team but is RBC Dominion Securities authority on fixed income or debt investing. Mikhial Pasic, Vise President, Fixed Income Advisor. Mikhial, welcome to the Behind the Numbers Podcast.
Thanks a lot for having me, Rob and Jeff. I'm looking forward to the conversations today.
Good. And I'm super excited because we're going to talk about a lot of things today. And so let me set the stage here. So last month, we explored trying to time the market to build wealth. And spoiler alert, you cannot. And everybody knows that. It's a fool's game. But what about trying to time your taxes? So we sent a big message out on this earlier this month.
The motivation behind this-- because we got a question from a client. The client basically said, there's been murmurings about possible budget changes at the end of March or in March. I'm not even sure when that is. And the question was should I realize my capital gains now before the government may decide to raise taxes?
So obviously, the motivation for this question is simple. Many people are concerned about higher taxes. Why? Because the government has literally spent more money, I think, in the last 12 months than they've done in the last 40 some odd years. So we are back to World War debt levels. It is concerning.
And we all know that our government has the best intentions, but it's not always managed efficiently. But we're not going to talk about that right away. I will just set the stage and say that, in the next few days, today is Feb 17th, we're going to be launching our latest blog, which is a five-step strategy to increase gains and lower your tax bill.
So if you want to know more detail on this, definitely check out our blog. But I think we'll probably talk about-- we'll start with government debt. Why don't we do that since Mikhial is an expert on debt. And maybe Mikhial, just explain to us in layman's terms. Maybe we talk about money supply and that sort of thing, and how more and more investors are going out the risk curve because of rates being so low.
Yeah, sure. Maybe let's just run through a bit of what we've seen happen over the last year to build up to where that's taken us. And I do also recognize that I think I've heard you say many times, 10 minutes talking about macro is 10 minutes too many. So I'm guessing that someone canceled this week. And I got the emergency call.
Nobody canceled. We actually thought about you. Well, we had a few other people we were thinking of inviting. But they'll have to wait. And I love that you've listened to my previous podcast, which means that this is going to be fun. So we're not going to stay on company
This is not a company format. This is Di lorio, and Lim, and Pasic format. So let's go do this our way. Go ahead
OK. I'll try not to make it a 10-minute lecture on economics and feel free to interject where you see fit. But I even think you go back a bit further than last year and talk about how we've got in the position we're in currently. If you go back even 20 years in terms of to build to where we are today-- back then, you had a very large corporate debt problem in a few of the sectors that are over expanded around that the telcom the internet boom. And there was a big corporate debt problem that existed.
And at that time period, the central banks in the US and around the world rode to the rescue. The first major time that they've done that. And they basically took rates to the precipice of zero for the first time that they've done that in 50 plus years. And with that, that helped alleviate that debt burden in the corporate sector. And it shifted it eventually to a different sector. Because what those low rates did is they encouraged a lot of borrowing at the consumer level. And a lot of borrowing and levering up inside the financial system.
And so from there, you had the debt burden in society in some ways that shifted from the corporate space and the non-financial corporate space into the financial space within the corporate world and in the household sector. And then we saw what happened with the housing market into the financial crisis.
And then if you zoom through what the decade after the financial crisis looked like, there was this slow and steady transition where you had non-financial corporates, once again, rebuilding their leverage to some extent. But by and large, prior to the pandemic in 2020, the story was one that the global debt burden was continuing to get larger. But increasingly, governments were taking a larger and larger share of that.
And even before the pandemic hit in 2020, government debt levels were in many parts of the world knocking on the door of like you reference in the intro, the World War II peaks that we'd seen. And then, of course, the pandemic hits. And those debt ratios and those debt levels skyrocketed. And in many cases, we've now eclipsed those prior highs. And so that's I think that the really important big picture narrative to keep in mind that we've had a large debt burden in society and a growing one that we've had with us for a number of years.
But the really, I think, interesting dynamic that was already in place was that that debt burden was increasingly shifting from private hands into public hands at the government level. And then what we've seen in the last 12 months or so has really been a massive acceleration of those dynamics.
If you look at in the United States, you look at the amount of borrowing and the amount of stimulus packages that have been unleashed. In the financial crisis, a number with a T was a bad thing. A trillion package was an unheard of amount. I think they settled on one large $900 billion package in the early days of the Obama administration and a number of small bolt ons around that.
If you look at what we've seen this time, trillions of dollars are thrown around. It seems like every couple of months. And so there's been just really a huge surge in government support. And one of the ways-- and maybe this is where I stop. And we can go back and forth a bit on this. But one of the ways that you've seen the financial market, in particular, the market I spent a lot time looking at. The fixed-income market play a very prominent role in what we've seen this time is all of that borrowing and all those programs at the government level, they've basically been funded by the central bank.
So in a country, you typically have a fiscal authority, the government who sets the policy and spends the money. And then you have a monetary authority who are the folks that look after the money supply and set interest rates and things of that nature. And really, what we've seen happen is basically the various central banks around the world, who are the monetary authorities, have done a few things. Conventionally, when you have a crisis, they take rates very close to zero. They accomplish that within a couple of weeks after the pandemic really reared its head in March.
But what they've actually done is in the United States, these trillions of dollars of stimulus programs, basically they've had to issue more bonds to fund those. They had to borrow more money to fund those. Well, the central bank in the case of the United States, the Federal Reserve has basically purchased all of the incremental debt that's been issued to fund these programs. And so the Federal Reserve has actually purchased $3 trillion and then some of government debt over the last 12 months to basically fund these growing government programs.
And so the net effect of that is you've really seen a very, very sizable amount of growth in the money supply that's occurred over that time period. And essentially, the money has made its way into people's hands. So maybe I don't want to go too long on this. I'm sure there's an infinite number of ways we could maybe redirect the conversation. So maybe I'll stop there and see if there's anywhere you want to specifically go from where I left that.
That's great. And I think you've done an awesome job summarizing where we are. We always say to ourselves, what does this mean for our clients? So we get that question about taxes And so here's what the client's thinking, and here's what we're thinking. One, how does this get paid? So you have the problem of-- and we're going to talk about inflation. And Jeff's going to talk about his perception of inflation. And how we theoretically, debt can be inflated away.
Let's go back to that in a sec. Second point, we talk about higher taxes. That's simple. The client basically says, they're spending like crazy. They're going to raise my taxes. And the answer is yes. And actually, after the war, taxes did go up. And they went up tremendously. And then the third thing is if you're a bond investor, which theoretically we are not.
Mikhial, we do run a balanced growth and all equity model. And I would say that the balance is probably-- it's going to have the majority of our assets just because it's pension fund style approach. But we are not getting alpha or alpha as-- maybe you guys want to know is the return you get above equity investing. The return you get above regular index investing.
We are not necessarily getting it from our bond portion of s model. So three problems-- higher taxes-- how do we get rid of this debt problem without raising taxes? And so that can be related to money supply. And I guess this all relates back to Bitcoin. We can talk about Bitcoin as well. And why that's going up. And how it's predicting that global currencies will get devalued.
So Jeff, maybe you want to add something here along those points.
Yeah, I would say like-- I think what people want to hear most about it and obviously our main concern as well is what the consequences. Like you mentioned, what the consequences are for our client. So the consequences are for a retail investor portfolios that are obviously exposed to fixed income. Maybe we're on the low end of what the average retail investor would have. I think we're around 33%, 34% even in our balanced model towards fixed income. Whereas, a lot of people would be higher than that. But I'm curious to get Mikhial thoughts. How do you see the retail exposure to fixed income as an asset allocation evolving or changing over the next little while?
Obviously, with rates this low and nowhere really to go in terms of going further down and eventually potentially heading higher if we do get tickups in inflation and things like that. What's your take on that?
Sure. So maybe let's start with exactly the portfolio element. Then we'll talk about how does the problem get remedies. Is it inflation? Is it higher taxes? I think that's maybe a good way to take it on exactly what I would expect. The thing that people really care about is, what does this all mean? And so from the perspective of looking at the fixed-income market on a day-to-day basis, what it means is bluntly, it's getting harder to generate positive returns after inflation in the fixed-income market today.
Because if you drive short term interest rates essentially down to zero, which is what's happened across the developed world over the last year, some jurisdictions have actually gone into negative rates in a modestly negative rates over that time period on very short dated securities.
Well, what that does is it basically forces you to assume some greater level of risk to generate a return. And what that could look like is a variety of things. You could simply take more interest rate risk. You could instead of owning a one or two-year bond, you could own a 10 plus year bond. And we have seen over the course of the last year as the economy has bounced back somewhat, and there's expectations that there's going to be a much larger bounce into 2021 here, the yield curve is steepened, meaning the short term rates have been moved. But longer term yields have increased a lot.
So one way you can drive enhanced return in a bond portfolio is you can purchase longer dated bonds. And if you hold those bonds, you get a higher return. But the trade off is if interest rates continue to rise, you're going to lose more money on a market-to-market basis on those securities. So one thing investors are thinking about doing or maybe already have done is they're adding interest rate risk to their portfolios. And they're buying longer term bonds to generate a return that's more acceptable.
The big trade of 2020 and the one that's really been going on into 2021 still is you can assume credit risk to earn a return. And so you drive a higher return but you lend money to a corporation, either in a senior structure or a junior structure and depending on the risk profile of the company, and the risk profile of the security that you're going to buy, you get paid a compensation that's in excess of what you would earn to lend the government money.
And what we saw happen right after the crisis hit was the incremental yield you earned to enter one of these corporate securities, that was very substantial. You got a lot of extra yield to take that credit risk. And what's happened over the course of the year is that narrowed as more and more investors have sought the higher yields of the corporate bond market. Those yields have been bid back down as prices of those securities have increased in value.
And so certainly, we've seen both of those two things play out in full. The third thing you can do is you can buy products that rank junior, and so they have a weaker claim on assets. And they're a little bit closer to equities. And then the third thing that you can do-- or I should say maybe the fourth thing if you count that other one as an option.
The fourth thing you do is, of course, you can change your asset allocation. In an environment where a large number of fixed-income securities pay you less than the rate of inflation, that's something where it's understandable why you might say, hey, I think I have a better chance of earning positive real rates of return in the equity market. And with that, there's clearly potentially greater draw downs and greater volatility. But certainly, that's increasingly something that you're seeing investors shift. You're seeing investors making their asset allocation.
And I think why the fixed income story is so important and so central is that set of decisions that-- I would say every one of those in some form we're seeing investors make, if not multiple versions of those decisions where they're incrementally creeping up the risk curve. All of that's emanating from the fixed-income environment that we're all observing, and we're all making decisions around. It's the base rate for everything basically. And so I think we're seeing bits and pieces of all of that.
From our perspective, 2020 was a year where the credit market, so those various corporate securities, did offer a lot of value. But as 2020 unfolded, the excess return available in those securities is now diminished because they've, in many cases, delivered those returns. And so at a portfolio perspective, conversations that we're certainly having at head office is do you think about where you're allocating your risk budget inside your portfolio.
There's a greater argument now that the places you're assuming risk, there's a greater argument to assume that risk in the equity market rather than the fixed-income market. Because frankly, a lot of the returns have already been realized in the fixed-income market. And you're dealing with a constrained upside in that place. Whereas, in the equity market, you don't have that.
And I love that you mention that. So we struggle with investment policy a lot. Because theoretically, investment policy, we manage one portfolio. But there's three variations of risk. There's balance, growth, and all equity. So we struggle with it. Because most of our clients have that 10-year time horizon. They're not pension funds. These are real people.
So we don't have to have a very rigid investment policy. We can say, even though a particular family is a bit older, they're not going to touch the money for 10 years. There's no reason why they can't be growth. But more often, because the family uses some of the income and they're a little older, they monetize their business, which is clearly what happens in most cases, then we gravitate to the balanced portfolio.
But it doesn't stop us. And I will say this because it is something we are thinking about. From recommending more growth over balanced. And I think I can see us as-- because more and more difficult like squeezing water out of a rock to find yields in fixed income, we will increase alts, which we have. We've been increasing our alternative assets, which is stuff like real estate. Jeff talks a lot about that. And we now have a sliver of Bitcoin in one of our alternative funds. So those are all things that you can do to get away from that problem.
But also full disclosure, we don't manage any of our bonds anymore. So we sub that out and Mikhial helps us decide who's going to get the money. Jeff does his quantitative analysis. And he sees who the best managers are and then which one fits our model best. And that we'll sub it out.
And full disclosure, we use RBC's London office to do the majority of our fixed income just because they're great. And it gives us a lot more time to spend on equities. So I mentioned those two things. And I did mention Bitcoin. So maybe we segue into that. Mikhial, what are you-- obviously, Bitcoin is a bit of a mania. But at the same time, it is predicting that money supply obviously is increasing. So it's become a store of value.
But what I find is interesting is gold has not follow Bitcoin in the last six months. Actually, I looked at it yesterday. I was shocked to see that gold is actually like 10% off its high, which is interesting. Jeff, Mikhial, anybody want to chime in on that?
Maybe Jeff, do you want to take that first? I think your birth certificate shows a younger age. So maybe you should start. It's more your wheelhouse probably. I'm happy to chime in. I have thoughts, but they're probably not as well informed as young Jefferies will be.
Look, to a certain extent, we've been, until recently, pretty restricted at least from a client perspective of doing anything related to crypto. Like Rob mentioned now, it's become really now a small sliver of our portfolio. Because it's wrapped within another product that's an alt that we've allocated to that has a 10% sleeve of Bitcoin in there. That's our way right now of accessing it. But we've been restricted from doing anything more direct. But speaking to people like friends or things like that, non-clients, or even clients who want to do a little bit on their own in the vast thoughts on it.
Without billing myself as a crypto expert because, by no means, am I one, I think it makes sense as a platform, I think crypto in general and obviously Bitcoin being the flagship of that whole area is going to make headway and going to become maybe potentially a new alternative place to put part capital, fill a similar role to what gold has done, maybe be an inflation hedge. Because the supply is obviously constrained and set. There's a maximum limit. And so it's not something that can be essentially continuously expanded like you can see with money supplies in countries.
That's my take on it. I think it eventually settles into becoming more of like let's say an alternative asset class that's a replacement for maybe some currency exposure and inflation hedge. I think there's a certain amount of mania in it now and it's crossing like the $50,000 US mark I think recently or as recently as this week. So that's my take on it. I don't have a ton of extra info. I'd be curious to hear if Mikhial has any further thoughts on that.
Yeah. I think that my first observation would just be that I think it's totally understandable the appeal of an instrument like this against the backdrop of money supply growth we've just lived through. Money supply-- broad money in the United States increased 25% year on year. That's a very, very sizable figure right now. Maybe the effects of that have been dampened by the fact that there's a lot less ways people can go out and spend that and use that. And perhaps there would be, if there weren't a pandemic ongoing.
But when you see policy reactions like that and it's on the heels of just over a decade ago seeing similarly large amount of policy support that was really driven by large central bank balance sheet, which is money being added to the system to solve the problem basically. I think the appeal of a fixed supply product like this is very, very compelling. Maybe I'm an old soul. My heart still has a bit of a fondness for gold. But in terms of serving a lot of the purposes of what Bitcoin can do, but I would totally acknowledge and say I very much appreciate the fact that it is easier. It's not an actual physical asset in some ways that's a strength. In some ways, that's a weakness.
The one thing that the last time Bitcoin had a really large run in the crypto space was extremely high three or four years ago, the one I thought was fairly obvious question that the crypto community had to answer was going to be, well, it's one thing if you have a finite supply or a fixed supply of one cryptocurrency, but what about the dilution that you encounter when there's three or four new cryptos launching every day or coins launching every day? Well, the one thing that does seem to be-- and again, I'm not an expert. I'm not in this market every day. I'm looking at it. But the one thing that seems to be more the case this time around is that it is concentrated maybe in Bitcoin and one or two of the other ones.
And so perhaps this market is maturing. And it's going the way a lot of tech markets go where it's winner take all or winner take most. And so certainly, institutional money, whether it be companies-- you've seen a number of companies generally tech companies or companies that lean tech that have been adding it to their balance sheet at some percent of their money. There's been investment research shops going back. I know you guys are big fans of Tommy Lee. He's talked for some time about-- I think he says, we'll have a 1% allocation.
I remember reading Horizon Kinetics piece back in 2017 that, unfortunately, I didn't take any action on. But I think they argued for like a 25-basis point allocation to it back then on the basis that hey, if it takes off, it's got a lot of optionality. Does it have as much optionality at $50,000? Probably not. But I would say that it's been a move that's certainly been something to behold.
So just a quick disclosure on that, we do have-- Jeff was mentioning 10% of one of the alternative assets or alternative funds that we have in our model that's through Accelerate. Julian's a one choice fund. So that's the way we're getting access to that. But let's go back to Tom Lee. Because I talk about Tom Lee a lot. I love Tom's research. And, of course, he's been right a lot in the last 12 months. So I like it even more when people are right. But it's really the data, and they bring great perspective to the table.
So he talks about-- and recently, I mentioned this. I had this conversation with a client. And it was because they couldn't get their arms around it. But let's break that down. So there's $6 trillion from baby boomers that is now in fixed income. OK. So we go back to that balanced portfolio. There $6 trillion from the baby boomer population, an estimate. And then don't forget, there's about $4 trillion in cash that was pulled out of the market. That was last year or early during the pandemic. So could that recycle back into equities over the next five years? Especially when their millennial kids like Jeff and I start-- I'm not a millennial. I'm just trying to pretend to be one.
But surely look like one.
I'm trying to look like one too. But they start to inherit all this capital. And then I bring another point in which I thought Tom, I love when they-- So this is all data. But the total bond market of the world is $100 trillion. Am I right, Mikhial? It's about that.
We'll take it is a round number. We'll go with that.
Exactly. So imagine that could start to shift out the risk curve as rates stay compressed. So the $6 trillion of baby boomers in fixed income, the $100 trillion over on global and we know a lot of that is in pension funds and a lot of sovereign debt. So that's not going to recycle into equities. But just imagine a tidal wave-- the massacre in bonds, and the tidal wave into stocks that you could potentially see over the next five years if rates continue to stay low. And Jeff, what do you think about inflation?
Look, inflation-- it's a debate. There's been an interesting perspective that I've been reading about that lasted awhile, and also thinking about is that there's some structural headwinds to inflation that I think are interesting like slow in population growth. And I a lot of people starting to project for peak population globally and maybe even entering population decline within the next 30 years or so if the trend continues. So obviously, there's some correlation. There's been studies looking at population growth versus inflation. And they're are positively correlated to a certain extent, which makes sense.
But on top of that, I don't know if we've ever-- and without trying to-- I don't want everyone to be the person that says that this time, it's different. And we're not trying to-- without being like, I don't know if we've really seen an environment where we have so many different factors coming together to potentially be structural headwinds for inflation. So we have things like we could talk about productivity gains in previous generations or previous periods in the market. But if we have right now things like obviously autonomous meeting with the AI, meeting with mobility and the ability to access and be more productive work from home, travel, obviously decentralization.
You have all these different factors that are contributing to potentially making people-- making things more productive and being more of, let's say, a less hard asset intensive and more soft asset intensive. I would say that there are these factors that do come together to present potentially a lower inflation for longer. Obviously, I think inflation is going to pick up to a certain extent when your money supply is increasing as quickly as they do. I don't doubt that inflation will pick up and rates will head higher. But I don't see them necessarily reaching previously seen levels historically. I don't know if-- Mikhial, do you have any thoughts on that whole side of things?
Yeah. I think that the points you make there from like a secular perspective and what the long term trend looks like, I think you're identifying the key secular trends that are definitely promoting a disinflationary or deflationary environment. And I think it's hard to argue that there's going to be an instantaneous reversal in any of those things. In fact, many of those, especially the more tech related ones, tend to go on into perpetuity. So I think that those make sense.
If you're thinking about it almost on like a chart, a string of lower highs kind of thing in terms of inflation. I think that's a reasonable framework to have. I guess if I look at things a little bit more cyclically though, which you're acknowledging there. The concept that as we come out of all the spending we've seen in the pandemic as things start to reopen. The money that's been injected the system starts to make its way through it and gets spent. Then I do think that there's certainly a cyclical case to be made for it.
A couple of the longer term trends-- interest rates are continually going lower and lower. I don't know that they push that one pretty far. Trends like labor share of GDP, things like inequality, I think there's a real question of do you get to enough of a tipping point on any of those things where the trend is just literally can't go on forever and things like trade.
Do I think we're going to suddenly go to a nationalized world where there's no trade? I don't think you can ever put that genie back in the bottle. But could we go to a world where there's maybe some more national barriers that are erected and a world where whether it's tariffs or other build local gain more steam? I think those things, even if they're not outright inflationary, I think they do offset some of those deflationary or disinflationary trends.
So I guess I'd summarize my view as one where I think that yes, those major themes are going to remain in place and provide disinflationary or deflationary pressures. But cyclically, I think there's some inflation pressures potentially coming. And I think that beyond that, a few of the maybe less powerful but I think still important secular trends, are maybe shifting.
And then I guess the biggest thing I would just say, and this maybe even goes back to some of what we brought up initially and perhaps this is the path you guys wanted me to take it down, but it would be the government-- the debt burden shifting its way to the government.
Well, the government has powers that you or I or a corporation doesn't have if the debt burden is in private hands, which is they also exert control over the money supply and the currency that they're actually using to pay that back. And so if you're somebody who's in debt and you're in a lot of debt, there's basically two ways you can rightsize your debt. One, you can default. And for a government, especially a major country in the globe to outright default on their debt would be incredibly destabilizing especially because the integration of most of that government debt in the banking sector. So I think that the system's basically been built to ensure that that doesn't occur. And that leaves the other way to restructure your debt, but maybe more elegantly, is through devaluing it in real terms, which is but stated in another way, you inflate it away.
And if you look at what happened out of World War II, in the middle of World War II, if you would have bought a 10-year US Treasury and you put $100 into it, you would've got paid back your 2% rate of interest. But in real terms, the $100 you showed up with would have been more like $65 or $67 in real terms by the time you got it back. Because inflation rate was well above the interest rate on the debt. And so it does seem like there's-- incentives often do drive actions. And there's a strong set of incentives for governments to make the math work I think for the position that they're in right now.
Absolutely. And so that's such a good example. And so people need to realize that when you're looking for places to allocate capital, and we talk about this too in the new blog that we're going to release, is the best way to do that is to focus on capital gains. Even if they raise capital gains, which I do want to talk about by the way because there are rumors that the next budget they could increase the tax or decrease the capital gains exemption, which is now at 50%. So that's definitely, a way to combat it is to buy generational companies that grow. Because the only way to beat inflation is to grow faster than inflation. And you're surely not going to do it with VICS or bonds.
But in investments as an alternative and in portfolio, they do what they need to do. So we don't have a lot of time guys. We've talked about a lot already, a lot of macro. Can we talk a little bit about SPACs and the mania in GameStop that we saw last month? I think people want to hear about that.
Sure. Do you want to start with just the SPAC market and what's going on there?
Maybe the one interesting perspective I'd add as someone who looks at the fixed-income market is I think in some respects, a lot of the reason this market exists is for the same reason that a lot of products that are potentially return enhancing, higher yielding vehicles or higher returning vehicles exist and are popular. It's the fact that if basically you're able to concoct a product where somebody who buys it on new issue gets essentially a return equal to T-Bills with free optionality if the sponsor is able to find a deal that makes sense that you're able to participate in through some of the warrants that are attached to these things. In the current backdrop where you're operating-- if interest rates were 5%, I don't know that these things would be quite as popular and if you bought alternatives in the fixed income market.
But in a world like we have today, I think there's some incentive for this structure to be popular for that reason. The other reason that I think they're popular is I don't know if-- I think democratized this is probably an overused word in our industry these days. But it makes-- let's just say, it streamlines or simplifies the process to take a company public basically versus the conventional IPO process.
So if I think of the word, I'd use would be simplify rather than democratize. But it makes it easier and cleaner to bring a company out. And so I guess those would be my two quick takes on SPACs. I'm happy to go into GameStop. But I don't know. I know you guys allocate to the space and are very informed on it. So maybe I'll turn it back to you.
In terms of SPACs and my perspective, the only thing I would add really to that-- I pretty much agree with everything you said. But the one thing and I think that's going to maybe make them stay around longer is going to be-- is basically the fact that IPOs especially to the average retail investor, let's say are pretty much inaccessible these days, the traditional way.
So it's like I think the whole idea of, especially with people wanting to get more and more involved in investing in early companies, and I think Rob and I see it a lot. We have some clients that will often come to us looking at different private equity options and things like that.
There are people want to get involved in companies early and obviously, a certain amount again of, I don't want to say mania, but it's become very popular. You have all these unicorn companies. And people want to get involved. And you read about them all the time. And if you can allocate to a SPAC-- the main thing to look at I think is to be careful with who the managers are and who the team behind looking like-- the team looking for the deal is going to be because these incentives are not necessarily aligned all the time. So a lot of these people will get paid based on closing a deal and that kind of aligns the incentive of--
They're going to look for any deal basically whether it's the right one or not, and not have to return the capital to the shareholders. So it's just a word of caution. I think it's going to democratize the space, to use the term that's overused. But it is something that I think had people be a little bit careful of. Because now everyone's launching them like it's-- I don't know what the supply is exactly. But I was reading about it how it's like-- we're talking like 10, 20, 30-fold increase year over year in terms of the number of SPACs out there. So there's only a certain number of deals out there to go around. So just a word of caution on that.
Yeah. I think--
And it's going to be-- Sorry, go ahead Rob.
No. I was just going to say that this is-- SPACs, just to remind people that there's a special purpose acquisition corp. So they're basically blank check companies that can take a company public. So you don't have to go through a little long-winded process of filing an IPO. But what it causes is it causes a lot of speculation. There's questionable fees. But there's some great companies that are early stage that are coming public faster. And that's actually a benefit. But I wanted to say, Mikhial, and hold your thought, is that I see this as part of the bigger disruption.
I think the GameStop for me is disruption when it comes to millennials versus boomer Wall Street types. So you get that hey, why should you be allowed to short a stock 140% of the float. There's only 100% to go around. So millennials and there's boomer Wall Street types. And then you have stock heavy today versus bond heavy in the past. And then you have self-directed like the Robinhood crowd versus hedge funds, or mutual funds I'd say. And then you have Reddit or Tiktok versus Grant's Interest Rate Observer. And you have thematic versus fundamental. You have digital assets versus gold. So you have crypto versus gold.
All of these things for me, it's just our industry getting disrupted. And it's been happening over the last few years. It takes a little more time. And I think it's good. Because in there, good things will come. There's also be speculation and stupidity, which we're seeing a little bit of now. So I think it's all part of a bigger movement. But you were saying, Mikhial? Sorry, I cut you off.
No problem. I was just going to say that I think that the way this probably goes, it builds a little bit what you just said is pretty much any time there's anything that's new in finance like there's some version of innovator, imitator, idiot that takes place in terms of the sequencing. That's just the way this stuff invariably goes.
And at some point, because I think of the ease with which you can bring deals in this market, it's unquestionable. It's going to probably overshoot at some point typically near market highs like IPOs, IPO activities frenzied. And so at some point, there's going to be somewhat of a blow off I think from this space. It's just anytime that much capital goes to one area. You're going to see it, but to your broader point, even if nothing else-- if you have only one way to do something like there's only one way to go public. It's through an IPO.
While the process is going to be more cumbersome and bulky than if there's two ways to do it. When there's two sports leagues versus one, they usually have a better product. Iron sharpens iron. And so I think having these competing processes in place, ultimately, is probably a good thing for investors. But as it's playing out things consistently in finance-- you referenced Jim Grant. I have to like him. So I'll defend him.
That's why I referenced him.
If I'm outing myself as a boomer sympathizer, so be it. But he's got this great quote. I don't want to butcher it. But it goes something like in all the science, knowledge is cumulative. But in finance, it's the only one. It's cyclical. It's something to that effect. Basically, it says that we just literally repeat the same mistakes every 10 or 15 years. And I'm sure-- I shouldn't say I'm sure. I would postulate that I think we're probably in the midst of seeing some of that happen in the SPAC market with some of these deals.
But the long term lasting effect of any boom, there's always positive innovation that occurs. And there probably will be here. So that would just be my final point on SPACs. And then to the broader of the GameStop short seller dynamic-- this may be less hot takey and media friendly of a take, but I look at it and I just say that my whole career-- I started in 2008. And so I started in one of the seminal moments in finance when a lot of the regulations that govern the industry changed and many of those regulations have had the effect of reducing liquidity in the market, or at least, the liquidity, the dealers, and the banks are able to provide.
And you see it in an extreme way in the fixed-income market where 15 years ago for every one or two bonds that are-- for every bond that was held in a fund that was a managed fund, the dealer, the folks making the market that was transacting in those bonds and providing the bonds for the fund companies. If every one bond in a fund, they owned half a bond. Or say it another way. If they had $100 of bonds in a fund, there was $50 of bonds on a dealer's balance sheet.
And so basically, they had similar size stacks of ammo back then. Well, today, the numbers like for every $100 of bonds on a client's balance sheet or in a mutual fund balance sheet, there's about $2 of bonds on a dealers balance sheet. And so market making has really been crimped in terms of what can be done. And it's a lot more done on an agency basis where the market makers are not actually holding their own inventory. They're just passing stuff through. And what that's done is it made markets a lot more thin. And so that's fine in peacetime when things are pretty stable and docile.
But when you get into these periods where there's a high level of volatility, whether it be the whole market like in March of 2020, or we saw in 2015, '16, or even like we saw in 2011, '12 when Europe was going through some tough times. Markets move a lot more in a lot shorter periods of time now. Because the market dynamics are such that there's less of a shock absorber in the system.
And I think this is true across markets maybe by virtue of being someone who looks at the fixed-income market. I see it in a more extreme version. But I think that's a really big and real thing. And so what it's done is it's created maybe a greater, I don't know if vulnerability is the right word. But maybe it's the markets just become more susceptible to a large group of people trying to do something quickly, whether they be on a Reddit board or whether it be at an idea dinner of fund managers. The market is just more fragile for that stuff.
And so I think that's for me, the biggest takeaway from the GameStop saga.
And I think it's every asset class. It's not only the bonds. It's in equities. We see correlated. We see machines [INAUDIBLE]. So that's where we say, where we have our methodology and our process to hedge. We're asked a lot about the mechanics of that. We're not going to get into that because we've already talked a lot today. Maybe we'll leave that for another podcast. But just the ability to be able to do that across the board for us and do it unemotionally is like a huge advantage that we have.
But anyway, so we've talked so much about different things. What's a good podcast without some banter? We cannot finish the podcast without talking about a personal bet. And Jeff, without mentioning the company that we've been on so-- we just want to tell everybody, Mikhial is a great fixed-income analyst. He's a terrible equity investor. And thank God he knows us because we've clearly stopped him from making huge mistakes. So maybe Jeff, you just highlight-- don't mention the company, but just highlight the parameters of the bet that we had going and how Mikhial--
Yeah sure. I remember brokering the bet and taking official notes and the due date and then everything like that. So basically, it was a market cap related. There was a company-- a particular company that was a certain size. And I believe it might have been 150% upside versus 50% downside or the two sides of the bet, I think. Something along those lines. And suffice to say Rob was on the positive side and Mikhial was on the negative side in terms of what they expected the stock to do in terms of the market cap. And it surpassed beyond the upside by a pretty wide margin. So Rob collected, I think I don't know exactly
I haven't collected anything it.
I don't know if he's collecting.
COVID has given me a reprieve. I've had a one year reprieve thanks to the pandemic.
So hopefully, the next time Mikhial comes to town, because if I go to Vancouver, I'm not going to collect that bet. Jeff has to be with me. So next time Mikhial's in town, he owes us a very expensive item at the bottom of the list. And so that's going to be the collection. And by the way, I drove him around in the thing we betted on. So let's just make that clear for everybody. So Mikhial, it's been awesome. This has been really, really great podcast. It's been over 45 minutes of really good content.
I want to thank you again for coming on. We want to have you on again in the future If anybody wants to know more, don't forget, check out our latest blog that's going to come out in the coming days. Five ways to maximize gains and decrease taxes. That's going to be a huge one. And looking forward to doing this again. Mikhial, thanks again for being with us.
Thanks a lot for having me, Rob. And I also want to say to that bet, thank you for at least limiting my losses and helping me avoid getting caught in a short squeeze of my own if I would try to reflect my viewpoint on that stock in the market. So I guess I owe you a thank you.
Anyways, great to speak with you guys and thanks for having me on.
Thanks a lot.
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